Scotiabank warns Canada could fall behind as Fed stays hawkish
New US inflation data has dashed any expectations of imminent interest rate cuts south of the border, with economists warning that the stickiness in US inflation could spill over into the Canadian economy.
The latest Consumer Price Index (CPI) released Wednesday showed core inflation, which excludes volatile items like food and energy, rising 0.4% month over month and 3.8% year over year, adding to concerns about persistent price pressures.
The overall CPI also increased by 0.4% for the month, reaching an annual rate of 3.5%, driven by high energy prices.
Derek Holt, head of capital markets economics at Scotiabank, analyzed the CPI results, noting that the Federal Reserve may need to maintain a hawkish stance even longer than previously anticipated - a development that could complicate policy decisions for the Bank of Canada.
“The results drove a nearly instant response from markets as fed funds futures almost entirely wiped out pricing for a June cut by the FOMC,” Holt said in a Scotiabank report. “We might need to push out our own Q3 start and reduce, if not eliminate easing. Markets are now pricing about a half percentage point cumulative rate cut by year-end at most. The US two-year Treasury yield is up 19bps on the day so far with a bear flattening overall curve, a stronger dollar and with the S&P losing ground.”
Holt highlighted the "incredible stickiness" in core inflation, with annualized rates over the past several months ranging from 3.4% to 4.8%. He pointed to strength in core services CPI, up 0.65% month-over-month, warning that this could flow through to the Fed's preferred core PCE gauge.
However, Holt pointed to strength in core services CPI, up 0.65% month-over-month. "That follows prints of 0.5% in February and 0.85% in January," he said, adding that this could flow through to the Fed's preferred core PCE gauge.
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Turning to the implications for Canada, Holt cautioned that the Bank of Canada is "even less likely to turn dovish now given the risk of totally unmooring CAD with the Fed being pushed down and out."
“Transportation categories were not big drivers except for a large jump in auto insurance. Clothing jumped, which may be a warning to Canada after its soft readings,” Holt said.
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