Why a Soft CPI Did Not Stop the Hike Odds
Swaps priced a Bank of Canada hike on October 28 at 36% before Governor Tiff Macklem spoke at the IMF and World Bank meetings on Saturday, according to Commerzbank. By Monday morning the figure was nearly 70%, and by 2:45 p.m. it was 87%, according to Canadian Mortgage Trends. Reuters reported about 80% on Tuesday.
The September CPI released Monday did not stop the climb. Headline inflation was 3.1%, a tenth below forecast, while CPI-trim was 1.8% and CPI-median 1.9%. What moved the odds was the Bank survey data: long-term consumer inflation expectations rose to match short-term ones, and about half of firms said they plan to pass on higher oil and tariff costs. BMO, RBC Dominion Securities and Desjardins moved to hike calls the same day.
This morning the Behavioural desk argued that the pump price, not the core measures, anchors household expectations. The Bank survey data now report that mechanism, and swap markets priced it. A recent Bloomberg survey of economists still pointed to a hold, so the decision turns on the October forecast update, which Scotiabank says Macklem has described as potentially decisive, not on the core readings.
The Loonie Closed the Premium a Weak Dollar Had Added to Brent
Brent rose 2.8% in US dollars between 4 p.m. on October 13 and 4 p.m. today, from US$106.14 to US$109.09*. In Canadian dollars the rise was 1.6%, from C$150.91 to C$153.36*, because USD/CAD fell from 1.4218 to 1.4058*, a 1.1% gain for the loonie.
Brent in Canadian dollars ran as much as two index points ahead of Brent in US dollars on October 12, and that gap has closed to 0.2 points as USD/CAD fell.
Brent in Canadian dollars is Brent in US dollars multiplied by USD/CAD, each sampled at 4 p.m. ET and indexed to 100 on September 21. The October 20 values are as at 4:00 PM ET and unsettled.
Reuters tied the move to hike bets and to the Alberta vote together, with the remain side at 76% of votes counted, so the offset is not a Bank of Canada effect alone. Marc Chandler of Bannockburn Capital Markets said the Canadian discount to the US has fallen sharply, and the gap between Canadian and US two-year yields narrowed to 146 basis points from about 160 earlier this month. Commerzbank warned that a hold on October 28 would delay the policy support for the loonie.
The same move cut the Canadian-dollar value of US holdings. The S&P 500 fell 1.2% in US dollars over the five sessions, or about 2.3% in Canadian dollars, while the TSX Composite rose 0.34%.
The Rally Ran Through the Long End, Not the Gulf
The TSX gained 0.50% to 36,107.96*, with the energy ETF down 0.45%, gold miners down 0.88%, materials down 0.79% and base metals down 1.11%. Brent slipped 0.4% to US$109.09* and gold 0.5% to US$4,139.70*.
Technology, real estate, financials and staples led the index higher while every commodity group fell, a rebound in the rate-sensitive groups that Monday had sold.
Group moves use iShares S&P/TSX ETFs (XIT, XRE, XFN, XST, XUT, XMA, XBM, XGD, XEG) as proxies for index sectors. The Canadian dollar bar is the inverse of USD/CAD.
Monday declines were led by utilities, consumer staples, real estate and mining, according to Fool.ca. Today real estate gained 1.61%, staples 0.80% and utilities 0.23%, while mining did not recover. Reuters reported the 10-year Government of Canada yield down 6.8 basis points at 3.894%, and said traders were weighing Houthi attacks on Saudi infrastructure and reports of vessel attacks in the Gulf. Neither energy nor gold responded.
With swaps near 80%, the groups reacting are those priced off the 10-year yield and the loonie, not those priced off Brent. A hold on October 28, which Bloomberg economists still lean toward, would test both.
*As at 4:00 PM ET on October 20, before official settlement. Group moves use iShares S&P/TSX ETFs as proxies for index sectors.