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June BoC Expectations In The Balance Ahead Of April CPI Report

CANADA
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[The following is taken from the MNI Canada CPI preview - in full here]
  • The Bank said after its April meeting that it’s seeing the sort of readings it needs to see to start cutting interest rates, but it just needs to see it for longer. Core metrics then surprised even lower in the March report released the week after, with the trim and median measures averaging just 1.3% annualized over three months and 2.3% over six months as mentioned above.
  • BoC-dated OIS is hovering a little under 50% probability of a June cut and with a 25bp cut fully priced for July. We would expect a sizeable increase in June cut probabilities if we see realization of core metrics similar to the consensus view above. However, expect heightened sensitivity to June expectations on any upside surprises or strength from stickier areas of the basket, with it not taking much for Governing Council to want to see target-consistent prints.
  • With the following July meeting not until Jul 24, the BoC will still see two further CPI reports (May on Jun 25 with a particularly short gap until June on Jul 16) and two labour reports (May on Jun 6 and June on Jul 5). That cuts both ways for the BoC: it adds further weight to keeping rates on hold in June if there’s a beat for core metrics, whilst a fourth consecutive miss gives it a good opportunity to start cutting with then plenty of data to assess what subsequent pace it wants to proceed at.
  • Looking beyond July, US developments are going to remain important considering there’s a practical extent to which Canadian monetary policy can diverge with the US before inflationary pressures from the exchange rate channel weigh. Government bond yields appeared to broach that limit back in mid-to-late April, when the Can-US 2Y yield differential pushed below -75bps and it has since closed that gap albeit to a still historically low -60bps. Similarly, USDCAD has retreated from highs of almost 1.3850 in mid-April to recently between 1.3600-1.3650.
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[The following is taken from the MNI Canada CPI preview - in full here]
  • The Bank said after its April meeting that it’s seeing the sort of readings it needs to see to start cutting interest rates, but it just needs to see it for longer. Core metrics then surprised even lower in the March report released the week after, with the trim and median measures averaging just 1.3% annualized over three months and 2.3% over six months as mentioned above.
  • BoC-dated OIS is hovering a little under 50% probability of a June cut and with a 25bp cut fully priced for July. We would expect a sizeable increase in June cut probabilities if we see realization of core metrics similar to the consensus view above. However, expect heightened sensitivity to June expectations on any upside surprises or strength from stickier areas of the basket, with it not taking much for Governing Council to want to see target-consistent prints.
  • With the following July meeting not until Jul 24, the BoC will still see two further CPI reports (May on Jun 25 with a particularly short gap until June on Jul 16) and two labour reports (May on Jun 6 and June on Jul 5). That cuts both ways for the BoC: it adds further weight to keeping rates on hold in June if there’s a beat for core metrics, whilst a fourth consecutive miss gives it a good opportunity to start cutting with then plenty of data to assess what subsequent pace it wants to proceed at.
  • Looking beyond July, US developments are going to remain important considering there’s a practical extent to which Canadian monetary policy can diverge with the US before inflationary pressures from the exchange rate channel weigh. Government bond yields appeared to broach that limit back in mid-to-late April, when the Can-US 2Y yield differential pushed below -75bps and it has since closed that gap albeit to a still historically low -60bps. Similarly, USDCAD has retreated from highs of almost 1.3850 in mid-April to recently between 1.3600-1.3650.