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Scotia At Higher End Of CPI Consensus But See Very High Bar To Not Cutting

CANADA
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  • Scotia estimate “little change in total inflation, but the key sensitivity will be what happens to the BoC’s preferred core gauges.”
  • They see headline CPI inflation of 0.1% M/M both SA and NSA. “Traditional core CPI (ex-food and energy) is expected to be up by 0.2% m/m NSA and 0.3% seasonally adjusted.” It yields headline at 2.8% Y/Y vs a Bloomberg median 2.7.
  • “And none of that matters so far. After trimmed mean and weighted median CPI both bounced higher in May following a four-month soft patch, key will be the July readings. That’s especially true in the wake of strong wage gains in each of the past two months.”
  • “Unfortunately, it’s virtually impossible to estimate these core gauges in m/m terms which is how to evaluate pressures at the margin that are independent of year-ago base effects. If it’s another set of the BoC’s preferred core gauges May then maybe Governing Council holds off at its next decision on July 24th. If it’s not, then they could say that core has been soft for most of the year in m/m SAAR terms except for May and carry on cutting.”
  • “In a more general sense I think there is a very high bar set against Macklem not cutting again this month. The BoC is convinced that its models will work this time after a rather underwhelming performance throughout the pandemic. They adamantly believe that inflation will durably land on 2% into 2025 and recall that this expectation embeds an unknown and unpublished internal estimate of how much cutting Governing Council could deliver in advance. We’ll see how this unfolds over time, but for now, it is the framework of thinking that is guiding their near-term decisions.”
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  • Scotia estimate “little change in total inflation, but the key sensitivity will be what happens to the BoC’s preferred core gauges.”
  • They see headline CPI inflation of 0.1% M/M both SA and NSA. “Traditional core CPI (ex-food and energy) is expected to be up by 0.2% m/m NSA and 0.3% seasonally adjusted.” It yields headline at 2.8% Y/Y vs a Bloomberg median 2.7.
  • “And none of that matters so far. After trimmed mean and weighted median CPI both bounced higher in May following a four-month soft patch, key will be the July readings. That’s especially true in the wake of strong wage gains in each of the past two months.”
  • “Unfortunately, it’s virtually impossible to estimate these core gauges in m/m terms which is how to evaluate pressures at the margin that are independent of year-ago base effects. If it’s another set of the BoC’s preferred core gauges May then maybe Governing Council holds off at its next decision on July 24th. If it’s not, then they could say that core has been soft for most of the year in m/m SAAR terms except for May and carry on cutting.”
  • “In a more general sense I think there is a very high bar set against Macklem not cutting again this month. The BoC is convinced that its models will work this time after a rather underwhelming performance throughout the pandemic. They adamantly believe that inflation will durably land on 2% into 2025 and recall that this expectation embeds an unknown and unpublished internal estimate of how much cutting Governing Council could deliver in advance. We’ll see how this unfolds over time, but for now, it is the framework of thinking that is guiding their near-term decisions.”