All systems go

Much ink has been spilled on the recent economic divergence between Canada and the US, with our friends south of the border flexing their impressive growth muscle for much of the past 12-18 months.  The divergence extends to our respective inflation paths too, with the silver lining of relatively weaker growth in Canada as having more impact on reducing price pressures. 

Economic data

On that front, Canadian headline Consumer Price Index (CPI) for the month of April arrived in line with expectations at 0.5% Month-over-Month (M/M), 0.2% seasonally adjusted. This brings the annual rate to 2.7% Year-over-Year (Y/Y) from 2.9% prior. It also marks the lowest annual print since March 2021 and the fourth consecutive monthly read below 3%.

Perhaps more importantly though is the fact that core measures are showing greater signs of progress —notably, the Bank of Canada’s (BoC) preferred median and trim core numbers gained just 0.1% on the month, placing the 3-month annualized rate at a modest 1.6%—well within the 1-3% target range. Compare that to the equivalent US core measure which is sitting closer to 4% on a 3-month annualized basis.  Moreover, broad-based pressures are also easing in Canada, now with over 55% of the CPI basket rising by less than 2% Y/Y. So, to summarize, it was a pretty constructive inflation report and futures markets accordingly raised the probability of a June rate cut to a little better than a coin flip. The market’s hesitation to fully discount that rate cut is likely because there’s not much new data between now and the BoC decision on June 5, 2024.

There’s also continued concern regarding the stickiness of shelter and broad-based services inflation, with the latter still hovering above 4% Y/Y.  There’s no need to dismiss those concerns, but remember that even if the BoC cuts 50 basis points (bps) this year (as priced in the market), the overnight rate will remain in restrictive territory. As a whole, the current backdrop of sluggish growth and inflation progress provides enough reason for the BoC to begin lowering rates in two weeks. But if not in June, the market is still fully pricing in a cut shortly after at the next meeting on July 24, 2024.

Friday’s earlier release of March retail sales also supports the BoC’s case for lowering rates, with the headline figure falling 0.2% M/M. The bigger miss came on the core ex-auto number, declining 0.6% M/M and well below expectations of a positive 0.3% print. That’s the first reduction in the core figure in four months and broad-based too as all but one category posted a decline in monthly terms. Interesting that the flash estimate for April is initially seen as fairly robust at 0.7%, but revisions are likely. 

There was less data to chew on in the US this week, with US Federal Reserve (Fed) meeting minutes affirming the Federal Open Market Committee’s (FOMC) data dependency going forward. It’s worth noting that these minutes are somewhat stale given they were compiled prior to last week’s more dovish CPI and retail sales reports. Consequently, the market didn’t ascribe much value to the release.

Bond market reaction: Canadian yields outperformed

Bond yields also diverged in the US and Canada this week with Canadian yields outperforming on the back of the constructive CPI report. In contrast, US rates sold off on little news, so perhaps just a healthy pullback from some of the solid month-to-date gains we’ve seen. Risk assets also remained relatively range-bound including corporate credit spreads—despite a busier new issue calendar particularly in Canada. Deals continue to be oversubscribed, but secondary performance has been more muted as new issue concessions are pretty much absent. High yield spreads were also unchanged on the week.

Stock market reaction: Global equities were choppy

Global equity markets were choppy this week across most regions, despite blowout results once again from Nvidia. The company reported quarterly results above analyst expectations and grew data centre revenues by 400% vs. last year! Guidance for the upcoming quarter also exceeded expectations. Nvidia’s products have been at the forefront of the artificial intelligence (AI) revolution we’ve witnessed over the past year. In fact, Nvidia’s quarterly revenues are now 2x Intel’s, who was once a leader in the semiconductors industry.

On another note, given the slowdown in the electric vehicle (EV) industry following affordability concerns, industry participants are cutting hundreds of jobs across their respective organizations. Over the last few months, there have been announcements from Tesla, Rivian, Lucid, amongst other large peers. As earnings season wraps up in most geographies, Canada remains in the midst of its reporting season with the banks expected to give updates next week. Stay tuned!

What to watch in markets next week

Not much in the way of data next week in Canada, aside from the important monthly gross domestic product (GDP) number for March along with the accompanying Q1 annualized figure. It’s busier during the holiday-shortened week in the US with the second estimate of its own Q1 GDP, as well as personal income and spending for April and a key personal consumption expenditures (PCE) deflator read for the Fed.

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Authors: Adam Ditkofsky, Pablo Martinez, Sandor Polgar, Steven Lampert, Craig Jerusalim and Rahul Bhambhani

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