Time is your friend

The primary data release of the week was Canada’s Consumer Price Index (CPI) for October, with the headline print coming in at 2.0% Year-over-Year (Y/Y), slightly above the expected 1.9%. The increase was driven primarily by higher property taxes, which are updated in the index annually with the October data. Historical patterns suggest October CPI in Canada often meets or exceeds expectations, but this time the focus was on a more significant development: the 0.2% rise in the core inflation measures, bringing the average to 2.55% Y/Y. While this constitutes an upside surprise, the headline CPI remains at the 2% target, which is unlikely to deter the Bank of Canada (BoC) from proceeding with another rate cut in December. However, the size of the cut is now skewed toward 25 basis points (bps) rather than 50bps. This is partly because the minutes from the BoC’s October meeting emphasized the exceptional nature of the last 50bps cut, signaling an intent to manage expectations around similarly large moves. Adding to the complexity, the weaker Canadian dollar may limit the BoC’s ability to cut aggressively, as this could trigger imported inflation pressures.

Economic data

The federal government’s announcement of GST relief and a $250 rebate to address affordability challenges was another notable development. The GST relief will apply to a basket of consumer goods from December 14, 2024 to February 15, 2025 and Canadians earning less than $150,000 in 2023 will receive the rebate in the spring of 2025. While these measures could mechanically lower headline inflation, their exclusion from core calculations means the impact on monetary policy will be limited. Meanwhile, the direct transfers could provide a growth boost in early 2025, potentially complicating inflation dynamics later in the year. Retail sales data also painted a positive picture, with a 0.4% increase for September matching expectations. Excluding autos, sales surged 0.9%, more than doubling forecasts. This growth was broad-based, with six out of eight subsectors posting gains. Total volumes rose 0.8% in September, and preliminary readings for October suggest a further 0.7% increase. This strength in consumption is likely to contribute positively to the 3rd quarter GDP report due next week.

In the United States, initial jobless claims unexpectedly fell to a 29-week low of 213,000 for the week ending November 16, beating the consensus of 220,000 and down from the prior week’s 219,000. This was also the survey week for November’s non-farm payrolls, suggesting an upside bias for the payrolls report on December 6. However, continuing claims disappointed, rising to 1.908 million, the highest level since November 2021. The uptick in continuing claims could indicate some underlying softness in the labor market, although the holiday hiring season may temporarily absorb unemployed workers in the coming weeks.

Bond market reaction: A notable shift is underway

The 10-year US Treasury yield has oscillated around 4.4% to 4.5% since November, but a notable shift is underway. For the first time since the 2022 rate hike cycle, US treasuries have become positive carry assets, with the 30-year yield at 4.6% exceeding the Secured Overnight Funding Rate (SOFR) of 4.56%. This marks a turning point for fixed income investors, as holding treasuries can now generate net positive cashflow rather than negative. Meanwhile, Canadian yields climbed 15bps over the week. This was largely driven by heavy supply-side pressures from treasury auctions, corporate, provincial and pension issuance, and a reaction to stronger economic data. Additionally, the market expressed concerns over the fiscal implications of Prime Minister Trudeau’s new tax cut and rebate package, which is estimated to add $6.3 billion to the deficit and more than expected treasury supply. The cheapening in Canadian yields was most notable in the front end, with 2-year yield being the worst underperformer on the week. This was largely because of the market pricing out the probability of a 50bps cut and moving towards 25bps for the December meeting. The selloff in Canadian rates seems technical in nature. With supply largely behind us and coupon payments in December approaching, Canadian yields could find support at these more attractive levels.

Stock market reaction: Reinforcing the ongoing AI-driven rally

In equities, Nvidia exceeded lofty expectations in its quarterly earnings report, citing “staggering” demand for its next-generation GPUs, reinforcing the ongoing AI-driven rally. The company also raised its forward guidance, keeping investor enthusiasm high. On the other hand, Google faced challenges as the US Department of Justice proposed remedies, including divestment of Chrome, to address antitrust concerns. Despite this, the NASDAQ and S&P 500 maintained their positive momentum for the week. In the cryptocurrency market, Bitcoin neared the US$100,000 mark, bolstered by optimism surrounding President-elect Trump’s pro-crypto stance. In Canada, the IPO of Groupe Dynamite, a fashion retailer, marked the country’s first public listing since March 2023. It remains to be seen whether this signals the end of the Canadian IPO drought or is an isolated event.

What to watch in markets next week

The upcoming week will be shorter due to US Thanksgiving on Thursday but packed with data releases. In the United States, key reports include final third-quarter GDP, October PCE inflation, personal income and spending, and monthly GDP numbers. In Canada, 3rd quarter GDP and September monthly GDP data will be released on Friday. These reports will likely shape the economic narrative heading into December, providing further clues on the policy outlook for both the BoC and the Federal Reserve.

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Authors: Adam Ditkofsky, Pablo Martinez, Sandor Polgar, Steven Lampert, Craig Jerusalim, Diana Li, Mona Nazir and Mickey Ganguly

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