Week of July 10, 2023
Dec Mullarkey, CFA , Managing Director, Investment Strategy and Asset Allocation
The June U.S. inflation print brought a lot of cheer, coming in at 3%. Energy effects are way down, from the spike in prices last year, but less volatile core inflation is also showing real progress. Inflation effects from core goods are close to flat. Core services, which unequivocally deserve the most scrutiny, are also cooling, driven by slower rent growth.
Another technical analysis of inflation from the Federal Reserve Bank of Atlanta shows that its index of “sticky” inflation is receding at a decent clip. Meanwhile, the Federal Reserve Bank of Cleveland, which also derives a normalized inflation trend by trimming outliers, is also reporting a steady decline.?
This is all generally good news, but there is still much to do, and the path will undoubtedly be rocky. For instance, in the current inflation print, hotels and airfare prices suggest a material drop. We would need to see some more evidence that this is a reliable trend. But we believe we are heading in the right direction in getting inflation under control.
And in other global inflation news, China is at risk of experiencing deflation, which underscores how fragile its recovery still is. This should motivate policymakers to ramp up rate cuts and stimulus, as deflation can be very corrosive to activity as consumers delay purchases and wait for better bargains.
Source: Bloomberg, Financial Times, 2023.
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Melissa Boulrice , Senior Director, Asset Management, Public Fixed Income
As expected, the Bank of Canada (BoC) lifted its overnight rate by 25 basis points to 5%. The BoC does not expect a recession, noting gross domestic product is set to expand 1.8% this year, up from its 1.4% forecast in April, before falling to 1.2% next year and improving to 2.4% in 2025. Inflation is expected to remain around 3% for the next 12 months, according to the BoC’s projections, and is now expected to return to the 2% target in mid-2025, six months later than previously forecast.
The BoC seems to have been caught off guard by the resilience of the economy during its rate hiking cycle. Housing prices and volumes, initially dented by rising interest rates, have both also turned higher over the past two months, likely fueled by immigration. While the BoC has not closed the door to further hikes as risks remain to the upside, many forecasters are sticking to 5% as the terminal rate at this point.
Source: Bank of Canada, 2023.?
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