Daily Points

ON DECK FOR TUESDAY, MAY 20

KEY POINTS:

• CAD, Canadian rates holding firm into CPI
• Canadian CPI cocktail: carbon tax cut, early tariff effects, underlying pressures…
• ...with Macklem and GDP also on tap before the June 4th decision
• Fed-speak to follow Williams’ relatively hawkish comments…
• ...as advice to fade overdone summertime cut pricing has paid off handsomely
• Markets predictably ignored Moody’s late and lagging US downgrade
• Canada’s Budget about-face should lean to no later than September
• RBA cut, but the market reaction feels overdone
• German PPI weighed down by energy
• Chinese banks cut LPRs as expected following earlier PBOC easing
• Global Week Ahead — Investment Bonanza or Shimmering Mirage? (reminder here)

Relatively small moves across asset classes are greeting Canadians returning from a chilly long weekend sure to depress seasonal retail spending. An exception is Australia post-RBA which may be overdone in my opinion. Canadian CPI is due out as the path to the June 4^th BoC decision faces a few more coming developments. Canadian PM Carney reversed plans for a Budget but remains too open-ended. Markets are largely ignoring Moody’s late and lagging US downgrade on Friday as the 10-year Treasury yield is little changed since then; politics and fiscal plans are another matter. Several Fed speakers are on tap after Williams’ relatively hawkish guidance that continues to sensibly wipe out cut pricing in keeping with my longstanding views. Other developments are relatively light.

CANADIAN CPI—ANOTHER MARKER ON THE PATH TO JUNE 4^TH

Canada updates CPI for April this morning (8:30amET). The elimination of the consumer portion of the carbon tax should weigh on the headline reading but key will be the BoC’s preferred core gauges.

My estimate of -0.2% m/m NSA turned out to be the lagging consensus estimate. Most are at -0.2% or -0.3%, with a few sample throwers on the high side who either seem to be oblivious toward the carbon tax cut or are very high on the rest of the drivers. The year-over-year rate should drop to 1.6% from 2.3% on base effects and the tax measure.

Lower gasoline prices—mostly because of the tax change—should contribute to a weighted -0.3% m/m NSA drag on CPI and another -0.1% is roughly estimated to be the impact of the removal of the carbon tax on home heating fuels.

Modest retaliatory tariffs on imports also kicked in during April. It’s highly uncertain how much of an effect tariffs may have in this report—if any—given that tariffs could take some time to work through inventories, supply chains and profit margins.

I wouldn’t be surprised to see the oscillating pattern for the BoC’s preferred core gauges return to a higher m/m SAAR reading. Those gauges exclude direct tax effects but may include indirect incidence effects as retailers crowd in some the space. There is no clear pattern during the six occasions when the carbon tax went up in terms of m/m core gauges by way of incidence effects as illustrated in the fuller preview in my Global Week Ahead. We do, however, know that some of the carbon tax cut this time was captured by fatter refining margins for gasoline, so the question is whether there will be broader evidence of crowding in. Indirect effects of tariff pass through could also be an influence.

This report and BoC communications later in the week—including comments by Governor Macklem—plus GDP for Q1 and the months of March and April on May 30^th will be the final domestic considerations ahead of the June 4^th BoC decision.

And in case you missed it, PM Carney backpedaled on refusing to deliver a budget this year by stating there will be a full budget in the Fall. That’s one welcome step. I’d still like a firmer commitment since Fall stretches to the Winter Solstice on December 21^st and markets need greater clarity sooner on debt issuance plans. I would still prefer a June Budget, but if you’re going to do Fall, make it September; four months from now should be more than enough time even for Ottawa.

RBA’S DOVISH STANCE DRIVES RATES OUTPERFORMANCE

Australia’s rates curve is strongly outperforming others and the A$ is the weakest major cross after the RBA’s dovish decision. The 2-year yield fell 16bps overnight in a bull steepener curve reaction while the A$ fell by under half a cent to the USD. The RBA cut 25bps as expected while considering both a hold that was “sort of put aside pretty quickly” and a bigger 50bps cut but that “25 was the right number on this occasion.” Growth and inflation forecasts were revised a little lower. Staff projections assumed 85bps of further cuts this year and some took that to be a policy signal of a path to a 3% neutral rate over coming quarters notwithstanding Governor Bullock’s emphasis upon uncertainty.

GERMAN PPI WEAKER THAN EXPECTED

Weaker than expected German producer prices in April may have contributed to a small decline in EGB yields. PPI fell -0.6% m/m which was a bigger decline than a thin consensus had guesstimated. Most of that drop came through energy, however, while underlying prices were otherwise much firmer.

MORE FED-SPEAK ON TAP

Several FOMC officials will fight for the microphone today. Bostic (9amET) speaks again after previously saying one cut later in the year may be reasonable. Richmond’s Barkin (9amET), Boston’s Collins (9:30amET), St. Louis President Musalem (1pmET), Governor Kugler (5pmET) and then both Cleveland’s Hammack and San Fran’s Daly (7pmET) are all on tap.

This follows yesterday’s comments from NY Fed President Williams who clearly stated that June and July were too soon to expect any moves by the FOMC that will require more evidence on the competing effects of tariffs and other developments on dual mandate goals.

June contract pricing strongly leans toward a hold with July only priced for about 9bps of a quarter point cut. Longstanding advice to lean in favour of a multi-meeting hold—if not for the full year—has worked out well compared to what was once market pricing for 75bps+ of cuts by July.

CHINESE BANKS CUT LENDING RATES

Chinese banks cut their 1-year (3% from 3.1%) and 5-year (3.5% from 3.6%) Loan Prime Rates as widely expected in the wake of the PBOC’s earlier easing.