Higher than expected inflation data in the United States dashed any hopes that the U.S. Federal Reserve would pause in its aggressive rate hikes. With this week’s moves in the U.S., the loonie lost about 1.5¢ to the USD, while the two-year Government of Canada bond yield pushed a few more basis points higher with the fiscal stimulus announced this week. U.S. bond yields increased and the U.S. dollar, which had started the week on the defensive, got a boost. The U.S. moves are likely to motivate the Bank of Canada to shoot past 4% with its policy rate.

Scotiabank economists and analysts weigh in on how economic indicators and trends are influencing inflation, equities and currencies, right now.


  • U.S. inflation data and Canadian fiscal stimulus have implications for markets in Canada. Stronger than expected U.S. core Consumer Price Index (CPI), which rose to 0.6% m/m and 6.3% from a year earlier at a seasonally adjusted and annualized rate, dashed any hope inflation was cooling and the Federal Reserve would pause its rate hike. Fed funds futures pricing for next week’s move is now over 80 bps. There was a violent swing in the U.S. front-end as the 2-year Treasury yield jumped by about 24 bps after the release and the U.S. 10-yr increased by about 11 bps.
  • Canada’s bond curve sold off in sympathy with the U.S. moves. There was a 20-bps jump in the 2-year yield and a 16-bps rise in the 10-year. The Canadian dollar depreciated by about 1.5¢ to the US dollar. Hotter U.S. inflation that drives aggressive Fed tightening and weakens the CAD is likely to motivate the Bank of Canada to have greater confidence to shoot past 4% with its policy rate.
  • It will be tough slogging to convince markets that spending more won’t drive hotter inflation. The two-year Government of Canada bond yield pushed a few more basis points higher with the fiscal stimulus announced this week — an increase to the GST credit for two years, tax-free payments up to $650 per child aged 12 and under for dental care, and a one-time $500 top-up to the Canada Housing Benefit to 1.8 million for low-income renters before year-end.
  • We will be assessing the implications for price pressures into the first half of next year, but it seems sensible to assume that this will add to pressures on measures of core inflation relative to what would have otherwise occurred and hence aggravate the Bank of Canada’s stance on monetary policy. The BoC is likely to be dragged along by the Fed with domestic fiscal stimulus reinforcing the likelihood that the policy rate breaches 4% by December if not October.

 —  Derek Holt, Vice-President and Head of Capital Markets Economics 


  • U.S. inflation proves more stubborn than investors expected. U.S. consumer prices topped estimates in August on both the headline (consensus -0.1% month over month versus +0.1% m/m) and core (consensus +0.3% m/m vs. +0.6% m/m) indexes. From a year-over-year perspective, inflation decelerated less than forecasted at 8.3% (consensus +8.1% year over year), while core inflation accelerated more than expected at 6.3% (consensus +6.1% and 5.9% last month). Admittedly, that was the worst-case scenario for investors hoping for a rapid deceleration. U.S. 10-yr (3.41%) and 2-yr yields (3.76%) closed 5 and 18 basis points higher, respectively. Half of the 10 U.S. yield-curve segments we track are now inverted. In the equity space, the S&P 500 tumbled 4.3%, with long-duration assets hit the hardest (Nasdaq -5.2%), and defensive sectors outperformed cyclical ones.
  • Where is inflation heading? Our chart below shows where headline inflation could land in December 2022 and March 2023 assuming different monthly changes in the CPI. Even if price pressures remain flat for the remainder of the year — mathematically doable, but less probable — inflation could end 2022 at 6.2%. At the other end of the spectrum, monthly gains of 0.6% would push the inflation rate up to 8.8% by year-end. We could be somewhere in the middle.
Source: Scotiabank GBM Portfolio Strategy, GBM    


  • The strong inflation data led to further re-pricing by the Federal Reserve. Based on Fed fund futures, we now have 100% probability of a 75-basis-point increase next week, while the odds of a 100-basis-point hike have gone up to 33%! As shown in the chart below, U.S. Fed fund futures are now pricing in one more 25-basis-point rate hike for the year compared with prior to the release, lifting the implied rate for the current year near 4.25%. With more tightening and no Fed pivot in sight, the rest of 2022 will remain volatile. 
Source: Scotiabank GBM Portfolio Strategy, GBM    

—  Hugo Ste-Marie, Director Portfolio & Quantitative Strategy; Jean-Michel Gauthier, Associate Director, Portfolio & Quantitative Strategy

Foreign Exchange

  • The FX markets continue to trade in fashion. The USD started the week on the defensive as investors reacted positively to better news from Europe. An improvement in the geo-political situation in Ukraine, lower natural gas prices and efforts by United Kingdom and Eurozone officials to put policies in place to curb the worst effects of surging energy prices over the coming winter lifted the euro and the pound, with the euro finding additional support from last Thursday’s hawkish European Central Bank meeting. 
  • The USD found itself under additional pressure from investors positioning ahead of the U.S. CPI report amid anticipations of a drop in month-over-month headline rate of inflation. But instead of hinting at a weakening in price pressures, the data reflected stronger than expected headline and core price growth in August. The year-over-year rate of inflation did decelerate to 8.3% from 8.5% but inflation pressures appear to be broadening, which encouraged markets to price in a more aggressive Fed rate hike profile for the remainder of the year. Swaps pricing indicates a hike of 75 bps at next week’s Federal Open Market Committee is fully priced in, with an additional 20% probability of an increase of 100 bps. Yields jumped, stocks fell, and the USD rebounded broadly, pushing the USDCAD back to the 1.32 range — where USD gains have peaked in the past few weeks.
  • More volatility followed Wednesday after the Bank of Japan surprised market participants by checking FX prices with interbank traders in Tokyo. This is a tried and tested (but rarely used in recent years) way of the monetary authorities expressing disapproval with currency volatility — yen weakness in this case — without actually intervening. The move follows fruitless “verbal support” from the monetary authorities for the yen, which weakened to its lowest level against the USD since 1998 this month and suggests that Japanese policy-makers might be considering intervening directly in the markets to buy yen and sell USD. Given that the interest rate policy in the U.S. and Japan is moving in opposite directions at the moment — explaining to a great extent the weakness — we are not persuaded that intervention would be effective beyond giving the yen a temporary boost.     

—  Shaun Osborne, Managing Director, Chief FX Strategist 


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