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What are the latest CPI numbers and what does it mean? Find out here

  • Andrew Masliwec, Analyst, Capital Markets

Greetings,

Happy Friday to all our readers out there. Now, I always assumed our target audience and reader base was concentrated in the Canadian market, but after seeing some marketing statistics from LinkedIn, it looks like we’ve had readers from Australia, New Zealand and even the far-off land of New York City. I shouldn’t be too surprised as they do say good news travels far and we are the most “glass-poured-full” commentary you can get. So with that, G’day matey’s and let’s get this prawn on the barbie.  Sorry, I mean shrimp for our Canadian readers.

Friday’s News - CPI

Well by now you know the only reason to look forward to Fridays are the hard-hitting economic releases that come out. This Friday was no different as we got August’s CPI numbers. The CPI Month-over-Month numbers came in on the screws at -0.1% as was expected by the economists polled. This gives an annualized YoY number of 2.8% which is also at the consensus. So, no surprises here. Getting a bit into the weeds, core inflation (which excludes food, energy and the effects of tax) edged higher on the year-over-year number to 2.1% annualized. The core number increased from 2% to 2.1% and has been on its fastest pace in the last 6 years.  This is important as it will not go unnoticed by the Bank of Canada even though the headline inflation number was flat. AKA rate hike looming.

Now for some details. Gas prices fell 1.6% which decreased the headline monthly number 0.05%.  Shelter costs were up 0.3% which was boosted by the uptick in mortgage interest costs of 0.6%. Remember when the BoC raised interest rates? Well any mortgage rate tied to prime would see higher mortgage interest costs, of course. You will most likely see the mortgage interest cost segment increasing as we go forward.  Food purchased at restaurants, was up 0.2%, which is actually the 29th consecutive month of increases for people eating out.  I’m still convinced the sushi-burrito and poke bowl bubble is set it burst in Q4 2018. I am bullish on Nashville Hot Chicken.

We also received retail sales numbers this Friday. The retail numbers including auto’s came in exactly on consensus at 0.3% MoM. Retail sales not including auto-sales, or Ex-auto’s, came in higher than expected at 0.9% vs 0.6%.  Overall, the releases were in-line with expectations and there wasn’t much there to change the narrative painted by the Bank of Canada. Current probabilities of a rate hike by the BoC on October 24th is now at 90%+ with a follow up hike in March being effectively 100%.

Other News this Friday

NAFTA is still at the forefront of most conversations in the market these days. This Friday was no different as a White House advisor told Fox News that the USA is moving closer and closer to a USA-Mexico only NAFTA deal. Note that Canada is still involved in negotiations but the USA/Mexico have agreed in principle. This would obviously be an issue for the Bank of Canada (and all of Canada really) moving forward, but with mid-term elections coming up in the USA in November, I would expect something to be resolved sooner rather than later.

Rates

It’s worth giving a shout out to interest rates over this past month. The Canadian market has seen a sell-off over the month of September which has caused rates to be higher across the yield curve. The 5-year Government of Canada’s are currently yielding 2.33% which is 16 bps higher than the beginning of September. The 10-year GoC is yielding 2.43% which is almost exactly 20 bps higher than September 3rd. It’s also worth mentioning, as we have previously, that Canada’s yield curve is very flat with the 5-10 spread at only 10bps. This is actually 4bps wider than a week ago when it was only(!) 6bps. It shouldn’t be a surprise then that Canada has the flattest yield curve in the G7.

Reasons for the recent sell-off could be varied, but it’s always good to look to our big brother in the south. The USA has had very strong economic data consistently and this only ramped up in September. Canada has outperformed on a relative basis to the USA on the NAFTA concerns mentioned before, but with an interest rate hike looming by the BoC, it comes as no surprise that interest rates back home are reacting accordingly. If you are a borrower concerned about higher interest rates, just know that we are still not even at pre-2010 levels. Any 10-year mortgages out there coming due? However, if the looming rate hike is of concern, First National does offer the renowned ‘early rate-lock’ option for all your borrowing needs.

Have a good weekend and hoo roo,

Andrew Masliwec