Cosmetic Canadian CPI Inflation Decline Still a Win for the Bank of Canada
Economic news and commentary for March 21, 2023
Canada CPI
Canada's CPI grew 0.4% MoM and 5.2% YoY in February, down from 5.9% YoY in January. This is the fastest deceleration in the annual rate of CPI inflation since April 2020. However, base effects played a major role in driving this deceleration as there was a sharp increase in inflation in the first half of 2022, from 5.1% YoY in January to 8.1% YoY in June 2022. As these months fall out of the calculation, annual inflation will continue to fall at a substantial rate. In terms of actual price movements in the month of February, most of the categories saw marginal increases. Food purchased from stores was up 10.6% YoY in, marking the seventh consecutive month of double-digit increases and pushing the general food index up 0.6% MoM to 9.7% YoY. Energy inflation flipped to deflation as the index for energy prices was down -0.6% YoY. Gasoline prices (-4.7% YoY) led the drop and saw the first yearly decline since January 2021.
Core CPI also increased at a healthy pace of 0.4% MoM with the annual pace only declining -0.1 ppt to 4.8% YoY. Housing prices continued to prop up the index despite seeing a slower annual increase for the third consecutive month, up 6.1% YoY in February which is down from 6.6% YoY in January. It is worth noting, though, that mortgage interest costs have become the most significant component of inflation, up 23.9% YoY, the fastest pace since July 1982. Durables and semi-durables both saw growth as well, up 0.5% MoM and 1.2% MoM respectively, and services prices were not far behind at 0.4% MoM. In terms of industries, it was household goods (0.9% MoM) and clothing (0.7% MoM) that pushed prices higher for the most part as they bounced from declines in January. On the other hand, recreation (-0.2% MoM) and transportation (-0.6% MoM) showed that there is some weakness developing in services spending as reopening effects continue to be neutralized by the Bank of Canada’s cooling of the economy.
The February report appears to be a more cosmetic decline in inflation than anything. Many categories still increased on the month, and the decline in the headline rate was heavily impacted by energy and base effects. If we just remove energy from the equation, inflation increased 0.5% MoM and was around 5.7% YoY. In the coming months, there will have to be some deflationary pressures outside of energy to keep the trend of deceleration going. That being said, Canada’s inflation is still lower than much of the developed world, and the housing sector notoriously more fragile. Thus, the Bank of Canada’s, currently in a data-dependence mode, will see this report as a win in the inflation fight, especially after pausing to monitor the effects of tightening. This is even more true in the context of financial market crises arising in the US and Europe. If we get inflation dipping below 5% in the March report, the Bank of Canada will have leeway to pause again in the next meeting.
Still to come…
10:00 am (EST) - US Existing Home Sales
Morning Reading List
Other Data Releases Today
The Reserve Bank of Australia's March minutes revealed a strong consideration of a pause at the next meeting. "It would be appropriate at some point to hold the cash rate steady, to assess more fully the effect of the interest rate increases to date." Since this was before the US banking crisis, a pause at the next meeting is all but assured.
The ZEW Indicator of Economic Sentiment for Germany fell -15.1 pts to 13.0 in March. The Economic Situation Germany index remained depressed, down -1.4 pts to 46.5.
Germany's producer prices of services were only up 0.9% YoY after falling -2.7% QoQ in Q4 2022, hinting at some weakness in selling prices in the services sector coming down the pipeline in future months.
US
A Not-So-Funny Thing Happened on the Way to the Terminal Rate (Guggenheim) - The market clamor over the Federal Reserve’s (Fed) execution of monetary policy in recent years has overshadowed its other important job—regulating and supervising our nation’s financial institutions and monitoring the whole financial system for potential risks. It is one of those things that we only notice when something goes wrong. Rarely are these two assignments at odds with each other, but it is becoming increasingly clear that aggressive monetary tightening was the straw that broke Silicon Valley Bank’s (SVB) back and brought on a crisis. Suffice it to say that it is never a good time for a bank run, but it is an especially bad time when the Fed is fighting inflation.
Uncertainty: Everywhere and All at Once (BMO) - Even in the absence of broader contagion, the economy will feel the effects of financial stress. Although Treasury yields have fallen sharply due to safe-haven demand and an expected earlier Fed pivot, financial conditions have tightened on wider corporate credit spreads and a firmer greenback. While borrowing costs have fallen for governments, that may not be the case for businesses and households. Lending standards, which were already tightening, will become more restrictive, constraining credit.
Could they? Will they? Should they? (EY Parthenon) - Yes, the Fed could continue to tighten monetary policy given policymakers’ hawkish interpretation of recent economic data. Labor market resilience, perceived inflation stickiness, and notable efforts to ensure access to liquidity and dollar funding for domestic and international banks could provide the Fed with room to justify a dual-track approach — distinguishing monetary policy tools from financial stability tools.
Heading Toward a National Bank? (First Trust Portfolios) - The late great Supreme Court Justice Antonin Scalia was often in dissent in key legal cases during his long career. Almost thirty years ago, he wrote that “Day by day, case by case, the Supreme Court is busy designing a Constitution for a country I do not recognize.” This quote comes to mind because it seems that crisis by crisis – the Federal Reserve, lawmakers, and regulators – are busy designing a financial system that looks a great deal like a national bank.
Europe
Swiss regulators broke the rules of the game (Saxo Bank) - The Credit Suisse takeover deal brokered by the Swiss government over the weekend broke all the rules, leaving money on the table for shareholders while wiping out additional tier 1 (AT1) capital holders. This move upsets the order in the capital structure and pushed the USD 250bn AT1 market lower this morning. The move by Swiss regulators could have longer term consequences for European banks with cost of capital going higher. In today's equity note we explain the AT1 market and why it is important for European banks.
UBS to take over Credit Suisse (DWS Group) - The Swiss authorities have brokered a deal that should take Credit Suisse out of markets’ line of fire for now. Investors are likely to struggle however with the way bond holders (AT1) were treated. The cost of capital for this sector is likely to increase, especially as we still don’t believe major central banks will cut rates this year. On a longer-term horizon we remain confident that current events could help to get inflation under control, while creating short-term volatilities.
Global | Turbulence in the banking system (BBVA) - This year had started off very well for banks. In fact, the share price of banks in the eurozone had risen by 20% by Wednesday, March 8; however, in one week these gains have been wiped out. The failure of three banks in the US and the sale of Credit Suisse to UBS have caused turbulence in the global banking system.
Polish data points to first quarter GDP contraction and sizable price pressures (ING) - Industrial production fell on a yearly basis for the first time since the outbreak of the pandemic and data shows a strong decline in employment last month, which goes against the seasonal trend. This fits with the scenario of a decline in GDP on an annualised basis in the first quarter.
The European Commission’s latest electricity market reform proposals (ABN AMRO) - The European Commission’s latest electricity reform proposals address a key weaknesses in the design of the existing wholesale energy markets by encouraging the availability and use of long term pricing solutions. Long term pricing contracts will protect consumers, support investment and bear down on funding costs. However, these benefits will occur over time and as such they will not provide consumers immediate relief.
Europe | ECB sticks to the manual (BBVA) - The European Central Bank (ECB) had to make a decision in difficult circumstances on Thursday, amid strong financial market turmoil and with the banking sector in the eye of the storm. It raised rates by 50 basis points to 3.50%.
Australia
Financial Conditions and implications for the Fed, RBA (NAB) - This week, we update financial condition indices for Australia and the US and outline how central banks are likely to navigate financial stability and price stability priorities.
The Forward View – Australia: March 2023 (NAB) - Our forecasts for the economy are broadly unchanged this month. Following a relatively healthy outcome for growth of 2.7% over 2022 – which saw GDP rise 7.2% above its pre-COVID level – we expect growth to slow sharply to 0.7% in 2023 and 0.9% in 2024, well below trend.
Markets
Global Portfolio Asset Holdings Decrease Amid Elevated Uncertainty (IMF) - Elevated risk aversion amid heightened geopolitical and inflation risks and tightening monetary policies in advanced economies weighed on sentiment.
Real Estate
Households Priced Out by Higher Interest Rates (NAHB) - New NAHB 2023 Priced-Out Estimates show that 96.5 million households are not able to afford a median priced new home, and that additional 140,436 households would be priced out of the new home market if the price goes up by $1,000. This post presents details regarding how interest rates affect the number of households that could be priced out of the new home market.
Commodities
The Commodities Feed: Gold benefits from haven demand (ING) - Broader market concerns are having the impact you would expect, risk assets, including the bulk of the commodities complex, are coming under pressure, while gold is benefitting from stronger safe-haven demand. This week’s FOMC meeting will be important for where markets go next.
Gold tests $2,000 as focus turns to FOMC (Saxo Bank) - Gold briefly traded above $2000 at the start of the European trading session, after the market responded with caution instead of relief to the high drama that unfolded in Switzerland over the weekend. The short-term direction of precious metals will, besides further developments on the banking and liquidity front, be dictated by Wednesday’s FOMC meeting, the outcome of which is turning out to be most unpredictable in years.
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