PrefBlog

The BoC stood pat:

The Bank of Canada today held its target for the overnight rate at 2.25%, with the Bank Rate at 2.5% and the deposit rate at 2.20%.

Canada’s economy is showing signs of improvement. Growth is picking up and inflation is projected to ease gradually from its recent spike. There are still important risks and uncertainties related to the war in the Middle East and US trade policy.

Since the April Monetary Policy Report (MPR), global economic prospects have been dented by higher oil prices stemming from the Middle East conflict. At the same time, the build-out of artificial intelligence (AI) is supporting economic activity in a growing number of countries. Oil prices are still lower than their peak in April but the situation in the Middle East remains volatile. The path for global inflation is highly dependent on how the conflict unfolds.

The US economy is growing at about 2½%, mostly because of strong consumption and booming AI investment. China’s economy is expanding solidly thanks to robust exports. Economic activity in the euro area has been weighed down by high energy prices, but is expected to strengthen in the second half of the year if energy prices come down as anticipated.

The Bank projects global GDP growth will slow to 2¾% in 2026, mostly because of the effects of the Middle East conflict, and recover to around 3¼% in 2027 and 2028.

Financial conditions in Canada have eased since April and global equity markets have been buoyant. US bond yields have risen, while those in Canada are little changed. This differential has contributed to the depreciation of the Canadian dollar.

Canada’s GDP data over the past year was choppy and growth stalled as the economy adjusted to new tariffs, high uncertainty and slower population growth. Labour market conditions have remained soft, reflecting ongoing economic slack. The unemployment rate was 6.5% in June and has hovered in a range of 6½%-7% since the end of 2024. There are clear signs that economic growth has resumed in the second quarter, with growth estimated at 2½%. While this largely reflects the unwinding of temporary factors, sources of economic growth appear to be broadening.

Recent indicators point to continued solid consumer spending. Housing activity has been weak but looks to be stabilizing. Export growth has resumed and is expected to continue to strengthen, albeit on a lower path. Business investment is projected to pick up modestly, boosted in the near term by the oil and gas sector. Although the Canada-US-Mexico Agreement is now subject to annual reviews, more businesses report they are finding ways to navigate through the uncertainty. Government spending also contributes to higher economic activity over the projection.

Following GDP growth of 0.7% in 2026, the Bank projects the economy will grow by 1.8% in both 2027 and 2028. As the recovery proceeds, economic slack will be gradually absorbed.

CPI inflation rose further to 3.2% in May, mainly because of higher gasoline prices linked to the war in the Middle East. Excluding gasoline, inflation was 2.2% and measures of core inflation remained close to 2%. Near-term inflation expectations are sensitive to changes in gasoline prices but longer-term inflation expectations remain well anchored. War-related cost pressures are still working their way through some consumer prices but are being offset by downward pressure on other prices from continued economic slack. CPI inflation is expected to stay elevated in June and then ease gradually in the coming months, returning to around 2% in early 2027, although this forecast is dependent on the path for oil and gasoline prices. Inflation is forecast to average around 2% in 2027 and 2028, albeit with some monthly fluctuations because of base-year effects.

Governing Council judges the current policy rate remains appropriate to sustain the economic recovery and bring inflation back to the 2% target, in line with the MPR projections. Uncertainty is still high. Governing Council will continue to assess the strength of the Canadian economy and the outlook for inflation, and is prepared to adjust monetary policy as needed. The Bank is committed to maintaining Canadians’ confidence in price stability through this period of global upheaval.

Macklem told the press:

“Obviously, you’ve seen in the last week [oil prices have] gone back up closer to around US$80-US$85, so they’ve backed up quite a bit, although they’re still a lot lower than they were in April. And yes, the longer oil prices stay high, the bigger is the risk that that begins to spill over into the prices of other goods and services, and inflation starts to broaden, it becomes more generalized, and that would certainly be a signal, a warning sign to us. Right now, what you see in the data is that the cause of inflation is very concentrated in gasoline prices. The latest [headline CPI] reading is 3.2 per cent. CPI ex-gasoline is only 2.2 per cent. Our measures of core, trim, and median are very close to 2 per cent. So far, it’s very concentrated in gasoline prices. We will be assessing very closely the spreading. We expect to see some pass through of higher oil prices to other prices, and we’ve built that into our projection.”

US PPI actually fell:

The Producer Price Index for final demand dropped 0.3 per cent last month after a downwardly revised 0.6-per-cent increase in May, the Labor Department’s Bureau of Labor Statistics said on Wednesday.
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A 1.4-per-cent decline in goods prices, the largest since July, 2022, accounted for the decrease in the PPI over the month. Goods prices were weighed down by a 6.4-per-cent drop in the cost of energy products. Wholesale food prices fell 0.6 per cent. Prices for services rose 0.2 per cent. The ceasefire between the United States and Iran collapsed last week after commercial tankers came under fire in the Strait of Hormuz, triggering military strikes between the United States and Iran. Oil prices rose to a four-week high after Washington reimposed a naval blockade of Iran.

And in the best news I’ve had all week:

[the Honourable François-Philippe Champagne] Minister [of Finance and National Revenue] was pleased to share, alongside his provincial and territorial counterparts, Ontario’s commitment to join Canada’s national securities regulatory passport system—an important step toward greater regulatory harmonization across provinces and, importantly, a requisite step to removing outstanding interprovincial trade barriers and growing one Canadian economy.

The TXPR price index set another 52-week high today of 714.52, in front of the old mark of 713.43 set yesterday.

PerpetualDiscounts now yield 5.59%, equivalent to 7.27% interest at the standard conversion factor of 1.3x. Long corporates yielded 5.09% on 2026-07-14 and gained 40bp in price (close/close) to 2026-07-14. BMO reports “duration” (they do not specify “Macaulay” or “Modified”; I will assume Modified) of 12.32, so the price change is roughly equivalent to 3bp in yield, leaving the assumed 2026-7-15 long corporate yield at 5.06%. Therefore the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed slightly (and perhaps spuriously) to 220bp from the 225bp reported July 8.

Another new 52-week high from the TXPR price index today of 713.43, beating the mark of 713.15 set yesterday.

Gas prices had a marked effect on US inflation:

The pace of price hikes slowed sharply last month, helped by a steep decline in gas prices as tensions eased in the Middle East.

Annual inflation measured 3.5% in June, compared to 4.2% in May, according to Consumer Price Index data released Tuesday by the Bureau of Labor Statistics.

However, that’s well above where it stood before the war with Iran broke out in February, when prices were rising at a 2.4% annual rate. Economists polled by FactSet had expected the pace of inflation to slow to 3.8% in June.

On a monthly basis, prices fell by 0.4%, after increasing by 0.5% in May. That marked the largest monthly decline in prices since April 2020.

Elisabeth Buchwald reports:

For the past few months, Americans’ paychecks were essentially being wiped out by inflation. That’s because inflation was growing at a faster rate than wages, a result of slowing wage growth combined with ramped-up inflation stemming from the war with Iran.

But Tuesday’s Consumer Price Index report showed that on an annual basis, prices are rising at 3.5%, which is equal to the annual rate average hourly earnings are growing, per the June employment report.

Elisabeth Buchwald takes issue with Warsh:

In his testimony before the House Financial Services Committee on Tuesday, Federal Reserve Chairman Kevin Warsh claimed that “interest rates don’t favor one class of people versus another.”

“They don’t favor those that have financial assets more than folks that are living off their bi-monthly paychecks,” he went on to say.

That’s not quite true.

John Towfighi reports

This morning’s better-than-expected inflation report prompted a shift in expectations for Fed policy: Markets are now pricing in a 17% chance that the Fed raises interest rates in July, down from a 42% chance one day ago, according to CME FedWatch.

The TXPR price index set a new 52-week high today of 713.15, eclipsing the old mark of 712.48 set last Friday, the 10th.

ZPR also set a new 52-week high, 12.96, beating the mark of 12.94, also set Friday 10th.

The TXPR Price Index set a new 52-week high today of 712.48, edging the previous mark of 712.22 set yesterday.

In addition, ZPR set a new 52-week high today of 12.94, edging the previous mark of 12.935 set yesterday, and CPD at 14.21 beat yesterday’s 52-week high of 14.18.

In today’s employment news:

Employers added 18,000 jobs in June, Statistics Canada said Friday, mostly in part-time and private sector work.
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Statscan said workers aged 15 to 24 added 33,000 jobs last month, coming off what’s been a tough labour market for youth. Workers aged 25 to 54 saw similar gains while older members of the labour market faced losses.

Overall growth was concentrated in part-time work as well as the food and accommodation and retail sectors of the economy, according to Statscan.
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Elsewhere in the economy, manufacturing shed 17,000 positions last month. The industry is down some 61,000 jobs since a recent peak in January 2025 as U.S. tariffs continue to weigh on the sector, StatCan said.
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As of Friday at noon, financial market odds were around 90 per cent in favour of an interest rate hold from the central bank next week, according to LSEG Data & Analytics.

All told, overall employment was up by 99,000 positions year-over-year in June with growth concentrated in the private sector.

Average hourly wages rose 3.3 per cent annually in June, up from three per cent in May.

The TXPR Price Index set a new 52-week high today of 712.22, erasing the previous mark of 710.92 set May 28.

PerpetualDiscounts now yield 5.62%, equivalent to 7.31% interest at the standard conversion factor of 1.3x. Long corporates yielded 5.06% on 2026-07-08. Therefore the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed dramatically to 225bp from the 250bp reported June 30.

The New York Fed has released the June Survey of Consumer Expectations:

June Survey: Inflation Expectations Up at Short- and Medium-Term Horizons; Gas Price Growth Expectations Fall

• Median inflation expectations at the one-year ahead horizon increased by 0.2 percentage point (ppt) to 3.7 percent in June, the highest level since September 2023, and by 0.2 ppt to 3.3 percent at the three-year-ahead horizon, the highest level since June 2022. They were unchanged at 3.0 percent at the five-year-ahead horizon.
• Gas price growth expectations declined by 3.5 ppts to 1.5 percent, the lowest level observed since August 2022.
• The mean perceived probability of losing one’s job in the next twelve months decreased by 1.0 ppt to 14.1 percent, and the mean perceived probability of finding a job if one’s current job was lost increased by 1.2 ppt to 44.9 percent.
• Perceptions about households’ current financial situations compared to a year ago improved, with a smaller share of households reporting a worse financial situation and a larger share reporting a better financial situation; however, expectations for future credit availability deteriorated slightly, with a larger share of respondents expecting that it will be harder to obtain credit in the year ahead.