Inflation

CPI was released this morning, and it came in a little lower than expected at 2.7%. The street had been looking for 2.9%. While this is a drop from the May inflation report, it is still uncomfortably high.

Once you get out of the headline number though, it gets a little dicey. Unfortunately the items driving up the CPI are groceries and rents. Sure, used car prices were down, air travel prices dropped, and that new couch you have had your eye on is a little more affordable, but all these things are ‘ nice to haves ‘ whereas groceries and rent are ‘ gotta haves’ .

If you want lower interest rates, you will take this report as a reason for the BOC to cut next week. If you want higher interest rates you will take this report as a reason not to cut next week. People will see into these numbers what they want to see. Government 5’s are down about 3 to 4 bps on the news, so nothing major. More telling though for BOC expectations is the 1 year note, which is also down around 3 bps on the news. If this report locked in a BOC rate cut next week I would expect to see the 1 year note down a lot more than 3 bps. That being said, odds are now between 75% to 80% that Tiff cuts a quarter point next week.

Of course the day is still young, and trading action today could be bumpy. Is 2.7% enough to get the BOC to cut? Is 2.7% for June a trend or is it a flash in the pan? Remember the May inflation number shot up after a drop in the April numbers, so could we see August reverse course and show inflation heading up? Maybe Tiff and Co. figure enough damage has been done and another cut will help? Personally I think they will still hold off on another cut and then re assess the situation in September once they have the July data and August data. If they can piece together June, July, and August, you can perhaps see trends.