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Market Wire
Canadian Inflation Misses Expectations for May

Karl Schamotta June 23, 2017

Canada’s Consumer Price Index (CPI) rose 1.3 percent on a year-over-year basis in May, missing market expectations that had coalesced around the 1.5 percent mark. A sharp slowdown in gasoline price growth was a major contributor, while food prices continued to stabilize. Excluding more-volatile food and energy prices, the CPI was up 1.4 percent on a year-over-year basis in May, following a 1.5 percent increase in April.

Traders are now discounting the likelihood of a July rate hike, and the loonie has plunged almost a full cent in response, largely erasing gains achieved yesterday when Statistics Canada reported that retail sales had blown the doors off through the early part of the year. Consumer expenditures increased at a record 3.6 percent through April, but with the rate of growth in household indebtedness dramatically outpacing income gains over the past five years, strong retail sales are more likely representative of a fundamentally unsustainable level of spending than a true measure of economic strength.

In cooler climes south of Toronto, traders are battening down the hatches ahead of what will be a data-intensive week in the United States. With a string of key consumer spending releases due to land along with revised first-quarter gross domestic product numbers, the stage is set for more turbulence in the money markets as traders jockey for position across the yield curve.

Bottom Line: Taken in combination with yesterday’s blockbuster retail sales report, today’s weaker-than-expected inflation print drastically weakens the case for a July rate hike from the Bank of Canada. A 2017 move remains on the table, but markets should not necessarily see the central bank’s recent hawkishness as a vote of confidence in the country’s economic prospects. Instead, it could very well be a sign of desperation – concerned policymakers ‎may be trying to slam the brakes on Canada’s out-of-control debt creation machine.

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