Inflation rate hits lowest level since 1999, challenging Bank of Canada’s plan to raise rates

Canadian inflation continued to ease in May, with a key gauge of price pressures at the lowest since 1999, a trend that will challenge the Bank of Canada’s recent efforts to set the stage for a rate increase.

The consumer price index rose 1.3 per cent in May from a year ago, down from an annual pace of 1.6 per cent in April, Statistics Canada reported Friday from Ottawa.

Measures of annual core inflation, a key indicator tracked by the Bank of Canada that excludes volatile components such as gasoline, fell to the lowest in almost two decades. The average of the central bank’s three core measures declined to 1.3 per cent, the lowest since March 1999.

The Bank of Canada last week began to play down sluggish inflation numbers, suggesting they were simply capturing the lagged effects of past excess capacity. But the numbers are below their forecasts. Inflation for the first two months of the second quarter is averaging 1.5 per cent, versus Bank of Canada forecasts of 1.7 per cent.

Economists surveyed by Bloomberg had forecast inflation would slow to 1.5 per cent from 1.6 per cent in April on lower gasoline prices. Prices rose 0.1 per cent on a monthly basis, lagging the 0.2 per cent median economist forecast.

The Bank of Canada’s ‘common’ core rate was 1.3 per cent in May, the ‘median’ core rate was 1.5 per cent and the ‘trim’ measure was 1.2 percent. Recent changes in electricity policy in Ontario seems to be having an impact. Electricity prices in that province were down 16.1 per cent year over year in May, bringing inflation down in Ontario to 1.4 per cent from 1.9 per cent in April.

Inflation is important to the central bank since its mandate is to target inflation at 2 per cent, an objective it has largely failed to deliver on over the past five years. When it talks about being less concerned about inflation, the Bank of Canada gives itself more leeway to talk about hiking interest rates, as it’s started do.

On a seasonally adjusted basis, consumer prices fell 0.2 per cent in May. Gasoline prices fell 4 per cent in May. Year-over-year, gasoline prices were up 6.8 per cent. That’s down from a 15.9 per cent increase in April. The gap between goods and services inflation is widening. Price increases for services were 2.3 per cent in May, compared with 0.1 per cent for goods. The difference between the two rates was the widest since 2015.

Services inflation “is a better indicator of domestic slack, and where underlying inflation trends are heading, says Nick Exarhos, CIBC Economics. All” told, a softer indicator on CPI, but something the market has gotten used to, and the trend in crude may be more instructive over the coming weeks for the path of inflation breakevens.”

 

Bloomberg News

Inflation data out today confirms Bank of Canada ‘can take its sweet time raising rates’

By Theophilos Argitis

Canadian inflation continued to ease in May, with a key gauge of price pressures at the lowest since 1999, a trend that will challenge the Bank of Canada’s recent efforts to set the stage for a rate increase.

The consumer price index rose 1.3 per cent in May from a year ago, down from an annual pace of 1.6 per cent in April, Statistics Canada reported Friday from Ottawa.

Measures of annual core inflation, a key indicator tracked by the Bank of Canada that excludes volatile components such as gasoline, fell to the lowest in almost two decades. The average of the central bank’s three core measures declined to 1.3 per cent, the lowest since March 1999.

Key Points

The Bank of Canada last week began to play down sluggish inflation numbers, suggesting they were simply capturing the lagged effects of past excess capacity. But the numbers are below their forecasts. Inflation for the first two months of the second quarter is averaging 1.5 per cent, versus Bank of Canada forecasts of 1.7 per cent.

Economists surveyed by Bloomberg had forecast inflation would slow to 1.5 per cent from 1.6 per cent in April on lower gasoline prices.

Prices rose 0.1 per cent on a monthly basis, lagging the 0.2 per cent median economist forecast.

The Bank of Canada’s ‘common’ core rate was 1.3 per cent in May, the ‘median’ core rate was 1.5 per cent and the ‘trim’ measure was 1.2 per cent.

What the economists say

“ In a nutshell, no matter where you look, overall inflation is roughly 1.3% in Canada at this point (or even lower) — Exhibit A for why the Bank can takes it sweet time before raising rates. Canada’s inflation rate is now not only well below Britain and the US, but it is now also lower than that in China and the EU.” — Douglas Porter, BMO chief economist

Big Picture

Inflation is important to the central bank since its mandate is to target inflation at 2 per cent, an objective it has largely failed to deliver on over the past five years. When it talks about being less concerned about inflation, the Bank of Canada gives itself more leeway to talk about hiking interest rates, as it’s started do.

Other Details

On a seasonally adjusted basis, consumer prices fell 0.2 per cent in May. Gasoline prices fell 4 per cent in May. Year-over-year, gasoline prices were up 6.8 per cent. That’s down from a 15.9 per cent increase in April.

Bloomberg.com

Yellen’s future uncertain as talk of possible successor expected to heat up

By Craig Torres, Saleha Mohsin and Jennifer Jacobs

Federal Reserve Chair Janet Yellen’s candidacy for another term is encountering resistance from some Trump administration advisers who want a new leader at the U.S. central bank, according to two administration officials, even as the Treasury secretary indicated she may still be in the running.

While White House officials are aware that Fed chiefs in the past have been asked to stay regardless of party affiliation, some advisers are keen to install their own pick in the coveted seat, two officials said on the condition of anonymity to discuss private deliberations. The selection process is in the early stages.

Publicly, Yellen hasn’t been ruled out.

“We haven’t made any decisions yet on the Fed chair, whether we’re going to have a new one or not going to have a new one,” Treasury Secretary Steven Mnuchin said in a Bloomberg Television interview June 20.

President Donald Trump has until the fall of this year to make a decision on a central bank chief and hasn’t given much thought yet to the qualities he’d like to see in potential contenders, according to another administration official, who like the others spoke about the matter on condition of anonymity.

The president hasn’t even discussed the situation at any length with his top economic adviser, Gary Cohn, this official said. Moreover, Trump likes Yellen and feels no sense of urgency to explore the matter, the official said.

Market reaction

Speculation that the Fed leader will stay on past her term ending in February is belied by the talk inside the White House that some of Trump’s aides doubt that he’d stick with Yellen, whom candidate Trump criticized last year for keeping interest rates low to help then-president Barack Obama.

“We’ll be working closely together with the president to consider all the issues,” Mnuchin added. Cohn, director of the National Economic Council, is working with Mnuchin on several Fed vacancies in the coming months. The two former executives of Goldman Sachs Group Inc. will be mindful of the financial-market impact of their decision.

The job of Fed chair affects every American, businesses that borrow and the price of money everywhere. The bond market would punish a bad choice, boosting market interest rates and threatening the economic expansion. Given the weight of the position, previous presidents have opted for continuity and reappointed the sitting chair, a tradition that would argue in favor of Yellen.

For her part, Yellen was careful not to criticize the president at her June 14 press conference. “I have felt that it’s been appropriate for interest rates to remain low for a very long time,” she said when asked about reports that Trump told her he considered her a “low interest-rate” person like himself.

When asked about a proposal to cut federal funding for job training programs, Yellen steered clear of criticizing the administration, noting “these programs can be undertaken at many different levels.”

People familiar with Trump’s sentiment suggest that the next chair — if not Yellen — is likely to have several qualities already visible in White House policies and nominations: a deregulatory bias, and a concern for credit flowing down to small businesses.

Loyalty vs independence

There’s another quality that shows through in his appointments that may not mesh well with the concept of an independent central bank: loyalty.

“What is Trump going to demand from the Fed chair? That is the question,” said Mark Spindel, an investment manager who has co-authored a book in the Fed’s relationship with Congress that will be published in August.

Republicans want to push through fiscal stimulus and tax reform at a time when the U.S. expansion has just completed its eighth year.

“The White House is not going to want the Fed” to offset fiscal initiatives, said Paul Mortimer-Lee, the chief economist for North America at BNP Paribas. “Whoever is running the Fed has to be independent enough to stand up to that.”

Conflicts may arise from a subtler point. White House officials could argue their tax policies hold the promise of supply-side effects that boost the economy’s potential growth down the road. Fed officials could disagree and raise rates, citing the short-term risks of higher inflation.

Job-market slack

Unemployment is low at 4.3 per cent, and Fed officials expect a tight job market to push prices up — one reason why they raised interest rates June 14. Mnuchin has said the unemployment rate has “excessive influence” over policy while pointing to broader measures of labor market slack.

However, even alternate measures of the jobless rate — which Yellen has also referred to — have come down in recent months.

“The big challenge for the next Fed chair is that the time will come to hit the brakes a little harder and cap the rise in inflation,” said Ethan Harris, head of global economics research at Bank of America Merrill Lynch. “Working through that without a recession is extremely difficult.”

Judy Shelton, an economist who advised the Trump transition team, said the president will look for somebody who wants to remove obstacles to Main Street credit growth.

“He was very concerned that small businesses didn’t have access to funds,” Shelton said. He was also concerned that “savers were getting zilch,” she added.

Careful selection

Choosing a Fed chair is typically the result of months of careful analysis by White House staff with highly specified criteria, according to people previously involved the decisions.

Republicans also have a general sense that the Fed under former chairman Ben Bernanke was too expansive and discretionary.

That’s raised investor’s interest in economists who espouse monetary rules such as Stanford University’s John Taylor. Glenn Hubbard, the dean of the Columbia University’s business school, wrote an essay in The Wall Street Journal on June 15 that advocated a policy rule. Taylor, Hubbard and former Fed governor Kevin Warsh were among the top four people economists picked as most likely candidates for the Fed chair job in a Bloomberg News survey conducted June 5-8. Yellen was atop the list.

Rumors about Yellen’s possible successor are likely to intensify as central bankers from around the world gather in Jackson Hole, Wyoming, for the annual conference sponsored by the Kansas City Fed typically held in August.

Warsh’s chances

The vetting process for Fed chairs isn’t transparent, and the choices aren’t always predictable. For that reason, outsiders on occasion act like they are running for office. For example, Warsh, a Bush appointee to the Fed, attended a monetary policy meeting at the Hoover Institution at Stanford in May. Warsh is a fellow at Hoover.

Warsh, who didn’t respond to a request for comment, was listed as a discussion moderator following a presentation by Princeton University economist Markus Brunnermeier on the euro crisis. Instead, Warsh gave a speech on the Fed that used variations of the word “reform” a dozen times in the text, prompting some in the audience to conclude he was campaigning for the Trump nomination. A public relations firm is reaching out to reporters for Hubbard.

“The Trump White House has been so chaotic in terms of vetting, selecting, and actually nominating candidates that such uncertainty invites opportunistic angling for the nomination,” said Sarah Binder, a senior fellow of governance studies at the Brookings Institution in Washington, and a co-author with Spindel on the Fed book.

Crisis management

Jason Furman, the former chair of the Council of Economic Advisers under Obama, said White House staff initially had four specific criteria to screen candidates as they approached the renomination of Bernanke and the nomination of Yellen.

The first, he said, was how the person would manage policy in a recession or crisis, a question Furman said is relevant today. “The number one quality is: What are they going to do in stressful circumstances?” Furman said.

Managing the large and diverse Fed system, which has 12 regional banks, was another criterion, as was confirmability, Furman said. The White House’s legislative director sat in on every Oval Office meeting on Fed candidates, he added.

Finally, Furman said, some reflection of “White House values” was part of the consideration. For Obama, that included jobs. Yellen checked several of those boxes.

And the chair’s independence? That was a basic assumption by everybody involved, Furman said. “We just took it for granted that whoever we picked would not be listening to us on monetary policy,” he said.

–With assistance from Shannon Pettypiece

Oil, Warren Buffett’s Home Capital investment help spur rally in Canadian dollar

Warren Buffett’s rescue of beleaguered alternative mortgage lender Home Capital Group Inc. is helping the Canadian dollar outperform all major currencies on Thursday.

The loonie rose 0.8 per cent to C$1.3233 against the U.S. dollar in Toronto, the top performer among 16 majors tracked by Bloomberg. A report by the government statistics agency that showed Canada’s April retail sales exceeded expectations also boosted the currency’s appeal, although it’s still the second-worst performing major this year.

Berkshire Hathaway will buy a 38 per cent stake for about $400 million (US$302 million) and provide a $2 billion credit line to backstop Home Capital. That gives the currency a reprieve after hedge funds and other speculators pushed net short positions to an all-time high last month. There had been speculation gains in the country’s real estate market were unsustainable and elevated levels of debt pose a risk to stability.

“The Home Capital news should temper some of the bearish bets that have accumulated against the Canadian dollar in recent weeks,” said Shaun Osborne, chief foreign-exchange strategist in Toronto at Bank of Nova Scotia. “Those still significant shorts must be feeling very uncomfortable.”

Home Capital shares jumped 12 per cent to $16.66 in Toronto. Berkshire agreed to pay an average price of $10 a share, a 33 per cent discount to Wednesday’s closing price of $14.94, becoming its largest shareholder.

“The news certainly helps sentiment,” said Derek Halpenny, a London-based head of European markets research at MUFG. “But Canadian dollar performance of late is certainly generally being fueled by the relative macro story.”

Bets for interest-rate increases in Canada jumped last week after Bank of Canada Senior Deputy Governor Carolyn Wilkins signaled it may be time to consider a bump in rates given the “impressive” growth in the economy.

Further supporting the Canadian dollar, crude oil stabilized after falling into a bear market earlier this week. West Texas Intermediate for August delivery rose 32 cents to US$42.85 a barrel on the New York Mercantile Exchange.

Home Capital shares have tripled since bottoming in May, though they’re still down about 70 per cent down from their peak in 2014. Company directors said on a conference call Thursday the focus on the deal with Berkshire was to restore investor and capital markets confidence.

“The rescue removes the last vestige behind this strange notion of a Canadian financial crisis,” said Sebastien Galy, a New York-based macro strategist at Deutsche Bank AG.

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