• BOC Governor Macklem: We will be watching carefully the next two CPI reports

    • There is some underlying volatility in inflation, don’t want to focus too much on one month.
    • Since April, the likelihood of the BOC’s ‘severe’ scenario has come down
    • Remarks about need for possible future cuts isn’t forward guidance
    • Rogers: CAD strength has had some effect on inflation
    • Rogers: We hope to be able to get back to issuing a single central scenario in July

    USD/CAD has just broken down to the lowest since October.

    This article was written by Adam Button at www.forexlive.com.

  • May US ISM services 49.9 vs 52.0 expected

    • Prior was 51.6
    • Prices paid: 68.7 vs. 65.1 prior
    • New orders: 46.4 vs. 52.3 prior — first negative reading in a year
    • Employment: 50.7 vs. 49.0 prior
    • Business activity: 50.0 vs. 53.7 prior
    • Supplier deliveries: 52.5 vs. 51.3 prior
    • Inventories: 49.7 vs. 53.4 prior
    • Backlog of orders: 43.4 vs. 48.0 prior
    • New export orders: 48.5 vs. 48.6 prior
    • Imports: 48.2 vs. 44.3 prior
    • Inventory sentiment: 62.9 vs. 56.1 prior

    There was a time when a report like this would truly rattle markets but it’s turned into a ‘boy who cried wolf’ scenario with consumers continuing to spend (and the government continuing to spend too). Notably, there is some USD selling on this and Treasury yields have ticked lower by 2-4 bps. USD/JPY is now down 80 pips on the day and fell about 50 pips on this.

    Comments in the report:

    • “Tariff variability has thrown residential construction supply
      chains into chaos. Many items are still manufactured in southeast Asia,
      and suppliers are beginning to test the waters for increases. Major
      heating, ventilation and air conditioning equipment manufacturers are
      passing on their cost increases due to higher refrigerant and steel
      commodity prices. Planning is difficult for community projects that
      could be scheduled for the next 22 to 30 months.” [Construction]
    • “Steady, with some signs of growth and opportunity.” [Finance & Insurance]
    • “Federal budget cuts are affecting purchasing decisions.” [Health Care & Social Assistance]
    • “Tariffs remain a challenge, as it is not clear what duties apply.
      The best plan is still to delay decisions to purchase where possible.”
      [Information]
    • “Due to the tariffs, we’ve had had small price increases on our
      international raw materials, and some suppliers are holding back
      inventory to cover uncertainties. We’ve seen some slowdown in the
      production of new wells, but there has been an increase in restimulation
      of existing wells.” [Mining]
    • “Life science startups continue to push forward on clinical trials
      and market launches. The level of investment grew this month. The
      impacts of tariffs are being watched but are not driving changes in
      strategic plans.” [Professional, Scientific & Technical Services]
    • “The projects are slowly starting to be issued, albeit with a great deal of market uncertainty.” [Public Administration]
    • “Business is strong. Consumer concerns over tariffs may be driving some demand.” [Retail Trade]
    • “Tariffs have increased the cost of doing business. It’s too early
      to tell what the lasting impact of this will be. We have tried to budget
      for the increase, but it has been a moving target. Overall, we are
      seeing a leveling off in business activity; time will tell if this is
      temporary or long lasting.” [Transportation & Warehousing]
    • “Business activity is increasing due to demand for data centers,
      commercial growth and infrastructure. Residential growth remains flat.”
      [Utilities]

    This article was written by Adam Button at www.forexlive.com.

  • Bank of Canada rate decision: Rates held at 2.75% as expected

    • The market was pricing in a 26% chance of a cut
    • Macklem said there was a ‘clear consensus’ to hold at this meeting
    • Governing Council decided to hold the policy rate as we gain more information on US trade policy and its impacts
    • April inflation excluding taxes was 2.3%, which was slightly stronger than expected
    • The US administration has continued to increase and decrease various tariffs
    • New trade actions are still being threatened. Uncertainty remains high
    • Pull-forward of exports to the United States and inventory accumulation boosted domestic activity in Q1
    • Consumption slowed from its very strong fourth-quarter pace, but continued to grow despite a large drop in consumer confidence
    • Housing activity was down, driven by a sharp contraction in resales
    • The economy is expected to be considerably weaker in the second quarter
    • Governing Council is proceeding carefully

    There is no real guidance in the statement but the second-last paragraph offers a strong indication of where they stand:

    Governing Council is proceeding carefully, with particular attention to
    the risks and uncertainties facing the Canadian economy. These include:
    the extent to which higher US tariffs reduce demand for Canadian
    exports; how much this spills over into business investment, employment
    and household spending; how much and how quickly cost increases are
    passed on to consumer prices; and how inflation expectations evolve.

    Highlights from Macklem’s opening statement:

    • Governing Council is proceeding carefully, with particular attention to the risks
    • We decided to hold the policy rate unchanged as we continue to gain more information on US trade policy and its impacts
    • The recent further increases in US tariffs on steel and aluminum underline the unpredictability of US trade policy
    • So far, the US economy has proven resilient as domestic demand stayed relatively strong
    • The labour market has weakened, with job losses concentrated in trade-intensive sectors
    • businesses are generally telling us that they plan to scale back hiring
    • The Bank will be watching measures of underlying inflation closely

    That sounds like a dovish hold and this encapsulates it:

    At this decision there was a clear consensus to hold policy unchanged
    as we gain more information. We also discussed the path ahead for the
    policy interest rate. Here, there was more diversity of views. On
    balance, members thought there could be a need for a reduction in the
    policy rate if the economy weakens in the face of continued US tariffs
    and uncertainty, and cost pressures on inflation are contained.

    Faced with unusual uncertainty, Governing Council is proceeding
    carefully, with particular attention to the risks. This means we are
    being less forward-looking than usual.

    USD/CAD is largely unmoved on the headlines but pricing for a July cut is down 45% from 71% before the BOC. I would expect some loonie buyers to wade in but I’m also mulling over this report, which could be a major CAD tailwind.

    This article was written by Adam Button at www.forexlive.com.

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