Daily Points

KEY POINTS:

• Bonds continue to richen post Fed decision, BoC comments
• The Fed was dovish relative to market pricing
• BoC's Macklem doesn't sound like he's cutting in June, maybe not July either
• US productivity slowed, labour costs accelerated
• US layoffs fell to their lowest this year
• Canadian trade to inform Q1 GDP growth
• Swiss inflation surprises higher

A quiet overnight session continued to mull over the consequences to what the Fed did and Governor Macklem said. The Fed was relatively dovish and Macklem was relatively hawkish as explained in my note to subscribers (here). Bonds are slightly richer and CAD is a touch stronger to the USD. Pricing for cumulative rate cuts by December is holding at between one and two quarter point cuts which is about 6–7bps more than before the announcements began at 2pmET yesterday. There was very little by way of new information overnight but the focus returns to the US this morning and tomorrow's nonfarm payrolls.

Governor Macklem and SDG Rogers take another swing at it today when they do round #2 of parliamentary testimony at 8:45amET. The opening statement will be the same as the one issued yesterday (here). I think the press coverage entirely missed the salient points and some of the press didn’t even cover it one bit. Therefore I’ll repeat the passages that caught my eye:

“I realize that what most Canadians want to know is when we will lower our policy interest rate. What do we need to see to be convinced it’s time to cut? The short answer is we are getting closer. We are seeing what we need to see, but we need to see it for longer to be confident that progress toward price stability will be sustained.”

“In the months ahead, we will be closely watching the evolution of core inflation. We remain focused on the balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behaviour as indicators of where inflation is headed.”

“To conclude, we’ve come a long way in the fight against inflation, and recent progress is encouraging. We want to see this progress sustained.”

Macklem might have said this during his earlier goofy love-in with Chair Powell that was effusive with praise toward one another. Yet the key parts included the emphasis upon ‘months’ (ie: plural) and “sustained.” Combined, they indicate that Governing Council wants to see quite a bit more inflation data before pulling the trigger. This guidance goes back to the narrative advanced by the BoC since last Fall that laid out three steps on the path to potential easing: a period of weaker core inflation; establishing confidence that this will be sustained; and then having a dialogue on whether and when to ease. Macklem is saying they’re on that path but haven’t reached the third stage yet. I think that’s the right way to proceed since for all we know the Q1 softening in core inflation readings may have been a flash in the pan for reasons I’ve been arguing. Since we only get one more month of inflation data before the June 5^th meeting it would seem to be inconsistent to turn around and cut so soon, barring a large shock. It’s not even clear that July is when they’ll go since the two months of CPI figures we get on May 21^st and June 25^th would barely meet the “months” test even assuming that they come in softly which is not assured. April CPI, for instance, faces upward pressure at least upon headline inflation from higher gasoline prices and carbon taxes and we’ll need to see if there is pass through alongside any potential rebound effect in underlying price pressures.

US job cuts fell to 64.8k in April which is the lowest tally since December. January, February and March had been tracking between 82k and 90k layoffs per month (chart 1). This deceleration plays to the narrative that seasonal adjustments might not be doing an adequate job of controlling for workforce trimming at the start of new financial years in the wake of the massive surge in post-pandemic hiring. If so, then further improvement may lie ahead. That said, the layoff figures offer no material consequences to tomorrow's nonfarm payrolls report.

Yesterday afternoon's gain in US vehicle sales offered some upside to the next retail sales print. Vehicle sales were up by +1.6% m/m SA to 15.74 million SAAR and in line with prior industry guidance. That should add about two tenths to retail sales (chart 2).

Swiss inflation surprised to the upside but remains low and in line with the SNB's rough expectations. The franc appreciated a bit on the back of the numbers.

Other US releases will focus upon the job market and its potential contributions to inflationary pressures. Productivity growth is expected to slow compared to the surge over 2023Q2-Q4 shown in chart 3 (8:30amET) and productivity-adjusted labour costs are expected to rise at a quicker pace that could see them rise by +/-4% q/q after being roughly flat in Q4 (8:30amET). This is a huge question mark overhanging the US economy by way of whether the productivity surge and concomitant softening of unit labour costs was temporary or can be sustained.

Canada and the US will also update trade figures for March (8:30amET). Canada may be particularly important as the figures will further inform net trade contributions to Q1 GDP growth during what is so far a great quarter for trade (chart 4).