Central banks in the limelight

• Canada’s CPI comes in hot.
• The Fed holds steady but dims prospects of a near-term cut.
• The market grapples with the steady climb of the 10-year Treasury yield.

This week was all about central banking, as both U.S. and Canadian markets had to digest a couple of surprises. Let’s dive in starting with Canada and the latest inflation numbers. The Canadian Consumer Price Index (CPI) for August showed an unexpected increase. Well, unexpected by some economists, that is. We’re guessing most of our readers were not that surprised. Because yes, as you figured while filling up your car lately, the price of gas was the primary driver for the resurgence of inflation. Headline CPI rose by 4% year-over-year, exceeding expectations by 0.2%, and the core rate (or as the Bank of Canada [BoC] calls it, the “trimmed” rate) increased by 3.9% year-over-year, up from July's 3.6%. While some of this can be attributed to the "base effect" from last year's figures, the monthly data still surged more than anticipated..

Market reactions post-data release saw yields increase, suggesting concerns that the BoC might take action (by raising rates.) However, other indicators hint that the economy's softer aspects might deter further interest rate hikes. On the back of this fear of further hikes, the Canadian dollar has been gaining, and this is expected to persist, given rising energy costs.

Down south, the U.S. Federal Reserve (the Fed) recently held the federal funds rate at between 5.25% and 5.5%. Although a pause sounds like a good thing, this time it doesn't denote a dovish stance. In fact, the Federal Open Market Committee’s (FOMC) projections showed a pronounced hawkish tilt. The good news: they raised the growth outlook for 2023 to 2.1% from 1% and anticipate unemployment to peak at 4.1%, which is an improvement from an earlier prediction of 4.5%. The bad news: within the FOMC, 12 of 19 members support another rate hike this year, and they are more hawkish over the long term. Interest rate predictions for 2024 and 2025 have been adjusted upward to 5.1% and 3.9%, respectively. U.S. Federal Reserve Chair Jerome Powell emphasized the Fed's 2% inflation target, noting the effect of oil prices on inflation switching from beneficial to detrimental.

Nobody was thrilled with the Fed's vibe. The 10-year Treasury yield hit new peaks, and stock markets, especially the Nasdaq, weren't fans, which made an already rough month for tech even worse. After a non-stop summer rally, retail stocks are getting a reality check. The dreams of a soft landing, or no landing at all, are slowly fading, and markets are waking up to the reality of consumers having to spend more at the pump, more at the bank and more at the grocery store.

Yet, there's a silver lining: jobs data. Initial jobless claims dropped by an impressive 20,000 week-over-week to a mere 201,000, crushing the 225,000 estimate. This puts the four-week average at 217,000, the best we've seen since February. Plus, continuing claims decreased by 21,000 to 1.66 million — a record low since January. Employers aren't letting go: they're clinging to the staff they spent ages hunting down in recent years. As long as the job market holds up, hopes of a soft landing remain.

Listen to this week’s podcast for further insights.