Canada: Headline CPI inflation to jump to 1.9% y/y in November – TDS

Analysts at TDS expect Canada’s headline CPI inflation to jump to 1.9% y/y in November from 1.4% y/y, driven by a surge in gasoline prices.

Key Quotes

“The sharp pickup will be short-lived as base effects are adverse over the coming months and gasoline prices are set for a partial reversal in December. This should lead headline inflation back down to 1.7% y/y in December before bottoming out at a benign 1.4% y/y in January.”

“Outside of energy, the inflation picture is constructive in November. After a series of declines, we expect food prices to rebound on a weaker loonie, which by November returned to its pre-July hike levels. Other past sources of weakness also should show some recovery, such as vehicle prices. Excluding food and energy, we expect prices to accelerate to 1.6% y/y, the highest read since March. The rapid absorption in labour market slack, which is now more apparent in wage growth, also points to stable to higher readings in the three new core metrics (CPI common, trimmed mean and median), which would be viewed favourably by the BoC, but unlikely in itself to trigger a hike in January.”

“That said, our forecast errs on the side of caution amid a few sources of downside risk, notably cellphone services prices due to the entry of new competitors and apparel prices due to more aggressive holiday promotions and competitive retail landscape.”

“Foreign Exchange

• The November CPI will set the tone ahead of Friday's GDP release. TD and the market both look for an upgrade in headline price pressures, though we come in touch a below consensus. Keep in mind, however, that the bulk of the forecasters on Bloomberg sit between 1.9 and 2.0% (the average is 1.99). There are a few outliers that lie between 2.1 to 2.3%, but we suspect that a print between 1.9 to 2.0% is unlikely to do much damage to CAD.
• Against the average, our forecast implies a 0.75-sigma miss, which is typically worth about 0.22% upside in USDCAD. However, the sensitivity of USDCAD to the 2y rate spread between the US and Canada underscores that the trend in both headline and the core indicators offers the better signal. In this regard, a pickup in the headline together with a stable (and perhaps improving) set of core indicators keeps a Q1 hike in play for the BoC. We also note our measure of data surprise momentum has turned positive for the first time since September. This backdrop comes against our high-frequency fair value estimates that show USDCAD is running 1-sigma rich, which we suspect increases the scope for downside on a decent round of data.”