Canada – Final Puzzle Pieces Before the Bank’s Rate Decision

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This week’s Business Outlook Survey, CPI inflation and retail sales reports offered the final puzzle pieces before the Bank of Canada’s interest rate decision on October 29th. The TSX briefly wavered after the CPI release on tempered expectations for rate cuts, but quickly recovered, finishing the week 0.9% higher (as of writing). They also seem to have brushed off President Trump ending trade talks with Canada over an Ontario ad quoting President Reagan. Taken together, the data supports expectations for another Bank of Canada cut next week, while attention increasingly shifts to fiscal policy and Carney’s forthcoming budget for signs of a broader growth strategy.

The week began with the release of the Bank’s Q3 surveys on business and consumer sentiment. Both measures improved modestly but remain subdued, with roughly one-third of firms and two-thirds of consumers still expecting a recession. From a policy perspective, the most important signal was that firms reported limited pricing power amid weak demand. That should offset the slight rise in longer-term inflation expectations among consumers, especially given that the survey was conducted before the federal government announced its plan to remove counter-tariffs.

More difficult to ignore is the September inflation report, which showed headline CPI rising 2.4% year-on-year, above expectations for 2.2%. The acceleration was due to base effects, slower declines in gasoline prices, higher food prices, and a pickup in travel services prices. Still, inflation remains within the Bank’s 1-3% target range, while three-month trends in most core measures moved sideways (Chart 1). The breadth of inflationary pressure also held steady and should ease some of the Bank’s lingering concerns.

While the Bank remains laser-focused on inflation, its recent communication placed greater emphasis on economic slack, albeit with the caveat that monetary policy has limited ability to deal with tariffs. In this context, August retail sales provided some insight into consumer demand. Sales expanded in line with the flash estimate, largely driven once again by autos. However, the September flash estimate suggests demand deteriorated again. Parsing through the noise, retail sales have clearly lost momentum (Chart 2). This is particularly obvious in autos and home-related goods, which will likely weigh on durable goods spending. That said, some discretionary goods categories are still growing at a decent clip, while services spending, especially on travel, appears to have accelerated in Q3 as signalled by our internal spending data.

Beyond these mixed signals, the Bank has sufficient evidence of slack to justify one more rate cut, particularly given the subdued outlook for exports and investment. This weakness framed the Prime Minister Carney’s address to university students on Wednesday, where he announced an ambitious goal to double Canada’s non-U.S. exports over the next decade. Given the limits of monetary policy, the strategic fiscal push from November’s budget has the chance to shape Canada’s economic trajectory in the coming quarters and years. Let’s hope it proves as potent as the Prime Minister’s speech was inspiring.  

U.S. – Persistent Inflation, Shutdown Pose Challenges for Federal Reserve

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