Canada – Yields Rise Ahead of Monday’s Inflation Report 

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Bonds have had a tough week, as the sell-off has pushed the U.S. 10-year Treasury yield up by 27 basis points, taking its Canadian counterpart 20 basis points higher. The Canadian 10-year yield is back up to 3.88% (at time of writing) - fully reversing its decline of the past two weeks. The bond sell-off has come despite oil prices treading water just below $90 a barrel. For the loonie this is a perfect storm of bad news. The interest rate differential with the U.S. widened out, while energy prices provided no support.  It now sits at a one-month low of 70 cents U.S..  

Behind this week’s market dynamics were a slew of hawkish commentary from Fed officials following yet another hot inflation report. Expectations for rate hikes in the U.S. ticked higher, pulling the rest of the world along.  

Hot core inflation is starkly different from the situation in Canada. Core inflation metrics have been relatively well behaved, still lingering around 2%, even on a six-month basis. The energy shock has translated to faster top-line growth, but thus far the pass through to core prices has yet to materialize (Chart 1).  

But there’s the rub. Just because core prices have yet to materially accelerate, doesn’t mean they won’t. The Bank of Canada’s October Monetary Policy Report expected the price surge to come in late 2026 and into 2027. Their forecast implies that businesses soon start passing on higher input costs to their customers. We too expect to see core inflation start to rise but are not yet confident that these increases will be of a similar magnitude. Recent weakness in the economy and the labour market suggest that demand-side conditions likely aren’t yet in a place where companies enjoy ample pricing power. An acceleration in growth next year is likely, but economic uncertainty is still high, whether it’s durable enough to sustain elevated inflation is an open question. Meanwhile, crude oil prices have tumbled 15% from their late October highs, removing some of the cost-push pressures.  

This all sets up next Monday’s October inflation report. We’re likely to see some volatility in energy prices, in particular gasoline (Chart 2) showing through on transportation costs. However, the important questions will be whether a broader set of price categories are showing accelerating price gains, and to what extent core measures are reflecting an uptick in underlying inflation.  

Regardless of how the October inflation report pans out, oil prices have declined in November. Even with tight supplies for refined products (diesel & gasoline), lower fuel prices will help alleviate inflation pressures up the supply chain. Where things go from here is highly uncertain, but broadly speaking we still expect a normalization of global oil flows to gradually bring prices down in 2027. This will help turn down the heat on inflation and limit the upside to interest rates.  

U.S. - Firm Inflation Cements the Case for Another Hike

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