Bonds Rally as Canada Inflation Unexpectedly Eases to 2.3%

A mechanic works connected the motor of an Air Canada airplane astatine Vancouver International Airport (YVR) successful Vancouver, British Columbia, Canada, connected Thursday, July 11, 2024. The broadening of the disinflation process stalled retired successful June with prices successful the discretionary services categories, specified arsenic restaurants, hotels, and aerial travel, each increasing. Photo by SeongJoon Cho /Bloomberg

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(Bloomberg) — Canadian user prices unexpectedly cooled arsenic prices fell for gasoline and question tours, with airfares plunging arsenic passengers avoided trips to the US.

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The user terms scale roseate 2.3% from a twelvemonth agone successful March, down from 2.6% successful February, Statistics Canada said Tuesday. The scale accrued 0.3% connected the month. Both the yearly and monthly figures were little than median estimates successful a Bloomberg survey of economists.

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The mean of the Bank of Canada’s 2 preferred halfway ostentation rates decelerated somewhat to a 2.85% yearly pace, versus 2.9% successful February. The three-month moving mean of the figures slowed to 2.74%, from 3.32% previously. Economists had besides expected the halfway rates to tick higher.

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The loonie dropped to the day’s debased versus the US dollar and traded astatine C$1.3890 arsenic of 9:05 a.m. successful Ottawa. Canadian bonds extended gains and outperformed astir planetary peers pursuing the release, with the two-year assemblage rallying immoderate 4 ground points to 2.547%. 

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The Bank of Canada whitethorn beryllium acceptable to intermission its easing run connected Wednesday for the archetypal clip since it began reducing borrowing costs past June. US President Donald Trump’s chaotic tariff rollout has caused important uncertainty, and caller surveys released by the cardinal slope showed consumers and businesses expect the commercialized warfare to boost inflation. 

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But with each cardinal ostentation measures coming successful beneath estimates, policymakers clasp the enactment to chopped involvement rates for an eighth consecutive clip to fortify the system amid tepid growth, occupation losses and anemic user spending. Traders successful overnight swaps boosted bets connected a complaint chopped to astir 45% aft the merchandise of the data, from conscionable implicit 30% previously. 

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While Trump excluded Canada from his now-delayed reciprocal tariffs earlier this month, helium has already imposed levies connected Canadian goods including steel, aluminum and vehicles. Canada has broadly matched the car tariffs and added import taxes to astir C$60 cardinal successful US products.

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Before Tuesday’s data, a flimsy bulk of economists successful a Bloomberg survey saw the cardinal slope holding rates steady. 

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“Prices are grounded for now, but that mightiness not last. In the months ahead, we could commencement to spot the interaction of caller tariffs pushing prices higher,” Andrew DiCapua, economist astatine the Canadian Chamber of Commerce, said successful a statement.

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“If commercialized tensions proceed to escalate, we’re looking astatine the hazard of a stagflationary situation with slower maturation and rising prices. With truthful overmuch uncertainty astir maturation —especially with tariffs introduced by the US — we expect the slope to clasp rates dependable astatine tomorrow’s meeting.”

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Katherine Judge, economist astatine Canadian Imperial Bank of Commerce, countered that the easing successful terms pressures is accordant with a 25 basis-point chopped connected Wednesday. The downside risks to maturation from the commercialized warfare outweigh immoderate upside to ostentation from tariffs, she told investors successful a report.