Implied probabilities in overnight swaps markets, which capture market bets on where monetary policy is heading, is now giving about 67 per cent odds of a 50 basis point cut on Oct. 23. Odds of 33 per cent are assigned to a smaller 25 basis point cut. Prior to this morning’s inflation data, markets were putting 50/50 odds of whether it will be a larger or smaller cut.
Markets are now fully pricing in a total of 75 basis points worth of monetary easing by the end of this year.
The Canadian dollar immediately lost ground after the 830 am data release, falling just over one-tenth of a U.S. cent to about 72.30 cents US, a 10-week low. The Canadian two-year bond yield fell five basis points on the data, to 3.018%.
Canada’s annual inflation rate slowed more than expected to 1.6% in September, mainly on cheaper gasoline, but indicators of underlying price pressures held steady, Statistics Canada said on Tuesday. Analysts polled by Reuters had forecast the inflation rate would cool to 1.8% from 2.0% in August. Month-over-month, the consumer price index decreased 0.4%, compared with a forecast of 0.2% decline.
It’s the last major economic report to be released ahead of the Bank of Canada’s interest rate announcement on Oct. 23.
Here’s how implied probabilities of future interest rate moves stood in swaps markets, according to LSEG data, just prior to the 830 am ET inflation data release. The overnight rate now resides at 4.25%. While the bank moves in quarter point increments, credit market implied rates fluctuate more fluidly and are constantly changing. Columns to the right are percentage probabilities of future rate moves. The second table to the bottom is a breakdown of probabilities for the size of a cut on Oct. 23.
And here’s how the probabilities look right after the inflation data release:
Here’s how economists are reacting in written commentaries issued right after the data release;
Royce Mendes, Desjardins Securities
With the share of components growing faster than 3% per year at just 30%, breadth indicators continue to suggest weakness across a range of categories. And that’s despite the fact that shelter inflation continues to run at an annual pace of 5.0%.
Core inflation measures didn’t move on a year-over-year basis, but three-month annualized rates slowed. The Bank of Canada’s core median and trimmed mean indicators averaged 2.35% for the second consecutive month. That said, the three-month annualized rates decelerated to 2.11% from 2.31% in August. Moreover, the three-month annualized rate of core services excluding shelter cooled to just 1.91% from 2.26%. These readings suggest weakness in recent trends and confirm that inflation is now at risk of falling below the Bank of Canada’s target.
More to come
