Inflation, where is thy sting?
In more signs that a Bank of Canada rate hike is likely not in the cards for some time, Canadian CPI readings came in lower than expected for the month of November.
You’ll recall that October CPI readings registered as the highest in two years. This reading was partly responsible for the violent sell-off in Canadian bonds over the past few weeks as investors fretted about a possible rise in inflationary pressures.
BMO noted the following:
“Canadian consumer prices rose just 0.1% in November, mild enough to chop the headline inflation rate to 2.0% from the two‐year high of 2.4% the prior month. Similarly, core prices were also below expectations at flat, carving the annual trend in underlying inflation to just 1.4% after it popped up to 1.8% in October.”
“Recall, that the wide gap between headline and core inflation can be readily explained by the start of the HST in Ontario and B.C. at mid‐year, which alone is bumping up overall inflation by 0.7 percentage points. Excluding that item, Canada’s current inflation rate (of 1.3%) is not much different from the 1.1% U.S. pace.”
“After a one‐month stir, Canadian inflation is headed back into hibernation. The big question after the surprise pop in October’s CPI was whether it was a one‐month fluke, or the start of a new higher trend for inflation—today’s report emphatically says “one‐month fluke”. This docile report will quell talk of a rate hike by the Bank of Canada in early 2011, especially in combination with the meagre 1.0% GDP growth seen in Q3.”
Once again I’ll point out that the data continues to support my suggestion that the Bank of Canada prematurely raised interest rates according to their own playbook, a mistake they won’t soon repeat. Indeed, it appears that subdued inflation readings are accompanying continued strong credit demand. It begs the question of what these CPI readings will look like once credit demand wanes and savings normalize.
Consumer confidence erodes
The December reading of consumer confidence by the Conference Board of Canada indicates that consumer confidence has fallen back to year-ago levels, erasing the gains from much of the year.
“The Index of Consumer Confidence fell 2.6 points to 81 (2002 = 100) this month to close out the year virtually unchanged from where it was in December 2009. Pessimism was concentrated in Central Canada, as lower index values in Quebec and Ontario outweighed the large upward movement in British Columbia.”
“The percentage of consumers who reported that their family’s financial situation had improved over the past six months rose to 17.6 per cent, up 1.2 points from November. Unfortunately, this positive development was more than offset by a 1.7 points increase—to 22.4 per cent—in the share of respondents who responded that they were worse off financially compared with six months ago. The balance of opinion on this question has been negative for 26 consecutive months.”
The most important finding of the survey is the following:
“Results on the major purchases question continue to prove worrisome. When asked if they feel that this is a good time to make a major purchase, just 38.5 per cent of respondents answered positively—down 2.7 points. Moreover, the share of respondents who responded that it is a bad time rose for a seven consecutive month, this time by 0.9 points. At 49.6 per cent, the share of Canadians who now consider it a bad time to make a major purchase has reached its highest level since April 2009.”
This is significant. Our GDP growth is 65% dependent on consumer spending. Indications that consumer demand is fading therefore give us a glimpse into whether the consumer will act as the propeller or the anchor on economic growth in the near term.
You may recall that the Consumer Metrics Institute publishes an interesting index that tracks major purchase intentions by US consumers. It has been an excellent leading indicator of broader economic growth. When advanced two quarters and compared with GDP growth, the results are interesting. Note the CMI index is the red line while GDP is represented by the green bars.
Given that our economies are both overly-dependent (by historic norms) on consumer spending for GDP growth, it suggests to me that the recent weakness in Canadian GDP is likely not a passing trend as house prices, HELOC growth, consumer spending, and savings all sit precariously off their historic norms and are set for a mean reversal.
End of the bond sell-off?
Bonds all across the curve experienced strong selling pressure over the past few weeks in response to inflation fears and sovereign debt concerns out of Europe. With today’s tepid GDP reading and declining consumer confidence, we may well see a strong bounce in bonds. Yields have already started creeping lower in the past few sessions as bonds have found their bid.
Slowing CPI readings and lackluster growth prospects lead me to believe that the start of a dreaded rate hike tightening cycle may be quite a ways into the future, meaning the bond market may be safe for a while. At least until sovereign debt concerns again raise their ugly head.