Daily Commentary

MarketMinder’s View: Canada’s CPI rose 3.0% y/y in August, unchanged from July, as volatile energy and food prices eased while travel costs rose. However, echoing commentary worldwide, some experts warn this stability isn’t likely to stay for long since the data predates the run-up in global crude oil prices—and that next month, gas prices will rise “at least five per cent,” which would mean an acceleration in headline CPI. Interestingly, this isn’t the consensus. “However, RBC economist Abbey Xu says there is limited evidence so far that higher energy costs are driving prices higher elsewhere in the economy. ‘Price growth remained high for energy-intensive categories such as air travel, but had not spread materially across the broader consumer basket,’ she wrote in research published Monday. ‘The risk of greater pass-through will rise the longer oil prices remain elevated.’” Look, energy prices may indeed speed up due to the recent jump in oil prices. But we have seen this movie already (earlier in the year!), and we know the plot: Accelerating prices in high-profile categories needn’t spill over into broader CPI, and oil prices can retreat as fast as they jumped. Inflation is always and everywhere a monetary phenomenon—energy’s vicissitudes alone won’t cause CPI to remain elevated, whether in Canada, the US or elsewhere. For more, see last month’s commentary, “On Inflation, Look Past Today’s Headlines.” 

MarketMinder’s View: As always, please note MarketMinder is nonpartisan. Our analysis focuses on politics’ economic and market implications only. In that vein, guess what is back in headlines: the debt ceiling! “Analysts project the U.S. will breach the $41.1 trillion debt ceiling at some point in 2027, requiring Congress to raise or suspend it before the Treasury Department runs out of ‘extraordinary measures’ to avoid a catastrophic default. If Democrats capture one or both chambers of Congress in November’s midterm election, it would open the door to a standoff as the party tries to extract policy wins from Republican President Donald Trump in exchange for averting a bumpy ride over the fiscal cliff.” We share this commentary for a couple reasons. First, warnings about a supposedly negative event to come in 2027 speaks to how dour sentiment has become recently—when headlines are hyping up possible problems next year, it won’t take much for reality to exceed expectations. Second, all this handwringing is over a well-established false fear: breaching the debt ceiling does not mean default, full stop. It is the statutory limit on outstanding bonds, but it allows existing ones to be refinanced, tax revenue covers interest five times over and the 14^th amendment requires Uncle Sam to pay Treasury interest first. The debt ceiling has been raised (often following fights) more than 100 times and is overwhelmingly likely to be this time too, whether in the “lame duck” post midterm vote or the new congress. As the latter half of the article acknowledges, “Democrats will also be hesitant to agree to raise the debt ceiling if they win the election in November, given that it represents one of their most crucial points of leverage over the White House.” This is why the debt ceiling remains a story—it is one of politicians’ favored talking points—one often used to extract concessions from opposing parties. For more, see last year’s commentary, “What to Know as the Debt Ceiling Stalks Headlines.”

MarketMinder’s View: Here is a specific forecast: “Analysts at several major banks expect the [Bank of England’s] Monetary Policy Committee (MPC) will increase the Bank Rate to 4pc on Nov 5, as new escalations in the war in Iran send oil prices soaring.” The rationale: The Bank of England will want to get in front of rising prices, and stronger-than-expected summertime growth means the UK economy can weather a hike. We agree that the UK economy can handle one or two hikes, though doing so would also be a mistake as it risks flattening the yield curve—which could discourage lending. We also reckon there is a bit of groupthink at play here, as the European Central Bank hiked its primary interest rate from 2.25% to 2.50% last week—central bankers tend to follow each other, so that may be influencing economists’ outlooks, too. Now, that BoE meeting isn’t until early November, and a lot can change between now and then, so don’t take any of these forecasts to the bank. But the consensus view that rate hikes are necessary is a risk worth monitoring, should a global hike cycle become a reality and materially affect the yield curve.