GILTS: Bulls Still In Control Despite Pullback

2RX5 97.6875/97.8125cs vs 3RX5 97.5625/97.6875cs, bought for 2 in 2k.

The statements accompanying the BOC's 25bp rate cut (to an overnight rate of 2.50%) show increasing concerns about growth and the labor market, with inflation is seen as a lesser concern. In short, the BOC says, since July's meeting there is evidence of "a weaker economy and less upside risk to inflation", compared at that time when there was still "some resilience" in the economy, with "ongoing pressures on underlying inflation". This shift of course mirrors the developments in the data since the July meeting on all fronts.

• The last few meetings, the BOC has held rates while saying they deliberated a cut. This time, Gov Macklem makes it clear in the press conference opening statement that it wasn't a close call: "At this rate decision, there was clear consensus to lower our policy rate for the first time since March." Even so, the new statement also doesn't directly suggest that further cuts may be required (the prior one said "there may be a need for a reduction in the policy interest rate" depending on how conditions evolve), and in the meantime Governing Council reiterates it is "proceeding carefully".
• The new rate statement says: "With a weaker economy and less upside risk to inflation, Governing Council judged that a reduction in the policy rate was appropriate to better balance the risks. Looking ahead, the disruptive effects of shifts in trade will continue to add costs even as they weigh on economic activity. Governing Council is proceeding carefully, with particular attention to the risks and uncertainties. Governing Council will be assessing how exports evolve in the face of US tariffs and changing trade relationships; how much this spills over into business investment, employment, and household spending; how the cost effects of trade disruptions and reconfigured supply chains are passed on to consumer prices; and how inflation expectations evolve."
• The prior one said: "With still high uncertainty, the Canadian economy showing some resilience, and ongoing pressures on underlying inflation, Governing Council decided to hold the policy interest rate unchanged. We will continue to assess the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs related to tariffs and the reconfiguration of trade. If a weakening economy puts further downward pressure on inflation and the upward price pressures from the trade disruptions are contained, there may be a need for a reduction in the policy interest rate. Governing Council is proceeding carefully, with particular attention to the risks and uncertainties facing the Canadian economy. These include: the extent to which higher US tariffs reduce demand for Canadian exports; how much this spills over into business investment, employment and household spending; how much and how quickly cost increases from tariffs and trade disruptions are passed on to consumer prices; and how inflation expectations evolve."
• On the labour market: In July, the statement said: "Labour market conditions have weakened in sectors affected by trade, but employment has held up in other parts of the economy. The unemployment rate has moved up gradually since the beginning of the year to 6.9% in June and wage growth has continued to ease. " Now: "Employment has declined in the past two months since the Bank’s July MPR was published. Job losses have largely been concentrated in trade-sensitive sectors, while employment growth in the rest of the economy has slowed, reflecting weak hiring intentions. The unemployment rate has moved up since March, hitting 7.1% in August, and wage growth has continued to ease."
• On inflation: The description of current inflation is not particularly dovish, but does suggest that concerns are abating: in July the conclusion was that "Based on a range of indicators, underlying inflation is assessed to be around 2½%", a sentiment repeated this time, though now they add "on a monthly basis the upward momentum seen earlier this year has dissipated" in core inflation. Noting that the Canadian government has removed most retaliatory tariffs on US imports would mean "less upward pressure on" import inflation, they also tweak a reference to assessing "how much and how quickly cost increases from tariffs and trade disruptions are passed on to consumer prices", changing to "how the cost effects of trade disruptions and reconfigured supply chains are passed on to consumer prices".

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