STIR: Fed Pricing Looks Through Stagflationary UoM, Survey Period Muddies

• There’s no sign of spillover on US rates from a hawkish reaction to the BoC holding rates in a decision that was expected on balance but with still sizeable odds of another 25bp cut.
• SOFR futures are within 0-1 tick higher since the 0945ET BoC decision vs 4.5 ticks lower for CORM5.
• Fed Funds futures cumulative cuts from 4.33% effective: 5bp May, 20bp Jun, 39.5bp Jul and 88bp Dec.
• US data also failed to move the needle earlier, with the retail sales control group missing but after an upward revision amidst some tariff front-running, a weak NY Fed services report and IP data broadly as expected with a large drag from utilities.
• Focus is on another appearance from Fed Chair Powell at 1330ET on the economic outlook (text + Q&A), having said there was no need to hurry to adjust rates after payrolls on Apr 4.  
• Before then, Hammack speaks in a Q&A including prepared remarks at 1200ET before the 20Y auction at 1300ET offers another test of duration demand.
• Trump headlines are also expected at some point in a meeting with Japan trade delegates.  

The BoC's updated Monetary Policy Report (link) includes two scenarios for the Canadian economic outlook in the context of a US/global trade conflict - one more benign and the other more severe. In any case, as expected, the scenarios point to weaker growth and higher inflation than foreseen in the January MPR, which had largely been expected. The two scenarios are described here, with the quarterly and annual projections in the images below:

• Scenario 1: "Trade policy uncertainty weighs on activity. GDP stalls briefly in the second quarter of 2025 and then expands at a moderate pace, resulting in persistent excess supply. Inflation drops below target for the rest of 2025 and in early 2026 due to both excess supply in the economy and the removal of the consumer carbon tax. This occurs despite the upward pressure on prices from the few remaining tariffs. Inflation then averages around 2% for the rest of the scenario horizon." The assumptions here include "that most tariffs imposed since the trade conflict began are negotiated away, but the process is unpredictable. Uncertainty about US trade policy continues, and businesses and households remain cautious."
• Scenario 2: "Canada’s GDP contracts over the next year due to tariffs and the adverse effects of uncertainty. Growth gradually recovers to around 1.8% in 2027. Inflation averages close to 2% through the first quarter of 2026. The removal of the consumer carbon tax and ongoing economic slack roughly offset the impact of tariffs. Inflation then rises above 3% in the second quarter of 2026 due to the impact of tariffs. It then gradually declines to the 2% target in 2027." This scenario assumes "the uncertainty and limited tariffs in Scenario 1 persist and other US tariffs are added. A long-lasting global trade war unfolds"
• Note that these scenarios were compiled on April 11, so ahead of this week's inflation data.

The pullback from session highs in wider core global FI markets has filtered into the GBP short end.

• While a 25bp cut is still fully priced for May, BoE-dated OIS covering the December meeting has eased back to ~81.5bp of cuts, essentially unchanged on the day, after briefly moving to ~87.5bp in the wake of the softer-than-expected CPI data.
• As a reminder, we still look for a 25bp cut in May.
• We don’t view this morning’s CPI release as a gamechanger when it comes to the pace and size of any impending BoE rate cuts, at least in isolation.
• SONIA futures also comfortably off session highs, last +2.5 to -1.0.
• Little of note on the UK calendar ahead of the elongated Easter weekend.
• Slightly further out, flash PMI readings and retail sales will be eyed next week, with a raft of BoE speak is also due (Bailey, Pill, Breeden, Lombardelli & Greene).
• We will provide greater colour around those events a little closer to the time of release.