FED: US TSY 17W BILL AUCTION: HIGH 4.155%(ALLOT 48.24%)

In a speech Monday, BOC Governor Macklem largely reiterated Governing Council's concerns over inflation noted at the September meeting. The title, "Navigating uncertainty and adapting to change", is suggestive of abating concern over Canadian economic growth as there is "mounting evidence that Canadian businesses and households are adapting" to various developments including "increased trade tensions". That was a theme played up at the latest meeting, and while Macklem acknowledged "uncertainty" in the overall outlook, the undercurrent of resiliency and economic adaptation continues to point to the next move in rates being to the upside rather than to the downside. 

• There was little market reaction to the speech's release, with markets still pricing in a little under 60% probability of a 25bp hike at the next meeting in October, 33bp cumulatively through the December meeting, and rates rising 112bp over the next 12 months altogether. We will hear more from Macklem at a post-speech press conference later (1230ET).
• Some key quotes:
• On the balance of risks: "developments are pulling the economy in different directions. Trade uncertainty will weigh on demand. Higher energy prices will keep inflation up. One creates downside risks to growth, while the other creates upside risks to inflation...The more difficult question is how persistent the inflationary and disinflationary forces will be."
• On energy/counter-tariff impacts on inflation: "The Bank has been looking through the direct impact of higher oil prices on inflation because so far, we haven't seen a lot of evidence that these higher costs are spreading to other goods and services. But we're watching closely. With the conflict ongoing and shipments from the Middle East still curtailed, the risk that inflation broadens and becomes more persistent has increased... In addition, Canadian counter-tariffs could add costs for some businesses and eventually feed into consumer prices. The counter-tariffs primarily target non-consumer goods that can be replaced with Canadian substitutes. As a result, we expect their impact on inflation will be modest."
• On growth: "The latest escalation [in US-Canada trade tensions] could once again cause businesses to delay investment and hiring decisions—pushing some businesses back to the reassessment stage. This would set back the progress we’ve seen and restrain growth. And because a weaker economy puts downward pressure on inflation, it would affect the inflation outlook as well. If these new tariffs remain in place, growth could be roughly halved in the fourth quarter, to below 1%....Even with the recent rebound, the economy remains in excess supply. And if growth weakens once again for several quarters, economic slack will persist, making it harder for businesses to raise prices."
• On the BOC's rate outlook: "Monetary policy cannot offset the effects of tariffs or influence global energy prices. What it can do is ensure that global developments do not jeopardize price stability in Canada. Our beacon is our 2% inflation target, and we are committed to keeping inflation close to target over time. As these risks evolve, we are prepared to adjust monetary policy as needed...we will be assessing whether the current policy rate balances the risks to our inflation outlook. We don’t want to raise our policy rate and restrain growth if inflationary pressures are contained. But nor do we want to be too slow to respond if inflationary pressures are becoming more persistent."
• Of note: "We’ve developed a new forecasting model called Prima to help us distinguish between temporary inflation pressures and those that could prove more persistent. It also improves our ability to consider alternative economic scenarios. We will use it for the first time as our primary forecast model for our October Monetary Policy Report."

• US TSY 26W AUCTION: NON-COMP BIDS $1.869 BLN FROM $79.000 BLN TOTAL

• US TSY 13W AUCTION: NON-COMP BIDS $1.979 BLN FROM $92.000 BLN TOTAL