Powell Says Fed’s Inflation Fight Could Take Years After raising rates rapidly over the past year, officials aren’t sure how much higher and faster to lift them

(…) Powell said because the Fed had lifted rates so quickly last year, there hasn’t been enough time to see the effects of those moves in slowing economic activity and inflation.

“Policy hasn’t been restrictive for very long…so we believe there’s more restriction coming,” Powell said during a panel discussion with other central bankers at the European Central Bank’s annual symposium in Sintra, Portugal. (…)

Powell said he doesn’t anticipate core inflation will return to the central bank’s 2% target until 2025. (…)

“The passage of time is not our friend here,” he said.

Most officials at the meeting penciled in two more increases this year. “The reason for that was if you look at the data over the last quarter, what you see is stronger than expected growth, tighter than expected labor markets, and higher than expected inflation,” said Powell. (…)

Powell said the failure of three midsize banks this spring had played a part in his desire to space out the Fed’s rate moves. (…)

The ECB this month lifted rates by a quarter percentage point, and its president, Christine Lagarde said officials would very likely increase interest rates again next month. She left open the possibility of a further rate increase in September.

Lagarde said she had been surprised by the resilience of Europe’s economy following enormous disruptions to energy markets and trade from Russia’s invasion of Ukraine. “Everybody thought the German model was dead, everyone would be on their knees. Resilience has been demonstrated at every level of society,” Lagarde said. (…)

“We were predicting a long but shallow recession, but the economy has been resilient,” said Bank of England Gov. Andrew Bailey. That resilience has been accompanied by a very tight labor market and large pay gains, Bailey said. (…)

Meantime, Bank of Japan Gov. Kazuo Ueda said he sees signs the country’s inflation rate is heading toward its 2% target, but isn’t yet confident enough to unwind its monetary easing.

Ueda said the central bank could change course if it becomes more convinced that inflation will be sustainably higher heading into 2024. Japan’s inflation rate has hovered at about 3% or higher since last summer. Core inflation was 3.2% in May.

Ueda pointed to recent increases in wages to suggest the country’s underlying inflation rate is still below 2%.

Bloomberg:

Powell and his Fed colleagues will get another reading on inflation on Friday, with the release of May data on the personal consumption expenditures price index.

Headline inflation on that measure is projected by economists to slow to 3.8% from 4.4% in April, in large part due to a decline in gasoline prices. But core inflation – which strips out food and energy costs and which policymakers view as more indicative of the underlying trend — is seen coming in unchanged at 4.7%, according to the median forecasts of economists surveyed by Bloomberg.

The Cleveland Fed’s Inflation Nowcasting sees Core PCE inflation at +0.38% in June, unchanged from May and unchanged from one week ago. That would be an annualized rate of 4.6% and +4.4% YoY.

This chart shows how little progress in core inflation there has been since March:

BTW, Bloomberg also reports that “We see the effects of our policy tightening on demand in the most interest rate-sensitive sectors of the economy, particularly housing and investment,” Powell said in his prepared comments.

But when is the last time we saw new home sales jump 40% after a doubling in mortgage rates? Construction spending is up 15% in the last 15 months, capex are up 4.2%, neither series showing any signs or rolling over.

Ed Yardeni proved right with his rolling recession theme, for a while. He now sees a need to shift to a rolling expansion theme, with rates still rising globally!

Maybe the bite has yet to hurt. Listen to the Oaktree podcast below.

BCWYWF dept. (Be Careful What You Wish For)

The St. Louis Fed paper linked below tells us that all these Fed QEs post GFC set the stage for the excess retirements during AND after Covid, now partly responsible for the labor shortage and rising wages. But no worries, the San Fran Fed recently analysed “that labor-cost growth has a small effect on nonhousing services (NHS) inflation, as well as inflation overall. The estimates imply that the recent surge in the employment cost index explains only about 0.1 percentage point (pp) of current elevated inflation readings, a negligible portion of the 3pp increase in the core PCE measure.”

In effect, St. Louis says that the Fed is guilty but San Francisco says there is actually no real damage.

So Mr. Powell’s focus on NHS inflation, the so-called “super-core”, is actually inconsequential.

The San Fran Fed analysis also concludes that “labor cost growth does not appear to fuel inflation through higher demand.” Actually, “recent evidence shows that wage growth tends to follow inflation.”

But that contradicts a March 2023 paper by the grand-daddy, the Board of Governors of the Federal Reserve System, titled The Role of Wages in Trend Inflation: Back to the 1980s?

The results show that wages consistently inform estimates of underlying inflation. The weight on wages was highest around 1980, drifted down through the 2000s, and returned to its 1980s value by 2022. In addition, inflation in the 2020s appears to have unmoored moderately from the 2 percent range that prevailed for decades, as the role of the persistent component of inflation increased in recent year. However, accounting for wages lowers the model’s view of the increase in the volatility of trend inflation. (…)

In other words, forecasting inflation is difficult, irrespective of the information set used to construct forecasts. Nonetheless, the data support a signal role for wages, and this signal is more important at certain points, including the late 1970s and early 1980s and the 2020s (to date). While a substantial weight on wages in an estimate of trend inflation from this type of model indicates that wages are important for signal extraction, it does not indicate causality and points to the need for further empirical and theoretical work.

All clear then.

Whatever. What is interesting in the below analysis is that there is evidence that the Covid excess retirements were not temporary.

Excess Retirements Continue despite Ebbing COVID-19 Pandemic

A 2021 Economic Synopses essay by Miguel Faria e Castro covered the COVID-19 retirement boom, using trend analysis to compare actual retirees with the natural trend that results from the aging of the baby boomer generation (those born between 1946 to 1965). This simple model estimated that there were just over 2.4 million excess retirees as of August 2021.

In a forthcoming Review article,¹ we study the LFPR drop in greater detail, discussing how abnormal returns across financial asset classes may have contributed to excess retirements over the period of 2020-2022, and how much of the drop in LFPR can be attributed to these excess retirements. Further, we update the simple model of retirement in Faria e Castro’s 2021 essay, using the methodology from Joshua Montes, Christopher Smith and Juliana Dajon’s 2022 working paper (PDF).

In this post, we updated the results from our retirement model used in the Review article with the latest available data—April 2023—and investigated how the share of people retiring has compared with what we would expect under normal conditions in the final months of the COVID-19 emergency period, which ended in May 2023.

This updated model of retirement assumes that for a specific demographic group—defined as a combination of age, ethnicity, education and sex—the decision to retire depends on labor market conditions, the generosity of Social Security retirement benefits for that specific age group, and time trends that capture other secular changes to how different demographic groups approach labor market decisions.

We used these three factors to predict retirement shares for different demographic groups. We first divided the U.S. population into 780 demographic groups, with each subgroup being a combination of age (16 to 80 and older), sex (men and women), education (less than a bachelor’s degree, and a bachelor’s degree or more), and ethnicity (non-Hispanic white, non-Hispanic nonwhite, and Hispanic). For each of these 780 groups, we used a time trend, the unemployment gap, and the expected returns from Social Security to predict the expected share of retired people using historical, pre-COVID-19 data from 1995 to 2019.

The unemployment gap is simply the difference between the current unemployment rate and the natural rate of employment, as estimated by the Congressional Budget Office (CBO). We included this variable as there is a large body of research that finds that current labor market conditions affect people’s decision to participate in the labor force.

To calculate expected returns from Social Security, we calculated how much an individual would be penalized or rewarded for retiring at their current age. The Social Security Administration (SSA) provides information on your normal (full) retirement age—which is dependent on what year you were born—and the penalty or reward for retirement—which is based on how many months you are from the normal retirement age.² We only calculated this variable for people in our sample who are ages 62 to 70, because 62 is the minimum age to begin receiving reduced benefits, and after 70 you can no longer accrue additional benefits from delaying retirement.

In the figure below, we compare the actual share of people who are retired, as a percentage of the civilian noninstitutional population age 16 and older, to our predicted share of retirements based on the model described above.

Actual Retirements Began to Greatly Surpass the Predicted Trend during the Pandemic

As shown in the figure, the actual share of retirements roughly tracked the predicted share from January 2000 through February 2020, when the actual share was 18.1%. In the first three months of the pandemic, however, actual share quickly increased to 18.6% versus a predicted share of 18.2%, implying just over one million excess retirees in May 2020.

The gap between actual and predicted shares of retirements continued to grow throughout the COVID-19 pandemic and peaked in December 2022, implying an estimated 2.95 million excess retirees in that month.

Starting in 2023, the model line begins to flatten out—meaning that predicted retirements are leveling off after consistently increasing from approximately 16% in 2012 to just over 18.6% in the first four months of 2023. In 2023, the actual share has also decreased since the peak of 19.8% in December 2022.

As of April 2023, we estimate that there were approximately 2.4 million excess retirees in the U.S. Excess retirements are still well above our predicted trend, which may be contributing to a continued tightness in the labor market and low unemployment rate since the recovery from the pandemic recession.

Micron Delivers Strong Forecast in Sign That Glut Is Easing

Sales will be as much as $4.1 billion in the fiscal fourth quarter, the company said in a statement Wednesday. That compares with an average analyst estimate of $3.87 billion.

“We believe that the memory industry has passed its trough in revenue, and we expect margins to improve as industry supply-demand balance is gradually restored,” Chief Executive Officer Sanjay Mehrotra said in the statement. But recent actions in China — where the government has decided that Micron’s products are a security risk — “is a significant headwind that is impacting our outlook and slowing our recovery,” he said.

Like many of its peers, Micron has suffered a collapse in orders for its products after sluggish demand for smartphones and personal computers led to a buildup of inventory. The company’s projection indicates that customers have worked through those stockpiles and are now returning to purchasing again. (…)

Though Micron’s customers are emerging from a pile of excess inventory, the company isn’t predicting a rapid return to growth in 2023. PC shipments are expected to decline by a “low double-digit” percentage from a year ago, slumping to a level that’s below where that market was before the pandemic. The smartphone industry will contract by a percentage in the mid-single digits from a year ago, Micron predicted. (…)

Worth listening to:

Conversations – This Time Might Be Different with Howard Marks and David Rosenberg

Howard Marks (Co-Chairman) and David Rosenberg (Co-Portfolio Manager, U.S. High Yield, Global High Yield, Global Credit) discuss topics from the June 2023 edition of The Roundup. They consider the evolution of the high yield bond market, investor optimism, and why this time might actually be different in financial markets.

This chart will help you visualize what David calls the coming reckoning. Floating rate debt now costs 550bps more than in 2021. Fixed rate debt is being renewed at double its pre-2022 cost. The hit on cashflow will only keep growing through 2025.

Since U.S. nonfinancial corporate debt reached $12.7T as of Q1’23, a 550bps incremental cost would reduce annualized cashflow by $636B or $500B after tax, a 16% setback on total corporate cashflow and 20% on corporate profits.

This topdowncharts.com chart shows that this is global and is concurrent with tightening standards across the world. Things are likely to get worse before they get better.

Surprisingly Strong US Economic Data Keeps Recession Fears at Bay

Purchases of new homes climbed to the fastest annual rate in more than a year, durable goods orders topped estimates and consumer confidence reached the highest level since the start of 2022, according to the Tuesday reports. Another release showed housing prices in the US rose for a third-straight month.

While the data don’t reject the possibility of a recession in the coming year, they do give reason to believe a downturn isn’t right around the corner, let alone a foregone conclusion. The latest reports on retail sales, inflation-adjusted consumer spending and the job market also support that notion. (…)

While homeowners are reluctant to move and take on a greater mortgage, prospective buyers have adjusted to the shift and are increasingly seeking out new construction instead.

Purchases of new single-family homes increased 12.2% to an annualized 763,000 pace last month, government data showed Tuesday. The figure marked the third-straight monthly advance and beat all but one estimate in a Bloomberg survey of economists. (…)

The robust confidence and homebuying data are rooted in what’s still a strong labor market. Unemployment is historically low and job openings are plentiful, though both metrics have been softening in recent months. (…)

Orders placed with US factories for business equipment rose in May for a second month, indicating companies continue to make longer-term investments despite high borrowing costs and economic uncertainty.

Shipments of nondefense capital goods, which are a proxy for actual spending, jumped 3.4%, the biggest increase since the end of 2020. (…)

My comments:

• Home builders are benefitting from the dearth of existing home sellers clinging to their low mortgage, and are buying down mortgage rates for new home buyers. In May, new single-family home sales were 9.2% above their February 2020 level, substantially outpacing starts (-4.0%) and permits (-8.5%). Over time, these 3 series converge.
• Non-defense capital goods orders ex-aircraft are very volatile. They were up in the last 2 months after being down the previous 2. A 3-m moving average shows +1.5% a.r. in May, down from +2.1% in April and March. Flat since August 2022 in spite of rising costs. That said, “core capex” are up nicely from their pre-pandemic levels.

• Consumer confidence, a coincident indicator, remains much lower than pre-pandemic.
• The BLS Job Openings perked up in April but Indeed Job Postings through June 23rd suggest lower levels in May and June.

• Second-Quarter GDP Growth Estimate Decreases On June 27, the GDPNow model estimate for real GDP growth in the second quarter of 2023 is 1.8 percent, down from 1.9 percent on June 20.

U.S. Considers New Curbs on AI Chip Exports to China Restrictions come amid concerns that China could use AI chips from Nvidia and others for weapon development and hacking

The Commerce Department could move as soon as early next month to stop the shipments of chips made by Nvidia and other chip makers to customers in China and other countries of concern without first obtaining a license, the people said.

The action would be part of final rules codifying and expanding the export control measures announced in October, some of the people said. (…)

The new restrictions being contemplated by the department would ban the sale of even A800 chips without a license, according to the people familiar with the matter. [The A800 is a version of Nvdia’s AI chips for the Chinese market that falls below performance thresholds outlined by the Commerce Department]. (…)

The administration is also considering restricting leasing of cloud services to Chinese AI companies, which have used such arrangements to skirt the export bans on advanced chips, some of the people familiar with the discussions say.

The timing of the rule’s rollout is still uncertain, as chip makers continue to push the administration to forgo or ease the new restrictions. The administration is likely to wait until after a visit to China by Treasury Secretary Janet Yellen in early July to avoid angering Beijing, according to a source familiar with the situation. (…)

U.S. officials and policy makers increasingly see AI through a national-security lens. Weapons infused with AI could give U.S. rivals a battlefield advantage, and AI tools could be used to create chemical weapons or produce malicious computer code. (…)

Xi Vows to Protect Foreign Investors in Charm Offensive The Chinese leader pledges the nation will do right by foreign investors.

“Development is the top priority of the Communist Party of China in governing and rejuvenating the country,” Xi told New Zealand Prime Minister Chris Hipkins during his official visit to Beijing on Tuesday.

“We will continue to vigorously promote high-level opening up and better protect the rights and interests of foreign investors per the law,” Xi said, according to the official Xinhua News Agency.

China’s attempts to encourage foreign investors have ramped up in recent weeks as it’s become increasingly clear that the economy’s recovery following the end of Beijing’s Covid Zero policies is starting to flag. Efforts in the US and Europe to “de-risk” supply chains by reducing their reliance on China have further clouded the prospects for future growth. (…)

A clampdown this year on foreign consultancy firms that help global investors and multinational firms understand China — part of a nationwide anti-espionage campaign — has weakened the appetite for investment from overseas firms.

That campaign and other government actions likely mean that China’s charm offensive will face skepticism. While Xi has repeatedly insisted that economic development is the Communist Party’s “top priority,” his government has clearly made protecting national security a central focus.

Prior to the consultancy crackdown, abrupt regulatory tightening moves affecting industries ranging from technology to real estate had already been sending foreign capital fleeing from the nation’s financial markets.

A record share of European companies say doing business in China is getting more difficult, according to a recent survey that noted some firms are already following through on plans to divest from the economy. Some American firms have also reconsidered investment.

Bloomberg adds this color in China Shifts Approach Toward De-Risking With Appeals to CEOs:

(…) Beijing’s warmer ties with business leaders compared to some Western politicians was on display earlier this month when President Xi Jinping called American billionaire Bill Gates an “old friend” during a meeting in Beijing. Days later, US Secretary of State Antony Blinken was granted only a brief audience with the Chinese leader in the capital. Xi and Biden haven’t spoken since November. (…)

Senior Communist Party officials also recently rolled out the red carpet in China for the chief executive officers of JPMorgan Chase & Co. and Tesla Inc., and a host of other foreign business chiefs.

While it remains to be seen how business leaders respond to Li’s call to challenge their governments’ economic interventions, he signed deals in Europe last week to deepen China cooperation with Airbus SE, BASF SE, BMW AG, Mercedes-Benz Group AG and Volkswagen AG. Li told those firms that risk prevention and cooperation are “not mutually exclusive.” (…)

Henry Gao, who researches Chinese trade policy at Singapore Management University, said the risk prevention measures Li supported companies pursing was fundamentally different to politicians’ de-risking strategies.

That could lead to both sides talking past each other, but perhaps that was the entire point. (…)

• Billionaires and Bureaucrats Mobilize China for AI Race With US A ChatGPT-inspired global wave of AI activity is only just beginning in the next battle for supremacy in technology.

Billionaire entrepreneurs, mid-level engineers and veterans of foreign firms alike now harbor a remarkably consistent ambition: to outdo China’s geopolitical rival in a technology that may determine the global power stakes. Among them is internet mogul Wang Xiaochuan, who entered the field after OpenAI’s ChatGPT debuted to a social media firestorm in November. He joins the ranks of Chinese scientists, programmers and financiers — including former employees of ByteDance Ltd., e-commerce platform JD.com Inc. and Google — expected to propel some $15 billion of spending on AI technology this year.

For Wang, who founded the search engine Sogou that Tencent Holdings Ltd. bought out in a $3.5 billion deal less than two years ago, the opportunity came fast. By April, the computer science graduate had already set up his own startup and secured $50 million in seed capital. He reached out to former subordinates at Sogou, many of whom he convinced to come on board. By June, his firm had launched an open-source large language model and it’s already in use by researchers at China’s two most prominent universities. (…)

“China is still three years behind the US, but we may not need three years to catch up.” (…)

AI investments in the US dwarf that of China, totaling $26.6 billion in the year to mid-June versus China’s $4 billion, according to previously unreported data collated by consultancy Preqin.

Yet that gap is already gradually narrowing, at least in terms of deal flow. The number of Chinese venture deals in AI comprised more than two-thirds of the US total of about 447 in the year to mid-June, versus about 50% over the previous two years. China-based AI venture deals also outpaced consumer tech in 2022 and early 2023, according to Preqin.

All this is not lost on Beijing. Xi Jinping’s administration realizes that AI, much like semiconductors, will be critical to maintaining China’s ascendancy and is likely to mobilize the nation’s resources to drive advances. While startup investment cratered during the years Beijing went after tech giants and “reckless expansion of capital,” the feeling is the Party encourages AI exploration. (…)

During the mobile era, a generation of startups led by Tencent, Alibaba Group Holding Ltd. and TikTok-owner ByteDance built an industry that could genuinely rival Silicon Valley. It helped that Facebook, YouTube and WhatsApp were shut out of the booming market of 1.4 billion people. At one point in 2018, venture capital funding in China was even on track to surpass that of the US — until the trade war exacerbated an economic downturn. That situation, where local firms thrive when US rivals are absent, is likely to play out once more in an AI arena from which ChatGPT and Google’s Bard are effectively barred.

Large AI models could eventually behave much like the smartphone operating systems Android and iOS, which provided the infrastructure or platforms on which Tencent, ByteDance and Ant Group Co. broke new ground: in social media with WeChat, video with Douyin and Tiktok, and payments with Alipay. The idea is that generative AI services could speed the emergence of new platforms to host a wave of revolutionary apps for businesses and consumers. (…)

Ford to Lay Off at Least 1,000 Contract, Salaried Workers The cuts are expected to significantly affect engineers in North America.

(…) This latest reduction of Ford’s white-collar workforce includes employees in its electric-vehicle and software side of the business, the company spokesman confirmed.

The cuts will also affect workers in the automaker’s gas-engine and commercial-vehicle divisions, he said. (…)

The salaried job cuts at Ford come weeks ahead of the scheduled start of negotiations with the United Auto Workers union over a new four-year labor contract for its hourly factory workers.

The automaker, along with rivals Stellantis and GM, face an especially tough round of talks with a higher-than-usual risk of a strike, analysts say, citing a hard-line stance taken by the UAW’s new leadership team. (…)

Axios:

Through May, there were about the same number of strikes in 2023 as last year — but the number of workers who walked out went up 80%.

Then this month — really in the past week — there was a lot more action:

• About 3,000 Starbucks workers are on strike this week over gay pride decor and accusations of unfair labor practices.
• Two large strikes in the manufacturing industry got underway — 1,400 members of the United Electrical Workers union at a locomotive plant in Erie, Pa., and one involving about 6,000 workers at a Boeing supplier in Wichita.
• Smaller actions sprung up, too: 84 Amazon drivers at a warehouse in California went on strike, demanding the company recognize their newly certified union. And cooks and cashiers at a McDonald’s in Oakland, Calif., walked out.
• Also in June, hundreds of workers at Gannett walked off the job, as well as 250 members of Insider’s newsroom.
• Meanwhile, the writers’ strike continues.

Starting back in “Striketober,” in 2021, mounting labor unrest was really about the pandemic, Johnnie Kallas, a Ph.D. candidate at Cornell University’s School of Industrial and Labor Relations, who works on its labor action tracker. But now?

• “Workers just feel a lot more empowered,” he said. “The increase in strikes speaks to ongoing discontent not just with wages, but disrespect and contentious negotiations, which are especially pronounced at Starbucks.”
• Unionized workers have struggled to come to a first contract with the coffee company, which has been hit with nearly 600 unfair labor practice charges from the National Labor Relations Board.

For all the renewed energy, unions still play a far diminished role in the U.S. compared to where they were decades ago.

Two major collective bargaining agreements are about to expire.

• Later this summer, 150,000 autoworkers from GM, Ford and Stellantis are set to begin what’s expected to be fairly contentious negotiations for their new contract; the existing one expires on Sept. 14.
• UPS is negotiating a contract with its 340,000 drivers right now — it’s the biggest collective bargaining agreement in North America. The union already voted to authorize a strike if the parties don’t come to terms by July 31 when their contract expires.
• Considering the number of workers these two unions represents, if either walks out that would mark a pivotal moment for labor in the U.S.

Data: Cornell ILR School Labor Action Tracker; Table: Kira Wang/Axios Visuals

Canada: A welcomed deceleration in core inflation

Annual inflation as measured by the consumer price index (CPI) fell sharply in May thanks to both a negative base effect (a sharp rise in May 2022 was removed from the calculation) and a moderation in the monthly momentum.

Indeed, the all-items CPI rose by only 0.1% between April and May after seasonal adjustment, the smallest increase in 6 months. The transportation, clothing & footwear and household operation categories all contributed to the monthly moderation in inflation. Conversely, some components have remained above historical norms, notably food prices, which remain surprisingly strong despite weak global commodity prices.

The housing component also continued to hinder the normalization of inflation, especially rents and mortgage interest costs, which continue to rise at a brisk pace.

The trend in annual inflation is welcome and should improve further next month as another strong increase that occurred in June 2022 is removed from the calculation (negative base effect). While inflation is approaching the upper part of the Bank of Canada’s target range, the Bank has expressed concern about a sustained return to the midpoint of the target. This prompted the Bank of Canada to resume its rate hikes earlier this month.

In this respect, May’s core inflation data may allay some of its fears. After a spike in April, the average of the monthly variation in the CPI trim and the CPI median was 0.22% in May, the smallest increase in 9 months. Going forward, we continue to expect a marked slowdown in economic activity over the coming months, in a context where the real interest rate is now the most restrictive it has been since 2009.

This should be sufficient to ease wage pressures in the Canadian economy, while deflation in global manufactured goods prices should eventually translate into lower prices for consumers.

Goldman Sachs views: Energy and Core Goods Push Down Headline Inflation but Services Inflation Remains Elevated

• Headline CPI inflation declined 1.0pp to +3.4% yoy in May—the lowest level since June 2021—in line with consensus expectations.
• CPI ex food and energy inflation declined to +4.0% yoy in May (vs. +4.4% in April), and the average of the BoC-preferred CPI-trim and CPI-median edged down to +3.85% yoy from an upwardly revised average of +4.25% in April.
• On a three-month average annualized basis, CPI-Trim was roughly unchanged at 3.8% relative to an upwardly revised April value, while CPI-Median declined to +3.6% (vs. +3.8% in April).
• Seasonally adjusted CPI ex food and energy inflation declined to +0.2% in May from +0.3% in April.
• Sequential core goods inflation was essentially flat in May, down from +0.7% in April. Sequential inflation for passenger vehicles also moderated to -0.2%.
• On the other hand, sequential services inflation edged up to +0.4% in May (vs. +0.3% in April) despite a marked slowdown in rent inflation (flat, vs. +1.2% in April) and a large negative contribution from telephone services.
• The rent index has been extremely volatile since 2019 and we think that underlying pace of inflation for rents remains much more elevated than what this monthly sequential prints suggests. Owned-accommodation inflation remained elevated at +0.6% (vs. +0.4% in April) due to another strong print for homeowners’ maintenance and repairs and continued strength in mortgage interest cost inflation. Sequential inflation in homeowners’ replacement cost remained negative at -0.4% in May but we expect that the recent uptick in house prices should put upward pressure on this component in the coming months.
• The BoC will likely revise up their inflation forecasts at the July meeting based on accumulated evidence since the last MPR. We therefore continue to forecast that the BoC will hike in July by 25bp and see risk that further policy tightening will be necessary to return inflation to the BoC’s target, although today’s progress on inflation and the softer May employment report raise some risk that the BoC moves more cautiously.

The FRED series for Canada’s headline CPI below ends in April. The dashed line is where May is at +3.4% vs +4.1% for the U.S.

Taiwan Sends Vice Premier to Japan for First Time in 29 Years