Daily Pulse


Inflation in Canada rose to a decade high of 3.6% y/y in May from 3.4% y/y in the prior month. Statistics Canada’s various measures of core inflation – common, median, and trimmed mean – all accelerated, painting a similar story. The Bank of Canada has already started tapering asset purchases and is likely to remain a leader among major central banks in normalizing policy. Canadian policymakers are very focused on the risks that rapidly rising house prices pose to financial stability, prompting them to shift towards a more hawkish stance in April. While the housing market is likely to remain policymakers’ core concern, Canadian economic conditions also indicate that an ultra-accommodative policy stance is no longer justified. The domestic recovery and vaccine campaign are progressing, and prices are rising. All three components of BCA Research’s Canadian central bank monitor have recently surged and now show that the BoC faces pressure to tighten. As such, the Bank of Canada is likely to initiate its first rate hike ahead of the Fed.


As expected, the Fed left policy unchanged following the conclusion of its meeting on Wednesday. However, the revised economic projections and subsequent press conference reflect an ongoing shift away from the need for ultra-accommodative policy. FOMC members revised up their economic projections for 2021. Median real GDP is now 7% versus March’s 6.5%. In addition, the median estimate for headline PCE inflation was revised up by 1 percentage point to 3.4%, while the core PCE inflation forecast was increased to 3.0%. In accordance with these changes, the updated dot plot now shows 7 of the 18 FOMC participants anticipate a rate hike in 2022, and the majority (13 members) expect at least one rate hike before the end of 2023, raising the median forecast for the fed funds rate to 0.6% by end-2023. In the subsequent press conference, Chair Powell acknowledged that the effect of supply bottlenecks on prices “have been larger than anticipated” and that there is “the possibility that inflation could turn out to be higher and more persistent than we expect”. Powell also noted that the committee “would be prepared to adjust the stance of monetary policy” in response to stronger inflation. Additionally, his comments suggested that tapering talks have been initiated, though Powell underscored that changes would be communicated “well in advance”. The communication was a hawkish surprise for markets. The 10-year Treasury yield increased 8.2 bps, the dollar advanced, and gold fell.


U.S., EU forge closer ties to counter Russia and China. In a sign of increased coordination, the allies unveiled a new high-level Trade and Technology Council. The council aims to boost innovation and investment within and between their economies and better compete with China and Russia on developing and protecting critical and emerging technologies.


The May economic data confirm that China’s domestic demand recovery has passed its peak strength. Most of the macro indicators released yesterday are below the consensus and growing at a slower rate (on both a year-on-year and month-to-month basis) than last month. According to the official release, real value-added output at industrial firms slowed to 8.8% y/y in May, versus 9.8% y/y in April. The disappointing production data in May is in part due to chip shortages, power outages and logistic disruptions China suffered last month from the COVID-19 flareup in Guangdong province. However, the lower-than-expected economic data are, at the core, a result of the sharp pullback in stimulus in the first five months of the year. Total social financing numbers released last week show that the credit growth deceleration has gathered speed in May, raising the risk of policy overtightening. Fixed-asset investment expanded by 5.5% in May, down from 10.9% in April. Growth in property and infrastructure investment continued to trend downwards. Production growth in some of the housing-related raw materials also declined.

The author

Michel Doucet

Michel Doucet

Vice-President and Portfolio Manager
After obtaining a Bachelor's degree from the Faculty of Social Sciences at the Université du Québec in Montréal and his Master’s degree, Michel Doucet began his career as a junior economist at the National Bank head office in Montreal. In 1992 he joined the institutional equities and fixed income group at Lévesque Beaubien Geoffrion as an economist and market analyst. Over the years, he has led various projects related to the North American and international economies as well as Canadian public finances. In 1996, the team of institutional economists to which he belongs was ranked first in Canada by Brendan Wood International. In August 1997, Mr. Doucet joined the personal services division of Lévesque Beaubien Geoffrion where he served as an economist, fixed income market analyst and vice president. In 2004, he joined the Desjardins Securities full service team as Vice President. He now occupies the roles of fixed income strategist, economist and portfolio manager. He manages the Securities Portfolio Advisory Group, advisor marketing and distribution of financial planning and insurance.