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• Consumer price surprised on the upside in May, rising to 2.4% year-on-year (from 2.0% in April). Month-on-month, seasonally adjusted prices were up 0.3%, the same gain as in April. Gains were broad-based with all sub-categories rising on the month.
• For once energy was not central to the story. Energy prices were down 0.1% from a year-ago, and excluding energy inflation was up an even stronger 2.7%.
• Food, on the other hand, was a key part of the story. Food price inflation accelerated to 3.5% in May (from 2.9% in April), led by meat and fresh vegetables.
• Transportation was another big source of price growth in May, up 3.1% (year-on-year) from 2.5% in April, with prices for passenger vehicles leading the way, up 4.2% (y/y).
• Two of three core inflation measures moved higher in the month. CPI-median moved to 2.1% (from 1.9%) and CPI-trim rose to 2.3% (from 2.0%) – its highest level in over a decade. The CPI-common measure was unchanged at 1.8%. On average, the three core measures are at 2.1% (up from 1.9% in April).

Key Implications

• Inflation is back in Canada, at least for now. While some of the factors pushing up price growth are likely to prove fleeting, we can't discount the relatively broad-based nature of price growth in May.
• The acceleration in the core readings support the notion that the Bank of Canada is likely to remain on the sidelines even as the U.S. Federal Reserve takes a more dovish stance. It has been some time since inflation surprised to the upside south of the border.
• The Canadian economy continues to recover from its soft patch at the start of this year, with increasing signs of improving domestic demand, that should push growth above its potential rate over the remainder of this year. For more on our outlook, please see our recently published Quarterly Economic Forecast.

Canadian Dollar jumps broadly in early US session, after stronger than expected inflation data remove another reason for BoC rate cut. Though, for now, Loonie is overshadowed by Sterling and Swiss Franc, which are the strongest ones. Meanwhile, risk appetite recedes mildly ahead of FOMC rate decision. Dollar is also mixed. Australian and New Zealand Dollars are the weakest ones. Yen is third weakest as German and US treasury yields recover.

There is practically no chance for Fed to cut interest rate from 2.25-2.50% today. It's too early for the "insurance" rate cut given that Trump and Xi still have a chance to avoid trade war escalation in next week's G20 meeting. Though there are still two major focuses. First one is on whether Fed will drop the "patient" stance from the statement, which will be an indication on readiness to act. Secondly, we believed that Fed's new economic projections adopt a base case of no escalation in trade conflicts. Such projections might not be dovish enough to push for a rate cut. Or, if the forecasts are dovish, they're really rather dovish.

In Europe, currently, FTSE is down -0.30%. DAX is down -0.05%. CAC is up 0.19%. German 10-year yield is up 0.025 at -0.293. Earlier in Asia, Nikkei rose 1.72%. Hong Kong HSI rose 2.56%. China Shanghai SSE rose 0.96%. Singapore Strait Times rose 1.53%. Japan 10-year JGB yield dropped -0.0042 to -0.134.

Canada CPI accelerated to 2.4%, beat expectations

Canada CPI accelerated to 2.4% yoy in May, up from 2.0% yoy and beat expectation of 2.1% yoy. CPI core-common was unchanged at 1.8% yoy, missed expectation of 1.9% yoy. But CPI core-median rose to 2.1% yoy, up from 1.9% yoy and beat expectation of 1.9% yoy. CPI core-trim also accelerated to 2.3% yoy, up from 2.0% yoy and beat expectation of 2.1% yoy.

Looking at some details, prices increased year over year in all eight major components in May, with six components growing at faster rates and two components growing at the same pace compared with April. Higher prices for food (3.5%) and transportation (3.1%) contributed to the increased growth in the all-items index.

UK CPI slowed to 2.0% in May, core CPI slowed to 1.7%

UK CPI rose 0.3% mom in May. Annually, CPI slowed to 2.0% yoy, down from 2.1% yoy. Core CPI slowed to 1.7%, down from 1.8%. All three figures matched expectations. RPI was unchanged at 3.0% yoy, above expectation of 2.9% yoy.

PPI input slowed to 1.3% yoy, beat expectation of 0.8% yoy. PPI output slowed to 1.8% yoy, matched expectations. PPI output core slowed to 2.0% yoy, matched expectations. House price index was unchanged at 1.4% yoy in April, above expectation of 1.1% yoy. CBI trends total orders dropped to -15 in June, down from -10 and missed expectation of -12.

Also release in European session, German PPI slowed to 1.9% yoy in May, down from 2.5% yoy and missed expectation of 2.2% yoy. Eurozone current account deficit narrowed to EUR 20.9B in April, versus expectation of EUR 23.2B.

ECB de Guindos: If inflation expectations start to de-anchor, we will act

ECB Vice President Luis de Guindos said today that the centra bank foresees "lingering softness" n the near term, due to geopolitical factors and trade tensions. Both are weighing on exports and manufacturing in Eurozone economy.

He emphasized that "if we see that inflation expectations start to de-anchor, we will act." ECB has a "wide range of instruments available", including forward guidance, TLTRO and QE is one of them. And, "a combination of actions" could be used to restore inflation.

De Guindos' comments echoed President Mario Draghi's yesterday. Draghi said, "in the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required."

Japan exports shrank for sixth straight months, won't take sides on US-China trade war

In Japan, trade balance recorded deficit of JPY -0.97T (non seasonally adjusted) in May, first deficit in four months. Exports dropped -7.8% yoy to JPY 5.84T, sixth consecutive month of decline. Imports dropped -1.5% to JPY 6.80T, first decline in three months. Sluggish exports are generally seen as the results of on-going, escalating US-China trade war, which remains a negative factor for the Japanese economy.

Looking at some details (non seasonally adjusted): Exports to China dropped -9.7% yoy. Imports from China dropped -0.9% yoy. Exports to EU dropped -7.1% yoy. Imports from EU rose 8.7% yoy. Exports to US rose 3.3% yoy. Imports from US dropped -1.6% yoy.

Separately, Masatsugu Asakawa, Japan's vice finance minister for international affairs, said more substantial talks on trade policy will be held in the G20 summit in Osaka next week. But he also noted that "Japan won't take sides on US-China trade friction, our stance is to not take steps that violate WTO rules."

Asian business sentiment sank to decade low, not just uncertainty but true slowdown

The Thomson Reuters/INSEAD Asian Business Sentiment Index dropped sharply from 63 to 53 in Q2. Worries over US-China trade war sent sentiments down to the worst reading since Q2 of 2009. The index tracks companies' six-month outlook. The survey interviewed 95 companies in 11 Asia-Pacific countries that together contribute about a third of GDP and are home to 45% of the world's population. It was conducted from May 31 to June 14.

Antonio Fatas, professor at global business school INSEAD said "it was the uncertainty about the trade war and people were worried about the future". And, "after four quarters of low numbers that now, it's not just uncertainty. This is a true slowdown in growth. We see activity declining — it's not just the expectation that activity will decline."

China: Four decades of history shows it's possible to have positive outcomes in Xi-Trump meeting

Regarding the upcoming meeting between Trump and Xi at G20, Chinese Foreign Ministry spokesman Lu Kang said "The two leaders will talk about whatever they want". And, "a deal is not only in the interests of the two peoples but meets the aspirations of the whole world." He added "I'm not getting ahead of myself, but communication over four decades shows it is possible to achieve positive outcomes."

USD/CAD Mid-Day Outlook

Daily Pivots: (S1) 1.3357; (P) 1.3395; (R1) 1.3416; More...

USD/CAD drops notably today but stays above 1.3328 minor support. Intraday bias remains neutral first and another rise is still in favor with 1.3328 minor support intact. Above 1.3432 will resume the rebound from 1.3239 to 1.3564 resistance next. On the downside, below 1.3328 minor support will turn intraday bias back to the downside for 1.3239 support instead.

In the bigger picture, outlook is turned mixed after USD/CAD drew strong support from 55 week EMA (now at 1.3232) and rebounded. Nevertheless, sustained break of 61.8% retracement of 1.4689 (2016 high) to 1.2061 at 1.3685, is needed to confirm resumption of up trend from 1.2061 (2017 low), towards 1.4689. Otherwise, medium term outlook will stay neutral first. Break of 1.3239 will revive the case of medium term topping at 1.3664. And, decisive break of 1.3068 cluster support (38.2% retracement of 1.2061 to 1.3664 at 1.3052) will confirm and pave the way to 61.8% retracement at 1.2673 next.

Economic Indicators Update

Daily Pivots: (S1) 1.3357; (P) 1.3395; (R1) 1.3416; More...

USD/CAD drops notably today but stays above 1.3328 minor support. Intraday bias remains neutral first and another rise is still in favor with 1.3328 minor support intact. Above 1.3432 will resume the rebound from 1.3239 to 1.3564 resistance next. On the downside, below 1.3328 minor support will turn intraday bias back to the downside for 1.3239 support instead.

In the bigger picture, outlook is turned mixed after USD/CAD drew strong support from 55 week EMA (now at 1.3232) and rebounded. Nevertheless, sustained break of 61.8% retracement of 1.4689 (2016 high) to 1.2061 at 1.3685, is needed to confirm resumption of up trend from 1.2061 (2017 low), towards 1.4689. Otherwise, medium term outlook will stay neutral first. Break of 1.3239 will revive the case of medium term topping at 1.3664. And, decisive break of 1.3068 cluster support (38.2% retracement of 1.2061 to 1.3664 at 1.3052) will confirm and pave the way to 61.8% retracement at 1.2673 next.

Daily Pivots: (S1) 0.9973; (P) 0.9993; (R1) 1.0021; More...

No change in USD/CHF's outlook and focus remains on 1.0008 support turned resistance. Decisive break will indicate completion of fall from 1.0237 and turn bias to the upside for 1.0098 resistance first. Rejection by 1.0008, followed by break of 0.9925 minor support will turn bias back to the downside for 0.9854 support.

In the bigger picture, USD/CHF's break of long term trend line support is the first indication of medium term reversal. That is, rise from 0.9186 (2018 low) could have completed at 1.0237 already). Sustained break of 38.2% retracement of 0.9186 to 1.0237 at 0.9836 will confirm and target 61.8% retracement at 0.9587. However, strong rebound from 0.9836 will revive medium term bullishness for 1.0237 and above.

Daily Pivots: (S1) 108.10; (P) 108.40; (R1) 108.74; More...

Intraday bias in USD/JPY remains neutral and consolidation from 107.81 is still in progress. In case of another recovery, upside should be limited by 109.02 support turned resistance to bring fall resumption. On the downside, sustained break of 61.8% retracement of 104.69 to 112.40 at 107.63 will pave the way back to 104.62/9 key support. However, break of 109.02 support turned resistance will indicate short term bottoming and bring lengthier consolidations first.

In the bigger picture, decline from 118.65 (Dec 2016) is still in progress, with the pair staying inside long term falling channel. Break of 104.62 will target 100% projection of 118.65 to 104.62 from 114.54 at 100.51. For now, we'd expect strong support above 98.97 (2016 low) to contain downside to bring rebound.

• Headline inflation was stronger than expected, rising to 2.4% in May
• BoC core measures averaged 2.1% (had been 1.9-2.0% for past 15 months)
• Most major components—particularly food and transportation—showed a pickup in y/y inflation

Today’s stronger-than-expected inflation data will still be overshadowed by this afternoon’s Fed meeting. The US central bank is under increasing pressure from the president and financial markets to lower interest rates over the second half of this year. That’s not the case north of the border, where markets are pricing in much less easing from the BoC (now less than 50% odds of a cut by end of year) than from the Fed (~50 bps of cuts by October). Inflation numbers like today’s—with core measures creeping higher in May but remaining around the 2% target—are one reason the BoC faces less pressure to reverse course and begin easing monetary policy. Granted, the BoC is subject to the same global forces as the Fed, and a further increase in trade tensions would raise the likelihood of both central banks lowering interest rates. But for now, stable to slightly higher inflation readings and generally improving domestic data allow the BoC to remain patient and monitor the impact of external developments.

• Canada MAY CPI M/M: +0.4% vs. +0.1%e; Y/Y: +2.4% vs. +2.1%e
• CPI Core- Median Y/Y: +2.1% vs. +1.9%e
• CPI Core- Common Y/Y: +1.8% vs. +1.9%e
• CPI Core- Trim Y/Y: +2.3% vs. +2.1%e (highest since Feb. 2012)
• Consumer Price Index: 136.6 v 136.2e

Data from Stats Canada showed Canada’s annual inflation rate climbed in May, driven by steep price increases for fresh vegetables and autos.

Canada’s consumer-price index increased +2.4% on a year-over-year basis in May, an increase from a +2% rise in the previous month.

Market expectations were for a +2.2% rise in May and on a month-over-month basis, inflation rose 0.4%.

Loonie takes flight after inflation data

CAD is trading at the intraday highs after this morning’s inflation print – C$1.3345 up +0.24% from C$1.3381 just ahead of the release.

Canada CPI accelerated to 2.4% yoy in May, up from 2.0% yoy and beat expectation of 2.1% yoy. CPI core-common was unchanged at 1.8% yoy, missed expectation of 1.9% yoy. But CPI core-median rose to 2.1% yoy, up from 1.9% yoy and beat expectation of 1.9% yoy. CPI core-trim also accelerated to 2.3% yoy, up from 2.0% yoy and beat expectation of 2.1% yoy.

The 12-month change in the Consumer Price Index

Looking at some details, prices increased year over year in all eight major components in May, with six components growing at faster rates and two components growing at the same pace compared with April. Higher prices for food (3.5%) and transportation (3.1%) contributed to the increased growth in the all-items index.

Consumer prices increase in all major components

Full release here.

USD/CAD drops notably as the release further reduce the chance of BoC rate cut. Nevertheless, sellers are so far refrained as FOMC rate decisions and statement lie ahead, with new economic projections.

Entering into US session, New Zealand Dollar and Australian Dollar soften mildly ask risk appetite recedes today. ECB Vice President Luis de Guindos affirmed the stance that the central bank is ready to "act" should inflation expectation expectations "de-anchor". Messages from China affirmed that there will be a Trump-Xi meeting at G20 next week. But traders generally turn cautious ahead of FOMC rate decision today

Staying in the currency markets, Canadian Dollar is the third weakest ahead of Canada CPI and oil inventory. Dollar is also softer ahead of Fed. The key will be Fed's two Ps, "patience" and "projections". We'd see if Fed is ready for an "insurance" rate cut in July. For now, Swiss Franc is the strongest one for today, followed by Sterling, and then Euro.

In Europe, currently:

• FTSE is down -0.31%.
• DAX is up 0.10%.
• CAC is up 0.10%.
• German 10-year yield is up 0.0308 at -0.287.

Earlier in Asia:

• Nikkei rose 1.72%.
• Hong Kong HSI rose 2.56%.
• China Shanghai SSE rose 0.96%.
• Singapore Strait Times rose 1.53%.
• Japan 10-year JGB yield dropped -0.0042 to -0.134.

Optimism ahead of Fed decision

The Fed meeting on Wednesday promises to be the highlight of the week, particularly in light of the events of the last 24 hours.

Between Trump announcing that he will hold a prolonged meeting with Xi next week, piling more pressure on the Fed to cut rates and criticizing the ECB President for hinting at further stimulus, the attention on today’s Fed meeting has only increased.

The central bank is now under considerable pressure, with the White House so unhappy at the job that Powell is doing that it has reportedly considered demoting him, despite Trump having been the one to hire him in the first place. These tactics didn’t work too well for the President last year, with the Fed raising interest rates four times despite huge pressure being publicly applied.

Will they do the same again and reassert their independence or will the memory of the previous policy mistake force their hand, calling into question how much influence the President is having on their judgement and decision making. One thing is clear, the current relationship is not healthy and is likely to lead to more bad policy decisions and questions around its independence.

Fed Interest Rate Probability

The announcement regarding the meeting next week may buy the Fed some breathing space today but that puts even more scrutiny on the language of the text, the press conference and the economic forecasts.

The Fed will likely indicate a willingness to cut interest rates if necessary but will it hint at doing so next month? And what will the dot plot say about their plans for the rest of the year? Not that we can read too much into them given how much hands on trade talks between the US and China.