April’s Consumer Price Index Release

Canada will have a holiday on Monday, as markets will be closed for Victoria Day. The Bank of Canada is scheduled to decide on interest rates on June 4, influenced by various economic data. On Tuesday, July will release April’s Consumer Price Index (CPI) numbers. The month-on-month CPI is expected to drop by 0.2%, down from the previous increase of 0.3%. Year-on-year, the headline CPI is forecasted at 1.6%. Core measures are expected to remain steady at 2.9% and 2.8%. Right now, there is a 64% chance that rates will be lowered by 25 basis points. On Wednesday, the Government of Canada will auction C$3 billion in 30-year bonds. Thursday will provide updates on April’s producer price index, where previous figures showed a +0.5% increase for industrial products and a -1.0% decline for raw materials. A speech by BoC Deputy Governor Toni Gravelle could influence the interest rate decisions in June. Friday wraps up with March retail sales data, expected to show a month-on-month change of -0.3%, an improvement from -0.4% earlier. There’s no agreement yet for sales excluding autos, which previously increased by +0.5%. The USD/CAD exchange rate is expected to finish the week just below 1.40. Currently, we see a consistent decline in several indicators. Consumer-level inflation pressures continue to ease. If April’s headline CPI confirms a drop of -0.2% month-on-month, it will be the softest reading since the pandemic distortions of 2020. The year-on-year inflation rate falling to 1.6% is well below the Bank of Canada’s 2% target. However, core measures close to 2.9% indicate some resilience in harder-to-change areas like services and housing.

Market and Inflation Trends

With the overnight rate still quite high, it’s becoming harder to keep rates steady each week. The market’s 64% chance of a rate cut in early June is looking stronger. Unless CPI or Friday’s retail sales exceed expectations by a large margin, this probability might become nearly certain. Gravelle’s comments could impact the overall tone, but the data is doing most of the work right now. The midweek bond auction provides insight into thirty-year pricing as expectations change. Long-term yields are likely to be more responsive to speculation about interest rates than short-term ones. If CPI disappoints or retail sales drop again, the curve may steepen, as markets anticipate quicker easing. Movements in the CAD financial market are telling a clear story—staying around 1.40 indicates traders are adjusting to a weaker domestic economy. Local demand is falling, and households are spending less. The previous high-interest approach to contain inflation no longer looks justified if these trends persist. Thursday’s producer prices might not grab headlines, but they’ll be more significant this time. If industrial product inflation cools below the current +0.5%, it would reinforce a deflationary trend in manufacturing and pricing. For those involved in medium-term volatility, shifts in expected input costs could start influencing inflation forecasts. We should get ready for heightened sensitivity to interest rate changes leading into early June. Any major changes to forecasts, especially on Tuesday or Friday, will impact USD/CAD trading and bond market volatility. Activity may increase in the risk reversal market due to the uncertain nature of the rate cut odds. It seems worthwhile to explore adjustments around skew and term structure as the bank approaches a critical decision point. Create your live VT Markets account and start trading now.

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