In June, Canada’s Industrial Product Price Index (IPPI) went up by 0.4% compared to the previous month. This was better than the expected drop of 0.1%. It follows a 0.5% decrease from the month before. Over the year, the IPPI rose by 0.7%, down from 1.2% in May. The Raw Materials Price Index (RMPI) also increased by 2.7%, mainly due to a 6.8% rise in crude energy products. The increase in the IPPI was driven by various sectors. Primary non-ferrous metal products jumped by 2.8%, with unwrought platinum group metals and alloys seeing a significant rise of 15.6%, the highest since September 2012. Meat, fish, and dairy products also grew by 2.2%, largely due to a 6.7% increase in fresh/frozen chicken, driven by summer demand. Energy products increased by 1.1%, ending a three-month decline; diesel fuel rose by 3.6%.

Sectors Experiencing Declines

While some sectors saw increases, others experienced declines. Primary ferrous metal products dropped by 2.4%, and electrical and electronic products fell by 1.7%. The price of motorized vehicles slightly decreased by 0.3%, balancing some gains in other areas. With the latest producer price data, we now question the trend of smooth disinflation in Canada. The unexpected 0.4% increase, rather than a decline, suggests that underlying price pressures are stronger than expected. This situation complicates the Bank of Canada’s decisions and leads to a reassessment of rate cut expectations. We interpret this as a signal to reconsider negative positions on Canadian interest rates. Derivative products, such as options on Canadian bond ETFs or interest rate swaps that benefit from stable or increasing rates, are now more appealing. With the market expecting a series of rate cuts, this surprise inflation data provides a chance to challenge that consensus. The rise in raw material prices, highlighted by an 8.2% increase in conventional crude oil, is a major concern. We should think about long positions in derivatives related to the Canadian energy sector, such as call options on prominent producers or oil futures. The Canada Energy Regulator recently forecasted record oil production for 2024, but current price increases, driven by geopolitical factors, are the key for short-term trading.

Non-Ferrous Metals And Agricultural Commodities

The notable rise in non-ferrous metals, especially the largest monthly platinum increase since 2012, indicates strong speculative and industrial interest. To take advantage of this, we can consider derivatives on precious metal miners or ETFs. The Silver Institute predicts a significant structural market shortage for 2024, supporting a bullish view on silver-linked investments. Food inflation is also picking up pace, with marked increases in meat and cooking oils. We should explore derivatives in agricultural commodities like canola, especially since Statistics Canada reported a year-over-year decline in planted areas, which adds to the tight supply. This suggests that prices for agricultural products could remain strong throughout the summer. However, the report shows falling prices in sectors like vehicles and electronics, indicating that inflation isn’t consistent across the economy. The difference between strong raw material prices and weak finished goods suggests increased market volatility. We believe that strategies benefiting from price fluctuations, such as long straddles on the S&P/TSX 60 index, may be wise. This data challenges the outlook for monetary policy and makes a rate cut in July less likely. Following this report, overnight index swaps indicate less than a 50% chance of a July rate cut by the Bank of Canada. We should monitor derivatives tied to central bank policies, like Bankers’ Acceptance futures, for signs of a shift toward a more hawkish stance. Create your live VT Markets account and start trading now.

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