Inflation Is Falling

red inflation table with business people's hands

At the close of business last Friday, global equities were marginally lower on the week amid elevated—but not worsening —US inflation data and ongoing wrangling over the US debt ceiling. The yield on the US 10-year Treasury note eased to 3.40%, down 4 basis points from a week ago, while the price of a barrel of West Texas Intermediate crude oil was steady at $71.50. Volatility, as measured by the Cboe Volatility Index (VIX), fell to 16.5 against a backdrop of range bound equity markets.



It appears that the Canadian housing market may have bottomed. CMHC will release its housing starts on Monday along with CREA which will announce April sales figures. Even more importantly, Stats Can will release its CPI numbers on Tuesday. Our inflation rate is currently at 4.3 per cent, which is down considerably from its peak of 8.1 per cent in 2022.



Expectations that the US Federal Reserve will be able to pause its hiking cycle at its June meeting were enhanced this past week. While inflation readings remain high, in our view, there was nothing in the data to force the Fed off the monetary sidelines given the delayed effect of interest rate hikes on the economy. In April, the US Consumer Price Index rose 0.5% from the month before and 4.9% from a year earlier, down from 5% in March.

I am often asked if the US default on its debt. My answer is absolutely not. We hear staffers are making progress toward an agreement. There are two big reasons they will not default. The first is that the US dollar, as the reserve currency of the world, would be put in jeopardy. The more important reason is that the US government owes over 31 trillion in debt. If they default, the interest rate on that debt would skyrocket literally, leading to a global depression.



The Bank of England raised rates 0.25% to 4.5%, saying that persistent inflation pressure would require further policy tightening and that the United Kingdom is likely to avoid recession this year. Markets presently expect the BOE terminal rate to be around 4.75% or 5%.



Amid flagging momentum from its reopening from COVID lockdowns, consumer prices in China rose only 0.1% from a year ago in April, the slowest rate since early 2021. New Chinese bank loans contracted sharply, adding to worries that the post-pandemic recovery is losing momentum and raising expectations that easier monetary policy from the People’s Bank of China may be in the offing.

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