BoC Holds at 2.25%; CAD Slips to 7-Month Low After US CPI

US Inflation Resets the Fed Timeline

South of the border, the May CPI report hardened the inflation picture. Headline inflation hit 4.2% year-on-year, the fastest pace in three years. Core inflation rose 2.9% year-on-year. Energy costs drove most of the headline gain. Non-housing services stayed firm. The NFIB small business survey showed a growing share of firms raised average selling prices and planned further increases. That suggests higher energy and input costs are rippling beyond the pump, the economists wrote.

Housing offered a modest reprieve. Existing home sales rose 3.2% in May to the highest level since December. Still, activity is hovering near the 4-million mark for a third year. Home price growth remains in the slow lane.

Labor market signals were mixed. Initial jobless claims ticked higher for a third week. Yet they remain broadly range-bound. The small business survey pointed to slower job creation ahead, with hiring plans softening alongside rising inflation worries.

The net effect is that the Middle East conflict's impact keeps showing up in data and is becoming harder for the Fed to ignore. Core inflation will likely stay elevated through year-end, supporting a prolonged Fed pause, the economists wrote.

Next week marks Kevin Warsh's first FOMC meeting as Chair. TD economists expect the committee to signal that rates will stay elevated through year-end in its updated Summary of Economic Projections. The last set reflected 25 basis points of easing this year and next. The statement may also drop the easing bias. That would bring the Fed closer to market pricing, which now shows a toss-up between no action and a 25-basis-point hike by year-end.