US inflation eases and buys the Fed time
US inflation data came in better than expected, easing pressure on the Fed to raise rates in July. The BoC remained on hold, while Japan's industrial sector showed signs of softer momentum..
Weekly highlights
Better than expected
Better than expected
Better than expected.
On hold.
Weaker than expected
Modestly increased.
OK, not great.
Pullback after strong run
Up 1.5% YoY
US: Tamer inflation buys Fed some time
The marquee inflation releases for June brought some much-needed relief. Overall consumer prices declined 0.4% MoM, allowing headline CPI inflation to decelerate from 4.2% YoY to 3.5% YoY. Core prices eased 0.1% MoM and the core inflation rate retreated three tenths to 2.6% YoY. Lower energy prices helped tremendously as gasoline prices dropped 9.7% MoM, but the real news was that service prices were flat during the month and shelter costs rose just 0.1% MoM. This is especially encouraging as the anticipated improvement in this sector following a period of data distortions is now manifesting. Producer price inflation (final demand) also came in better than expected at 5.5% YoY following a downwardly revised 6.0 YoY May print. The combination points to a modest rise in the core PCE in June.
As Chair Warsh indicated in his testimony, this is far from “mission accomplished” on inflation. But it is an important respite, nonetheless, removing urgency for Fed rate hikes. By the end of the workweek, the probability of a July hike had fallen to about 10%, from a recent high of about 40%. News of renewed hostilities between US and Iran reintroduce energy price risks into the picture, but we still believe that hikes can be avoided this year.
Canada: BoC on hold
The BoC remains in wait-and-see mode, but the bank’s growth tone was modestly more constructive than in June. The latest blockade has lifted oil prices, adding upside risk to the BoC’s assumptions. Still, with the economy below capacity and core inflation near target, we expect the Bank to stay on hold through year-end.
The BoC left its policy rate unchanged at 2.25% and pointed to a modest rebound after the soft start to the year. Although labor market slack remains, stronger exports, resilient consumption, and firmer business investment should support second-quarter GDP growth.
The updated Monetary Policy Report kept Canada’s growth outlook “broadly unchanged.” Near-term growth was revised lower after the weak first quarter, but activity is still expected to strengthen in the second half of 2026. Over time, excess capacity should be absorbed as exports, spending, and business investment recover, though uncertainty remains the key caveat.
Inflation tells a story of near-term pressure but limited persistence. CPI remains elevated, largely due to earlier energy price increases, and the Bank assumes some war-related cost pressures will pass through to consumers. Even so, it expects CPI to “ease gradually in the coming months, returning to around 2% in early 2027.” Broader pass-through remains limited, core inflation is near target, and “longer-term inflation expectations remain well anchored.”
Governing Council reiterated that policy can respond if the outlook shifts materially. US trade uncertainty remains a downside risk, but the Bank stands ready to “adjust monetary policy as needed.”
Japan: Some loss of industrial sector momentum
Total industrial production (mining and manufacturing) advanced 0.1% in May, leaving it 0.8% higher than a year earlier. Manufacturing production itself has also settled in a similar range, up 0.8% YoY, but with substantial performance differentiation within manufacturing (Figure 3).
When combined with the sharp pullback in core machinery orders, down 12.4% in May, the signal appears to be one of a temporary loss of momentum in the manufacturing activity space. Part of this may simply reflect a normal pullback in orders following a really good run recently, so it is important to not make too much of these softer prints.
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