PM spotlight

Steve Morris, CFA, Senior Managing Director & Portfolio Manager



Steve’s take: “As of December, Canadian headline CPI decreased 0.6% month-over-month, exceeding market consensus of a 0.5% decrease and causing the year-over-year increase to slow to 6.3% (figure 1). Despite the deceleration in headline inflation, underlying price pressures remain sticky, with core inflation measures remaining stubbornly elevated.”


Private transportation accounts for 0.9% of the 6.3% year-over-year inflation (Figure 2), representing a smaller contribution to overall inflation compared to Q3. This was driven by falling gasoline prices (-13.1% month-over-month). Price decelerations in this category have been a large contributor to the deceleration in overall year-over-year inflation.

Food purchased from stores accounts for 1.3% of year-over-year inflation. With grocery costs remaining high, this category continues to be a major contributor to both year-over-year and month-over-month inflation.

Shelter had a 2.1% contribution to year-over-year inflation in September. Shelter costs increased 0.4% month-over-month. Mortgage interest costs increased 2.7% month-over-month, bringing the year-over-year increase to 18%. Homeowners’ replacement costs and utilities had negative contributions to month-over-month shelter inflation.

Figure 1: CPI Change

Figure 1

Figure 2: Canada headline CPI contribution year-over-year

Figure 2



Steve’s take: “Without new issuance, the real return bond (RRB) market is increasingly driven by technical factors and less based on market participants’ inflation expectations. Future trades will be dependent on existing holders selling RRBs for strategic reasons. As liquidity has diminished, trading of RRBs remains possible, but in smaller amounts in order to achieve attractive pricing.”


Figure 3: Breakeven inflation rates

Figure 3

In the first week of November, following the Bank of Canada’s announcement of their decision to cease issuance of RRBs, breakeven inflation rates initially increased (Figure 3), as RRB markets were active with international sellers and domestic buyers.

The market settled into a less liquid state by late November, as flows from RRB sellers were met with less demand on the purchase side as inflation-based investors seemingly adopted buy-and-hold strategies.

Breakeven levels increased slightly at the beginning of December due to modest demand for coupon reinvestment. Movements in breakeven levels over the last few weeks of December were primarily technically driven.

Should the RRBs remain poorly traded, utilizing U.S. inflation-linked bonds (e.g. TIPS) may be a potential solution for Canadian inflation hedgers (Figure 4). This is due to the high correlation of U.S. CPI with Canadian CPI. By combining a long position in U.S. TIPS and Canadian provincials with a USD/CAD cross-currency swap, the investor can receive cash flows denominated in Canadian dollars and based on Canadian interest rates, with payments that increase with U.S. inflation.

Figure 4: Comparison of synthetic Canadian RRB exposure vs. Canadian RRB exposure

Figure 4

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CPI change (figure 1)

12-month, YTD, and MoM change in the Statistics Canada Consumer Price Index, monthly, not seasonally adjusted (Table 18-10-0004-01)

Canada headline CPI contribution year-over-year (figure 2)

Bank of Canada Consumer Price Index Portal

Breakeven inflation rates (figure 3)


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