PM spotlight

Steve Morris, CFA, Senior Managing Director & Portfolio Manager

 

 

Steve’s take: “Accelerating core inflation measures show that underlying price pressures remain, which may push back the expected date for the first rate cut from the Bank of Canada. As of December, headline CPI increased 3.4% year-over-year (figure 1), in line with market consensus. This continues to be above the control range of 1%-3%. The increase in year-over-year inflation seen in December was somewhat expected as the large decrease in energy prices last December created a strong base year effect.”

 

Shelter continues to be a major driver of headline inflation, contributing 1.7% to year-over-year inflation (figure 2). Price growth for both rented and owned accommodation accelerated year-over-year, increasing by 7.5% and 6.7% respectively.  

Food price inflation appears to be stubborn, with prices increasing by 5.0% year-over-year, matching November’s reading.

Gasoline prices fell month-over-month but rose 1.4% year-over-year due to base year effects caused by the large decrease in energy prices last December. The year-over-year increase in gasoline prices was a key determinant in pushing headline CPI higher in December.

Figure 1: CPI Change

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

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

Bank of Canada Consumer Price Index Portal

 

 

Steve’s take: “With decreasing liquidity in real return bonds (RRBs), strong dealer relationships and market experience is a key factor in being aware of opportunities to obtain significant allocations and implementing new RRB mandates at efficient prices.”

 

Figure 3: RRB Trading Volume

Bloomberg

RRB trading activity was light in Q4, consistent with trends seen since the Government of Canada’s cessation of RRB issuance in November 2022 (figure 3). Daily trade volume was mostly light over the quarter except for a few days in increased trading in December, including daily trading volume of $87M on December 21st. This was potentially prompted by heightened activity in the indexed pension risk transfer space.

We continue to monitor entry points for clients who are considering using alternatives to RRBs to hedge Canadian inflation, including U.S. TIPS and inflation swaps. Over the past quarter, the gap between 10-year breakeven inflation rates in the U.S. and Canada narrowed from 54 bps to 40 bps (figure 4). This suggests that, while implementing a U.S. based inflation strategy remains relatively expensive, market conditions have improved.

Figure 4: US vs. Canadian 10-year breakeven inflation rates

Bloomberg

The content of this presentation is intended for institutional investors only. It is not for retail use or distribution to individual investors. All investments involve risk including the possible loss of capital. This presentation is for informational and educational purposes only. Past performance is not a guarantee of future results. 

Unless otherwise stated, all figures and estimates provided have been sourced from the Bank of Canada. Unless otherwise noted, all references to “$” are in CAD. Any reference to a specific asset does not constitute a recommendation to buy, sell or hold or directly invest in it.  It should not be assumed that the recommendations made in the future will be profitable or will equal the results of the assets discussed in this document.

The information contained in this presentation is not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information contained in this presentation.

The information may present materials or statements which reflect expectations or forecasts of future events. Such forward-looking statements are speculative in nature and may be subject to risks, uncertainties and assumptions and actual results which could differ significantly from the statements. As such, do not place undue reliance upon such forward-looking statements. All opinions and commentary are subject to change without notice and are provided in good faith without legal responsibility.

SLC Management is the brand name for the institutional asset management business of Sun Life Financial Inc. (“Sun Life”) under which Sun Life Capital Management (U.S.) LLC in the United States, and Sun Life Capital Management (Canada) Inc. in Canada operate.

Sun Life Capital Management (Canada) Inc. is a Canadian registered portfolio manager, investment fund manager, exempt market dealer and, in Ontario, a commodity trading manager. Sun Life Capital Management (U.S.) LLC is registered with the U.S. Securities and Exchange Commission as an investment adviser and is also a Commodity Trading Advisor and Commodity Pool Operator registered with the Commodity Futures Trading Commission under the Commodity Exchange Act and Members of the National Futures Association. In the U.S., securities are offered by Sun Life Institutional Distributors (U.S.) LLC, an SEC registered broker-dealer and a member of the Financial Industry Regulatory Authority (“FINRA”).

© 2023, SLC Management.

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)

Bloomberg

“FTSE®” is a trade mark of FTSE® International Limited and is used under license.

No part of this material may, without SLC Management’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.

© SLC Management, 2023

SLC-20240126-3350819