By Michael O’Neill

Bank of Canada Governor Tiff Macklem has made it clear that risk management is now the Bank’s guiding principle.  The Business Outlook Survey (BOS) and the Canadian Survey of Consumer Expectations (CSCE) underscore why. The results show a Canadian economy that’s not collapsing but clearly losing altitude. Business confidence is fragile, consumers are cautious, and inflation expectations are softening just enough to give the Bank room to maneuver. The latest CPI data is not enough to deter the BoC policymakers from cutting rates to 2.25% next week.

A Bleak Business Backdrop

Corporate Canada is keeping its head down. The BOS shows that sales growth has slowed and order books are thinning. Firms are not planning to expand capacity, hiring plans are on ice, and investment spending is being reduced. The survey also noted that businesses facing weaker demand and higher costs reported less ability to pass cost increases through to output prices.

The survey is clear: demand is weak, and confidence is fading. That’s a problem for policymakers because it means that economic growth is not going to be coming from the private sector.

Consumers in Caution Mode

Consumers aren’t helping. The survey’s composite measure of sentiment dropped again in Q3, with households reporting weaker plans for major purchases and a greater tendency to save rather than spend, as well as worrying more about job stability. Inflation expectations have ticked down modestly, but most consumers now view tariffs and higher living costs as the main threat to price stability.

CPI Speed Bump

The September inflation report hit a speed bump on the road to lower rates.  Headline CPI rose 2.4% y/y compared to 1.9% y/y in August, but that gain was largely due to higher gasoline prices. When you peel back the layers, the underlying trend shows more of the same: progress has stalled, not reversed.

But the BoC isn’t really a big fan of the Statistics Canada data. They use their own metrics, CPI-Trim and CPI-Median, both of which are measures of core inflation. The former drops the biggest increase and the biggest decrease from the calculation, while the latter reflects the middle of the calculation. And those measures ticked 0.1% higher, to 3.1% for Trim and 3.2% for Median.

The results may prolong the rate cut discussion for a few minutes longer, but the dismal economic outlook and a universally expected 25 bp rate cut by the Fed favour another 25 bp move lower.

The FOMC Meeting May Be a Dud

Even if the Bank of Canada follows through with a quarter-point cut next week, those expecting guidance from Washington may be sorely disappointed. The FOMC meets the same day, and while a 25-basis-point reduction is the consensus, traders will be focused on the amount of dissent. So far, only Governor Stephen Miran has admitted to favouring a 50 bp cut. However, he is likely to remain the lone voice, especially if the U.S. government remains shut down.

And he won’t get any support from the inflation data that is released on Friday. The quality of the delayed U.S. September inflation report has made many economists worried about the accuracy of basket calculations because of the use of alternative methods for calculations. Policymakers are unlikely to react to minor increases or declines.

Loonie Dancing to Greenback’s Tune

The U.S. dollar has all the G-10 currencies dancing to its tune, and the Loonie is just part of the conga line. The greenback has been higher daily since the middle of September, which has knocked the G-7 major currencies from their peak levels while leaving them trapped in well-travelled trading bands. The U.S. dollar index (DXY) rose from 96.16 on September 17, when the Federal Open Market Committee (FOMC) last met, to 99.54 on October 9, with prices underpinned primarily by China/U.S. trade tensions and the U.S. government shutdown.

The greenback has given back some gains in recent days due to a mix of profit-taking and comments from President Trump that hint at a resolution to the China/U.S. trade spat.

Even if the U.S. dollar continues to retreat, Canadian dollar gains may be limited. On Tuesday, the Globe and Mail published an article saying that Canada and the U.S. may be signing a trade deal on steel and aluminum on the sidelines of the October 27–November 1 Asia-Pacific Economic Cooperation summit in Seoul, South Korea. The lack of an agreement on the auto and lumber sectors, which are far more important to the Canadian economy, suggests any USDCAD losses will be short-lived.

The Survey Says… Cut Rates.