Rewrite this financial news report into a clean, professional blog post. Keep the core facts about the US-Iran MOU and Switzerland meeting postponement. If there are currency data tables or heat maps, summarize their main takeaway cleanly in text and remove the raw table code. Keep all basic paragraph HTML formatting: Canadian Highlights
The Bank of Canada held the policy rate at 2.25%. Soft growth argues against further tightening, but the risk inflation pressures become more generalized keep cuts off the table, reinforcing a prolonged hold.
Canada’s international trade books moved further into surplus territory. Broad export gains and firmer volumes point to net trade supporting Q2 growth after dragging in Q1.
The Canadian economy is expected to rebound in Q2, but it’s not out of the woods – lingering uncertainty continues to cap the upside.
U.S. Highlights
The effects of the Iran war were evident in the CPI inflation report, which hit a three year high in May. Core inflation edged up to 2.9% y/y in line with consensus expectations.
NFIB pricing indicators also moved higher in May and inflation concerns continued to rise, while hiring plans continued to soften.
Existing home sales beat market expectations in May, but activity remains low compared to historical norms. Lacklustre markets are reflected in home price growth, which is still in the slow lane (1.3% y/y).
Canada – Tumbling Energy Prices and Economic Stabilization
Reports that a memorandum of understanding between the U.S. and Iran has been signed pushed have helped push oil prices lower, easing inflation pressures and supporting market sentiment. However, the downside for oil prices is likely limited, with global supply conditions still tight, suggesting some scope for energy prices to rise from today’s level as markets adjust to the evolving supply-demand balance in the coming months. For Canada, near-term reliefg to inflation and household budgets is likely on the way, and we expect that beyond the tough start to the year, a gradual economic recovery is in the making.
After a tough first quarter, the housing market is showing tentative signs of stabilizing. Housing starts pulled back 6% month-on-month (m/m) in May, but continue to track above Q1 levels, limiting the downside to residential investment in the second quarter. Meanwhile, existing home sales rose 5.5% m/m in May, with gains across most provinces. At the same time, new listings declined, tightening the sales-to-new listings ratio to 49.2%. While still below historical averages, this suggests improving balance. Prices remain mixed, reflecting ongoing weakness in segments such as condos. Overall, improving alignment between buyers and sellers appears to be supporting a partial rebound in activity, leaving sales on track for a firm Q2 gain. For the housing sector overall, headwinds from elevated inventories and slower population growth remain, but the near-term signal is one of stabilization rather than deterioration (see our Provincial Forecast for more details).
Emerging stability in the housing market is a positive sign, but consumer spending remains soft in the face of rising inflation. Retail sales rose 0.5% m/m in April, but volumes were unchanged, indicating that higher prices are driving gains (Chart 1). Strength in autos and gasoline masked underlying weakness, with core retail sales falling for a second consecutive month (-0.7% m/m). The dynamic suggests that households are becoming more selective as higher energy costs weigh on budgets. As a result, consumer spending is likely to grow modestly in Q2. The recent decline in energy prices should offer some relief heading into the second half of the year.
Attention now turns to next week’s inflation report for May. We expect a firm print, with gasoline prices rising about 3% in the month. However, the key focus will be on inflation breadth (Chart 2) and core measures. In April, headline inflation rose to 2.8% y/y on higher energy prices, while the average of the Bank of Canada’s (BoC) core measures cooled to 2.1%. The critical question for the BoC will be whether price pressures are broadening beyond energy prices and, given that the upside to oil prices appears limited for the time being, how persistent any pass-through becomes.
Overall, while the upcoming inflation report will be important for assessing underlying pressures, the broader backdrop remains one of excess supply, subdued domestic demand and likely moderating energy prices. This should limit the pass-through to core inflation and keep the Bank of Canada on the sidelines through the remainder of the year.
U.S. – Price Pressures Now on the Front Foot
Middle East tensions spiked and then eased again this week, with President Trump threatening new strikes on Iran and then calling them off as he noted progress toward a deal. WTI oil prices, which had been holding near $90/barrel, fell sharply toward $85/barrel. The 10-year Treasury yield also dipped initially, reflecting hopes that a resolution to the conflict would limit the energy shock’s spillover into broader inflation expectations, but recovered some lost ground later in the week as investors digested another firm inflation report.
The May CPI report was the clearest evidence that inflation pressures continue to build. Headline inflation accelerated to the fastest pace in three years – 4.2% year-on-year (Chart 1). Higher energy costs accounted for the bulk of that increase. The gain in core inflation was more contained, but the annual rate still moved further above target (2.9% y/y), adding support to a “higher for longer” policy stance. Sifting through the details, shelter cooled after April’s outsized gain and core goods prices slipped, but non-housing services remained firm.
Inflation pressure was also evident in the NFIB small business survey, where a growing share of firms reported that they had raised average selling prices and that they planned further increases in the months ahead. This supports the view that higher energy and input costs are starting to ripple beyond the pump.
Housing offered a modest reprieve from the sour inflation news. Existing home sales rose a solid 3.2% in May to the highest level since December. Still, little has changed in the broader picture, with activity hovering near the 4-million mark for the third consecutive year and home price growth remaining in the slow lane.
Labor market signals, meanwhile, were mixed. Initial jobless claims ticked higher for the third week in a row but remained broadly range-bound, while continuing claims are still low by historical standards. Signals out of the small business survey, however, were less reassuring on this front. Small businesses are pointing to slower job creation ahead, with job openings and hiring plans softening recently amid an increase in inflation concerns (Chart 2).
All told, the effects of the Middle East conflict continue to show up in the data, and this is becoming harder for the Fed to ignore. Our view is that core inflation will likely remain elevated through year-end, supporting the case for an extended Fed pause. Next week marks Kevin Warsh’s first FOMC meeting as Chair. Markets will be watching not only for a clear rate signal, but also for clues on how he intends to communicate. Warsh has indicated a preference for a shift in communication strategy, like potentially not holding a press conference after every Fed meeting. We expect the committee to telegraph a “higher for longer” policy stance in its updated Summary of Economic Projections, which had reflected 25 bps of easing this year and next. It is also likely to drop its easing bias in the statement. This expected shift would move the Fed closer to market pricing, which now reflects a toss-up between “no action” and a 25-bps hike by year-end.
