US inflation printed below expectations for a fifth consecutive month in June as tariff-led price increases in core goods categories were offset by softness in the services sector and in automobile costs. According to data published by the Bureau of Labor Statistics this morning, the core consumer price index – with highly-volatile food and energy prices excluded – rose 2.9 percent in June from the same period last year, up 0.3 percent on a month-over-month basis, accelerating from the prior month’s 0.1-percent pace, but undershooting consensus estimates among economists polled by the major data providers ahead of the release. On a headline all-items basis, prices climbed 2.6 percent year-over-year, speeding up from the 2.4 percent pace set in May, and were up 0.3 percent from a month-over-month standpoint.

Tariffs played a clear role, but signs of sentiment-driven demand destruction—particularly in the services sector—weighed on the headline calculation. The core goods measure pushed 0.2 percent higher from the prior month as apparel prices rose 0.4 percent month-over-month, household furnishings were up 1 percent, and electronics climbed 1.1 percent, suggesting that businesses passed along rising import costs in the form of higher sticker prices. But shelter cost growth decelerated, airfares fell, and prices for new and used vehicles declined, offsetting the impact on overall measures.

The dollar is down incrementally, yields are very modestly lower across the curve, and North American equity markets are gaining at the open as investors turn slightly more optimistic on the likelihood of an imminent resumption in the Federal Reserve’s easing cycle. June producer prices and the closely-watched Beige Book survey, both out tomorrow, along with Thursday’s retail sales number, could force a recalibration in expectations, but for now, the jury is still out on whether tariffs will ultimately force the central bank to postpone its rate cuts for longer. We expect July and August data to play a more decisive role, and think policymakers will continue repeating their wait-and-see message for now.

Here in Canada, inflation pressures intensified more than expected last month, further lowering the likelihood of a rate cut at next week’s Bank of Canada meeting. Data released by Statistics Canada this morning showed an average of the two core price measures now preferred by the Bank of Canada (trim and median) accelerating to 3.05 percent in June, faster than the 3 percent previously recorded, while the headline consumer price index climbed 1.9 percent on a year-over-year basis in June, up from 1.7 percent in May. A “diffusion” index, which tracks the number of price components rising by 3 percent or more, widened to 39.1 percent from 37.3 percent previously.

With inflation risks clearly skewed to the upside and labour markets showing signs of resilience, market participants are increasingly betting against near-term rate cuts, and conviction in easing by the end of this year has begun to fade. Pricing derived from overnight index swaps suggests just a 10-percent likelihood of a July move, down from 17 percent ahead of the release, and only 20 basis points in easing are now priced in for year-end. The loonie is firming as we go to print, reflecting a narrowing in dollar-Canada rate differentials.

China’s economy proved more resilient than expected in the second quarter, with gross domestic product expanding at a 5.2-percent annualised pace in the April-June period from a year earlier, even as the country faced an escalation in trade threats from the United States. Exports held up surprisingly well, growing 5.8 percent in the year to June as tariff front-running efforts continued and goods were transshipped through intermediary countries on their way to Western markets. But growth remained unbalanced, with a raft of other activity indicators showing industrial output—sustained through a combination of government stimulus and net exports—expanding 6.8 percent year-on-year in June, while retail sales and fixed asset investment—both driven by domestic demand—climbed just 4.8 and 2.8 percent, respectively. New home values fell 3.7 percent from a year earlier, while second-hand residential prices fell 6 percent.

After years of investment-led growth, China remains too reliant on a manufacturing sector that is struggling with increasing levels of overcapacity — especially given that this is only exacerbating concerns about a torrent of artificially-cheap goods in other major economies. Data published last week showed producer price growth remaining negative in June for the 33rd month running, and the country as a whole is running a goods trade surplus totalling more than $115 billion a month, indicating that factories are engaged in an externally-focused price war that could ultimately represent a serious misallocation of economic resources if access to global markets is restricted.

Under General Secretary Xi Jinping, the political establishment has resisted a shift in growth strategies for years, but signs of a thaw have recently emerged, with Li Lecheng, Minister of Industry and Information Technology telling businesses to “manage the low-price disorderly competition,” and a number of Party-aligned think-tanks and media outlets coming out in favour of regulating prices and production levels. This suggests—to us, at least—that the government could soon attempt a repeat of its 2015 effort to reduce overcapacity in the steel industry. At the time, Beijing forced local governments to blow up uneconomic steel plants (something that should not be necessary in a truly capitalist system) and provided a shot of offsetting stimulus to cushion the blow to employment levels and fiscal revenues. We’re not sure what form a contemporary policy framework could take (today’s businesses are more diffuse and local governments even more reliant on production taxes), but any deeply-coordinated effort to steer the Chinese economy toward domestic consumption could have profound consequences for global markets and trade imbalances.