US consumer spending softened, income growth slowed, and the Federal Reserve’s preferred inflation measure decelerated as expected in October, adding momentum to the massive decline in yields seen since Governor Waller put “mechanical” rate cuts on the table earlier in the week.

Data released by the Bureau of Economic Analysis this morning showed the core personal consumption expenditures index – targeted by central bankers – flatlining in October relative to the prior month, up 3.5 percent year-over-year – aligning perfectly with consensus estimates. The overall personal consumption expenditures index was up 3 percent from a year ago.

Speaking at an event earlier this week, Governor Waller essentially suggested that the central bank would begin cutting after a few months of declining price pressures even in the absence of a “hard landing”, saying “If we see disinflation continuing for several more months—I don’t know how long that might be, three months, four months, five months—you could then start lowering the policy rate just because inflation’s lower… It has nothing to do with trying to save the economy”.

Personal income rose 0.2 percent month-over-month, decelerating from September’s 0.4-percent gain, matching a rise in inflation-adjusted household outlays, which climbed 0.2 percent.

Front-end yields are slipping and the greenback is retreating incrementally as traders modestly adjust bets on when the Federal Reserve will deliver its first rate cut next year. Ahead of the release, markets were assigning circa-80-percent odds to a pivot by May, and we suspect that picture remains largely unchanged.

Separately, the Canadian economy unexpectedly shrank in the third quarter, helping bolster expectations for an imminent policy pivot from the Bank of Canada. Numbers released by Statistics Canada this morning show real gross domestic product falling at a 1.1 percent annualized rate after a revised 1.4 percent gain in the second quarter. The statistical agency pointed to weakness in housing investment, inventory accumulation, exports and household spending as playing the biggest role in dragging the headline lower, with “increased business investment in engineering structures and higher government spending” providing modest offsets.  

An advance estimate showed the economy posting a modest 0.2 gain in October, defying expectations for a continued slowdown as oil and gas extraction, retail sales, and construction activity helped balance weakness elsewhere.

Taken in sum, the data add to our conviction that the Canadian economy is now poised on the edge of a recession, with further weakness likely to emerge in the coming months, setting the stage for a relatively rapid reversal in the Bank of Canada’s tightening cycle. Ultimately, we expect Canada to continue a long run of economic underperformance relative to the US, keeping the loonie under fundamental pressure – even as the greenback enters a broader period of decline.