Today
Adjusting expectations. After another look at inflation this morning with the release of U.S. PPI data, U.S. and Canadian futures are higher while bond yields edge lower as investors dial back expectations for a Fed rate hike at next month’s meeting. A hike later this year remains the base case, but last week’s softer jobs report, together with yesterday’s headline and core CPI readings showing inflation easing modestly, suggest the Fed has a little more room to breathe. The TSX is looking to build on yesterday’s record close, when gains in materials and financials helped it outperform its U.S. peers. Gold producers benefited as bullion climbed to $4,467 an ounce, while Canadian banks advanced after Fitch reaffirmed their credit ratings, although valuations are becoming stretched relative to U.S. peers. Overseas, markets are mostly higher, with the Euro Stoxx 50 up 0.5% at the time of writing. In Asia, enthusiasm for the AI trade is building again, with South Korea’s Kospi Index up 3.6%, helped by gains in Samsung and SK Hynix. Combined with the previous session’s 3.7% advance, the index has re-entered bull market territory, climbing 20% from its July 30 low in just 10 trading sessions. That’s fast. Even after a sharp pullback from a year-to-date gain of roughly 116% less than two months ago, the Kospi is up 62% this year. That’s still big.
Wholesale inflation cooled more than expected in the U.S. last month, adding to signs that price pressures are moderating despite inflation remaining elevated. The producer price index was unchanged from June, and below the 0.2% expectation, while annual PPI slowed to 4.7% from 5.5% and came in below the 4.9% forecast. Core producer prices rose 0.2% for the month, also below expectations, although the annual core rate of 4.2% was slightly higher than consensus. Combined with yesterday’s encouraging CPI print, the report suggests inflation pressures are easing and could reduce the need for the Fed to raise interest rates in the coming months.
Unintended consequences. Fed Chair Kevin Warsh’s recent push to scale back the central bank’s forward guidance is raising concerns that less transparency could increase market volatility and borrowing costs. Since taking over a few months ago, Warsh has shortened policy statements, eliminated forward guidance and emphasized current economic conditions, and has considered reducing the number of scheduled policy meetings. Supporters believe the approach could reduce market dependence on Fed commentary, but some have warned that decades of transparency have become embedded in bond pricing and risk-management models, meaning greater policy uncertainty could push up the premium demanded on longer-term Treasuries. With 30-year yields recently reaching a 19-year high, markets may become more sensitive to individual economic releases as investors rely more heavily on inflation, employment, and growth data in the absence of comments from the Fed.
On the same page. Japan’s government appears ready for a Bank of Japan rate hike, with the next move likely in September or October as policymakers look to address persistent yen weakness and inflation pressures. The government and BOJ have become aligned, as higher rates could reinforce the recent coordinated U.S.-Japan currency intervention while limiting the inflationary impact of a weaker yen. Markets are pricing a 74% probability of a September hike, after officials signalled concern about upside inflation risks and the possibility of accelerating the tightening cycle. The BOJ’s policy rate is currently 1%, and another increase would represent its fastest pace of tightening over a 12-month period since 1989. While Prime Minister Sanae Takaichi has in the past been cautious about aggressive tightening, her government continues to emphasize the BOJ’s independence while signalling greater tolerance for additional rate increases.
That’s a big (number). The U.S. budget deficit rose to $432.3 billion in July, up 48% from a year earlier and marking the largest monthly shortfall since March 2021. The fiscal-year deficit through July has now reached nearly $1.8 trillion as higher Medicare spending and rising debt-servicing costs pressure government finances. Medicare spending jumped to $174 billion for the month, while net interest on the national debt reached $104 billion and now totals $931 billion fiscal YTD. The government has paid $1.17 trillion in total interest costs this fiscal year on the $39.9 trillion national debt, roughly $157 billion more than at this point last year. While lower interest rates could provide some relief, it doesn’t appear like the Fed is in any rush to cut rates any time soon.
AI ambitions meet public resistance. A new Nanos poll for The Globe and Mail found that nearly two-thirds of Canadians oppose government financial support for AI data centres, even as Ottawa commits billions to expand the country’s AI computing capacity and strengthen digital sovereignty. Respondents cited electricity demand, environmental impacts, water use, and potential job displacement among their biggest concerns, while fewer than half believed data centres would have a positive impact on the economy. The findings suggest governments and developers still have work to do in building public support as they balance Canada’s AI ambitions with environmental considerations and the infrastructure needed to power the next generation of AI.
Thanks for the championship, now about those taxes. Former Raptors head coach Nick Nurse is appealing Ontario’s refusal to refund nearly $700,000 in Non-Resident Speculation Tax paid on his former Mississauga home. As a foreign national working in Canada, Nurse was required to pay the tax when he purchased the property in 2021, but he says he later qualified for a rebate available to foreign nationals employed full-time in Ontario. He applied for the rebate in 2024 after selling the home, but before the province amended the rules. Ontario rejected the request, saying he no longer met the residency requirements after selling the property. At the heart of the dispute is whether Ontario applied changes to the rebate rules after Nurse submitted his application. The appeal will now play out in court, where he’ll be looking to add one more win to his Ontario record.
Diversion: Mom said no double jumping…
