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AI analysis
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Key arguments
- The tentative Canada-U.S. trade deal adds a modest tailwind to BoC hike odds, but core inflation remains well-behaved, allowing the BoC to stay patient on rates.
- Longer-term Treasury yields continue to climb due to shifting Fed policy expectations and a higher term premium, driven by fiscal supply concerns.
- U.S. housing starts fell 12.4% m/m to 1.2 million units in July, their second-lowest level outside the pandemic since March 2019.
- FOMC minutes showed deepening inflation concerns, with several participants ready to raise rates if inflation does not decline.
- WTI prices rose 5% this week to a four-week high of $86/bbl, with growing tightness in refined product markets, particularly diesel and jet fuel.
Risks
- Fiscal concerns and rising term premium could push longer-term Treasury yields even higher.
- Renewed Middle East tensions could lead to higher oil prices and increased inflationary pressures.
- The Canada-U.S. trade deal is not fully finalized, with CUSMA negotiations still ahead.
- Housing activity is weak and could be further dampened by elevated interest rates.
- Policymakers may need to tighten policy if inflation does not decline, which could weigh on growth.