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“Inflation Forecasts Aren't Worth the Paper They're Written on”: This Is about the Bank of Canada's Reaction to Inflation, But it's the Same in the US and Everywhere – WOLF STREET

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“Why the current tightening cycle is unlike anything we’ve observed in the past.”

By Wolf Richter for WOLF STREET.

When Canada’s Consumer Price Index for May was released a couple of days ago, it was – “as expected,” I would say – a lot lot worse than expected, and exceeded once again by a huge margin the inflation forecasts by the Bank of Canada. According to the exasperated economists at the National Bank of Canada, CPI inflation runs 1.5 percentage points above the BoC forecasts of CPI, outrunning those forecasts at every step along the way. May was “the biggest miss yet in what has been a systematic underestimation of inflation,” they wrote in a note.

“So if May’s CPI report doesn’t set alarm bells ringing at Governing Council [of the Bank of Canada], someone should check their collective pulse,” they noted.

The headline CPI for Canada spiked by 7.7% in May compared to a year ago, the worst inflation rate since 1983, according to Statistics Canada:

The BoC has already hiked its policy rates by 125 basis points, to 1.50%. At its last meeting, it included hawkish language of more and bigger hikes than expected, such as a 75- basis point hike at the July meeting. The BoC has also embarked on QT, and its balance sheet has been shrinking since March 2021. But the rate hikes and the hawkish language of future rate hikes were based on the BoC’s inflation forecasts which have been “a systematic underestimation of inflation.” So this rate-hike cycle is going to get interesting.

On a month-to-month basis, CPI jumped by a stunning 1.4% in May from April, not seasonally adjusted; and by 1.1% seasonally adjusted. As expected, I would say, those spikes totally blew away the expectations.

The month-to-month CPI rates of March, April, and May, annualized, spiked to an annual rate of 12.5%.

The red-hot month-to-month increases came across the board, and not just in a few commodities-linked items. It gave the BoC more than enough reasons to pull the trigger on a 75-basis point hike at its meeting on July 13.

“Inflation forecasts aren’t worth the paper they’re written on.”

The BoC’s inflation forecasts that it released at each of its prior meetings going back to April 2021 are depicted in different colors in the chart below from National Bank of Canada’s Financial Markets shop. The red line is the actual CPI rate for each quarter. The BoC’s estimates start at each meeting with the then current CPI rate.

So at its April 2021 meeting (light blue, first line from the bottom), as inflation had begun to surge, the BoC estimated that CPI would peak at just under 3% by mid-2021 and then decline to 2% by March 2022, hahahaha.

Then at its July 2021 meeting, the BoC forecast that inflation would top out at 3.8% by Q3 2021, then drop to 3% by about right now, hahahaha, and to 2% by Q3.

The above chart shows how ridiculously far off these inflation forecasts were, and how this inflation is a big wild card that just keeps getting worse, even as commodities prices have started to come down.

“For BoC watchers trying to compare today’s inflation trajectory with earlier monetary tightening episodes, give up. There’s simply no comparison in the overnight rate target era (that started in the mid-1990s). That’s why the current tightening cycle is unlike anything we’ve observed in the past,” said National Bank of Canada’s Warren Lovely and Taylor Schleich in their note.

“As aggressive as the past couple of BoC actions may have seemed at the time, it’s time to turn the screws even tighter,” they said.

“A 75 bp rate hike on July 13th won’t fix Canada’s inflation problem, not with labour markets as tight as they are. As an aside, job vacancy data are clearly worrying, and Canada’s acute labour shortage won’t be remedied quickly despite a resumption of healthy population growth [through immigration],” they wrote.

And they added – sprinkled with stark inflation humor:

“To summarize: We have out-of-control inflation. Simply sending more money to households like some governments have done (or intend to do) is just like adding gasoline (itself already expensive) to the fire.

“Inflation demands an uber-forceful BoC reaction, including a 75 bp hike in three weeks’ time.

“Exceptional rate hikes have done little to control prices (so far) but have turned housing markets upside down. Consumer psyches bear watching and recession risks have mounted.

“Indeed, with inflation data like this, securing a ‘soft landing’ might be like threading the eye of a needle. We haven’t totally abandoned hope, but today’s CPI report should sober up even the most enthusiastic among us.”

The Fed was also ridiculously off with its inflation forecast every step along the way and by now has gotten burned at the stake for its use of “temporary” and transitory.” The ECB too has been ridiculously far off with its inflation forecasts. And their monetary policies – their refusal to hike rates starting in early 2021, and their refusal to end QE and start QT at the same time – were driven by this ridiculous underestimation of inflation. But now they’ve gotten the memo.

It is an interesting turn of events that economists at the big banks in Canada as well as the US and everywhere are exhorting their respective central banks to crack down on inflation by raising rates further and harder as this inflation is threatening to spiral out of control, after which the economic and financial damage from runaway inflation is going to be huge.

Stock and bond markets have already reacted sharply to this tightening scenario, and in Canada, housing markets have already “turned upside down,” and central banks have just started to tighten, and nothing central banks did in recent decades can be compared to what comes next, and if a recession is part of the deal of getting this runaway inflation under control, so be it.

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Quebec pension giant Caisse takes $33.6 billion investment hit in worst markets in 50 years – Financial Post

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Pension fund writes off $150-million investment in bankrupt Celsius

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The Caisse de dépôt et placement du Québec posted a negative return of 7.9 per cent for the first six months of the year, in what chief executive Charles Emond noted was the worst period for stock and bond markets over the past 50 years.

As of June 30, the Caisse had net assets of $392 billion, with the $28.2-billion decrease due to investment losses of $33.6 billion offset by $5.4 billion in net deposits. The losses included a full write off of the fund’s US$150 million investment in crypto lender Celsius Network LLC, which is now in Chapter 11 bankruptcy proceedings in the United States.

“The first six months of the year were very challenging,” Emond said in a statement. “The mix of factors we faced had not been witnessed in several decades: spiking inflation that triggered rapid and sharp interest rate hikes, rare simultaneous corrections in both stock and bond markets, fears of an economic downturn and the war in Ukraine with its many collateral effects.”

Over the same period, the Ontario Teachers’ Pension Plan Board reported a positive return of 1.2 per cent on Monday.

During a news conference Wednesday to discuss the Caisse results, Emond said the Quebec pension fund wrote off the Celsius crypto investment even though it is considering its legal options and intends to preserve its rights in the court-monitored U.S. bankruptcy proceedings.

“We decided to take it now” out of prudence, Emond said of the writeoff. “The last chapter hasn’t been written.”

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He said his team conducted extensive due diligence with outside experts and consultants. They were aware of management and regulatory issues at Celsius and underestimated the time it would take to resolve them, he said, adding the Caisse was keen on “seizing the potential of block chain technology” and perhaps the investment in Celsius had been made “too soon” in the company’s development.

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He noted that the investment was a very small part of a large venture portfolio that has produced 35 per cent returns over the past five years.

“In these disruptive technologies, there’s ups and downs…. Some big winners and many losers,” Emond said.

Although the Caisse posted an overall return in negative territory for the first six months of the year, the performance exceeded that of its benchmark portfolio — which posted a negative return of 10.5 per cent.

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“Over five and 10 years, annualized returns were 6.1 per cent and 8.3 per cent respectively, also outpacing benchmark portfolio returns,” the pension manager noted.

Emond said the Caisse is managing the “turbulence” with a combination of asset diversification and strategic adjustments made since the COVID-19 pandemic began.

“For the past two years, we’ve been working in an environment of extremes characterized by particularly fast and pronounced changes. These unusual and unstable conditions will persist for some time,” he said.

“In the short term, we’ll be watching what central banks do to contain inflation and how that impacts the economy.”

  1. The Ontario Teachers’ Pension Plan board eked out a 1.2 per cent return in the first half of the year.

    Ontario Teachers’ Pension Plan Board ekes out small return in ‘difficult’ markets

  2. The Canada Pension Plan Investment Board reported a 4.2 per cent loss, equivalent to $23 billion, for the three months ending June 30.

    CPPIB breaks winning streak with $23-billion loss amid ‘market turbulence’

  3. In July, crypto lender Celsius Network filed for Chapter 11 bankruptcy protection and owes users about US$4.7 billion.

    Canadian watchdogs join probe of Celsius’ multi-billion-dollar collapse, sources say

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During the first six months of the year, negative returns in equities and fixed income were partially offset by gains in the Caisse’s investments in real assets including infrastructure and real estate.

The pension giant posted a negative return of 13.1 per cent in fixed income, which beat the negative 15.1 per cent return for its benchmark portfolio. This represented nearly $3 billion in “value added” attributable to all credit activities, the Caisse said.

A negative return of 16 per cent in equities beat the negative 17.2 per cent return in the benchmark portfolio.

The Caisse’s real estate and infrastructure portfolios, meanwhile, generated a 7.9 per cent six-month return, “demonstrating their diversifying role which contributes to limiting inflation’s impact on the total portfolio.”

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The real asset class performance also beat the benchmark portfolio’s return, which was 2.4 per cent.

“So that asset class played its role. The two portfolios are doing well,” Emond said.

He said it is challenging to compare the short-term performance of Canadian pension funds because they have e different mandates and investment models. The Ontario Teachers’ Pension Plan, for example, has less exposure to equity markets than the Caisse and more exposure to natural resources and commodities, which performed well in the first half of the year.

• Email: bshecter@postmedia.com | Twitter:

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Air Canada says its baggage handling success rate is back to 98% – Yahoo Canada Finance

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Air Canada travellers wait at the check-in area as baggage handlers at Pierre Elliott Trudeau airport walked off the job, causing cancellations and delay, in Montreal March 23, 2012. REUTERS/Olivier Jean (CANADA - Tags: BUSINESS EMPLOYMENT CIVIL UNREST TRANSPORT)

Air Canada travellers wait at the check-in area as baggage handlers at Pierre Elliott Trudeau airport walked off the job, causing cancellations and delay, in Montreal March 23, 2012. REUTERS/Olivier Jean (CANADA – Tags: BUSINESS EMPLOYMENT CIVIL UNREST TRANSPORT)

Air Canada says it has improved its service levels through the summer, reducing wait times and cancellations and bringing its baggage mishandling rate back to 2019 levels.

The Montreal-based airline provided an update on Wednesday on the operational improvement initiatives that have been underway as the company grapples with numerous challenges in the post-pandemic recovery.

Air Canada says that from the week of June 27 to the week of August 8, it saw the strongest improvement in baggage handling. While the company did not disclose its baggage mishandling rate, it says that the rate during the week of June 27 was 2.5 times the rate in 2019, before the pandemic hit. As of Aug. 8, Air Canada says the rate has returned to pre-pandemic levels, with a baggage handling success rate of 98 per cent.

The airline has also experienced a reduction in flight delays of more than one hour between, with 1,160 fewer flights per week facing longer delays. Air Canada also says delays are getting shorter, with the average arrival delay improving from 28 minutes longer than 2019 levels in the week of June 27, to 12 minutes longer than 2019 levels in the week of Aug. 8.

The number of flights cancelled fell 77 per cent between June 27 and Aug. 8. The airline’s flight completion rate reached 96.7 per cent, less than one percentage point lower than in the same week in 2019.

“We know how much our customers value travel and their reliance on us to transport them safely, comfortably and without disruption. This is always our goal and we share with them their disappointment that, coming out of the pandemic, the global industry faltered due to the unprecedented challenges of restarting after a two-year, virtual shutdown,” Air Canada chief executive Michael Rousseau said in a statement on Wednesday.

“While I am very satisfied with the progress to date… we all continue to work hard on behalf of our customers to complete our recovery.”

Air Canada says it currently operates an average of nearly 1,100 flights per day and it will operate 79 per cent of its pre-pandemic schedule through the summer. It now employs 34,000 workers, slightly below the 34,700 that were on staff before the pandemic.

Despite the improvements, Air Canada’s stock was trading down nearly 2 per cent on the Toronto Stock Exchange as of 1 p.m. ET.

RBC Capital Markets analyst Walter Spracklin says the improvements are a key positive for the airline, and reinforce that “the worst is behind them in terms of travel disruptions.”

“Taken together, these improvements should offer greater confidence to Air Canada’s customer base,” Spracklin said.

“Looking ahead, we hope to see capacity growth as the system gains resilience from the summer travel boom.”

Air Canada apologized to customers earlier this month for the operational instability seen in the post-pandemic ramp-up that came after travel demand surged for the first time in more than two years. The increase in demand strained the global air transport system and resulted in challenges for Air Canada and chaos at some of the country’s biggest airports.

The airline had pointed to challenges throughout the system as a key source of the issues, including resource challenges that impacted airport security screening, Canada and U.S. border customs processing, air traffic control, maintenance providers, equipment, supply chain, aircraft catering and fuelling partners. Air Canada also says a series of mechanical failures at airport baggage handling systems contributed to ongoing issues.

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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Hudson's Bay resurrecting Zellers a decade after most locations closed – CBC News

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