TD Securities analysts note that Canadian January CPI surprised slightly to the downside at 2.3% year-on-year, with core measures also easing. They argue the Bank of Canada is unlikely to overreact but say softer core momentum reduces the bar for policy response to future growth headwinds. Canadian fixed income outperformed, and TD believes downside rate risks are now fully priced.

Disinflation seen but BoC patient

"Headline CPI surprised to the downside in January with a 0.1pp deceleration to 2.3% y/y (market: 2.4%, TD: 2.5%) as prices held unchanged on the month. Base-effects from last year's HST pause drove a sharp acceleration in food prices, but this was offset by a larger drag from energy and further disinflation in shelter."

"Core inflation measures mirrored the headline surprise with a 0.2pp deceleration to 2.45% y/y for CPI-trim/median, which pulled 3m core inflation rates to just 1.2%. We do not expect the BoC to overreact to softer core inflation momentum, but it should lower the threshold for the Bank to respond to any new growth headwinds in 2026."

"Canadian fixed income outperformed on the back of the downside miss on CPI, which nicely illustrates the current market dynamic: for the moment, we look for markets to embrace negative data prints and look past positive ones. Canada-US 10s tightened by ~2bps following the release, and with the move lower in short-end rates we believe that downside risks are fully priced."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)