By Douglas Porter

October 24, 2025

Overture, curtains, lights, this is it, the night of nights. No more rehearsing and nursing a part, we know every part by heart.

Overture, curtains, lights. This is it, you’ll hit the heights. And oh what heights we’ll hit. On with the show, this is it.

While we may like to imagine that Bugs & Co. were singing about the World Series, it’s much more likely that next week’s wave of central bank meetings was actually the focus of attention. Any possible drama surrounding the Federal Reserve’s decision on Wednesday was fully drained from the markets by Friday’s relatively mild CPI result for September.

An abrupt slowdown in the broad rental components helped hold core prices to a 0.2% monthly rise and clipped the yearly rate a tick to 3.0%. Headline inflation similarly came in at 3.0% even with a slightly heavier 0.3% monthly rise. While 3% inflation would hardly be cause for relief in pre-pandemic days, this first major official data release in weeks was warmly greeted by investors. Coming in a tenth below expectations, it all but locked in 25 bp Fed rate cuts both next week and in early December.

Looking a bit further ahead into 2026, we suspect that the near-absence of serious tariff-related inflation sets the stage for additional cuts. After all, core goods prices, the very area one would expect tariffs to affect, rose a moderate 0.2% last month and 1.5% in the past year. True, that’s up from essentially no inflation in this category in the decade up to 2020, but it’s not the shape-shifting pace that many analysts expected in the wake of double-digit tariffs.

And now with shelter cost inflation steadily moderating—to 3.6% y/y, less than half the 2023 peak, and nearly back to pre-2020 trends—we look for overall and core inflation to average just below 3% next year. Accordingly, we continue to expect a follow-up 75 bps of further rate cuts in 2026, eventually bringing the fed funds rate to just below 3% from just above 4% now.

The U.S. dollar barely blinked at the increased probability of Fed easing, as the odds were already so stacked in that direction heading into this week. In fact, the dollar nudged slightly higher on net against a basket of major currencies and has stabilized in the past six months after absorbing a mighty blow in April.

The one currency that did make a major move this week was the yen, which fell 1.5% as the new PM Takaichi called for a fiscal push but less BoJ tightening. In a curious piece of timing, Japan also released its CPI on Friday and reported nearly identical results as the U.S. with headline inflation at 2.9% and core-core edging down to 3.0% (Chart 1). The BoJ is now expected to hold rates steady this Thursday (day after the FOMC), versus earlier expectations of a hike.

It was a broadly similar story of stability for Treasuries, with yields barely budging on the week. Ten-years spent much of the time drifting a bit below 4%, but finished very close to that key level, with the good CPI news somewhat countered by a further uptick in consumer inflation expectations. The University of Michigan reported that households now expect inflation to average 3.9% over the next five years, up from 3.7% last month and 3.0% a year ago.

It’s this deterioration in the trade outlook and the increasingly clear impact it is having on key sectors—and not the economic data—that has pulled us into looking for a BoC rate cut next week.

Equities had no such concerns, as the CPI helped power the S&P 500 to all-time highs on Friday morning, and up 2% from a week ago. This week’s wave of Q3 earnings was largely supportive, with some important positive surprises in key consumer and industrial companies, reinforcing the view that the U.S. economy is soldiering ahead, even beyond the fiery growth in AI infrastructure.

If only the Bank of Canada call was as straightforward as the Fed. A quick glance at market pricing would suggest there’s not much mystery, as it is leaning very heavily to a 25 bp cut next week as well. But that certainty only gradually jelled in recent weeks, and finally firmed up as it became crystal clear on Friday that there will be no cessation of U.S./Canada trade hostilities anytime soon.

Not for the first time, the President called for a halt to negotiations with Canada, and his economic advisor Kevin Hassett indicated that those talks “have not been going well”. Just to recap, the U.S. has imposed a 50% tariff on steel and aluminum, up to 25% tariff on vehicles, a 45% tariff on lumber, while Canada has dropped most of its retaliatory tariffs, dropped the digital services tax, and significantly boosted defence spending. This, at a time when a variety of auto plants are cutting production plans in Canada, and shifting investment and output to U.S. plants.

It’s this deterioration in the trade outlook and the increasingly clear impact it is having on key sectors—and not the economic data—that has pulled us into looking for a BoC rate cut next week. To be clear, we have consistently been among the most dovish on the BoC outlook, calling for an eventual move to 2% on overnight rates.

With the trade uncertainty unlikely to dissipate anytime soon and eventually carving further into activity, we continue to believe that it makes perfect sense for rates to go to the very low end of neutral, or even a bit below to support the economy through this difficult episode. We just happened to believe that sticky core inflation may somewhat slow the pace of cuts, but can’t at all disagree with the direction of travel.

As indicated, it’s actually quite difficult to build the case for another BoC cut based solely on the economic data since the Bank last met. Since that time, we had a surprisingly perky 60,400 job gain for September, albeit with a steady jobless rate at 7.1%, which Governor Macklem largely brushed aside. Retail sales popped back up with a 1.0% volume increase in August, countering softness in wholesale and manufacturing trade that month, but all look to reverse course in September (retail flash down 0.7%, manufacturing up 2.8%, nominal basis for both).

And, the September CPI was the opposite of the U.S. result, landing 1-2 ticks on the high side of consensus across the board. Even so, the old measure of core, excluding food & energy and sales taxes, held steady at 2.4%, which meets the Bank’s mantra that “underlying inflation is close to 2½%”. Meantime, housing starts jumped and remain robust, although sales and prices continue to drift sideways with a soft undertone, indicating that the rate cuts to-date have certainly not overcooked the housing goose.

Finally, there is the real-world element that the market is leaning so heavily to a rate cut now that a decision to hold would lead to a nasty whipsaw in yields. While the Bank is not going to let the market drive its decisions, the Governor chose to not lean against rate-cut pricing in his latest public remarks—quite the opposite, in fact.

Accordingly, it appears that the die is cast for a 25 bp trim next week, and we expect a bit more later on given the ongoing and damaging uncertainty on the U.S./Canada trade front. So now, let’s play ball.

Policy Contributing Writer Douglas Porter is Chief Economist for BMO.