Consumer prices in Canada grew at a slower pace in December compared with the prior month, as weakness in gasoline and telephone plan prices weighed down on inflation.

More Into the Headlines

Consumer prices in Canada increased 1.9% year over year in December compared with 2.1% in the prior month, in line with economists’ forecast.

Looking at Bank of Canada’s three core inflation measures, Consumer Price Index (CPI)-median was unchanged compared with November at 1.9%. CPI-trim which seeks to exclude the impact of extreme price changes, increased 1.9% compared with 1.8% in the prior month. CPI-common, which seeks to exclude the impact of prices that changed due to extraordinary circumstances, increased 1.6% compared with 1.5% in the prior month.

Coming to drivers of inflation, gasoline prices increased 12.2% year over year in December compared with 19.6% in the prior month. Moreover, telephone service prices decreased 7.6% in December, the fastest decline since 1988, driving household operations prices down 0.3% in the month.

Monetary Policy

Earlier this month, Bank of Canada (BoC) hiked its benchmark interest rate by 25 basis points, the third time since July 2017. The key interest rate was hiked to 1.25% in the recent monetary policy meeting, the highest since 2009.

Per a BNN article, citing a statement by TD Bank senior economist Brian DePratto, "It provides a little more confirmation that the interest rate hike earlier this month was justified from an economic fundamentals point of view," adding, "That core mandate of the bank is to control inflation and this speaks to the need for further hikes."

Also, the central bank cited concerns over the future of NAFTA weighing on the economy’s outlook, as the protectionist stance of the Trump administration might weigh on Canada’s export dependent economy (read: ETFs to Watch On NAFTA Talks).

However, per latest IMF reports, Canada’s economy is expected to grow 2.3% in 2018 and 2.0% in 2019. For a data-dependent central bank like Bank of Canada, this supports a hawkish policy stance. Per a Reuters article, citing an analyst poll, two more rate hikes are expected in 2018.

Let us now discuss a few ETFs focused on providing exposure to Canadian equities (see all Canadian Equity ETFs here).

iShares MSCI Canada ETF (EWC Quick QuoteEWC - Free Report)

This is one of the most popular funds offering exposure to Canada. It is a perfect bet for those who are bullish on the overall performance of Canadian large-cap firms.

The fund manages AUM of $3.2 billion and charges 49 basis points in fees per year. Financials, Energy and Basic Materials are the top three sectors of the fund, with 42.3%, 20.9% and 10.7% allocation, respectively (as of Jan 26, 2018). From an individual holdings perspective, the fund has high exposure to Royal Bank of Canada, Toronto Dominion Bank and Bank of Nova Scotia, with 8.5%, 7.5% and 5.4% allocation, respectively (as of Jan 26, 2018). It has returned 12.5% in a year. EWC has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

SPDR MSCI Canada Quality Mix ETF

This fund targets exposure to large-cap companies in Canada. It is an appropriate bet for those looking to gain exposure to Canadian equities but at the same time avoiding the inherent risks that small-cap investments bring.

The fund manages AUM of $43.8 million and charges 30 basis points in fees per year. Financials, Energy and Consumer Staples are the top three sectors of the fund, with 39.7%, 13.6% and 9.7% allocation, respectively (as of Jan 26, 2018). From an individual holdings perspective, the fund has high exposure to Royal Bank of Canada, Canadian Imperial Bank of Commerce and Toronto Dominion Bank, with 4.4%, 4.2% and 4.0% allocation, respectively (as of Jan 26, 2018). It has returned 14.7% in a year. QCAN has a Zacks ETF Rank #3 with a Medium risk outlook.

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