The Bank of Canada maintained its monetary policy settings. The FOMC minutes showed that policymakers will not be in a hurry to cut rates :: InvestMacro

By JustMarkets

At the end of the trading day, the Dow Jones Index (US30) was down 1.09%, while the S&P 500 Index (US500) lost 0.95%. The NASDAQ Technology Index (US100) closed yesterday negative 0.84%. A sharp rise in bond yields pressured equities yesterday after the March US Consumer Price Index exceeded expectations for the third consecutive month, reinforcing the likelihood that the Federal Reserve will not rush to cut interest rates. The annualized US inflation rate was 3.5% in March 2024, the highest since September, up from 3.2% in February and forecasts of 3.4%. In addition, core CPI (excluding food and energy) rose by 0.4% m/m to 3.8% y/y, stronger than expectations of 0.3% m/m and 3.7% y/y. Fed swap prices are now pricing in only a 50 bps rate cut this year, less than the Fed’s recent 75 bps dot plot. Markets estimate the odds of a 25 bps rate cut at 3% at the next FOMC meeting on May 1 and just 21% (vs. 70% last week) at the next meeting on June 12.

Minutes from the March FOMC meeting showed that the Federal Reserve does not believe it is appropriate to lower the target range until there is confidence that inflation is moving steadily toward 2%. The central bank still closely monitors inflation risks but expects to see some unevenness in monthly inflation readings as inflation returns to target. The so-called dot plot showed policymakers still plan to cut interest rates three times this year, matching quarterly forecasts made in December.

The Bank of Canada (BoC) kept its key rate at 5%, as expected, and refrained from hinting at the start of rate cuts because of lingering upside risks to inflation. The central bank noted that price pressures have eased across a wide range of goods and services since the last meeting but added that an uncertain macroeconomic backdrop and higher-than-expected commodity prices, including oil, prevent disinflation from converging more smoothly. Bank of Canada Governor Macklem added that while recent data indicate some progress in containing core inflation, it is still insufficient to justify monetary easing with confidence. As such, the Bank of Canada expects inflation to remain around 3% in the first half of this year and not reach the 2% target until 2025.

Equity markets in Europe traded without a single dynamic on Wednesday. Germany’s DAX (DE40) rose by 0.11%, France’s CAC 40 (FR40) closed down 0.05%, Spain’s IBEX 35 (ES35) lost 0.38%, and the UK’s FTSE 100 (UK100) closed positive 0.33% on Wednesday.

The European Central Bank (ECB) will hold a monetary policy meeting today. Market participants expect the ECB to leave the key rate unchanged at 4.5%. After last month’s meeting, the Eurozone economy has gained momentum but is still close to recession. Therefore, the ECB will likely want to get an update on inflation and labor market data before embarking on full-blown easing. Most of the central bank’s recent statements hint that a key rate cut in June is a real possibility. Therefore, given current market speculation, there is a risk that Lagarde’s statement and press conference will be less dovish than financial markets expect. In that case, the euro could get a boost to growth. But if Lagarde’s statement is confidently dovish with a hint of a real rate cut in June, the euro will continue to decline.

WTI crude oil prices rose to $85.7 a barrel on Wednesday, breaking a two-day decline, as the market reacted to the news from Gaza. Several important Hamas figures were killed in an Israeli airstrike, which could complicate ceasefire talks. Tensions in the Middle East ran high, with Israel warning OPEC representative Iran that it will attack the Islamic Republic if Tehran strikes Israel, with the US reportedly confident of an imminent strike by Iran or its supporters on Israel. The EIA reported a 5.841 million barrel rise in inventories on Wednesday, beating market expectations for a 2.366 million barrel increase.

Asian markets traded without any unified dynamics. Japan’s Nikkei 225 (JP225) was down 0.48% yesterday, China’s FTSE China A50 (CHA50) lost 0.42%, Hong Kong’s Hang Seng (HK50) was up 1.85% overnight and Australia’s ASX 200 (AU200) was positive 0.31%. Asian equity markets fell on Thursday, following a sharp decline on Wall Street overnight. Investors also priced in data that China’s consumer prices rose less than expected in March, while producer prices fell by the most in four months. Chinese consumer prices were 0.1% y/y in March 2024, compared to market forecasts of 0.4% y/y, after rising to 0.7% in the previous month. China’s lower-than-expected inflation numbers have bolstered bets on further policy easing from the PBoC.

Fitch Ratings revised its outlook on China’s sovereign credit rating to negative from stable while affirming its A+ rating amid growing concerns about the outlook for the country’s public finances. The agency cited large budget deficits and a sharp rise in government debt in recent years as undermining fiscal reserves from a rating perspective.

The Japanese yen hit a new 34-year low. Traders are now expecting currency intervention from the Bank of Japan (BoJ), seeing the 152-153 per dollar exchange rate as a potential catalyst. On Tuesday, Finance Minister Shun’ichi Suzuki said that the authorities do not rule out any measures against excessive yen movement.

S&P 500 (US500) 5,160.64 −49.27 (-0.95%)

Dow Jones (US30) 38,461.51 −422.16 (−1.09%)

DAX (DE40) 18,097.30 +20.61 (+0.11%)

FTSE 100 (UK100) 7,961.21 +26.42 (+0.33%)

USD Index 105.17 +1.03 (+0.99%)

Important events today:

• – China Consumer Price Index (q/q) at 04:30 (GMT+3);
• – China Producer Price Index (q/q) at 04:30 (GMT+3);
• – Eurozone ECB Interest Rate Decision at 15:15 (GMT+3);
• – Eurozone ECB Monetary Policy Statement at 15:15 (GMT+3);
• – US Producer Price Index (m/m) at 15:30 (GMT+3);
• – US Initial Jobless Claims (w/w) at 15:30 (GMT+3);
• – Eurozone Press Conference at 15:45 (GMT+3);
• – US Natural Gas Storage (w/w) at 17:30 (GMT+3).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.