[BOC] July Rate Decision: Cut Policy Rate by 25bp, Inflation Expected to Slow Further

Remarks of Officials

Summary:

The Bank of Canada lowered its policy rate by 25 basis points to 4.5% for the second consecutive month and indicated that further rate cuts may be considered if inflation continues to cool as expected.

The Bank of Canada (BOC) reduced its policy rate by 25 basis points to 4.5% On July 24, local time. The monetary policy report revealed that:

The economy is expected to expand by 1.5% in the first half of the year. However, potential output growth remains faster than GDP growth, indicating an increased supply surplus. Additionally, there are signs of a slowdown in the labor market and wage growth.

Inflationary pressures are easing broadly, with the BOC's preferred core inflation measure remaining below 3% for several months. Meanwhile, price increases in CPI components are approaching their historical average. Housing price inflation remains high, driven by rising rent and mortgage interest costs, and continues to be the largest contributor to overall inflation. Inflation in services such as dining and personal care, which are more affected by wages, has also increased.

GDP growth is projected at 1.2% for 2024, 2.1% for 2025, and 2.4% for 2026.

Core CPI is expected to be 2.5% in 2024, gradually easing in 2025.

CPI inflation is anticipated to be below core inflation in the second half of the year, in part due to base-year effects on gasoline prices. With these effects dissipating, CPI inflation may rise again and stabilize near the 2% target next year.

Following this rate decision, the market anticipates that the Bank of Canada may cut rates for the third consecutive time in September, with the possibility of up to four rate cuts by the end of 2024. Currently, the Canadian money market estimates a roughly 50% chance of another rate cut by the Bank of Canada in September.

BOC Monetary Policy Report

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Alex

Cryptocurrency

Fold, a popular Bitcoin financial services platform, has confirmed arrangements to become a publicly traded company on the NASDAQ stock exchange.

The firm’s entry will add another tally to the growing list of public stocks that keep a large swath of Bitcoin directly on their balance sheet.

Bitcoin Banking Gone Public

Per a press release on Wednesday, Fold said it had entered a definitive agreement with FTAC Emerald, a special purpose acquisition company.

The proposed business combination will allow Fold to become a public company. Though it will first inherit the EMLD ticker from Emerald, Fold will remain on the NASDAQ under a new ticker to be announced later.

“This transaction represents a significant step in Fold’s mission to expand access to premium bitcoin financial services and empower individuals to achieve their dreams,” said Will Reeves, CEO of Fold.

Fold is a centralized financial service that helps expand the utility of its customers’ BTC by bridging Bitcoin to the world of traditional banking.

Users can buy and withdraw Bitcoin, split their paychecks between cash and BTC, and earn sats by making purchases using their FOLD debit card. Since inception in 2019, Fold has processed $2 billion in aggregate transaction volume, and distributed over $45 million in BTC rewards.

The company’s latest deal gave it a proposed equity valuation of $365 million. Legacy shareholders in Fold are expected to own 71% of the business after the transaction is completed.

“Looking forward, Fold will continue to build on bitcoin, with a road map that envisions value-added credit, lending, and insurance solutions,” Reeves added.

Bitcoin On The Books

Upon going public, Fold anticipates that it will hold over 1000 BTC on its consolidated balance sheet – worth over $65.6 million at writing time.

This would make Fold the next publicly traded company in the United States with a significant Bitcoin treasury position. MicroStrategy (MSTR), the first company to adopt the strategy, has acquired over 226,000 BTC, and its stock is up 144% year to date.

Japanese investment firm MetaPlanet has also benefitted massively from its Bitcoin Treasury strategy adopted earlier this year. Holding Bitcoiin worth $14.8 million, the firm’s stock is up 1,775% yearly at writing time.

Source:CryptoPotato

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WELLS FARGO

Central Bank

Economic

Bank of Canada Delivers Back-to-Back Rate Cuts

The Bank of Canada (BoC) cut its policy rate 25 bps to 4.50% at today's monetary policy announcement, matching the consensus forecast, and following on from the initial rate cut delivered in June. Just as important as the interest rate reduction, the BoC offered dovish guidance that points to ongoing rate cuts in the months ahead. Among the comments from the Bank of Canada's announcement as well as Governor Macklem:

The upside risks to CPI inflation need to be increasingly balanced against the risk that the economy and inflation could be weaker than expected. Indeed, as inflation gets closer to target "the downside risks are taking on increased weight in our monetary policy deliberations."
Spare capacity in the economy has increased, and ongoing excess supply is lowering inflationary pressures.
Household spending, including both consumer purchases and housing, has been weak. The softness in household spending was cited as a particular area of weakness, with the BoC pointing to a larger share of incomes being allocated to debt servicing (Figure 1), and with upcoming mortgage rate renewals also seen as a downside risk for consumer spending.
The labor market has cooled significantly. While policymakers acknowledged elevated wage growth, it suggested a loosening labor market should see a moderation of pay increases over time.
Economic growth has been weak relative to population growth.
Further rate cuts are likely if inflation keeps easing.

These dovish overall comments were reinforced by the BoC's updated economic projections. The central bank forecasts GDP growth of 1.2% in 2024 (down from 1.5% previously) and 2.1% in 2025 (previously 2.2%). GDP growth is seen at 2.4% in 2026, up from a previous projection of 1.9%. In the near-term, the Bank of Canada expects moderate GDP growth of 1.5% quarter-over-quarter annualized in Q2-2024. With respect to year-end inflation forecasts (Q4/Q4), both headline and core inflation are seen at 2.4% year-over-year at the end of 2024, before slowing to 2.0% by the end of 2025 and 2026.

Figure 1 Source: Datastream and Wells Fargo Economics

Figure 2 Source: Bloomberg Finance L.P. and Wells Fargo Economics

Market participants certainly interpreted the Bank of Canada's announcement as dovish, with two-year government bond yields down 9 bps today to 3.62%, and ten-year government bond yields down 4 bps to 3.35%. The Canadian dollar is, however, only marginally weaker after the announcement. That said, we view today's announcement as fully consistent with further 25 bps Bank of Canada rate cuts at the September and October monetary policy meetings, which would take the central bank's policy rate to 4.00% (Figure 2). While our base case is currently for the Bank of Canada to pause in December, should economic growth, as well as wages and inflation, remain especially subdued, the risks are tilted in the direction of the BoC cutting interest rates at its December meeting as well.

To stay updated on all economic events of today, please check out our Economic calendar

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JPMorgan

Economic

Emerging Market (EM) equities are up 8% year to date, fueled by a rebound in Chinese stocks and structural narratives in Taiwan, India, and Korea. With the U.S. election approaching, potential U.S. policy changes are a key concern for global investors. After most U.S. elections, the MSCI EM Index has had positive performance in the 100 days following. This is because markets don’t like uncertainty, and elections almost always reduce it. However, while EM equities typically don’t react negatively to U.S. elections, they may respond more to policy changes over the longer term.

Key policy areas for EMs include:

Trade: The Trump administration’s 2018-19 tariffs on $370 billion of Chinese goods were largely upheld under Biden/Harris, signaling bipartisan consensus on a tough stance toward China. Recently, the U.S. imposed more tariffs on certain Chinese goods, including EVs. In his campaign documents, Trump is considering a baseline tariff and up to 60% tariffs on Chinese imports. Overall, protectionist policies against China and supply chain diversification are likely to persist, regardless of the election outcome. For EM equities, this will likely translate into increased currency and market volatility, especially for China and Mexico. From 2018-19, the yuan depreciated 7%, 2/3rds of which was attributable to the Trade War according to the NBER1. Overall, low-cost EM producers with strong U.S. ties could benefit from production shifts in the long run. For Mexico, short-term volatility could increase if Trump begins pressuring to curtail Chinese investments. However, "nearshoring" remains a powerful theme for Mexico.

Immigration: The Trump administration enforced strict controls, and his 2024 campaign promises even tougher measures. Biden/Harris reversed many of Trump’s deterrence policies but have become stricter recently, as immigration to the U.S. has surged. While tighter immigration policy should have a limited impact on EM equities, it could reduce remittance flows. EMs received 78% of the world’s remittance flows in 2022. This could impact Mexico that received a record $63 billion in remittances in 2023, which led to a stronger peso and domestic consumption.

Industrial policy:Laws like the CHIPS and Science, IRA, and IIJA Acts have channeled over $135B into domestic research and manufacturing of semiconductors into the U.S. Both parties aim to boost domestic semiconductor production and reduce China’s dominance although some policies could be altered if the Republicans sweep. By relying less on China, the U.S. will likely need to strengthen ties with allies like Taiwan and Korea (22% and 21% of global semiconductor production, respectively, in 2020) as well as South American countries (56% of the global lithium production and 30% of copper in 2022) to satisfy its demand and source critical minerals to fuel new production. However, if the U.S. ramps up semiconductor production at home, the demand for EM goods could shrink over time, hurting EM companies.

Fiscal/monetary policy:The Fed’s expected rate cuts starting in Sep. 2024 will likely benefit EM equities. Regarding fiscal policy, both administrations significantly increased the deficit, even when excluding COVID spending. It is uncertain if the new Democratic nominee will deviate from Biden’s attitude on the fiscal issues, but the deficit’s trajectory will likely remain upward. Extending the 2017 Tax Cuts could add $4 trillion to the debt over the next 10 years. Higher U.S. debt and the resulting pressure on long-term rates may contribute to further dollar strength, which could act as a headwind for EM equities.

U.S. election results often have short-term impacts on EM equities, but policy changes are typically more significant, especially if they cause more USD strength. While the currency effect explains 20% of ann. EM equity returns over the past 15 years, earnings and dividends are what ultimately drive long-term returns, each explaining 47% and 28%, respectively. Therefore, while managing policy and currency risk is key, EM investors benefit from having a long-term perspective, focusing on structural trends like middle-class growth and technological innovation, which are more likely to drive long-term performance.

What Are the Potential Implications of the U.S. Election For Emerging Markets?_1

To stay updated on all economic events of today, please check out our Economic calendar

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FastBull Featured

Daily News

[Quick Facts]

1. U.S. Democrats will nominate Harris and running mate by August 7.

2. U.S. stocks were hit hard on "Black Wednesday".

3. BOC cuts rates by 25bp and expects inflation to slow further.

4. Former Fed official Dudley backs a July rate cut.

[News Details]

U.S. Democrats will nominate Harris and running mate by August 7

Democratic National Convention delegates will meet virtually within the next two weeks to confirm Vice President Kamala Harris as their nominee for president and her yet-to-be-named running mate. The Rules Committee for the Democratic National Convention approved the nomination process with an overwhelming majority on Wednesday, clearing the final hurdle before the convention in Chicago on August 19.

The exact date of the vote — some time between Aug. 1 and Aug. 7 — will be decided by the convention's co-chairs, Jaime Harrison and Minyon Moore. Potential candidates for Harris's running mate include several Democratic governors: Andy Beshear of Kentucky, Roy Cooper of North Carolina, Josh Shapiro of Pennsylvania, and Tim Walz of Minnesota, with Senator Mark Kelly of Arizona also considered.

U.S. stocks were hit hard on "Black Wednesday"

For Wall Street investors, Wednesday was one of the most dramatic trading days of the year. Tech giants, which had been soaring for the past two years, pulled back by 10%.

The S&P 500 index plunged 2.3% on Wednesday, ending a remarkable streak of 356 trading says without a decline of 2% or more, the longest streak since the 2007 global financial crisis. The Dow Jones Industrial Average fell by 504 points, or 1.2%. The tech-heavy Nasdaq Composite Index plunged 3.6%, marking its largest single-day drop since October 2022.

As the stock market tumbled, the Cboe Volatility Index (VIX), known as the "fear gauge," soared to 18.46 points overnight, marking its highest level since late April. Data from Trade Alert indicated that VIX options trading volume nearly doubled compared to usual levels on Tuesday.

Analysts noted that Wednesday's sharp sell-off underscored the vulnerability of major U.S. stock indexes to declines in large tech stocks, raising concerns about overvaluation and drawing parallels to the internet bubble of over two decades ago.

BOC cuts rates by 25bp and expects inflation to slow further

On July 24, the Bank of Canada (BOC) lowered its policy rate by 25 basis points to 4.5% from 4.75%. BOC Governor Tiff Macklem stated that this decision reflects three key considerations. First, monetary policy is helping alleviate overall price pressures. Second, due to oversupply and a weak labor market, there is more room for economic growth without generating inflationary pressures. Third, with inflation approaching the 2% target, the balance between risks of higher-than-expected inflation and weaker-than-expected economic performance must be reinforced.

Macklem anticipates further inflation easing and is increasingly confident that the ingredients to bring inflation back to target are in place. If inflation continues to ease and aligns with the BOC's projections, there may be further rate cuts. However, Macklem acknowledged that the decline in inflation could be gradual and might face setbacks.

Former Fed official Dudley backs a July rate cut

Former New York Fed President William Dudley, who has long advocated for maintaining high interest rates to control inflation, now believes the Fed should cut rates, preferably at next week's policy meeting.

For years, the persistent strength of the US economy suggested that the Fed wasn't doing enough to slow the overheated economy down, Dudley pointed out. The loosening of financial conditions, especially the surge in stock markets, has increased consumption among wealthy households. While ongoing monetary tightening seemed necessary to control inflation, recent efforts by the Fed to cool the economy are showing significant results.

Most concerning, the three-month average unemployment rate has risen by 0.43 percentage points from its low over the past 12 months, very close to the 0.5 threshold that, as identified by the Sahm Rule, has invariably signaled a U.S. recession. Meanwhile, core PCE inflation increased by 2.6% year-on-year in May, slightly above the Fed's 2% target. Although it may be too late to prevent a recession through rate cuts, delaying action only adds unnecessary risk.

[Today's Focus]

UTC+8 16:00 Germany Ifo Business Climate Index (Jul)

UTC+8 19:00 ECB Governing Council Member Nagel Speaks

UTC+8 20:30 U.S. Durable Goods Orders MoM (Jun)

UTC+8 20:30 U.S. Q2 GDP

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Cohen

Economic

Commodity

Oil prices eased on Thursday as concerns over weak demand in China, the world's largest crude importer, and expectations of a nearing ceasefire deal in the Middle East overcame gains in the previous session after draws in U.S. inventories.

Brent crude futures for September fell 38 cents, or 0.5%, to $81.33 a barrel by 0129 GMT. U.S. West Texas Intermediate crude for September slid 33 cents, or 0.4%, to $77.26 per barrel.

Benchmarks settled higher on Wednesday, snapping three straight sessions of declines after the Energy Information Administration said U.S. crude inventories fell by 3.7 million barrels last week. That compared with analysts' expectations in a Reuters poll for a 1.6-million-barrel draw. [EIA/S]

U.S. gasoline stocks dropped by 5.6 million barrels, compared with analysts' expectations for a 400,000 draw. Distillate stockpiles fell by 2.8 million barrels versus expectations for a 250,000-barrel increase, the EIA data showed.

"Despite draws in U.S. crude and gasoline stocks, investors remained wary about weakening demand in China and expectations of advancing ceasefire talks between Israel and Hamas added to pressure," said Hiroyuki Kikukawa, president of NS Trading, a unit of Nissan Securities.

This year, China's oil imports and refinery runs have trended lower than in 2023 on lower fuel demand amid sluggish economic growth, according to government data.

Slumping U.S. stock markets also reduced traders' risk appetite, Kikukawa added. All three main indexes on Wall Street ended lower on Wednesday.

In the Middle East, efforts to reach a ceasefire deal to end the war in the Gaza Strip between Israel and militant group Hamas under a plan outlined by U.S. President Joe Biden in May and mediated by Egypt and Qatar have gained momentum over the past month.

On Wednesday, Israeli Prime Minister Benjamin Netanyahu sketched a vague outline of a plan for a "deradicalized" post-war Gaza in a speech to U.S. Congress and touted a potential future alliance between Israel and America's Arab allies.

"If Middle East ceasefire talks progresses, U.S. equities continue to slide, and China's economy remains sluggish, oil prices could fall to early June levels," said Satoru Yoshida, a commodity analyst with Rakuten Securities.

Source:Reuters

To stay updated on all economic events of today, please check out our Economic calendar

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Cohen

Economic

Stocks

Asia-Pacific markets saw a sell off on Thursday, tracking losses on Wall Street as the S&P 500 and Nasdaq Composite saw their worst days since 2022.

The broad market index lost 2.31%, closing at 5,427.13, while the tech-heavy Nasdaq slid 3.64% to end at 17,342.41. The Dow Jones Industrial Average shed 504.22 points, or 1.25%, closing at 39,853.87.

Tech names sold off, including Nvidia and Meta Platforms, which lost 6.8% and 5.6% respectively. Shares of Alphabet — Google’s parent company — fell 5% for their biggest one-day drop since Jan. 31.

Meanwhile, Tesla shares declined 12.3% — their worst day since 2020 — on weaker-than-expected results and a 7% year-over-year drop in auto revenue.

Over in Asia, investors will assess South Korea’s advance second-quarter GDP numbers, which came in slightly below expectations.

South Korea’s GDP grew 2.3% year on year, lower than the 2.5% expected by economists polled by Reuters. On a quarter on quarter basis, the country’s economy shrank 0.2%, compared to a 0.1% rise expected in the Reuters poll and a reversal from the 1.3% growth seen in the first quarter.

Japan’s Nikkei 225 extended its six-day losing streak and plunged 2.64%. The Topix also tumbled 2.24%. The top loser on the index was SoftBank Group, which nosedived 7%.

The yen also marked a fourth-straight day of strengthening against the U.S. dollar, climbing to 153.09 against the greenback.

South Korea’s Kospi lost 1.8%, while the Kosdaq was down 2.32%. The index was dragged by heavyweight SK Hynix, which also fell 6%.

This comes as the company reported an all-time high quarterly revenue of 16.42 trillion won ($11.85 billion) for its second quarter, marking a gain of 125% from a year ago.

Operating profit came in at 5.47 trillion, its highest in six years. Net profit stood at 4.12 billion. Both metrics reversed from loss positions in the same period last year.

Australia’s S&P/ASX 200 was 0.86% lower.

Hong Kong Hang Seng index futures were at 17,242, also lower than the HSI’s last close of 17,311.05.

Separately, Taiwan’s market will be closed for a second day, as the island braces for Typhoon Gaemi.