Bank of Canada Surprises Markets with Interest Rate Hike, Triggering Market Reactions

Traders' Opinions

Central Bank

In a surprising move, the Bank of Canada (BoC) announced an unexpected interest rate hike, raising its target for the overnight rate by 25 basis points to 4.75%. This decision comes after two consecutive meetings where the central bank had paused its tightening campaign. The unexpected rate hike has generated significant market reactions, impacting various sectors of the Canadian economy.

Interest Rate Hike Reflects Concerns over Inflation and Demand-Supply Balance

The BoC's decision to raise interest rates indicates growing concerns about inflationary pressures and the need to bring supply and demand back into balance. With annual Consumer Price Index (CPI) reaching 4.4% in April, the first increase in ten months, and core inflation measures consistently in the 3.5-4% range, fears of inflation remaining persistently above the 2% target have intensified. The central bank aims to restore price stability for Canadians by taking a more restrictive monetary policy stance.

TSX Composite Index Experiences Volatility

The announcement of the surprise rate hike caused the S&P/TSX Composite index to pare early gains and hover slightly above the flatline at the 20,100 level. Investors were caught off guard by the central bank's decision, which marks a resumption of its tightening campaign. However, positive signals from the Canadian economy, including expanding exports in April and strong trade volumes, helped offset some of the negative sentiment. Energy producers, particularly Suncor Energy, experienced a 1.6% rise, and miners also traded sharply in the green.

Canadian Dollar Strengthens to Two-Month High

Following the BoC's surprise interest rate hike, the Canadian dollar experienced a significant boost, strengthening to 1.335 per USD, its highest level in two months. This upward movement came as a surprise to market participants who expected rates to remain steady or potentially decline. The rate hike suggests that borrowing costs in the Canadian economy were not as restrictive as previously thought. Despite the strong Canadian dollar, the BoC maintained its forecast that headline inflation would slow to 3% by the summer.

Canadian Government Bond Yields Spike

The announcement of the unexpected interest rate hike led to a surge in yields on Canadian 10-year government bonds. The yield jumped over 12 basis points, nearing a three-month high of 3.4%. The central bank's indication that it may further increase rates if necessary contributed to the rise in bond yields. The BoC expressed concerns over the persistently high levels of excess demand in the economy and the possibility of inflation remaining materially above the 2% target. The Canadian economy's stronger-than-expected Q1 performance and tight labor market further supported the case for the rate hike.

The Bank of Canada's decision to raise interest rates caught markets by surprise and triggered a range of reactions across different sectors. With inflationary pressures and excess demand persisting, the central bank aims to restore price stability and ensure a balance between supply and demand. While the rate hike caused volatility in the stock market, positive economic indicators, such as expanding exports and strong trade volumes, helped mitigate the impact. The Canadian dollar strengthened to a two-month high, and government bond yields spiked in response to the unexpected rate hike. Investors and market participants will closely monitor future developments and the central bank's approach to maintaining price stability in the Canadian economy.

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FastBull Featured

Daily News

[Quick Facts]

1. Bank of Canada unexpectedly raises interest rates due to the overheated economy.

2. Yellen: Inflation is easing as some sectors slow and the labor market remains strong.

3. The U.S. trade deficit widens to the largest in six months.

4. The market has fully digested the expectation of a July Fed rate hike.

5. U.S. natural gas futures prices have risen for a fourth straight session.

6. Bank of England faces huge pressure to raise rates as the U.K. inflation rate will top the developed countries this year.

[News Details]

Bank of Canada unexpectedly raises interest rates due to the overheated economy

The Bank of Canada went against market expectations and restarted interest rate tightening measures, saying the economy is too hot. The Bank of Canada has raised interest rates to 4.75%, the highest level since 2001. According to the bank's rate statement, the excessive demand in the economy overall appears to be more persistent than expected. The statement, however, was not accompanied by a new set of forecasts. Since the conditional pause in rate hikes was announced in January, policymakers have warned that further rate hikes may be necessary. While some Canadians are feeling the pinch of rising borrowing costs, the central bank's move suggests that officials are concerned that economic growth will not slow enough without another rate hike.

Bank of Canada Governor Tiff Macklem and other officials pointed to elevated three-month moving measures of underlying price pressures as a key reason for their move. There were no forward-looking comments in the statement, suggesting that policymakers were not yet sure whether the rate hike would ultimately be a tweak or the start of a new round of hikes.

Yellen: Inflation is easing as some sectors slow and the labor market remains strong

The U.S. economy is strong amid robust consumer spending but some areas are slowing down, U.S. Treasury Secretary Janet Yellen said on Wednesday. She expects continued progress in bringing inflation down over the next two years.

While banks may struggle with commercial real estate and face some consolidation, the financial system has ample liquidity, and, overall, banks should be able to withstand any stress.

Yellen also said that inflation can subside while maintaining a strong labor market, with unemployment in the 4% range.

The U.S. trade deficit widens to the largest in six months

The U.S. trade deficit widened in April to the largest in six months as imports rose and exports fell. The goods and services trade deficit widened 23% in April from a month earlier to $74.6 billion, compared with an estimated deficit of $75.8 billion, according to data released by the U.S. Department of Commerce on Wednesday. The data were not adjusted for inflation. Imports of goods and services rose 1.5% to $323.6 billion, while exports fell 3.6% to $249 billion. Imports of automobiles and parts, industrial supplies, cell phones, and other household goods increased, while exports of oil and jewelry decreased. The widening trade deficit means trade will be a drag on second-quarter GDP.

The market has fully digested the expectation of a July Fed rate hike

The U.S. Treasury bond market has fully priced in that the Federal Reserve will make its last rate hike in July 2023. The interest rate on swaps associated with the July meeting climbed to 5.33% on Wednesday, 25 basis points higher than the current effective federal funds rate of 5.08%.

The June swap shows 10 basis points left for tightening before next week's Fed meeting, suggesting most traders think the Fed will "pause to raise rates" in June. The December swap rate is about 25 basis points lower than July's, meaning the Fed will cut rates by 25 basis points by the end of the year.

Next week, all eyes will be on CPI data, and inflation is still well above the Fed's target. Therefore, they may choose to "pause interest rate hikes." But there is no doubt that it isn't a guarantee of not raising rates in the future.

U.S. natural gas futures prices have risen for a fourth straight session

U.S. natural gas futures prices have risen for a fourth straight session. Bulls appear to be returning to the natural gas market as they anticipate a hot summer and the hurricane weather will give support to natural gas demand. U.S. natural gas prices have fallen nearly 50% so far this year, but the U.S. Energy Information Administration (EIA) said in its monthly outlook report released yesterday that the natural gas market could rebound over the summer as production declines slightly, power plants begin using more natural gas, and consumers and businesses start using air conditioners. Lower natural gas prices are also leading power plants to use more natural gas and less coal.

Bank of England faces huge pressure to raise rates as the U.K. inflation rate will top the developed countries this year

According to the Organization for Economic Co-operation and Development (OECD), the U.K. inflation rate will top the developed countries this year, with its headline inflation rate projected at 6.9% in 2023, above the 6.6% average. In the latest OECD Economic Outlook, Only Argentina and Turkey are expected to have a higher headline rate than the U.K. this year. This underscores the pressure on the Bank of England, which raised interest rates by another 25 basis points in May, bringing the benchmark rate to 4.5%. At the time, the Bank recognized that inflation in the first quarter of the year was "higher than expected." mainly due to rising food prices.

There is growing evidence that price pressures are being generated within the U.K., which has risen interest rate expectations. The market expects that interest rates will rise further and peak at 5.25%, 75 basis points higher than the previously projected 4.50%. Interest rates will not start to fall until the second half of next year.

[Focus of the Day]

UTC+8 20:30 U.S. Initial Jobless Claims

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Kevin Du

Cryptocurrency

It's been a frantic week in crypto, with the U.S. securities regulator suing both Binance and Coinbase for allegedly violating U.S. laws. Bitcoin took a hit in turn, falling to its lowest level since March. Here's what you need to know:

This week's most read

· US sues Binance and founder Zhao over 'web of deception'

· US tightens crackdown on crypto with lawsuits against Coinbase, Binance

· Binance, US affiliate hit by net outflows of $1.43b since SEC lawsuit, data shows

The U.S. Securities and Exchange Commission this week brought long-awaited cases against Binance and Coinbase, alleging that the platforms violated U.S. securities laws.

The regulator sued Binance, the world's largest cryptocurrency exchange, and its CEO Changpeng Zhao on Monday, alleging the exchange artificially inflated its trading volumes, diverted customer funds, failed to restrict U.S. customers from its platform and misled investors about its market surveillance controls.

The SEC also claimed that Binance and Zhao, its billionaire founder and one of the crypto industry's highest-profile moguls, secretly controlled customers' assets, allowing them to commingle and divert investor funds "as they please."

The exchange created separate U.S. entities "as part of an elaborate scheme to evade U.S. federal securities laws," the SEC also alleged, citing a number of practices first reported by Reuters in a series of investigations into the exchange published this year and in 2022.

In a statement, Binance said it had "actively cooperated" with the SEC "from the start," and intends to defend its platform "vigorously."

Investors pulled around $1.43 billion from Binance and its U.S. affiliate as of 11 a.m. ET (15:00 GMT) on Tuesday, data firm Nansen said.

The SEC also sued Coinbase on Tuesday, accusing the largest U.S. cryptocurrency exchange of operating illegally without having first registered with the agency. In a complaint filed in Manhattan federal court, the SEC said Coinbase has since at least 2019 made billions of dollars by handling cryptocurrency transactions, while evading the disclosure requirements meant to protect investors.

The lawsuit addressed several aspects of Coinbase's business, including Coinbase Prime, which routes orders; Coinbase Wallet, which lets investors access liquidity; and the Coinbase Earn staking service.

Coinbase's chief legal officer Paul Grewal said in response to the lawsuit that the "SEC's reliance on an enforcement-only approach" is harming American competitiveness as well as companies like Coinbase.

Crypto essentials

· Crypto shares tumble: Bitcoin, the world's largest cryptocurrency, and crypto-related stocks plunged after the SEC sued Binance in the regulator's latest crackdown on the digital asset ecosystem. Experts say that this week's latest move could prompt companies to increase compliance, spike products and expand overseas.

· Musk and Dogecoin: Investors are accusing Elon Musk of manipulating the price of the cryptocurrency Dogecoin in a lawsuit filed May 31 in Manhattan federal court. They say Musk used Twitter posts and paid online influencers to profitably trade Dogecoin via wallets that he or his company Tesla controlled.

· Cboe gets CFTC nod: Exchange operator Cboe Global Markets on Monday received regulatory approval from the U.S. Commodity Futures Trading Commission to offer leveraged derivatives products on its digital trading platform, including physically and financially settled bitcoin and ether margined futures contracts.

Crypto Wire: The SEC Comes for Binance and Coinbase_1

Bitcoin has been uncommonly quiet over the past four weeks, despite major market-moving news such as the end of the U.S. debt ceiling saga.

Bitcoin's volatility index is near 64, well below the 2023 peak of 116.5 touched in January, according to CryptoCompare.

Overall daily cryptocurrency spot trading volumes - above $20 billion for most of the year - have languished at around $10.6-$12 billion in the last two weeks, data from The Block shows.

What I'm reading

· Hong Kong 's central bank plans to test the use of its digital currency under a pilot project in its $229 billion mortgage market. Here's how they're aiming to use e-HKD to slash the month-long loan approval process by half.

· Breakingviews: Reuters opinion columnist Anita Ramaswamy says there are bigger risks to Binance than the SEC's lawsuit, including the fact that cryptocurrency users are increasingly spurning corporate-owned exchanges. Part of the problem may also be that retail traders have lost loads of money, she says.

· Apple on Monday unveiled a costly augmented-reality headset called the Vision Pro, barging into a market dominated by Meta. Here's how Apple says its vision for the $3,499 Vision Pro differs from Meta's headset.

Source: Reuters

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Damon

Economic

An interest rate decision from India and revised Japanese GDP will be the big local drivers for Asian markets on Thursday, with wider sentiment soured by a profit-taking slump in U.S. tech stocks and a surprising rate hike in Canada.

After rallying more than 25% this year, and more than 20% from the U.S. banking shock low in March, the Nasdaq had its worst day since April, sliding 1.3%.

The index of Mega Tech stocks that has driven this year's U.S. equity rally almost single-handedly - up more than 60% this year - slumped almost 3% for its biggest fall since February.

The Bank of Canada's decision to raise rates to a 22-year high of 4.75% was not widely expected. This followed an equally surprising rate hike from Australia the day before, a one-two hawkish punch from policymakers that investors had probably not braced for.

Throw in a 1% rise in oil prices, a slump in Chinese trade activity, and the yuan hitting a fresh 6-month low, and the backdrop for Asian markets in the second half of the week looks a bit darker than the first half. Indian Rates, Japan GDP in the Spotlight_1

Indian Rates, Japan GDP in the Spotlight_1

Indian Rates, Japan GDP in the Spotlight_2

The Reserve Bank of India is expected to leave its key interest rate unchanged at 6.50% and for the rest of 2023, according to a Reuters poll of economists. Although inflation hit an 18-month low of 4.70% in April, it is not seen falling to the RBI's 4% medium-term target for at least another two years.

If inflation is that sticky, investors can perhaps expect a 'hawkish pause' rather than a 'dovish pause' from the RBI, especially in light of the hawkish surprises from Australia and Canada this week.

Japanese first quarter growth, meanwhile, is expected to be revised up one tenth of a percent to 0.5% on a quarterly basis, and three tenths of a percent to 1.9% on an annualized basis, thanks to solid investment from manufacturers.

The U.S. dollar is back above 140.00 yen and a soft GDP print could push it closer to the year-to-date high just below 141.00 yen. A narrower-than-expected current account surplus in April, figures for which are also out on Thursday, could do the trick too.

The Australian dollar, which hit a one-month high on Wednesday following the RBA's rate hike, could get a nudge from Australian trade data on Thursday. The consensus forecast is for the surplus to narrow slightly from March to A$14 billion.

Here are three key developments that could provide more direction to markets on Thursday:

- India interest rate decision

- Japan GDP (Q1, revised)

- Australia trade (April)

Source: Yahoo

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

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Warren Takunda

Traders' Opinions

Economic

In a recent interview, billionaire investor Ray Dalio, founder of Bridgewater Associates, the world's largest hedge fund, sounded the alarm on the United States' economic stability. Dalio highlighted the nation's vulnerability to a "late, big-cycle debt crisis"¹², citing persistently high inflation, elevated real interest rates, and political fragmentation as the main contributing factors¹.

Dalio's warnings come at a time when the US government has just reached a deal to suspend the borrowing limit. However, the investor believes this agreement falls short of addressing the core issue and won't alleviate the mounting concerns³. According to Dalio, the deal fails to resolve the primary problem of excessive debt and a scarcity of buyers³.

The respected investor cautioned that the US economy is heading for a turbulent period, stating that the nation is only at the beginning stages of the impending debt crisis¹². With the burden of debt continually increasing, accompanied by a shortage of interested buyers, the financial stability of the country appears to be under significant strain¹².

Moreover, Dalio expressed deep concern over the political fragmentation in the United States, emphasizing its potential impact on social stability¹. The increasing polarization and division within the nation's political landscape could exacerbate the economic challenges and further complicate efforts to find effective solutions¹.

Dalio's assessment of the current economic landscape paints a bleak picture, predicting that the situation will deteriorate further¹. His observations align with the growing apprehension among economists and investors who fear that the United States is on the brink of a substantial financial crisis.

While some experts may question the severity of Dalio's warnings, his track record as a successful investor lends credibility to his concerns. Bridgewater Associates' reputation as a leading hedge fund further underscores the gravity of his assessment.

The US government, policymakers, and economists now face the daunting task of navigating the treacherous waters of rising debt, stubborn inflation, and social divisions. Finding a comprehensive and sustainable solution to address these issues will require a concerted effort from all stakeholders involved.

As the nation stands on the precipice of a potentially dire economic situation, the insights and perspectives shared by figures like Ray Dalio serve as crucial reminders of the urgent need for proactive measures to avert a full-blown crisis. The course of action taken in the coming months will undoubtedly shape the future economic landscape of the United States.

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

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Warren Takunda

Traders' Opinions

Central Bank

Bank of Japan (BOJ) watchers, economists who closely monitor and forecast the central bank's policy adjustments, have revised their predictions following Governor Kazuo Ueda's recent indication of maintaining the current monetary stimulus despite increasing inflationary pressures. As a result, expectations for a policy change have been pushed back, highlighting the cautious stance of the BOJ.

The BOJ's monetary policy framework revolves around yield curve control (YCC), a strategy implemented in 2016 to guide short-term interest rates at -0.1% and target the 10-year government bond yield at 0.5% above or below zero2. This mechanism aims to manage the shape of the yield curve and facilitate the achievement of the BOJ's 2% inflation target2. However, some investors are testing the central bank's commitment to capping bond yields by speculating on a potential rate hike2.

A recent survey of economists indicates that over 90% of respondents anticipate no change to the BOJ's policy at the upcoming June meeting1. Instead, the majority now view July as the most likely month for a policy adjustment1. Furthermore, the survey reveals that more than half of the economists surveyed believe there is an increased likelihood of the BOJ achieving its inflation goal, which could potentially pave the way for policy changes1.

The BOJ's commitment to maintaining its current policy stance aligns with Governor Ueda's cautious tone and his warning against premature policy changes, even in the face of rising prices2. This approach is aimed at ensuring stability and avoiding any disruptive impact on the economy. The central bank's focus remains on carefully monitoring economic indicators before considering any adjustments to its existing measures2.

Yield curve control has been a crucial aspect of the BOJ's policy framework, helping to manage interest rates and bond yields. However, the recent speculation and bets on a rate hike indicate some skepticism among market participants regarding the BOJ's commitment to capping bond yields2. The central bank's ability to navigate these expectations while maintaining stability will be closely observed.

While economists and market participants eagerly await the next BOJ policy meeting, scheduled for June, the central bank's decision-making will continue to heavily depend on key economic indicators and progress towards its inflation target. With Governor Ueda's recent dovish tone and the majority of economists predicting a delay in policy adjustments, the BOJ seems determined to proceed cautiously in light of evolving market dynamics and economic conditions12.

As financial markets remain on alert for any shifts in the BOJ's policy stance, the central bank's commitment to yield curve control until 2024, as suggested by recent reports, aims to provide stability and reduce uncertainty in the foreseeable future[^7^]. The effectiveness of these measures and their impact on Japan's inflation trajectory will be crucial in shaping the future of the country's monetary policy.

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Justin

Economic

GDP growth slows again

GDP growth in Australia has been slowing since 2Q22 when the reopening of the economy temporarily lifted economic activity dramatically. Since then, the Reserve Bank of Australia (RBA) has been engaged in a battle to try to squeeze rampant inflation out of the economy, while simultaneously trying to avoid tipping the economy into a sharp recession. So far, this seems to be working.

Following a 0.2% quarter-on-quarter increase, the annual growth rate in 1Q23 has slowed to 2.3% year-on-year from 2.6% in 4Q22, and we expect it to slow further. Household consumption has driven the decline in growth, with occasional fluctuations from inventories or net exports adding volatility. But the key observation in the latest set of data is that really nothing, including business investment, is picking up the slack from consumption. There are no obvious factors in the pipeline that could lift the numbers in the coming quarters. So growth will probably slow a little further, or at best pootle along at similar low growth rates over the next couple of quarters. That means that full-year GDP growth should come in at about 1.7% according to our latest calculations, though probably a little lower rather than higher if we consider the balance of risks.

Contribution to QoQ GDP growth (pp)

If it's slowing, then RBA policy must be working...

While no one wants to see the economy drifting into recession, the slowdown we are seeing is evidence that the RBA's tightening (which they added to earlier this week taking the cash rate target to 4.1%), is working.

Admittedly, the labour market has yet to show much evidence that it is also cooling sufficiently to help bring wage growth and hence service sector inflation back to a more manageable growth rate. And headline and core measures of consumer inflation are also taking their time to drop back to an acceptable rate. But today's numbers do add ammunition to the view that current policy is working. These other, lagging indicators should fall into line, given time and a little patience.

All of this suggests to us that the current cash rate is probably high enough and that market expectations for further tightening may be a bit overdone. A more rapid rate of inflation decline in the coming months should help support our view.