Could Bank of Canada Follow the RBA and Hike Rates?

Forex

Central Bank

Summary:

European markets managed to eke out a positive session yesterday, despite some disappointing economic numbers, and an unexpected rate hike from the RBA, which could be the first of a series of rate hikes from other central banks over the course of the next few days.

Financials helped drive the move higher, in the same fashion as we saw in US trading which also saw a positive close, and the S&P500 close at its highest levels this year. What was especially notable about yesterday's move higher was it was led by the Russell 2000 which closed at 3-month highs despite short-term yields pushing higher on the day.

The rise in short term yields appears to suggest that markets are not only pricing in further rate hikes, but also the likelihood that rates are likely to stay at current levels for longer.

For the time being this doesn't appear to be affecting sentiment around equities but that could change if economic data continues to disappoint, which in some cases it has been.

Looking towards today's European open, Asia markets have had to digest the latest trade numbers for May from China at a time when there are real concerns that the recovery there is running on fumes.

While the relaxation in covid restrictions at the end of last year prompted a solid rebound in economic activity, the last two months have seen this pickup in economic activity run into some trouble in the aftermath of Chinese New Year.

China trade in March saw the elements of a pickup in economic activity, with a strong surge in exports of 14.8%, while imports improved as well, although they were still negative. This rebound in economic activity is slowing already if recent inflation and consumption data is any guide.

Factory gate prices have been deflating for the last 6 months and look set to get worse later this week.

There was no improvement in the April import numbers as they got worse with a sharp decline of -7.9%, although some of that may be down to lower prices in some areas, rather than lower volumes. Export growth slowed in April to 8.5%, while recent manufacturing and services PMI numbers have also pointed to an economy that is seeing evidence of a slowdown in economic activity.

With concerns about a slowdown in the Chinese economy growing, today's trade numbers have served to reinforce those concerns, with imports coming in at -4.5% and exports plunging by -7.5%, a one year low.

While the imports numbers were better than expected the plunge in exports into negative territory for the first time in 3 months is a real concern suggesting that while domestic demand is starting to turn higher, global demand is starting to falter, and that the Chinese government may need to do more to boost the local economy.

Having seen the RBA surprise the markets with another 25bps rate hike yesterday, today it' s the turn of the Bank of Canada, who in April signalled that they would keep rates on hold at 4.5% as policymakers looked to assess the impact recent rate hikes have had on the Canadian economy.

Since then, the Canadian economy has shown that it is holding up well, while inflation appears to be edging up again. April CPI saw headline CPI nudge up to 4.4% year on year, while core prices also came in firmer. With the labour market remaining solid, after positive jobs reports in March and April, and a slide in the unemployment rate to 5%, and wages at 5.2% the prospect of another rate hike remains high. The consensus is for no change however we could see the Bank of Canada follow the RBA with a 25bps hike of their own, pushing the headline rate to 4.75%.

EUR/USD – currently trading between resistance at the 1.0780 highs of last week, and support back at the recent lows at 1.0635. We need to see a break of this range with broader resistance at the 1.0820/30 level.

GBP/USD – currently trading between resistance at the 1.2540 area and last week's highs and support at the 1.2300 level. Still in the uptrend from the March lows, while we have trend line resistance from the 2021 highs at 1.2630. This, along with the May highs at 1.2680 is a key barrier for a move towards the 1.3000 area.

EUR/GBP – support remains at the 0.8560 level and last week's lows, just above the December 2022 lows at 0.8558. Currently have resistance at the 0.8660 area. We also have major resistance at the 0.8720 area.

USD/JPY – yesterday's rebound is currently struggling to make it above the 140.00 area. Is the US dollar trying to carve out a top? The main resistance remains at 140.95 area. We have support at the 138.40 area which if broken could see a move back to the 137.00.

Source: CMC

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Warren Takunda

Traders' Opinions

In a recent report, the World Bank has revised its global growth forecast for 2023, projecting a higher growth rate than previously expected. The world economy is now anticipated to expand by 2.1% in 2023, up from the earlier projection of 1.7% made in January. The upward revision is attributed to the stronger-than-anticipated resilience observed in major economies.

World Bank Projects Higher Global Growth for 2023, but Cuts Forecast for 2024_1

The United States, the largest economy in the world, is expected to experience a growth rate of 1.1% this year, an improvement from the previous forecast of 0.5% in January. Similarly, the Eurozone is set to advance by 0.4%, compared to the previously predicted flat outlook. One of the standout performers is China, with its growth forecast revised upward from 4.3% to 5.6%.

However, while the World Bank foresees a brighter economic landscape for 2023, concerns linger regarding the future. The institution has lowered its global growth projection for 2024 to 2.4% from the previous estimate of 2.7%. This adjustment is primarily due to the ongoing effects of tighter monetary policy and the persistence of banking stress.

It is worth noting that the global economy experienced a significant contraction in 2020, with the global GDP growth rate recording a negative figure of 3.27%. The subsequent recovery and positive growth projections for 2023 indicate a gradual rebound from the pandemic-induced downturn.

The World Bank's updated forecast aligns with the improving sentiment in the financial markets. Investors and policymakers will closely monitor economic indicators and policy decisions to assess the trajectory of global growth and make informed investment decisions.

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Devin

Central Bank

The Bank of England is trying to curb an inflation rate that is running higher in Britain than in the United States and the euro zone, without pushing the economy into a recession after having already increased borrowing costs 12 times since late 2021.

The BoE is expected to raise rates again, to 4.75% from 4.5%, on June 22 after inflation slowed by less than it hoped in April. Investors see a roughly 60% chance that Bank Rate will climb to 5.5% later this year.

Nonetheless, two of the Monetary Policy Committee's nine members say the delayed impact on the economy of the BoE's rate hikes to date mean there is no need to tighten policy any further.

Below is a summary of the factors the BoE is weighing up as it approaches its next meeting.

Inflation

British consumer price inflation (CPI) fell to 8.7% in annual terms in April, down from 10.1% in March but higher than the BoE's forecast of 8.4%. It was the joint highest among Group of Seven advanced economies alongside Italy's.

More worrying for the BoE, two measures of underlying price growth - core inflation, which excludes energy, food and tobacco prices, and price increases in the services sector - both hit their highest rates since 1992.

However, analysts polled by Reuters last month forecast that headline CPI will slow to 3.7% in the fourth quarter of this year and to just above the BoE's target of 2% in a year's time as last year's surge in energy prices drops out of the figures. The analysts mostly expected Bank Rate to peak at 5.0%.

Inflation Expectations

The BoE takes comfort from signs that inflation expectations are falling after rising in recent months.

Public expectations for inflation over five to 10 years - which are watched closely by the central bank - eased in May to their lowest in nearly two years at 3.5%, according to a survey by U.S. bank Citi and polling firm YouGov.

Companies surveyed by the BoE in May intended to raise prices by 5.1% over the coming year, down from 5.9% in April's survey, the lowest since Russia's invasion of Ukraine.

Wage Settlements

The same BoE survey showed businesses planned to raise wages by 5.2% over the coming year, down from expectations of 5.4% in April and the lowest since July 2022.

But data from human resources firm XpertHR showed pay settlements by employers held at 6% in the three months to April, matching recent record increases.

Inflation Heat in The Labour Market

The BoE is worried about long-term inflation heat from the labour market where a shortage of workers, caused by a rise in the number of long-term sick after the COVID-19 pandemic, has been compounded by new Brexit rules on European Union workers.

There have been some signs of an easing of that pressure recently. More people sought to get back into work in the first three months of the year, pushing down Britain's inactivity rate and easing the need for employers to raise pay to attract workers.

The Rate Hikes Already in The Pipeline

The BoE knows much of the impact of its 12 rate hikes to date has yet to be felt because most mortgages in Britain are fixed-rate deals which protect home-owners from swings in borrowing costs but will come up for renewal at higher rates.

The BoE said in May that 1.3 million fixed-rate mortgages were due to mature by the end of 2023 with more up for renewal in 2024 and beyond, meaning much of the hit to household budgets has yet to be felt.

Recession Risk Remains

Britain's economy has so far defied recession forecasts made only a few months ago, but it remains fragile and the recent jump in expectations of higher borrowing costs may yet tip it into a contraction this year.

British gross domestic product has recovered from the COVID pandemic more slowly than all the other G7 economies bar Germany, according to data for the first three months of 2023.

Source: Yahoo

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Warren Takunda

Traders' Opinions

RIYADH, Saudi Arabia - In a significant boost to Saudi Arabia's ambitious plan to diversify its oil-dependent economy, the futuristic city of Neom has secured a staggering $5.6 billion investment from a consortium of local investors. Neom, an unprecedented project spearheaded by Crown Prince Mohammed bin Salman, aims to transform the Red Sea coast into a cutting-edge hub of innovation and sustainability.

The multimillion-dollar deal, announced today, marks a significant milestone for Neom, which is set to become the centerpiece of Saudi Arabia's vision for a post-oil era. This substantial investment will facilitate the development of temporary housing and state-of-the-art facilities capable of accommodating a staggering 95,000 individuals.

Neom, derived from the Greek word "neos" meaning "new" and the Arabic word "mustaqbal" meaning "future," embodies Saudi Arabia's ambitious aspirations to create an entirely new urban landscape that embraces technological advancements and renewable energy sources. With an estimated cost exceeding $500 billion, Neom is envisioned as a sprawling metropolis powered by 100% renewable energy.

The latest injection of funds into the project showcases the commitment of local investors to Saudi Arabia's transformative vision. The consortium behind this landmark investment is comprised of influential business figures who recognize the vast potential of Neom as a catalyst for economic growth and diversification.

Commenting on the deal, Crown Prince Mohammed bin Salman expressed his gratitude and highlighted the strategic importance of Neom in driving forward Saudi Arabia's Vision 2030 agenda. He emphasized the significance of public-private partnerships in advancing the development of Neom and affirmed that the project remains a priority for the government.

Neom is expected to create numerous job opportunities, attract foreign investment, and stimulate sectors beyond oil, such as technology, tourism, and entertainment. The city's innovative design, complemented by its strategic location on the Red Sea coast, positions it as a prime destination for global investors seeking a foothold in the Middle East.

As Saudi Arabia moves away from its historical reliance on oil revenues, the success of Neom holds great promise for the country's economic transformation. The investment injection of $5.6 billion underscores the confidence of local investors in the project's long-term viability and its potential to reshape the region's economic landscape.

With the support of key stakeholders and a commitment to sustainable development, Neom continues to make substantial strides towards becoming a pioneering city of the future. As construction progresses and further investments pour in, the eyes of the world remain fixed on this ambitious endeavor that seeks to redefine urban living and propel Saudi Arabia into a new era of prosperity and innovation.

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Cohen

Russia-Ukraine Conflict

A huge Soviet-era dam on the Dnipro River that separates Russian and Ukrainian forces in southern Ukraine was breached on Tuesday, unleashing floodwaters across the war zone.

Ukraine said Russia had destroyed it, while Russia said Ukraine sabotaged it to cut off water supplies to Crimea and distract attention from a "faltering" counter-offensive.

What is the dam, what happened - and what do we not know?

The Kakhovka Dam

The dam, part of the Kakhovka hydroelectric power plant, is 30 metres (98 feet) tall and 3.2 km (2 miles) long. Construction was started under Soviet leader Josef Stalin and finished under Nikita Khrushchev.

The dam bridged the Dnipro River, which forms the front line between Russian and Ukrainian forces in the south of Ukraine.

Creation of the 2,155 sq km (832 sq mile) Kakhovka reservoir in Soviet times forced around 37,000 people to be moved from their homes.

The reservoir holds 18 cubic kilometres (4.3 cubic miles) of water - a volume roughly equal to the Great Salt Lake in the U.S. state of Utah.

The reservoir also supplies water to the Crimean Peninsula, which Russia annexed in 2014, and to the Zaporizhzhia nuclear plant, which is also under Russian control.

What happened?

Ukraine, which commented first, said Russia was responsible:

Ukrainian President Volodymyr Zelenskiy accused Russian forces of blowing up the Kakhovka Hydroelectric Power Station from inside the facility, and said Russia must be held to account for a "terrorist attack".

"At 02:50, Russian terrorists carried out an internal detonation of the structures of the Kakhovskaya HPP. About 80 settlements are in the zone of flooding," Zelenskiy said after an emergency meeting of senior officials.

A Ukrainian military spokesperson said Russia's aim was to prevent Ukrainian troops crossing the Dnipro River to attack Russian occupying forces.

Russia said Ukraine sabotaged the dam to cut off water supplies to Crimea and to distract attention from its faltering counteroffensive.

"We can state unequivocally that we are talking about deliberate sabotage by the Ukrainian side," Kremlin Spokesman Peskov told reporters.

Earlier some Russian-installed officials said no attack had taken place. Vladimir Rogov, a Russian installed official in Zaporizhzhia, said the dam collapsed due to earlier damage and the pressure of the water. Russia's state news agency TASS carried a report to the same effect.

What is the human impact?

With water levels surging higher, many thousands of people are likely to be affected. Evacuations of civilians began on both sides of the front line.

Maxar said that satellite images of more than 2,500 square km (965 square miles) between Nova Kakhovka and the Dniprovska Gulf southwest of Kherson city on the Black Sea, showed numerous towns and villages flooded.

Ukrainian officials estimated about 42,000 people were at risk from the flooding, which is expected to peak on Wednesday, including some 25,000 in Russia-held parts. About 80 communities were threatened by flooding.

Crimea

The destruction of the dam risks lowering the water level of the Soviet-era North Crimean Canal, which has traditionally supplied Crimea with 85% of its water needs.

Most of that water is used for agriculture, some for the Black Sea peninsula's industries, and around one fifth for drinking water and other public needs.

Nuclear Plant

The Zaporizhzhia Nuclear Power Plant, Europe's largest, gets its cooling water from the reservoir. It is located on the southern side, now under Russian control.

"Our current assessment is that there is no immediate risk to the safety of the plant," International Atomic Energy Agency chief Rafael Grossi said.

He said it was essential that a cooling pond be left intact as it supplied enough water for the cooling of the shut-down reactors.

"Nothing must be done to potentially undermine its integrity," Grossi said.

Source: Colorado Springs Gazette

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Thomas

Economic

Japan is committed to mobilise all policy options available while putting the economy before fiscal reform, according to a draft of the government's mid-year policy framework reviewed by Reuters on Wednesday, signalling its will to keep the fiscal spigot wide open before looming elections.

The draft framework, which will be presented at Prime Minister Fumio Kishida's top economic advisory panel, provides the basis for medium- to long-term macroeconomic management and will be approved by Kishida's cabinet later this month, along with a separate action plan on his "new capitalism" agenda.

Kishida, who is seen as a fiscal hawk, also hopes to strike a delicate balance between fiscal stimulus and the unwinding of it, with the framework calling for normalisation from crisis-mode fiscal largesse.

Still, the framework dropped a specific timeframe on the budget-balancing target for a second year, reflecting a compromise Kishida needed to strike with reflationary forces within his own Liberal Democratic Party (LDP).

"We have not abandoned the flag of fiscal reform," the framework said, in a tacit reference to Kishida's aim of bringing a primary budget surplus, excluding new bond sales and debt servicing costs, by the fiscal year ending in March 2026.

The target was originally set to be met in the early 2010s but has pushed back four times.

Since he took office in October 2021, Kishida has pledged to achieve a virtuous cycle of growth and redistribution under his "new capitalism", while suggesting that previous administrations' stimulus policies created social division and inequality.

To accelerate the "new capitalism" drive, the new framework calls for a structural increase in wages and the expansion of financial assets, including a decision by the end of 2024 to boost contributions to the defined contribution pension system and the overhaul of asset management firms.

"We will realise sustainable growth by mobilising budget, taxation and regulatory reforms, aiming to exit deflation and sharp declines in childbirth," it said, pointing to downside risks to the global economy because of a prolonged war in Ukraine, the global trend of monetary tightening and elevated inflation.

Source: Reuters

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

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Warren Takunda

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Economic

Wheat futures in the United States experienced a notable surge, reaching $6.4 per bushel, signaling a recovery from the over-two-year low of $5.9 observed on May 30th. This upward trajectory is largely attributed to the devastating breach of a dam in Ukraine, which is expected to have a significant impact on the country's agricultural sector. The explosion at the Kakhovska hydroelectric dam has severed the crucial water supply that sustains agriculture in the southern region of Ukraine.

Wheat Surges Following Dam Breach in Ukraine, Raising Geopolitical Concerns and Threatening Grain Exports_1

The destruction of agricultural infrastructure, coupled with the resultant water shortage, has raised concerns over the geopolitical implications of the incident. The situation further intensifies anxieties regarding the extension of Russia's seaborne grain export deal, which heavily relies on Ukrainian ports. With the disruption caused by the dam breach, the possibility of an extension appears grim, adding an additional layer of uncertainty to the global grain trade.

Despite these concerns, the surge in wheat prices was tempered by robust output in other regions. Russia, for instance, has witnessed a bumper harvest, leading to an upward revision of foreign sales forecasts to nearly 50 million tonnes. Moscow's recent decision to increase grain export duties has not deterred sellers in the world's top exporter. In fact, they have responded by lowering prices, aiming to manage the current record-high harvest and prevent inventories from reaching unsustainable levels.

While the impact of the dam breach in Ukraine is expected to be significant, the strength of global wheat production in other key regions has mitigated the extent of the price increase. This, however, does not downplay the potential long-term consequences on the Ukrainian agricultural sector and the geopolitical dynamics surrounding grain exports.

Market participants will closely monitor the aftermath of the dam breach and its implications for both domestic and international wheat markets. Any disruption in grain supply from Ukraine could result in a ripple effect across the global market, potentially triggering heightened volatility and impacting food security in certain regions.

As the situation unfolds, market analysts will pay attention to the response from both Ukraine and Russia, as well as the subsequent actions of major players in the wheat market. The resilience of the global wheat supply chain will be put to the test, with potential repercussions for consumers, traders, and investors alike.

In summary, the breach of the Kakhovska hydroelectric dam in Ukraine has sent shockwaves through the wheat market, propelling prices upward as concerns mount over the disruption of agriculture and the implications for grain exports. The repercussions of this event, combined with the response from key market players, will significantly shape the trajectory of the wheat market in the coming months.

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

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