Will the BoC Resume Interest Rate Hhikes?

Justin

Central Bank

Economic

Forex

Summary:

After staying inactive for two consecutive meetings, the BoC is now expected by a decent percentage of market participants to raise interest rates when it meets on Wednesday at 14:00 GMT. The hype of another rate hike was bolstered by the much-better-than-expected GDP data for Q1. Will policymakers indeed press the button, or will they stay patient and wait for more incoming data before deciding whether raising interest rates further is appropriate?

Data keeps the hike door open

At its latest gathering, the Bank of Canada decided to stand pat for the second meeting in a row as it was largely anticipated. However, it did not satisfy those expecting a rate cut later this year, with the statement revealing that policymakers are still prepared to raise rates further if deemed necessary.

Data after the meeting have been adding credence to the Bank’s choice to leave the door to more hikes open. The April jobs report revealed that the unemployment rate held steady at 5.0%, just a tick above its lowest level in more than five decades, while the inflation data for the month showed that headline inflation accelerated in April, and although all the underlying metrics slowed, both the Trimmed mean and Common CPI rates slid by less than expected.

Will the BoC Resume Interest Rate Hhikes?_1

Most importantly, the economy grew by double the estimated pace during the first three months of the year after stagnating at the end of 2022, resulting in a skyrocketing quarter-on-quarter annualized rate to 3.1% from -0.1%.

But a hike more likely in July

Having said all that though, although market participants are convinced that another hike may be firmly on the table, they don’t see a high probability of this happening at this week’s gathering. They are assigning a 40% probability to the hike scenario, with the remaining 60% pointing to no action. They believe that a hike is more likely to be delivered in July and nearly another one by December.

Will the BoC Resume Interest Rate Hhikes?_2

Therefore, should policymakers stay sidelined and stick to their guns that they remain prepared to hike more if needed, the loonie is likely to slide but not much. For a noteworthy and sustained tumble in the Canadian currency, officials may need to stand pat and officially announce the end of this tightening crusade, which according to the aforementioned data appears to be the least likely scenario.

The former looks the wisest choice as it is too early to describe the latest rebound in the headline CPI rate as inflation getting out of control, and thus, officials may prefer to wait for more data before they hike again. They could do so at the July meeting, where updated macroeconomic projections will be available. Now, in the case of the Bank pressing the hike button this week and appearing willing to deliver more, the loonie could rally.

Dollar/loonie stays trapped within a wide range

Dollar/loonie has been trading in a trendless mode since November, with most of the price action being contained between the 1.3230 and 1.3650 barriers. Thus, the medium-term picture, at least from a technical perspective, looks neutral.

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Currently, the pair is sitting slightly above the 1.3400 zone. If the BoC appears less hawkish than expected on Wednesday, dollar/loonie is likely to rebound and perhaps aim for another test at the upper bound of the range, at around 1.3650.

On the other hand, a potential hike could extend last week’s retreat, with a potential break below 1.3400 perhaps paving the way towards the lower bound of the aforementioned range, at around 1.3230.

Employment report also on tap

Having said all that though, apart from the BoC decision and the related market reaction, loonie traders will also have to evaluate the Canadian employment report for May, due out on Friday. Even if policymakers stay on hold, conditional upon leaving the door open to another hike, a strong employment report could prompt investors to add to their hike bets, adding more basis points worth of increments by the end of the year.

Will the BoC Resume Interest Rate Hhikes?_4

Source:XM

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Justin

Central Bank

Economic

The Reserve Bank Board raised the cash rate by 0.25% to 4.1% at its June Board meeting.

The Governor’s statement has rearranged the order of previous statements to put maximum emphasis on the damage associated with high inflation and inflationary expectations becoming entrenched in the economy. He points out that services price inflation is still very high and that unit labour costs are rising briskly with productivity growth remaining subdued. He also points out that public sector wages are expected to pick up further and that the annual increase in award wages was higher than last year.

He clearly now sees his dominant objective as being to contain inflation expectations and achieve the inflation objective which he now sees as associated with more risk.

The statement acknowledges “a substantial slowing in household spending” and “uncertainties regarding the global economy” but the emphasis has clearly pivoted away from concerns around domestic growth and maintaining the progress that has been achieved around the labour market since the pandemic, and towards ensuring that inflation returns to target, reflecting the rising risks around wages growth and inflationary expectations. He further emphasises that: “The Board remains alert to the risk that expectations of ongoing high inflation contribute to larger increases in both prices and wages”.

Our reading of the statement is that the Board believes that further work will need to be done in the near term to allay their concerns around inflationary expectations and wages growth.

Despite having increased the cash rate in both May and June we expect that a further rate hike will be required by the Board in July, to really emphasise their commitment to the inflation objective.

Thereafter the risk is that a further follow-up move may be required at the August meeting when the June quarter inflation report will be available. We expect that underlying inflation will have dropped from 6.6% to 6.1% but labour markets will remain tight and the ongoing concerns around wage pressures will persist.

The additional risk for the August meeting is that, due to these concerns around expectations, the staff may raise their inflation forecasts which would open the door to another rate increase.

Westpac has been expecting the first rate cut in the next easing cycle to come in February 2024 with at least 100bps of cuts over the course of next year. Since that call was made, the Board has now raised the cash rate by an additional 50bps with another 25bp move now expected in in July.

While this will put additional pressure on the Australian economy, particularly for households and eventually business, progress on reducing inflation and wages growth will not be sufficient to allow for a pivot to rate cuts any earlier than February.

Our current forecast for growth in the Australian economy in 2023 is 1%yr. Since that forecast was issued we have seen a lift in wages growth for certain sectors; higher immigration and a recovery in house prices. But the revised rate profile is certain to weigh even more heavily.

We expect the Australian economy grew by a very tepid 0.3% in the March quarter and further weakness is now almost certain through the remainder of the year. We will review our growth profile to take these major developments into account following the release of the national accounts.

Conclusion

The Board has become increasingly concerned around inflation risks. It has now raised the cash rate on two consecutive months following the pause in April.

We now expect a follow up move in July with risks of a further increase in August.

Source:Westpac Banking Corporation

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Devin

Commodity

A possible extension next month of a deal allowing the safe wartime export of grains and fertilizers from three Ukrainian Black Sea ports could hinge on the reopening of a pipeline that delivers Russian ammonia to one of those Ukrainian ports.

The Deals

The United Nations and Turkey brokered the Black Sea Grain Initiative for an initial 120 days last July to help tackle a global food crisis worsened by Moscow's invasion of Ukraine, one of the world's leading grain exporters. It has been extended three times since, most recently until July 17.

More than 31 million tonnes of mostly corn and wheat have been exported by Ukraine under the deal. The Black Sea Grain Initiative also allows for the safe export of ammonia - a key ingredient in nitrate fertilizer - but none has been shipped.

To convince Russia to agree to the Black Sea Grain Initiative, a three-year pact was also struck last July in which the United Nations agreed to help Moscow overcome any obstacles to its own food and fertilizer shipments.

While Russian exports of food and fertilizer are not subject to Western sanctions imposed after the February 2022 invasion of Ukraine, Moscow says restrictions on payments, logistics and insurance have amounted to a barrier to shipments.

Ammonia

A pipeline used by Russia to pump up to 2.5 million tonnes of ammonia annually for global export to Ukraine's Pivdennyi port on the Black Sea from Togliatti on the Volga River in western Russia has been shut down since Moscow's invasion of Ukraine.

It is the world's longest ammonia pipeline at about 2,470 kilometres (1,534 miles) in length, according to the International Energy Agency.

Ukrainian authorities have said workers would need about 30 days to prepare the pipeline to pump ammonia again.

Ukraine

The Black Sea Grain Initiative covers the "safe navigation for the export of grain and related foodstuffs and fertilizers, including ammonia" from the Ukrainian Black Sea ports of Odesa, Chornomorsk and Pivdennyi, known in Russian as Yuzhny.

Ukraine has argued that the language of the deal does not cover the transit of Russian ammonia across Ukraine. A Ukrainian government source told Reuters that Kyiv would consider restarting the pipeline in exchange for an expansion of the Black Sea grain deal to include more ports and commodities.

Russia

Russia said the transit of ammonia "although not spelled out literally, is implied by the logic of the agreement." Moscow has said it was "ready without delay, in a matter of days" to restart the ammonia pipeline.

Until the ammonia pipeline is restarted, Moscow has said it will limit the number of vessels allowed to travel to Pivdennyi port under the Black Sea deal, the U.N. said.

U.N. data shows no ships have visited Pivdennyi port for more than three weeks.

Under the Black Sea Grain Initiative, a joint coordination centre in Istanbul made up of officials from Ukraine, Russia, Turkey and the U.N. agrees on the ships to be registered and conducts inbound and outbound inspections in Turkish waters.

U.N. Proposal to Restart Ammonia Pipeline

In September, Reuters reported that the United Nations proposed that ammonia gas owned by Russian fertilizer producer Uralchem be brought via pipeline to the Russia-Ukraine border.

At the border it would be purchased by U.S.-headquartered commodities trader Trammo, according to the proposal. Trammo has been approached by the United Nations to assist in this project and is happy to cooperate, it said in an emailed statement.

The United Nations has consistently pushed for the reopening of the ammonia pipeline.

Reuters reported last week that the U.N. proposed that Kyiv, Moscow and Ankara start preparatory work on restarting the pipeline, while conducting parallel talks to broaden the Black Sea deal to include more Ukrainian ports and other cargoes.

Source: Devdiscourse

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Alex

Political

The deal to end the United States' debt limit standoff was classic Joe Biden politics: eke out a narrow compromise from an ugly beginning and declare victory.

Biden's pact with Republican Kevin McCarthy suspends the $31.4 trillion U.S. debt ceiling, avoiding an economic crisis, in exchange for setting spending caps in the coming two fiscal years.

Both sides got something out of the deal and Biden said it fits with a declared goal throughout his political career: striking bipartisan deals to fix problems and take the venom out of the country's ideological divide.

"I know bipartisanship is hard, and unity is hard," Biden said during his first-ever Oval Office address on Friday. "No matter how tough our politics gets, we need to see each other not as adversaries, but as fellow Americans.

But it remains to be seen whether this deal can help the longer-term effort of healing what Biden refers to as the "soul of the nation."

"That's easier said than done," said Bishop Silvester Beaman, a family friend who gave the benediction at Biden's inauguration and credits him with "trying to strike a chord that we need to put our partisanship aside so that we can better govern the country."

In his first two years as president, Biden used Democratic majorities in the House of Representatives and the Senate to push through massive stimulus packages despite the protests of Republicans.

But he also crafted compromises deals on veteran healthcare, semiconductor chips, gun safety legislation, and now the debt ceiling.

Senate Minority leader Mitch McConnell said after the debt deal was struck that "divided government means negotiated deals - it means nobody gets everything they want."

Some of those compromise deals have upset elements of Biden's Democratic Party, who wanted him to do more to tackle a wide range of issues that he campaigned on, ranging from addressing police brutality, to protecting voting rights, to the battle over women's right to abortion.

"A lot of Americans are very disaffected by mainstream politics and by the compromises that the Democrats have made," said Premilla Nadasen, a professor of history at Columbia University's Barnard College.

Biden's own popularity has withered over the course of his term, now standing at around 40%.

Compromise

But some analysts give him credit for trying to bring the country back towards the political middle and isolate radicals who embraced former President Donald Trump's false claims of fraud in the 2020 election and were involved in the assault on Congress on Jan 6, 2021.

"How best to contain the anti-democratic conspiratorial right in America - that is the project that you're seeing Biden work on," said Matthew Dallek, a political historian and professor at George Washington University.

Biden has at times applied the across-the-aisle strategy outside Capitol Hill, too.

Mitch Landrieu and other top Biden advisers recently negotiated an electric vehicle charger agreement with Elon Musk, the Tesla Inc billionaire owner who has called Biden a "damp (sock) puppet" and has expressed support for Ron DeSantis, who is seeking the Republican presidential nomination.

"This is what's amazing about working for this president: irrespective of what other noise is going on, outside of whatever it is that you're talking about, he's focused on solving the problem," Landrieu said.

McCarthy, who negotiated the debt ceiling deal with Biden, was critical of the president during the crisis, saying he had "wasted time and refused to negotiate for months," although he later had warmer words for Biden's deal-makers.

"I do want to thank the president's team that he put together," McCarthy said, calling them professional and smart, despite "very strong beliefs that are different than ours."

The brief peace in Washington after the deal may be short-lived, as both sides gear up for the 2024 presidential election.

Trump and DeSantis, the leading Republican candidates, seem focused for now on attacking each other but they are expected target Biden with fierce rhetoric.

And former South Carolina governor Nikki Haley says a vote for Biden is a vote for President Kamala Harris, suggesting she believes Biden could die or be forced from office before completing a second term, putting his vice president in power.

Source: The Japan Times

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Owen Li

Commodity

Parts of the U.S. Corn Belt have been historically dry over the last month, pressuring both corn and soybean health and offering an early challenge to the government's record yield forecasts.

Data from the U.S. Department of Agriculture on Monday afternoon showed 64% of the U.S. corn crop in good or excellent (GE) condition, down from 69% a week earlier and below the lowest trade guess of 65%.

That marked the largest weekly decline in U.S. corn health since mid-August 2020, and Crop Watch corn conditions earlier on Monday had also reflected the largest drop since August 2020.

U.S. corn conditions had not fallen 5 percentage points or more at this time of year since 2012, when severe drought eventually cut corn yields by a quarter. In fact, aside from that one week in August 2020, a fall of 5 or more points had not been observed in any other week since 2012.

Corn health in early June 2021 fell by 4 points in two consecutive weeks, followed by a 3-point drop in the month’s third week to 65% GE. Near-record low ratings in the drought-stricken Dakotas weighed, though corn health in top grower Iowa lost 14 points in June's second week due to extended dryness.

Timely rains and moderate temperatures in July and August 2021 allowed for a record national corn yield, so the 2023 crop is not yet out of the game. But it needs to rain soon, and that is unlikely at a widespread level for at least another week, so conditions may fall again before any recovery is possible.

Prior to 2012, U.S. corn condition declines of 5 points or more during June were uncommon. The last three instances occurred in 2007, 2001 and 1994, though the crop was initially rated higher in those years versus 2023.

Corn conditions debuted at 59% GE in early June 2019 due to a waterlogged start, but 64% GE is otherwise the lightest for early June since 63% in 2013 and below the year-ago 73%.

Corn health in No. 2 grower Illinois featured the most concerning trend in the latest week, down 19 points to 50% GE, the state's lowest for the week since 2002. The week's five-year average is 70%.

Soybeans

Initial U.S. soybean conditions came in at 62% GE Monday, below both the average trade guess of 65% and the five-year average of 67% for the season's first rating.

Soy conditions began at 54% GE in late June 2019, but 62% is otherwise the lowest initial soy rating since 57% in 2008. Last year's initial score of 70% was issued a week later than this year.

Top bean grower Illinois was 51% GE as of Sunday, most recently comparable with 50% one week later in 2012. Nebraska at 58% GE was 21 points below the same week a year ago, before drought severely cut the state's yields.

Similar to U.S. corn yields, soy yields are not typically best when early health conditions are low, but there is more variation and potential leeway.

The last two times U.S. soybean yield was above the long-term trend when initial conditions were 62% GE or worse was in 2005 and 1997, though the starting 51% in 1992 gave way to a record yield more than 7% above trend.

Soy conditions were 73% GE by mid-July 1992, though that was an unusual year. July 1992 across the Midwest was the second wettest and third coolest in the last 128 years, following the Midwest's fourth driest May-June period at just 56% of normal precipitation.

Many climatologists consider 1992 a "year without a summer" due to unusually cool temperatures across the Northern Hemisphere, crediting volcanic ash from the mid-1991 eruption of Mount Pinatubo in the Philippines as the possible culprit.

Source: Reuters

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Damon

Stocks

Cryptocurrency

Forex

As world stock markets levelled off on Tuesday, Australia dampened hopes that central banks were set to pause the interest rate rise cycle, the crypto universe nursed its latest blow, and Apple underwhelmed overnight.

A relatively quiet week for U.S. macroeconomic and market news has investors resting on an assumption the Federal Reserve will skip a rate rise at next week's policy meeting, while considering one last hike in its campaign next month. Soft service sector surveys for May on Monday underlined that idea.

The Reserve Bank of Australia was in no mood to hold off, however. It raised interest rates by a quarter-point on Tuesday to an 11-year high and warned further tightening may be required to ensure that inflation returns to target, boosting the Aussie dollar as markets had been leaning towards a pause.

Eyes will now be trained on the Bank of Canada's latest policy decision on Wednesday, with many forecasting it will resume tightening interest rates after a four-month pause.

Stock and bond markets remained calm, however. S&P500 futures were mostly flat after a mixed start to the week.

Apple's stock retreated a touch after setting a record high on Monday just before an underwhelming launch of its new gadget.

The firm unveiled a costly augmented-reality headset called the Vision Pro in its riskiest bet since the introduction of the iPhone more than a decade ago.

The Vision Pro will start at $3,499, more than three times the cost of the priciest headset in Meta's line of mixed and virtual reality devices.

The crypto world was far from calm, with Bitcoin trying to find its feet after a 5% recoil to three-month lows on Monday.

U.S. regulators sued Binance and its CEO Changpeng Zhao on Monday for allegedly operating a "web of deception", piling further pressure on the world's biggest cryptocurrency exchange.

The Securities and Exchange Commission complaint listed 13 charges against Binance, Zhao and the operator of its purportedly independent U.S. exchange. Binance said it "respectfully" disagreed with the SEC's allegations.

But investors have pulled around $790 million from the exchange and its U.S. affiliate in the last 24 hours, data firm Nansen said on Tuesday.

Oil retreated sharply once more despite Saudi Arabia's weekend plans to cut crude output again, with many analysts seeing the solo move as partly a reflection of disagreements within the OPEC cartel.

The euro and euro debt yields slipped back on surveys showing household inflation expectations in the bloc subsiding.

And the yuan slipped lower after reports Chinese authorities had asked the nation's biggest banks to lower their deposit rates for at least the second time in less than a year in an effort to boost the economy.

The dollar was marginally firmer overall.

Events to watch for later on Tuesday:

* U.S. Secretary of State Antony Blinken visits Saudi Arabia

* U.S. corporate earnings: JM Smucker Markets Level, Aussie Hikes, Crypto Judders_1

Markets Level, Aussie Hikes, Crypto Judders_2

Markets Level, Aussie Hikes, Crypto Judders_3

Source: Yahoo

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Cohen

Commodity

Energy – Saudi increases the official selling price for oil

Saudi Arabia increased its official selling price for all regions for July, a day after the nation pledged an additional oil supply cut for the same month. Saudi Aramco will sell the Arab Light crude for buyers in Asia at a US$3/bbl premium for July deliveries, an increase of US¢45/bbl compared to June 2023.

The premium for the US and European deliveries has increased by US¢90/bbl, while buyers in the Mediterranean region will see an increase of US¢60/bbl. The hike in premium comes as a surprise considering ongoing demand concerns and that Saudi Arabia has been pushing for supply cuts to bring the oil market into balance.

Metals – Declining copper on-warrant stocks tighten LME spread

Recent LME data shows that total on-warrant stocks for copper dropped by 17,750 tonnes – the biggest daily decline since October 2021 – for a second consecutive session to 71,575 tonnes (the lowest level in almost a month) as of yesterday. The majority of the outflows were reported from South Korea's Busan warehouses. Meanwhile, cancelled warrants for copper rose by 18,025 tonnes after declining for three consecutive sessions to 27,375 tonnes yesterday, signalling potential further outflows. The cash/3m for copper stood at a contango of just US$4/t as of yesterday – compared to YTD highs of a contango of US$66.26/t from 23 May – indicating supply tightness in the physical market.

In mine supply, Peru's latest official numbers show that copper output in the country rose 30.5% year-on-year (+1.2% month-on-month) to 222kt in April. The majority of the annual production gains came from the higher output levels from mines like Southern Peru Copper, the Las Bambas and Cerro. Cumulatively, copper production grew 15.7% YoY to 837.5kt in the first four months of the year. Among other metals, zinc production in the nation increased 31.4% YoY to 130.6kt in April.

In ferrous metals, the most active contract of iron ore trading at the Singapore Exchange extended its upward rally for a fifth consecutive session and traded above US$108/t this morning on speculations of more supportive steps from China to accelerate its economic growth. The recent market reports suggest that the People's Bank of China is likely to cut the reserve-requirement ratio for banks and might also lower interest rates in the second half of the year. Meanwhile, BBG also reported that the Chinese government is preparing a new batch of measures to push growth in the property market.

Agriculture – US crop planting maintains the pace

The USDA's latest crop progress report shows that US corn plantings continue to rise with 96% of plantings completed as on 4 June, compared to 93% of planting done at this point in the season last year and the 5-year average of 91%. Similarly, soybean plantings are also growing, with 91% planted as of 4 June – well above the 76% seen at the same stage last year and the 5-year average of 76%. Meanwhile, spring wheat plantings are 93% complete. This is above the 81% planted at the same stage last season and in line with the 5-year average. Meanwhile, the agency rated around 36% of the winter wheat crop in good-to-excellent condition, up from 34% a week ago and 30% seen last year.

The USDA's weekly export inspection data for the week ending 1 June indicated a drop in demand for US grains over last week. The agency stated that US corn export inspections stood at 1,181kt, lower from 1,346.4kt in the previous week and 1,458.5kt reported a year ago. For wheat, export inspections stood at 291.6kt, down from 391.3kt from the previous week and 355.3kt reported a year ago. Similarly, soybean export inspections fell to 214.2kt, compared to 243.1kt from a week ago and 370kt from a year ago.

The director general of the Ivory Coast's cocoa regulator, Conseil Café Cacao, stated that the domestic cocoa crop is expected to improve in 2022-23 (compared to the previous year) despite intensifying concerns about a potential outbreak of the swollen shoot virus. Ivory Coast cocoa production is stabilizing despite a slow start, taking the season's harvest projections between 2mt-2.2mt. Last week, the International Cocoa Organization (ICCO) projected an increase of 4% in Ivory Coast's cocoa output this season, reaching 2.20mt.