Canada Inflation Rate Cools More Than Forecast

Zi Cheng

Traders' Opinions

Economic

Forex

Summary:

In January, Canada experienced a more pronounced than anticipated decrease in its annual inflation rate, primarily driven by reduced expenditures on gasoline by consumers and a continued deceleration in the rate of grocery price hikes.

At the onset of the year, Canadian consumer prices experienced a moderation, indicating progress in alleviating underlying pressures. This development is likely to grant the Bank of Canada increased flexibility to consider potential rate cuts in the near future.

According to Statistics Canada's report in Ottawa on Tuesday, the consumer price index climbed by 2.9% in January compared to the previous year, a deceleration from the 3.4% rise registered in the preceding month. This figure fell below the median estimate of 3.3% projected by economists in a Bloomberg survey and marks the first instance since June that the headline rate has fallen within the central bank's target range.

Canada Inflation Rate Cools More Than Forecast_1

On a monthly basis, the index remained unchanged, contrary to expectations of a 0.4% increase, following a 0.3% decline in December.

Both of the Bank of Canada's preferred core inflation measures exhibited a slowdown, averaging 3.35% compared to a downwardly revised 3.6% in the previous month, also lower than the 3.6% pace anticipated by economists. Bloomberg calculations indicate that a three-month moving average of these rates dropped to an annualized pace of 3.22% from 3.63% in December.

The January inflation data reflects further progress in disinflation following a stagnation at the end of the previous year. As the Bank of Canada evaluates the necessity of maintaining its policy rate at restrictive levels, this report is expected to alleviate concerns regarding the persistence of underlying inflation and the sluggish progression towards the 2% inflation target.

During their January discussions, Governor Tiff Macklem and other officials deemed the current monetary policy stance as adequately restrictive to attain the target, emphasizing the need for more time to restore price stability. They anticipate inflation to hover around 3% in the first half of the year before gradually subsiding and aligning with the target by the following year.

This report serves as the sole inflation update preceding the next rate decision scheduled for March 6. Economists widely anticipate officials to maintain policy rates at 5% for a fifth consecutive meeting, with the easing cycle projected to commence around mid-2024.

In January, the primary contributor to the deceleration in headline inflation was the decline in year-over-year gasoline prices by 4%. Excluding gasoline, the index moderated to 3.2% from the previous year, down from 3.5% in December.

The slowdown in grocery inflation, along with reduced airfare and travel tour prices, also contributed to the overall deceleration.

Among the components of the CPI basket, namely food, shelter, health and personal care, alcoholic beverages and tobacco, and cannabis products, four experienced growth rates above 3%, collectively constituting approximately 55% of the basket weights.

Inflation excluding food increased by 2.7%, while excluding food and energy, it rose by 3.1%.

Mortgage interest costs and rent remained the primary drivers of year-over-year price increases, with mortgage interest costs surging by 27.4% and rent rising by 7.9%.

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Ukadike Micheal

Forex

Economic

In January, the Consumer Price Index (CPI) inched up by 2.9% on a year-over-year basis, marking a deceleration from the 3.4% gain observed in December. The primary contributor to this slowdown was the decrease in year-over-year gasoline prices in January (-4.0%), in contrast to the rise recorded in December (+1.4%). Excluding gasoline, the headline CPI moderated to 3.2% year over year in January, down from the 3.5% growth in December. Consumer Price Trends: An In-Depth Analysis of January 2024 Data Reveals Varied Influences on Inflation_1

Consumer Price Trends: An In-Depth Analysis of January 2024 Data Reveals Varied Influences on Inflation_1

The decline in the year-over-year price growth for food purchased from stores in January (+3.4%) compared to December's figure (+4.7%) exerted downward pressure on the overall CPI. Additionally, lower prices for airfares and travel tours played a role in the headline deceleration.

On a monthly basis, the CPI remained unchanged in January, following a 0.3% decline in December. However, on a seasonally adjusted monthly basis, the CPI fell 0.1% in January, marking the first decline since May 2020. Gasoline prices experienced a notable 4.0% decrease in January compared to a 1.4% increase in December, primarily due to a base-year effect. This contrast was influenced by refinery closures in the southwestern United States following Winter Storm Elliott in January 2023.

Monthly gasoline prices continued to decrease in January 2024 (-0.9%) for the fifth consecutive month, with lower gas prices in Manitoba (-14.1%) contributing to the national decline after a temporary suspension of the provincial gas tax. While grocery prices remained elevated, their year-over-year growth slowed in January (+3.4%) compared to December's pace (+4.7%).

The deceleration in grocery prices was widespread, with various products such as meat (+2.8%), other food preparations (+4.2%), dairy products (+1.5%), bakery products (+4.0%), and fresh fruit (+1.9%) contributing to the slower year-over-year price growth in January. Conversely, certain food items, including soup (-2.1%), bacon (-8.4%), and shrimps and prawns (-3.4%), experienced year-over-year price declines in January.

Prices for airfares also witnessed a decline in January (-14.3%) compared with December's figure (-9.7%) on a year-over-year basis, typically reflecting the post-holiday season. On a monthly basis, prices fell in January (-23.7%) compared with December's increase (+31.1%).

Moreover, cellular services prices fell by 16.4% in January on a year-over-year basis, following a 26.8% decline in December. Monthly prices rose by 6.7% in January compared with December, as prices returned to earlier levels following promotions offered in November and December. Year over year, prices rose at a slower pace in January compared with December in nine provinces, with Alberta being the only province experiencing faster price growth due in part to higher electricity prices. Consumer Price Trends: An In-Depth Analysis of January 2024 Data Reveals Varied Influences on Inflation_2

Consumer Price Trends: An In-Depth Analysis of January 2024 Data Reveals Varied Influences on Inflation_2

In Saskatchewan, the cessation of the carbon levy collection in January 2024 contributed to the province's year-over-year price decline of natural gas (-26.6%).

From a technical viewpoint, the data indicates mixed trends in consumer prices, with certain categories experiencing declines, especially in the context of seasonal patterns and base-year effects. The fluctuations in prices for goods and services highlight the dynamic nature of inflation and its sensitivity to various economic factors. Policymakers and analysts will closely monitor these trends to gauge the potential impact on overall economic conditions and formulate appropriate strategies.

Source: Statistics Canada

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Alex

Commodity

Global Wheat Crisis: War, Weather, And Pandemic's Toll On Food Security_1

As dawn breaks over the golden fields stretching from Oklahoma to Texas, the amber waves of wheat tell a story far beyond their tranquil appearance. This narrative, unfolding amidst the chaos of the Russia-Ukraine conflict, a global pandemic, and extreme weather events, speaks of a commodity essential to our survival: wheat. The repercussions of these crises have sent shockwaves through global food prices, leading to a precarious situation that threatens food security worldwide, particularly in regions like Nigeria, where the stakes are even higher.

The Tumultuous Journey of Wheat Prices

In the wake of COVID-19, wheat prices saw an unprecedented surge, climbing from a modest $4 to a staggering $8, as nations grappled with the pandemic's immediate impacts. The situation intensified with Russia's invasion of Ukraine, propelling prices to soar over $13, reflecting the critical role these two nations play in the global wheat supply. However, recent developments hint at a stabilization, with the 2024 wheat harvest forward contract price in Oklahoma and Texas currently pegged at $5.50. This figure, while below the tumultuous highs, remains significantly above pre-pandemic levels, illustrating the lingering effects of the past years' events on wheat markets.

Global Wheat Dynamics: A Delicate Balance

The conflict between Russia and Ukraine has not only disrupted supply chains but also altered the landscape of global wheat production and exports. Russia has managed to increase its wheat production and exports, while Ukraine struggles with the loss of croplands and shortages of crucial inputs. Despite these challenges, global and U.S. wheat stocks-to-use ratios have remained stable, a testament to the resilience of agricultural systems. Yet, this balance is precarious. The aggressive export strategies adopted by Russia and Ukraine are impacting global prices, contributing to the current state of flux in wheat markets. Coupled with spikes in production input costs, including a notable rise in fertilizer and diesel prices, the agricultural community faces a daunting task.

Implications for Food Security: A Closer Look at Nigeria

The volatility of global wheat prices has far-reaching implications, particularly for countries like Nigeria, where the ripple effects exacerbate existing challenges. Rising inflation, the removal of fuel subsidies, and an increase in agricultural input prices post-COVID and post-conflict have compounded food insecurity. Nigeria, reliant on wheat imports, stands at the frontline of this crisis, grappling with the dual challenge of ensuring affordability and availability of food for its population. The scenario unfolding in Nigeria is a microcosm of the broader trends affecting agricultural communities worldwide, highlighting the interconnectedness of global food systems and the vulnerability of nations to disruptions in commodity markets.

In conclusion, the journey of wheat prices from the fields of Oklahoma and Texas to the global market encapsulates a complex narrative of resilience, uncertainty, and the relentless pursuit of stability in an ever-changing world. The Russia-Ukraine conflict, compounded by the effects of COVID-19 and extreme weather events, has reshaped the global food landscape, underscoring the importance of sustainable agricultural practices and robust food security policies. As the world navigates these turbulent waters, the lessons learned will undoubtedly shape the future of food production and distribution for generations to come.

Source：BNN

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Ukadike Micheal

Economic

Forex

Negotiated pay in the euro zone increased by 4.5% at the close of 2023, as reported by the European Central Bank (ECB), alleviating concerns of sustained inflation due to rising salaries. Despite remaining elevated, the fourth-quarter pay growth decelerated from the euro-area record of 4.7% in the previous quarter, as revealed by the ECB's negotiated wage indicator.

This quarterly gauge, analyzing non-harmonized country data, holds particular significance for policymakers in Frankfurt, who are closely monitoring labor costs to determine the opportune time for interest rate cuts. The modest slowing in wage growth at the end of 2023 provides reassurance that the feared wage-price spiral may not unfold in the euro zone, according to Carsten Brzeski, the global head of macro at ING. However, decisions on rate cuts are expected to hinge on the first-quarter wage growth data for 2024, set to be released in May.

ECB President Christine Lagarde emphasized the significance of salaries as a driving force in inflation dynamics, cautioning against premature policy decisions without assurance of a return to the 2% inflation target. While a forward-looking ECB tracker continues to signal strong wage pressures, agreements in the last quarter of 2023 suggest some leveling off.

In December, the ECB projected a gradual decline in nominal wage growth over time, expecting it to decrease from 5.3% in 2023 to 3.3% in 2026, measured in terms of compensation per employee. The forecast anticipates limited pay increases as firms pass higher costs to consumers at a slower pace. However, differing perspectives exist, with some officials, like Austria's Robert Holzmann, suggesting that companies may not absorb rising wage bills.

ECB Executive Board member Isabel Schnabel highlighted weak productivity as a factor exacerbating the effects of strong nominal wage growth on unit labor costs for firms. This raises concerns about firms passing higher pay costs to consumers, potentially delaying the return of inflation to the 2% target.

For the entirety of 2023, the ECB reported a negotiated wage increase of 4.5%, marking a significant uptick from 2.9% in 2022 and 1.4% in 2021.

From a technical viewpoint, the deceleration in negotiated wage growth may offer a delicate balance for policymakers, allowing for cautious optimism regarding inflationary pressures. However, the nuanced dynamics of wage growth, coupled with differing views on the extent to which firms can absorb increased labor costs, create complexities for the ECB's monetary policy decisions. As the market awaits further wage data in the coming quarters, the trajectory of negotiated pay will continue to play a pivotal role in shaping the central bank's approach to interest rates and overall economic stability.

The nuanced picture of negotiated pay growth in the euro zone presents both reassurance and complexities for policymakers, offering insight into the delicate balance between inflation concerns and the need for economic stimulus. The coming quarters will undoubtedly be critical in determining the trajectory of wage dynamics and their implications for the broader economic landscape.

Source: Bloomberg

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Samantha Luan

Economic

The Chinese returned from their Lunar New Year holiday having traveled and spent more this year than before the pandemic. The early trading hours were cheery, but enthusiasm left its place to doom and gloom quickly as the Chinese equities found it hard to extend gains on the back of looming Chinese problems, like deflation, aging population, a deepening property crisis and lost investors’ confidence. As such, yesterday’s 1% advance in CSI 300 couldn’t gain momentum today, even though China cut its 5-year LPR rate – which is the reference rate for mortgages – by most on record to prop up demand for its tumbling property market and hoping to stop the downturn. In vain, the equity markets didn’t react much. Nasdaq’s China real estate index continues its race to the bottom.

Equities in Europe however extended gains to a fresh ytd high, and the Stoxx 600 index continues to trade at a spitting distance from an ATH even though France lowered its growth forecast for 2024 to 1% and Germany announced a 0.3% contraction lately. The energy crisis and higher rates are eating into the old continent and the European Central Bank (ECB) is not sure it would start cutting the rates soon enough, given that inflation risks remain tilted to the upside. Rising shipping costs, upside pressure in oil prices and the softening Federal Reserve (Fed) cut expectations threaten the price stability and some European policymakers think that it’s safer to wait for more evidence that inflation is easing sustainably than acting prematurely and looking foolish.

This is certainly what keeps the US dollar appetite contained, and the other currencies somehow supported: the fear that a delay in Fed rate cut would translate into a stronger dollar, a stronger dollar would send a fresh wave of high inflation across the globe and the latter would delay other central banks’ rate cut plans as well. But the latter reasoning will be just enough to contain the buying pressure in the dollar, and not to reverse the greenback’s positive trend. The dollar index saw support near its 100-DMA yesterday and the EURUSD failed to clear its own 100-DMA to the upside. The diverging fortunes between the US – where growth remains strong – and the euro area – where growth is nowhere to be found – justifies an earlier ECB cut compared to the Fed, but the ECB will cut only and if only inflation remains on a falling path.

Anyway, back to the European stocks, the Stoxx 600 performed surprisingly well this year despite the sputtering euro area economies and no guarantee that the ECB will start cutting rates before summer. Some think that the European valuations are just below their long-term average which makes them much cheaper and somehow appetizing. But AI makes the American stocks shine brighter than the European diamonds. Nvidia, for example, is worth more than the entire German DAX index today and the AI premium is justified by massive, concrete AI investments and the tech companies’ high ROI. Therefore, even if the European stock valuations are more reasonable than the tech-heavy US peers, the upside potential that the US tech giants offer is incomparable to the European counterparts.

Across the Channel, the energy and finance-heavy British FTSE 100 refused to return to last year’s negative trend and rallied 3% since last week, Cable remains under pressure as the Bank of England (BoE) doves stand up against Bailey’s cautious stance regarding premature cuts. The Bank’s former economist said that ‘it’s one thing to have missed inflation on the way up, it’s quite another to then have crushed the economy on the way down’. Premature easing, however, is not a risk that the central bankers are willing to take. The latest Reserve Bank of Australia (RBA) meeting minutes revealed that the policymakers considered to hold rates steady or a case for a 25 bp hike (scary!). And the latest FOMC minutes due Wednesday will give more clarity on if and how the Fed members reacted to last year’s skyrocketing rate cut expectations. From what they publicly say, they think that the expectations went well ahead of themselves. There will hardly be a rate cut announced from a major central bank before June.

Today, Walmart and Home Depot earnings will serve as amuse-bouche before Nvidia’s much-expected results due after the bell tomorrow.

In energy, nat gas futures took another dive yesterday while American crude cleared the 100 and 200-DMA offers last week and is testing a major Fibonacci resistance to the upside. Trend and momentum indicators remain supportive of a further rise toward the $80pb level as tensions in the Middle East, the Chinese stimulus, and OPEC’s efforts to restrict supply are supportive factors for the bulls. On the opposite camp, the rising supply from countries outside OPEC, China’s inability to boost growth and slowing demand growth for fossil fuel are arguments that will make the bulls’ life harder above the $80pb mark.

Source：Action Forex

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Alex

Forex

The U.S. Federal Reserve is expected to cut interest rates later this year and, while that may not be good news for the dollar, some Asian currencies stand to benefit.

Higher interest rates boost a country’s currency, attracting foreign investment and increasing demand for the country’s currency. A weak U.S. dollar is generally positive for emerging markets, which is often the case when the Fed cuts interest rates outside of an economic crisis.

The Fed shifted to a more dovish stance in December, with markets now pricing in rate cuts by summer. The CME FedWatch tool suggested the first 25-basis-point rate cut in 2024 could happen as early as June.

The Fed’s January meeting concluded with the central bank holding its benchmark borrowing rate in a range between 5.25% and 5.5%.

Experts told CNBC currencies such as the Chinese yuan, the Korean won and the Indian rupee stand to benefit from the Fed loosening monetary policy.

Yuan can’t go any lower

China has weathered a slew of disappointing headlines that have beaten down investor confidence. But hopes that authorities would not allow the trade-reliant nation’s currency to weaken below a certain level have limited yuan pessimism.

China has tried to stabilize the yuan against the dollar in the past and is expected to continue doing so, according to Arun Bharath, chief investment officer at Bel Air Investment Advisors.

“While the exchange rate has weakened to a 7 handle on the USD/CNY rate, reflecting a weaker economic situation in China, further weakening is unlikely as policymakers start to be more aggressive in fiscal stimulus, credit growth, and propping up property values,” Bharath said.

He noted that the Chinese currency’s exchange rate will likely hover in “a narrow band around the current exchange rate of 7.10.”

Unlike other major currencies like the Japanese yen or U.S. dollar which have free floating exchange rates, China keeps strict control of the onshore yuan. The currency is pegged with a so-called daily midpoint fix to the greenback based on the yuan’s previous closing level and quotations taken from inter-bank dealers.

Last year, the onshore yuan hit a 16-year low against the dollar at 7.2981.

If the Fed starts cutting rates by summer, that would likely narrow the yield differentials between the world’s two largest economies and alleviate some pressure off the Chinese yuan. Yield differentials is a way to compare bonds through the differences between how much they yield.

The People’s Bank of China is a main player in managing the currency, which Simon Harvey, head of FX analysis at Monex, said can be done through its daily fixing, liquidity measures, regulatory channels, and instructing state banks to intervene.

That last method is the most opaque as the total value of dollars in China’s FX reserves is unknown.

Rupee riding high

The Indian rupee could benefit from carry trades this year, a strategy where traders borrow low-yielding currencies such as the U.S. dollar in order to buy high-yielding assets like bonds.

“A lot of carry trade against other currencies like the yen or the euro but once interest rates fall in the U.S., we will see the interest rate differential widen to allow carry trade to happen. So those are also positive for the Indian currency,” said Anindya Banerjee, vice president of currency and derivatives research at Kotak Securities.

The rupee could also strengthen amid hopes the Reserve Bank of India may loosen monetary policy more slowly than other central banks.

Banerjee noted that the RBI’s rate cut pace will be “far slower” than the Fed and “will always significantly lag the Fed because India did not have the same inflation problem which Europe or America had.”

“The reason is simple, because fiscal policy is firing on all cylinders, the economy’s doing very well and they don’t want any overheating at this point in time,” Banerjee said.

The rupee has strengthened to as much as 82.82 against the dollar in the last three months. The currency dipped 0.6% in 2023, a much smaller weakening against the dollar compared to the prior year’s 11% decline.

Pressure off Korea’s won

South Korea’s won has been under pressure for three years, but improving economic prospects and looser Fed policy will help ease that strain in 2024.

“As a low yielding and highly cyclical currency, we think the Korean won stands to be one of the major beneficiaries of the Fed’s easing cycle in the second half of the year as lower U.S. rates will not only reduce pressure on KRW through the rates channel but will also lead to an uptick in the global growth outlook,” Monex’s Harvey said.

But Harvey said the won’s gains will also be determined by the extent of the Fed’s cuts. He predicted the currency could gain anywhere between 5% and 10% if the easing cycle is deep, while as little as 3% if the cycle proves to be shallow.

South Korea’s economic prospects are also expected to improve this year. The International Monetary Fund predicted 2.3% growth in 2024 and 2025, higher than last year’s growth of 1.4%.

Source:CNBC

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Ukadike Micheal

Economic

Stocks

European stocks and Wall Street futures experienced an early decline on Tuesday as China's central bank's efforts to rejuvenate the struggling property market fell short of inspiring confidence in the world's second-largest economy. The Stoxx Europe 600 index, encompassing constituents heavily exposed to China, dipped by 0.3% at the opening bell, with France's Cac 40 down 0.1%, London's FTSE 100 dropping 0.2%, and Germany's Dax sliding 0.4%.

The downturn extended to Wall Street, with contracts tracking the S&P 500 and Nasdaq Composite down 0.4% and 0.5%, respectively, anticipating a subdued New York trading session.

The market sentiment reflects concerns over China's economic stability as the central bank's interventions failed to instill confidence among traders. The Stoxx Europe 600, a broad indicator of European stock performance, particularly felt the impact due to its diverse constituents with significant exposure to the Chinese market.

As investors assessed the implications of China's struggling property market and the central bank's response, European indices like the Cac 40, FTSE 100, and Dax registered declines, reflecting the interconnectedness of global markets.

The early decline in Wall Street futures, particularly for the S&P 500 and Nasdaq Composite, signals a cautious start to the U.S. trading session. The negative sentiment emanating from China's economic challenges extends beyond regional boundaries, affecting international markets.

From a technical perspective, the downward movement in these indices suggests increased market volatility and uncertainty, as traders react to the ongoing economic struggles in China. Investors are closely monitoring how global markets navigate these challenges, especially as China plays a crucial role in the world economy.

While the initial focus is on the impact of China's economic woes, broader geopolitical and economic factors contribute to the nuanced dynamics in the European and U.S. markets. As the day progresses, traders and investors will keenly observe developments in both Asia and the United States, recognizing the ripple effects of interconnected global financial markets.

The early slip in European stocks and Wall Street futures underscores the fragility of investor confidence amid concerns about China's economic health. The market's reaction highlights the intricate web of global interdependencies, with events in one region influencing sentiments and behaviors across the world. As markets evolve throughout the day, the narrative of economic resilience or vulnerability will become clearer, offering valuable insights into the current state of the global financial landscape.