China kept key interest rates unchanged. Inflation is accelerating in Canada

By JustMarkets

As of Tuesday’s stock market close, the Dow Jones Index (US30) decreased by 0.40%, while the S&P 500 Index (US500) lost 0.22%. The NASDAQ Technology Index (US100) closed negative 0.23% on Tuesday. Stock indices declined amid a weak US housing report and a rise in 10-year bond yields to a 15-year high. US housing starts fell by 11.3% to 1.283 million units in August, much weaker than expectations of a decline of around 1%. In addition, the likelihood of an expanded UAW union strike and the resumption of student loan payments on October 1 also put downward pressure on stocks. Stocks also traded on a cautious note ahead of the two-day FOMC meeting. Markets fully expect the FOMC to leave the lending rate target unchanged at 5.25/5.50%. However, markets expect the FOMC to maintain its hawkish attitude and leave open the possibility of another rate hike later this year. This would be negative for stock indices.

Canadian inflation accelerated more than expected for the second consecutive month. The Consumer Price Index rose from 3.3% to 4% y/y in August, the fastest pace since April. Core inflation (excluding food and energy prices) rose slightly to 3.3% from 3.2%. The three-month moving average of indicators the Bank of Canada cited as key to its team rose a full percentage point to 4.49% on an annualized basis, according to Bloomberg calculations. Investors raised bets that Canada’s Central Bank will resume policy tightening and hold another rate hike at its October meeting.

Equity markets in Europe were mostly up yesterday. Germany’s DAX (DE40) fell by 0.40%, France’s CAC 40 (FR40) gained 0.08%, Spain’s IBEX 35 (ES35) added 0.40%, and the UK’s FTSE 100 (UK100) closed up by 0.09%. The August Eurozone Consumer Price Index was revised slightly from 5.3% to 5.2% y/y. Core CPI remained unchanged at 5.3% y/y. Lower inflationary pressures are dovish for ECB policy.

OECD economists cut the UK’s economic growth forecast for next year due to pressure on households and businesses from high interest rates. The analysts added that economic activity in the UK has “already weakened” due to the “lagged effect on household incomes from a large energy price shock in 2022.” The think tank forecast economic growth of 0.3% in 2023, which would be the second weakest among G7 countries.

WTI crude oil prices rose to a new 10-month high on Tuesday, extending the rally seen over the past three months, driven by expectations of a strong supply outlook for the rest of the year. However, crude oil prices declined later in the session, pressured by liquidations of long positions and some concerns about the global economy. Yesterday, the OECD lowered its 2024 global GDP forecast to 2.7% from 3.0%.

Asian markets traded yesterday without any unified dynamics. Japanese Nikkei 225 declined yesterday by 0.87%, Chinese FTSE China A50 (CHA50) rose by 0.02%, Hong Kong Hang Seng (HK50) increased by 0.37% on the day, and Australian ASX 200 (AU200) was negative 0.47% on Tuesday.

On Wednesday, the People’s Bank of China kept the one-year LPR rate unchanged at 3.45%, while the five-year LPR rate, which is used to determine mortgage rates, was left unchanged at 4.20%. Both rates are at historic lows after three cuts over the past year. Key comments from the People’s Bank of China (PBOC) official following the meeting:

• The PBOC will pay more attention to changes in the RMB exchange rate against a basket of currencies;
• There is a solid basis for keeping the RMB exchange rate basically stable;
• The PBOC will resolutely correct the unilateral pro-cyclical behavior of the RMB exchange rate;
• The PBOC will resolutely crack down on market disruption, resolutely guard against the risks of exchange rate overvaluation;
• China’s monetary policy still has ample room to respond to unexpected challenges and changes.

On Friday, the Bank of Japan will hold its monetary policy meeting. While no changes are expected at this meeting, swap market indicators are now showing stronger expectations for a soon-to-be abandonment of negative interest rates by March 2024 than a further widening of the range around the BoJ’s 10-year bond yield target. Against this backdrop, Bank of Japan Governor Kazuo Ueda is expected to take a somewhat hawkish stance, primarily to manage the yen’s depreciation.

S&P 500 (F)(US500) 4,443.95 −9.58 (−0.22%)

Dow Jones (US30) 34,517.73 −106.57 (−0.31%)

DAX (DE40)  15,664.48 −62.64 (−0.40%)

FTSE 100 (UK100) 7,660.20 +7.26 (+0.095%)

USD Index  105.15 −0.06 (−0.05%)

• – Japan Trade Balance (m/m) at 02:50 (GMT+3);
• – China PBoC Loan Prime Rate (m/m) at 04:15 (GMT+3);
• – UK Consumer Price Index (m/m) at 09:00 (GMT+3);
• – UK Producer Price Index (m/m) at 09:00 (GMT+3);
• – German Producer Price Index (m/m) at 09:00 (GMT+3);
• – US Crude Oil Reserves (w/w) at 17:30 (GMT+3);
• – US Fed Interest Rate Decision at 21:00 (GMT+3);
• – US FOMC Statement at 21:00 (GMT+3);
• – US FOMC Economic Projections at 21:00 (GMT+3);
• – US FOMC Press Conference at 21:30 (GMT+3).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.