The focus today is on Canadian inflation data. There is a deterioration in economic indicators in Europe

The US stock market did not trade yesterday due to the bank holiday.

Bank of Canada, business and consumer surveys showed that the economy has suffered from the Bank’s aggressive rate hike campaign, reinforcing the view that the tightening cycle is likely over and setting the stage for policymakers to start considering rate cuts as early as the first half of this year. Canada will release inflation data today. Economists forecast core inflation to remain at 2.8% in annualized terms, while overall inflation is forecast to jump from 3.1% to 3.4% y/y. However, the Bank of Canada prefers to focus more on median values. The median CPI is expected to fall from 3.4% to 3.3% y/y. Lower inflation will put pressure on the Canadian currency, but a lot will also depend on oil prices, as CAD is a commodity currency, and higher oil prices tend to strengthen the Canadian currency.

EU manufacturing output continued to fall in November on both a monthly and annualized basis. EU manufacturing output fell by 6.3% year-on-year in November 2022, the seventh consecutive year-on-year decline. As in the EU as a whole, November was the weakest month for German industrial production since September 2021. Germany’s annualized price-adjusted GDP in 2023 was 0.3% lower than the previous year as Germany’s overall economic development slowed in 2023.

With most central bank governors agreeing that interest rates have probably peaked, the world is entering a period where markets will be watching to see which of the major banks will be the first to cut rates. Interest rate expectations now suggest around 6-7 cuts for the dollar and euro, while expectations for sterling have risen significantly and now predict around 5-6 cuts in 2024.

The Middle East is critical to global oil supplies, with major producers, including Saudi Arabia, Iraq, and the UAE, relying on transportation routes, including the strategic Bab el-Mandeb Strait near Yemen. About 4.8 million barrels of crude oil and petroleum products pass through this narrow strait daily. That’s why Yemen’s attacks on shipping in the region have led to a response from the US and allies. Yesterday, the US Consulate in Erbil in northern Iraq was heavily damaged in an attack by ballistic missiles and drones fired by Iran. Thus, the degree of war in the region is starting to be prohibitive and could escalate into a serious armed conflict between Yemen and Iran vs. the US and its allies.

Asian markets were mostly down yesterday. Japan’s Nikkei 225 (JP225) continues to break records, up by 0.91%, China’s FTSE China A50 (CHA50) was down by 0.08% on Monday, Hong Kong’s Hang Seng (HK50) decreased by 0.17% on the day, and Australia’s ASX 200 (AU200) was negative by 0.03%.

The latest Chinese data suggests the economy is starting 2024 on shaky legs: persistent deflationary pressures and a modest rebound in exports are unlikely to turn around weak domestic activity quickly. December bank lending was also weak. China’s economic outlook in 2024 will be shaped by the outlook for the real estate sector. The government’s goal is to reduce the oversupply that has built up in the sector in recent years and bring supply in line with real demand. The People’s Bank of China (PBoC) has pledged to step up policy support for the economy this year and help prices recover. However, the PBoC faces a dilemma as more credit is directed toward productive forces than consumption, which could increase deflationary pressures and reduce the effectiveness of monetary policy tools.

A former Bank of Japan (BoJ) executive believes the BoJ is likely to be encouraged by better results from annual wage talks, which will pave the way for an end to negative interest rates this spring. That’s one of the main reasons most BoJ watchers predict the Central Bank will wait until April before raising rates for the first time since 2007. However, recent economic data showed persistent weakness in Japan’s producer price index inflation, indicating additional pressure on the BOJ to continue its ultra-soft stance.

The Australian and New Zealand dollars hit one-month lows on Tuesday, breaking through key support levels as risk appetite eased and domestic data reinforced signs that interest rates in Australia have peaked.