FOMC officials remain hawkish. Bank of Canada will hold rates longer than the market expects

On Tuesday, Federal Reserve President Cleveland Mester made somewhat hawkish comments and supported the dollar, saying she was in no rush to cut interest rates and that policymakers would likely gain confidence to cut rates “later this year” if the economy performs as expected. Markets rate the odds of a 25 bps rate cut at 23% for the March 19-20 FOMC meeting and 82% for the April 30-May meeting.

Bank of Canada Governor Tiff Macklem said Tuesday that monetary policy needs more time to ease price pressures and warned that the biggest driver of rising prices – housing costs – cannot be tamed by borrowing costs. Canada’s severe housing shortage has driven up the cost of buying or renting real estate in the country. Macklem said housing costs are now the most significant contributor to above target inflation.

Eurozone retail sales for December fell 1.1% m/m, weaker than expectations of 1.0% m/m and the most significant decline in a year. ECB 1-year inflation expectations fell to 3.2% in December from 3.5% in November, the slowest rate of increase in 2 years. Three-year inflation expectations for December rose to 2.5% from 2.4% in November. Swaps estimate the odds of a 25 bps ECB rate cut at the next meeting on March 7 at 19% and at the next meeting on April 11 at 74%. Investors will evaluate German industrial production, French trade balance, and Italian retail sales data in today’s European session.

Switzerland’s January 2024 unemployment rate rose to a seasonally adjusted 2.5% from a more than one-year low of 2.3% in the previous month. It was the highest unemployment rate since February 2022.

WTI crude futures climbed above $73.5 a barrel on Wednesday and rose for the third straight session as investors continue to assess the risk of supply disruptions in the Middle East. Analysts say that as long as tensions remain in the region, markets will factor in supply concerns. Nevertheless, oil prices have fallen about 7% since late January amid reports of progress in ceasefire talks between Israel and Hamas. Fading expectations of an immediate interest rate cut by the US Federal Reserve and lingering concerns about China’s economic recovery also weighed on the outlook for global demand.

Asian markets were mostly up on Tuesday. Japan’s Nikkei 225 (JP225) was down 1.12% for the day, China’s FTSE China A50 (CHA50) jumped 3.81%, Hong Kong’s Hang Seng (HK50) was up 4.31% at Tuesday’s close, and Australia’s ASX 200 (AU200) was positive 0.52% for the day. Chinese and Hong Kong indices rose yesterday on signs that China is stepping up efforts to combat the stock market slump, including a pledge by a state fund to increase stock purchases. Over the weekend, China’s securities regulator also vowed to prevent abnormal market swings and crack down on “vicious” short selling before adding that it would take strong measures to avoid risks of margin.