RBA may raise rates amid price hikes. BoC is likely to postpone rate cuts amid inflationary pressures

The Conference Board’s US Consumer Confidence Index for June fell by 0.9 to 100.4, slightly stronger than expectations of 100.0. The S&P CoreLogic Composite-20 Home Price Index in the US for April fell to 7.20% y/y from 7.46% y/y in March, stronger than expectations of 7.00% y/y. The Richmond Fed survey of business activity in the US manufacturing sector for June declined to negative 10 from 0, weaker than expectations of 3. The Chicago Fed National Activity Index for June unexpectedly rose by 0.44 to 0.18, stronger than expectations of a decline to 0.25.

On Tuesday, Fed spokeswoman Bowman’s hawkish comments proved bearish for stocks when she said she sees several upside risks to the inflation outlook and “we are still not at a point where it is appropriate to lower the discount rate.” She added that she “does not see the Fed cutting the Funds rate this year and has pushed back her estimate for a rate cut to 2025.” Fed spokeswoman Cook said it would be appropriate for the Fed to cut interest rates “at some point,” but “the timing of any such adjustment will depend on how economic data evolve and what they mean for the economic outlook and balance of risks.” Markets estimate the odds of a 25 bps rate cut at 10% at the July 30–31 FOMC meeting and 65% at the September 17–18 meeting.

Canada’s annual inflation rate for May 2024 rose to 2.9% from a three-year low of 2.7% in the previous month, contradicting market expectations of a slowdown to 2.6%. Although inflation is expected to remain near the 3% mark in the first half of the year, the halt in the disinflationary trend belied earlier bets that the Central Bank (BoC) would continue to ease monetary policy. The Canadian dollar strengthened to 1.365 per dollar, the strongest level since the beginning of the month.

European equity markets opened higher on Wednesday, building on strong gains on Wall Street. However, investors remained cautious ahead of Friday’s US PCE inflation data, which could affect the Federal Reserve’s monetary policy outlook. The GfK consumer climate indicator for Germany fell to 21.8 in July 2024 from a marginally revised 21.0 in the previous period, missing market estimates of 18.9 and marking the first decline in five months. The interruption of the recent upward trend in consumer sentiment shows that recovery from the consumer downturn will be difficult. A sustained recovery in consumer sentiment requires a slowdown in inflation.

WTI crude futures climbed above $81 a barrel on Wednesday, recovering some of the previous session’s losses, even after industry data pointed to an unexpected rise in US crude inventories, adding to fears of weaker demand in the world’s top oil consumer. API data showed that US crude inventories rose by 0.914 million barrels last week, contradicting market expectations of a 3 million barrel decline. Official data from the US EIA will be released today.

Asian markets were predominantly up yesterday. Japan’s Nikkei 225 (JP225) rose by 0.95%, China’s FTSE China A50 (CHA50) was down 0.15%, Hong Kong’s Hang Seng (HK50) added 0.25% and Australia’s ASX 200 (AU200) was positive 1.36%.

The offshore yuan depreciated to 7.29 per dollar, hitting its lowest level in seven months, mainly due to weak Central Bank guidance and a stronger US dollar. The People’s Bank of China (PBoC) set the average rate at 7.1248 per dollar, the lowest since November, suggesting the central bank may be allowing the yuan to weaken gradually.

The Australian dollar rose to $0.667, hitting a two-week high after better-than-expected domestic inflation data bolstered bets that the Reserve Bank of Australia (RBA) may raise interest rates again after a hawkish pause in June. Australia’s monthly Consumer Price Index rose to 4% in May, accelerating from 3.6% in April and beating market expectations of 3.8%. The latest figure was also the highest since November last year.