US Fed to start cutting rates in September. The Canadian dollar reached a 2-month high

June US CPI declined to 3.0% y/y from 3.3% y/y in May, better than expectations of 3.1% y/y. June CPI, excluding food and energy, declined to a 3-year low of 3.3% y/y from 3.4% y/y in May, which was better than expectations of no change at 3.4% y/y. US weekly initial jobless claims fell by 17,000 to a 6-week low of 222,000, indicating a stronger labor market than expectations of 235,000. The trade surplus with the US increased to $31.78 billion in June from $30.81 billion in the previous month. In the first half of 2024, the surplus totaled $435 billion, with exports rising 3.6% to $1.71 trillion and imports increasing 2.0% to $1.27 trillion. Markets rate the odds of a 25 bps rate cut at 9% for the next FOMC meeting on July 30–31 and 93% for the September 17–18 meeting.

The Canadian dollar strengthened to 1.36 per US dollar in July, hitting an eight-week high. This was due to a weaker dollar after a decline in US inflation boosted bets that the Fed would cut rates in September. These developments balanced the outlook for the Fed and the Bank of Canada. Canada’s macroeconomic backdrop also supports bets that the Bank of Canada will continue to lower borrowing costs.

WTI crude oil prices rose to 82.9 dollars per barrel on Friday, rising for the third consecutive session amid positive market sentiment following the release of lower-than-expected inflation data in the United States, the world’s largest oil consumer. The June slowdown in US consumer price growth boosted expectations of a Federal Reserve rate cut, with traders now estimating the probability of a rate cut in September at 93%, up from 73% on Wednesday. In addition, signs of strong summer demand are supporting oil prices.

Asian markets were predominantly up yesterday. Japan’s Nikkei 225 (JP225) gained 0.94%, China’s FTSE China A50 (CHA50) added 0.55%, Hong Kong’s Hang Seng (HK50) jumped 2.06%, and Australia’s ASX 200 (AU200) was positive 0.93%.

Japan’s 10-year government bond yield fell to around 1.05%, hitting a two-week low, as investors reassessed the Bank of Japan’s monetary policy outlook in light of the yen’s surge. On July 11, the yen rose 2.6% to 157.42 per dollar, which traders attributed to likely government intervention. The Bank of Japan is under pressure to raise interest rates again in July to defend its currency and narrow the gap between domestic and foreign yields. The Central Bank is also expected to announce its plans to reduce bond purchases this month after it met with market participants this week to determine the actual pace of bond buying cuts.

China’s trade surplus in June 2024 rose to 99.05 billion US dollars from 69.80 billion US dollars in the same period a year earlier, beating market expectations of 85 billion US dollars. It was the biggest trade surplus since July 2022, as exports rose and imports fell. Exports rose by 8.6% from a year earlier, the fastest pace in 15 months and beating estimates for 8% growth, while imports unexpectedly fell 2.3%, missing estimates for 2.8% growth and after rising 1.8% in May.

Singapore’s economy grew at a 2.9% annualized rate in the second quarter of 2024, beating market estimates that expected 2.7% growth. The preliminary estimate also followed an upwardly revised 3% growth in the previous quarter, the fastest growth rate in a year and a half.