The bloodbath in U.S. equities was the stuff of headlines, keeping risk aversion in play and lifting the lower-yielding Japanese yen. The Loonie managed to break free from the selloff, though, as the BOC hiked rates and signaled room for more tightening.
On the flip side, the pound and euro still found themselves far behind as Brexit-related troubles lingered.
- U.S. Markit flash services PMI up from 53.5 to 54.7 vs. 54.1 forecast
- U.S. Markit manufacturing PMI up from 55.6 to 55.9 vs. 55.4 estimate
- BOC hiked interest rates from 1.50% to 1.75% as expected
- BOC removed “gradual” in referring to future policy tightening
- U.S. new home sales down from 585K to 553K vs. 627K consensus
- U.S. EIA crude oil stockpiles up 6.3M barrels vs. projected 3.6M gain
- PM May avoided leadership challenge with “emotional and personal” speech?
- PM May sets date to start “no deal” Brexit preps
- BOC Gov. Poloz: Every one of our meetings is live
- Poloz: Economy is at its capacity and no longer needs stimulus
- BOC Wilkins: Risks are two-sided and we’ll be data-dependent
- Fed Beige Book: Economic activity expanded with growth modest to moderate
- Beige Book: Labor shortages linked to higher wages, tariffs still a concern
- FOMC official Mester: U.S. underlying economy is strong, inflation expectations stable
- FOMC official Bostic: Fed’s view to let economy stand on its own
BOC statement and presser
As widely expected, the Bank of Canada hiked interest rates by 0.25% from 1.50% to 1.75% on account of solid growth and inflation, as well as an upbeat economic outlook.
Their official statement highlighted how it’s fun to stay at the USMCA as this removes trade uncertainty in North America, although it also pointed out risks from the spat between the U.S. and China. As for Canada itself, projections for business investments and exports have been upgraded despite dips in commodity prices.
The BOC also acknowledged that inflation dipped last month but pinned this on temporary factors, adding that it could continue to stay close to the 2% target well until 2020. Of particular interest to Loonie bulls was the removal of “gradual” when it comes to future monetary policy adjustments, spurring speculations that the BOC could tighten at a faster than expected pace.
During the presser, BOC head honcho Poloz clarified that every one of their meetings is live, downplaying market expectations that they might act only every other meeting. He also mentioned:
“The reality is that the economy is at its capacity and is no longer needing stimulus. And so it’s our job to prevent the thing from overheating and creating inflation pressures down the road.”
When it comes to dropping “gradual,” Poloz explained:
“It does permit the flexibility to move at a faster pace, but it would be completely hypothetical, depending on the data. And so it also permits us to go at a slower pace if the data suggests…”
Meanwhile, Senior Deputy Governor Carolyn Wilkins admitted that weaker crude oil prices is shaving off a bit from Canada’s growth but added later on that it is also a function of how U.S. fiscal policy continues. She also reiterated the central bank’s dependence on data:
“Every decision is a decision, and yes it’s possible that the pace could be a bit faster, but it’s also possible that it could be a bit slower, because as I said, the risks are two sided and we’ll be decidedly data dependent.”
Wall Street in the red
Over in the U.S., the mood was less cheery as another tumble in tech stocks due to weaker earnings and forecasts pulled equity indices to negative territory for the year.
- Dow 30 index is down 608.01 points to 24,583.42 (-2.41%)
- S&P 500 index is down 84.59 points to 2,656.10 (-3.09%)
- Nasdaq is down 329.14 points to 7,108.40 (-4.43%)
It didn’t help that investors were still worried about geopolitical risks stemming from Brexit issues and Italy’s budget, the upcoming U.S. mid-term elections, and tensions with Saudi Arabia. Downbeat U.S. new home sales added bearish pressure as well. Yikes!
To top it all off, Fed tightening expectations also loomed like a dark cloud over business investment and consumer spending thanks to mostly hawkish remarks from FOMC members Mester and Bostic, along with an upbeat Beige Book.
Major Market Mover(s):
The Japanese yen was the main beneficiary of risk-off flows as it managed to snatch some safe-haven flows away from the U.S. dollar.
USD/JPY slumped from 112.72 to 112.02; EUR/JPY tumbled from the 128.50 area to a low of 127.65; GBP/JPY fell from 145.58 to 144.32; AUD/JPY slid to the 79.00 levels, and NZD/JPY is down to 72.94.
Thanks to the BOC hike and optimism, the Loonie scored immunity from most of the risk-off moves that dragged the rest of the higher-yielding currencies deep in the red.
However, the Loonie had trouble holding on to most of these gains as it caved to profit-taking and nearly non-stop declines in the markets.
USD/CAD fell from 1.3094 to a low of 1.2968 but bounced back to 1.3017 before the session ended; CAD/JPY popped up from 86.02 to 86.69 then retreated back to 86.27; EUR/CAD slipped to 1.4777, and GBP/CAD is down to 1.6813.
The pound continued to slide across the board even as PM May’s speech might have saved her from a leadership challenge. Fears of a “no deal” Brexit still remain as the U.K. government set the date for when contingency plans should be put in place.
EUR/GBP is up from .8826 to .8847; GBP/AUD slumped from 1.8282 to 1.8209; GBP/NZD fell to a low of .9710, and GBP/CHF is down to 1.2846.
Watch Out For:
- 11:50 pm GMT: Japanese SPPI y/y (dip from 1.3% to 1.2% expected)