Markets:
- CAD leads, EUR lags
- S&P 500 up 0.9%
- Gold up $3 to $1909
- US 10-year yields up 3.8 bps to 4.29%
- WTI crude oil up $1.96 to $90.48
We’ve experienced a period of stagnation for a while now, but several factors have come into play recently to create some market volatility. These include a cut in China’s reserve requirement ratio (RRR), another round of robust economic data from the United States, and signals from the European Central Bank (ECB) indicating that it may have concluded its interest rate hikes.
The significance of China’s RRR cut might have been overshadowed by other news, but sentiment towards China has significantly improved over the past month. This has had an impact on risk assets and commodities. For instance, met coal prices have surged, and oil prices have also seen an uptick. While concerns of a potential Lehman Brothers-type event in China were raised last month, the country remains somewhat opaque, but signs of stability and incremental stimulus measures are emerging.
Regarding the ECB, a leak on Monday had foreshadowed the interest rate hike, accompanied by language suggesting it might be a one-time move. Although ECB President Lagarde indicated in the press conference that further hikes were possible, the market remains skeptical about their likelihood. As a result, the euro initially rose but then declined later in the day, reaching just below the June low.
The British pound followed the euro’s downward trend as the market perceives a slowdown in the European economy. The odds of a Bank of England (BOE) rate hike on September 21 have decreased from 75% to 71%, although there is still a reasonable chance of another rate increase. Gilts, UK government bonds, were in demand.
On the other hand, there is mounting evidence that the US economy is performing well. Retail sales exceeded expectations, and initial jobless claims remained low. Since the nonfarm payrolls report on September 1, nearly every US economic indicator has beaten estimates.
Producer Price Index (PPI) also showed an increase, leading to a selloff in bonds. However, it’s noteworthy that bond prices did not break recent trading ranges. The market might be sensing that slowing global inflation could be advantageous for the Federal Reserve, even with a strong US economy. In any case, the Fed is now more likely than most others to continue its rate hike cycle in 2024, while the US economy remains the strongest among a group of slowing economies.
The Canadian dollar (CAD) managed to outperform the US dollar on the day, driven by another rally in oil prices. Although there was some profit-taking after oil briefly touched $90, buyers stepped in once again, demonstrating strength. We are anticipating headlines from Canadian Prime Minister Trudeau aimed at “bringing down the cost of living” at any moment.
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