North American stock markets have returned to trading this morning with traders in more of an upbeat mood. The three main US index futures contracts are up 0.4% to 0.5%, clawing back some of Friday’s losses of 1.0% to 1.3% for the Dow, S&P 500 and the NASDAQ. European trading finds the FTSE flat and the Dax up 0.7%.
Commodities action is mixed with natural gas down 1.3% despite the Nord Stream 1 pipeline now offline indefinitely as political tensions between Russia and western countries remain high. WTI Crude Oil is down 0.2% and still trading below $90.00/bbl even after OPEC+ announced a small 100K bbl/d production cut for this month, which has been seen by investors as more of a political signal and a commitment to maintain control over the market and pricing. Copper is up 1.1% so far today. In currency action, the US Dollar is down a bit today, losing 0.2% to Gold and the Canadian Dollar, and 0.5% to the Pound as investors respond to yesterday’s announcement of Liz Truss as the next UK Prime Minster.
It is a big week for central bank meetings. Overnight, the Reserve Bank of Australia raised its benchmark rate by 0.50% for the fourth monthly meeting in a row, and in the statement, Governor Lowe confirmed the RBA’s intention to continue fighting inflation while suggesting the pace of rate hikes could change depending on data. On Thursday, the European Central Bank meets. A 0.50% ECB rate hike is widely expected but there has been speculation in the media on a possible 0.75% increase following hawkish comments from leaders at the ECB and several other central banks at the Jackson Hole Symposium last month.
Tomorrow morning at 10:00 am EDT, the Bank of Canada announces its latest interest rate decision. Last time, Canada’s central bank raised it’s overnight rate by 1.00% which was a hawkish acceleration from the 0.50% increases of the previous two meetings and was more than the 0.75% increase the street had expected. This time around, the Governing Council is expected to announce a 0.75% rate increase to 3.25%. As this is a similar pace to the last Fed decision, such a hike could be seen as a middle of the road decision, with a 0.50% or less potentially seen as dovish by the street while an increase of 1.00% or more could be seen as increasingly hawkish by investors.
Since the Bank of Canada did not speak at Jackson Hole this year, and since there is no post-announcement press conference scheduled this time, investors may look to the accompanying statement for insight into the Bank’s plans for monetary policy and the state of the Canadian economy. There has been speculation from some quarters lately that the Bank of Canada could slow the pace of interest rate increases further in the coming months. Similar speculation in the United States was stamped out by Fed Chair Powell at Jackson Hole so investors may be watching to see if Governor Macklem does the same, and also if he has any comments related to employment, wage inflation or the housing market.
It is important for investors to remember that the Bank of Canada has a long-standing target of 2.00% inflation and a 2.00% overnight rate. Even though consumer price index growth shrank to 7.6% over year from 8.1% the previous month, it was only one decrease so far and there would still be a large gap between CPI and the overnight rate even if the Bank of Canada raised the benchmark rate to 3.25%. Another question for the Bank and investors to consider is not only how high rates may have to go but how long they may need to remain elevated. In its statement overnight, the RBA posted Australian inflation forecasts of 7.75% for 2022, 4.00% for 2023 and 3.00% for 2024. Investors may look to what the Bank of Canada is forecasting as a point of comparison with the forecasts from the ECB due later this week and from the Federal Reserve Board due later this month.