Bank of Canada keeps rates on hold

• The Bank of Canada held its benchmark interest rate unchanged at the record low of 0.25% yesterday, as had been widely anticipated. The bank’s communiqué painted a fairly bullish picture of the economic recovery underway in Canada while being careful to acknowledge the residual risks from the pandemic crisis. As such, it believes that ‘the recovery continues to require extraordinary monetary policy support’, and the bank pledged to maintain these low rates until the recovery gained traction. It also said that it would maintain its asset purchases at present rates of CAD 3bn a week, but did reiterate that adjustments to this would be driven by its assessment of the strength of the recovery, potentially paving the way for a return to tapering at the next meeting in July. The Bank of Canada was one of the first major central banks to break ranks when it cut its asset purchases by a quarter at its April meeting.
• The UK’s withdrawal from the European Union, completed at the start of 2021 as the transition period drew to a close, continues to generate disputes between the two parties due to the difficult environment this created for Northern Ireland and its trading relationship with the rest of the UK. European Commission vice president Maros Sefcovic has talked of potential tariffs and quotas which could be imposed on the UK if the EU feels that it is breaking the terms of the withdrawal agreement.
• Outgoing BoE chief economist Andy Haldane made a number of media comments yesterday in which he not only talked up the economic recovery in the UK, but also warned against potential inflationary pressures. Haldane was the only MPC member to vote to reduce the bank’s asset purchase programme at the last meeting in May.

Today’s Economic Data and Events

15:45 ECB rate decision: forecast -0.5%

16:30 US initial jobless claims, week to June 5: forecast 370,000

16:30 US CPI inflation, % y/y May: forecast 4.7%

Egypt CPI inflation, % y/y

Fixed Income

• Yields on USTs slipped ahead of today’s US CPI report, with the 10-year slipping to 1.49%, the first close below 1.5% for the benchmark since March. A much higher-than-anticipated inflation print could see rates pick up again, but for now markets are buying the Fed’s line that this price growth acceleration is transitory – or at least that the central bank considers it to be and will not take any action on tightening policy just yet.
• The ECB’s rate-setting meeting will be in focus later today. There is little expectation for a slowdown in asset purchases by the bank given that economic data is still relatively mixed despite an improvement in the outlook in recent weeks. The MPC would also be reluctant to make any such move ahead of the Fed. However, the rise in inflation, seen in Europe as well as in the US, could prompt a modest change in language.

FX

• The broad dollar index has been holding on to its modest recent gains above 90 ahead of the CPI print today. It closed at 90.12 yesterday and is at 90.17 this morning, but movement has been quite limited ahead of today’s events.
• Sterling was the major mover yesterday, losing -0.3% by the end of the day to close at 1.4118. Bolstered earlier in the session by bullish remarks by outgoing BoE chief economist Andy Haldane, mooted EU sanctions pushed it down later in the day. The Euro gained 0.1% against the dollar.
• Movements today are likely to be quiet until the release of the CPI and ECB news.
• El Salvador has become the first country in the world to accept Bitcoin as legal tender. The purported aim is to cut transaction fees for the substantial remittances sent back to the country from citizens working abroad.

Equities

• The launch of the EU digital passport has bolstered travel stocks across Europe, but this was insufficient to see all of the region’s equity markets close higher yesterday. The STOXX 600 edged its way to a new record high with a 0.1% gain and the CAC gained 0.2%, but the FTSE 100 (-0.2%) and the DAX (-0.4%) both lost ground.
• In the US, all three major benchmark indices slipped yesterday. The Dow Jones was the biggest faller at -0.4%, while the NASDAQ and the S&P 500 lost -0.1% and -0.2% respectively.
• Within the region, the DFM lost -0.1% but the Tadawul (0.5) and the ADX (0.6%) both gained, as did the EGX 30 which closed up 0.8%.

Commodities

• Oil prices remained fairly buoyant yesterday, with Brent futures closing at USD 72.2/b – unchanged on the previous day’s more than two and a half year high. WTI closed down marginally at USD 69.96/b compared to the previous day’s high of USD 70.05/b.
• Both benchmarks are trading modestly lower this morning as oil data out of the US disappointed. The EIA reported that fuel stocks rose even as crude inventories reported a third weekly drop. The start to the US driving season has got off to a slower than expected start, in part due to poor weather on the East Coast over the Memorial Day weekend.

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