Bank of Canada rate hike smaller than anticipated

• The Bank of Canada raised its policy rate by a smaller than expected 50bp to 3.75%. While officials remained hawkish on inflation, and have signalled that further rate hikes are likely, they appear to be concerned about rising recession risks and have slowed the pace of tightening. The BoC revised down its growth forecast for 2023 to 0.9% from 1.8% previously and expects growth to slow to just 0.5% in Q4 2022. The Bank also raised the prospect of a technical recession – two quarters of negative GDP growth – in its Monetary Policy Report.
• New home sales in the US fell by less than forecast in September, declining -10.9% m/m to 603k, as high mortgage rates deterred buyers. Transactions had surprisingly increased in August.  The median house price rose 13.9% y/y in September. 
• UK PM Rishi Sunak has delayed the announcement of the government’s medium-term fiscal plan – renamed the Autumn Statement – from 31 October to 17 November, in order to allow more time to come to the “right” policy decisions and to have these confirmed by the cabinet. This means the BoE won’t have the full details of the government’s fiscal policy when it meets on 3 November, but given the new PM’s commitment to restoring stability and credibility, the BoE can assume a tighter fiscal stance will be forthcoming.  The market is pricing a 75bp rate hike to 3.0% in November. 
• Saudi Arabia’s Public Investment Fund (PIF) said that it plans to invest another USD 14bn in MENA economies including Bahrain, Oman, Jordan, Iraq and Sudan, through five regional investment companies. The funds will be invested in infrastructure, healthcare, real estate, telecommunications and other strategic sectors. A separate USD 10bn fund has already been set up for Egyptian investments through the Saudi Egyptian Investment Company, bringing PIF’s total commitment to the region to USD 24bn.

Today’s Economic Data and Events

• 16:15 ECB Deposit Facility rate decision forecast +75bp to 1.5%
• 16:30 US Q3 GDP (preliminary) forecast 2.4% q/q saar
• 16:30 US Durable Goods Orders (Sep) forecast 0.6% m/m
• 16:30 US Initial jobless claims (22 Oct) forecast 220k

Fixed Income

• US Treasuries settled higher overnight after a strong auction for 5yr USTs and were also supported by the Bank of Canada’s move to hike by 50bps, smaller than expected. The 2yr UST yield dropped 7bps to 4.4039% while the 10yr closed down almost 10bps at 4.0028%. The smaller hike from the BoC may prompt more hope that the Fed will also slow down its pace of tightening: our expectation is for a 75bps hike at the November FOMC followed by 50bps at the December meeting.
• European bonds closed stronger with yields dropping by about 5-6bps across the space. The 10yr bund yield closed at 2.107%. South African bonds extended a rally with yields down 13bps to 11.257% while Turkey bonds were flat.

FX

• Currency markets strengthened against the dollar for second day running with hope of a Fed pivot creeping back into markets. Following a 50bps hike from the Bank of Canada, USDCAD dropped by 0.4% to 1.3553 and seemed to help spark a risk on rally. EURUSD rose 1.15% to close above parity for the first time since mid-September, settling at 1.0081. GBPUSD also extended its recent gains, up 1.3% at 1.1625. USDJPY also moved in favour of the yen, down 1% to 146.37.

Equities

• Some disappointing earnings results weighed on equity markets yesterday. In the US, the Dow Jones managed to close flat, but both the S&P 500 (-0.7%) and the NASDAQ (-2.0%) recorded sizeable losses.
• The day had started more positively elsewhere. The Hang Seng snapped its five days straight of losses with a 1.0% gain and it is trading up a further 2.6% so far this morning. In Europe, the DAX was the standout as it added 1.1%, while the UK’s FTSE 100 closed 0.6% higher.
• Locally, the ADX gained 0.3% but the DFM fell by -0.9%. Saudi Arabia’s Tadawul ended the session -1.5% lower.

Commodities

• Oil prices pushed much higher overnight with Brent futures up 2.3% at USD 95.69/b and WTI gaining 3% to USD 87.91/b. Markets will turn their attention to the implementation of a price cap on Russian oil in more and more detail as the deadline of December 5th is fast approaching.
• In the US, commercial crude inventories added 2.6m bbl last week while the SPR continues to drain. Gasoline inventories dropped, down 1.5m bbl while distillates were marginally higher. US oil production was unchanged at 12m b/d.

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