Bank of Canada, PBOC cut policy rates

The PBOC cut its 1y Medium Term Lending Facility rate by 20bp to 2.3% this morning, after reducing its short term rate earlier this week. The move was not expected by analysts and was a larger increment than PBOC typically moves; the last time the PBOC cut by 20bp was in early 2020. CNY 200bn was offered to banks via the facility today, double what was previously offered.

The Bank of Canada cut its benchmark overnight rate by 25bp to 4.5% as expected, although the bank revised up its forecast for year-end inflation. Policymakers were more focused on downside risks to growth and weak household spending, along with rising unemployment to justify the cut.

Former Fed governor Bill Dudley said he thinks the Fed should not wait until September to cut rates, citing cooling growth and a softening labour market. Dudley wrote in an opinion piece for Bloomberg that inflation pressures have “abated significantly” and that by delaying rate cuts, the Fed may be increasing the risk of a recession in the US. The Fed meets next week and is expected to keep rates on hold, with a 25bp rate cut priced in by September.

Flash PMIs for the major economies were mixed yesterday, with the Eurozone surveys coming in softer than expected while the UK and US PMIs were better than forecast for July. Manufacturing was the main drag on the Eurozone PMI, with the manufacturing PMI slipping to 45.6 this month from 45.8 in June, led by weakness in Germany. The services PMI for the Eurozone also declined m/m to 51.9. In the UK, both manufacturing and services improved from June, while in the US the composite PMI rose to 55.0 in July from 54.8 in June, led by the services PMI at 56.0 - the highest reading since March 2022.

The central bank of Turkey repaid a USD 5bn deposit from Saudi Arabia, in a sign of its improving foreign exchange reserves position. Net fx reserves in early July (excluding swaps) is estimated at USD 15bn, according to Bloomberg, a significant improvement from -USD 60bn earlier this year.

Key Economic Data and events

12:00 Germany IFO Business Climate (Jul) forecast 89.0

16:30 US Q2 GDP (Preliminary) forecast 2.0% q/q annualized

16:30 US durable goods orders (Jun, prelim) forecast 0.3% m/m

16:30 US initial jobless claims (12 Jul) forecast 238k

Fixed Income

• The treasury yield curve steepened on Wednesday after former Fed governor Dudley said the Fed should start cutting rates at next week’s meeting. The 2y yield fell -6bp to 4.43% and has declined further to 4.41% this morning. The 10y yield rose 3bp to 4.28% yesterday but is slightly lower in early trade today.
• 10y European bond yields rose yesterday, except for the Swiss benchmark which declined -3bp to 0.46%. 10y gilt yields rose 3bp to 4.15% while the 10y bund yield rose 0.7bp to 2.44%. Greece and Italy saw the biggest jump in 10y yields, up almost 5bp respectively.

FX

• The USD index declined fractionally yesterday, with JPY the main beneficiary. JPY gained 1% yesterday to 154.56/USD and has appreciated another 1.5% this morning to 152.35/USD as the market considers the prospect of monetary policy tightening by the BoJ next week. EUR and GBP both lost ground against the dollar yesterday, along with the commodity currencies.

Equities

• US equities fell sharply yesterday, amid concerns about slowing growth, highlighted by former Fed governor Bill Dudley, as well as disappointing earnings from some big tech companies. The S&P500 fell -2.3%, while the Nasdaq100 declined -3.7%. The Bloomberg index of “magnificent seven” firms fell -5.9% yesterday. European stock also had a red day with the EuroStoxx 50 down -1.1%.
• Local equity markets fared better with the DFMGI ADXGI both up 0.3%. The Tadawul ASI was broadly unchanged.

Commodities

• Brent and WTI gained 0.9% and 0.8% respectively on Wednesday after the EIA confirmed a draw of 3.74mn barrels in US inventories last week, the fourth consecutive week of decline. However, concerns over economic growth, and demand from China in particular, appear to be weighing on oil prices again this morning.