26 October 2023
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Bank of Canada kept rates on hold at 5%

Daily Outlook

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By Emirates NBD Research

The Bank of Canada kept its benchmark rate on hold as expected at 5.0% yesterday but noted that inflationary risks have increased and indicated that it is prepared to hike rates further if needed. At the same time the bank lowered growth forecasts for this year and next, with Governor Macklem saying the path to a soft landing in Canada “is narrower”.

New home sales in the US surged to 759k (12.3% annualized) in September, the fastest pace of growth since early 2022, and much higher than the market had expected. With a lack of supply, most transactions were for new homes as developers have offered incentives to buyers facing the highest mortgage rates in a generation. The data is volatile however, and it remains to be seen if the pace of home sales growth can be maintained the face of high financing costs.

United Auto Workers (UAW) has reached a tentative agreement with Ford which will see hourly wages rise 25% over the new contract, which exceeds four years. Union leadership will vote on the deal over the weekend, and it must then be ratified by members in a process that could run for several weeks. Workers are expected to return to factories during the ratification process. GM and Stellantis are set to meet UAE today to continue talks.

Republicans elected a new speaker of the House, Mike Johnson, more than three weeks after Kevin McCarthy was ousted. Johnson’s immediate priority will be to avert a government shutdown on 18 November.

Germany’s IFO business climate index improved slightly to 86.9 in October from 85.8 in September, with both the current assessment and expectations indices coming in ahead of forecasts. The data suggests that the Eurozone’s largest economy may be stabilizing even as a recession is expected this year. The services sector appeared to be the main driver of improvement in the survey released yesterday, as manufacturing remains under pressure from weaker demand in China.

Today’s key economic data and events

15:00 Central Bank of Turkey monetary policy meeting, forecast +500bp to 35%

16:15 ECB rate decision (main refinancing rate) forecast 4.5%

16:30 US GDP (Q3) forecast 4.5% annualized.

16:30 US durable goods orders (Sep) forecast 1.8%

18:00 US pending home sales (Sep) forecast -2.0% m/m

Fixed Income

  • 2y treasury yields ticked 1bp higher to close at 5.12% yesterday, while the 10y yield rose 13bp to 4.95%. Once again, weak demand in the auction of 5y notes weighed on treasuries.
  • Government bond yields across most major markets rose yesterday with 10y gilts up 7.2bp to 4.61% and bunds up 6.3bp to 2.9%.
  • In Canada, markets are now pricing a 23% probability of another rate hike in December. The 10y benchmark yields rose 11bp to 4.12%.
  • Higher than expected inflation in Australia also raised the prospect of another rate hike down under, pushing up 3y bond yields to their highest since 2011. The 10y bond yield rose 12.6% to 4.84%.

FX

  • The Bloomberg USD index rose 0.24% yesterday with the major currencies losing ground against the greenback. GBP lost 0.7% to 1.2123, while EUR lost almost half a percent to 1.0574. JPY remains under pressure from higher US rates and weakened to a new low this year, trading above 150/USD this morning. It remains to be seen whether Japanese authorities will intervene to support the yen ahead of the BoJ meeting next week.
  • Commodity currencies also declined against the USD overnight. AUD weakened further this morning after the RBA governor appeared to dismiss the higher-than-expected inflation reading yesterday, and is trading at the weakest levels since November 2022 as of this writing.

Equities

  • Tech stocks and higher yields weighed on US equities after disappointing results from Alphabet. The Nasdaq Composite had its worst day since February and closed down -2.4%. The S&P500 fell -1.4% and closed below 4200 for the first time since May. European stocks had a better day with the UK’s FTSE100 up 0.3% and the Euro Stoxx50 up 0.2%.
  • The DFMGI closed 2.7% higher yesterday, led by real estate and materials stocks which rose 2.6% and 3.0% respectively. ADXGI rose 0.6%. The Saudi Tadawul ASI gained 1.2 in yesterday’s session.

Commodities

  • Both Brent and WTI contracts rose yesterday, reversing the -2% declines seen on Wednesday. Brent closed up 2.3% at just over USD 90/b while WTI recovered to USD 85.25/b at Thursday’s fix. Oil prices are a touch softer in Asian trade this morning.

Written By

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Emirates NBD Research Head of Research & Chief Economist

Mayed Alrashdi Research Analyst


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