Is the BoC to ‘Walk the Walk’ next week?

Recent economic data is beginning to support this global shift toward pessimism for risky assets. The plethora of global PMI releases of late has printed lower. Last month we witnessed weaker trade numbers for Korea and China, a disappointing US payroll and auto sales release. Added together, and they are beginning to highlight the deterioration of global activity. Spain has now become Capital Markets main focus of attention and fixed income dealers ‘new squeeze.’ None of this is expected to dissuade Bank of Canada Governor Carney from ramping up hawkish warnings at next week’s rate announcement. On the street, many do not see the BoC hiking rates, not this time (+1%). The Canadian economy currently walks a fine line between the above external risks and its own domestic concerns. Inflation is currently running at the upper range of the bank’s mandate, along with the persistent worry about high household debt, rate talk is not “out of order” come Tuesday.

Below are some other highlights of the week:

Americas

• USD: Helicopters Ben’s keenly awaited speech earlier in the week proved to be another nonevent, with him refraining from discussing monetary policy. However, investors have had to sift through a plethora of other Fed speeches this week looking for any hints of easing, which can only be bullish for the dollar.
• CAD: Canadian housing starts were up a better than expected +5% to an annual rate of +215.6k last month, largely due to increases in multiple starts in Ontario and out west.
• CAD: BoC Business outlook survey revealed that Canadian companies were more optimistic about future sales. This optimism is fuelled by a stronger US and global outlook and higher commodity prices. Their inflation expectations have increased. The more upbeat tone from the survey coupled with Governor Carney’s relatively more hawkish recent remarks has many revisiting the timelines for interest rate hikes. Futures are pricing in a tightening bias beginning near year end.
• USD: US import prices rose +1.3% in March, above analysts’ expectations for a +0.9% gain. It was the largest monthly rise in 12-months, mostly on the back of higher crude prices. Prices are up +3.4%, y/y, and the smallest annual increase in three-years. More importantly, inflationary pressure remains relatively localized to the commodity sector.
• USD: Whole sale inventories and sales beat market expectations in February, as inventories grew by +0.9% (+0.5%) and sales rose by +1.2% (+0.4%). The January report was also revised higher. On a y/y basis, both categories have risen +9.3%. The inventory to sales ratio held at 1.17 for the fifth consecutive month. The inventory report is partially a reflection of increased fuel costs.
• USD: Weekly EIA crude inventory reported a build of +2.8m barrels just above expectations of +2.1m.
• USD: Mid-week, risk appetite tried to make a timid comeback after a stronger than expected opening to the Q1 earnings season in the US, “interrupting a multi-day sell off across asset classes.”
• USD: US 10-year auction (+2.043%) produced less than a stellar demand (bid-to-cover was 3.08 vs. 3.11), but better than the equivalent bund auction.
• FED: The Fed’s Janet Yellen reaffirmed her colleagues “highly accommodative” policy and argued that the Fed probably will not achieve its goal of full employment for years while inflation is likely to remain in check. This is rhetoric that allows ‘risk-on’ to be applied.
• FED: The Beige Book said that the economy grew in all 12 of its regions as manufacturing, hiring, and retail sales showed signs of strength in the face of energy prices.
• CAD: Canada produced the smallest trade surplus in four-months, narrowing to +C$292m as exports declined-3.9% (the most in a year) to +c$39.6b and imports edged up +0.2% to +c$39.3b. The market had been expecting a surplus of +c$2.2b.
• USD: The US trade deficit registered its biggest contraction in nearly three-years in February (-$46.03b), assisted by record exports (+$181.1b) and a slump in imports of oil and Chinese goods.
• USD: US wholesale prices held steady in March, as gas costs declined after a sharp increase the prior month. However, the underlying rate (ex-food and energy) rose +0.3% in March.
• USD: Applications for weekly jobless benefits rose sharply last week, +13k to a seasonally adjusted +380k. It was largest weekly rise in 12-months. The four-week moving average has increased by +4,250 to +368.5k, which is still near a four-year low. This seems to vindicate Fed vice-chair Yellen dovish view and her assessment that the current loose monetary policy is appropriate.
• FED: Dudley commented that there is ‘not enough growth to make a dent in US economic slack.’ He now sees Q1 growth at an annualized +2.7% and believes that oil shock and slower growth abroad are a US downside risk. He did comment on the US job market claiming that “many labor market measures remain weak.”
• USD: US consumer price rose +0.3% in March, with core up an expected +0.2%. Although gas prices remain in concern, they are not pushing up core prices, which remain at a tepid +2.3% annualized growth rate. The market can now expect growth and jobs to be the “primary focus” in any discussion about Bernanke and company undertaking more QE.
• USD: UoM consumer sentiment index for April stood at 75.7, compared to 76.2 at the end of March. It seems that consumers feel more cautious about the current economy. The current conditions index dropped to 80.6 from 86 while the expectations index improved to 72.5 from 69.8.

Europe Week in FX

Asia Week in FX

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