In this week’s market review, as usual we will start in the US, cross to Europe, then Asia, and end in Australia, and in passing we cover commodities and crypto.
I have been highlighting how the data driven approach by Central Banks is a problem, because as new data lands, markets try to respond, making swings in sentiment a core feature of every day.
On Wednesday we got a rate cut from the Bank of Canada, who became the first major central bank among the Group of Seven countries to cut interest rates by a quarter of a percentage point to 4.75 per cent, with governor Tiff Macklem saying if inflation continues to ease, and our confidence that inflation is headed sustainably to the 2 per cent target continues to increase, it is reasonable to expect further cuts to our policy interest rate. Inflation in Canada has slowed this year to hit a three-year low of 2.7 per cent in April. While inflation has stayed below 3 per cent for four straight months, it is still above the central bank’s 2 per cent target.
The BoC joins Sweden’s Riksbank and the Swiss National Bank in bringing down rates and more central banks are weighing rate cuts.
And on Thursday the European Central Bank made a widely expected decision to cut its deposit rate from a record 4% to 3.75% even though inflation remains above its 2 per cent target and recently ticked up. So, the ECB was prepared to cut despite inflation clearly remaining sticky, despite persistent wage pressures and despite some signs the European economy might be improving.
Not only is it one of the very few times that the ECB makes a turn on monetary policy before the Fed, it is also the first time the ECB starts cutting rates after a tightening cycle without facing a recession or crisis. But what’s less clear is what Lagarde does next. Having delivered the historic first cut, she was very reluctant to give many clues on when the next one would be. Watch the data, she said.
And in fact, global stocks pulled back from an all-time high on Friday after surprisingly strong U.S. monthly jobs data dimmed hopes that the Federal Reserve would soon follow euro zone and Canadian interest rate cuts, causing Treasury yields to shoot higher.
So the big question is, with the Bank of Canada cutting on Wednesday night, and Lagarde going on Thursday night, does this give the RBA any more room to deliver the rate cut many Australian households and investors crave? The short answer is no!
The RBA is expected to be among the last central banks to cut rates because the Australian inflation pace is above most major economies. At 3.6 per cent, CPI remains well above the RBA’s 2.5 per cent target and a reason why money markets are only fully priced for an easing in one year’s time.
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