Weekly Market Recap Market News

Weekly Market Recap: US Inflation Soars, BoC and RBNZ Lead Tightening Cycle

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Weekly Market Recap: This week witnessed many data releases and policy decisions from central banks in Canada and New Zealand. Here are the top economic highlights for the week:  

  • US inflation posted its largest gain in 13 years. 
  • Chinese economy grew at a weaker than expected pace.
  • BoC continues tapering.
  • Australian labor market tightens.

USD: Inflation Data urge the Fed to Taper 

US consumer price inflation jumped 0.9% m/m in June from 0.6% in May. Annual inflation is now running near its highest levels at 5.4%. Core inflation, which excludes food and fuel prices, rose 0.9% on a monthly basis and 4.5% annually.

Separate data showed that the Producer Price index rose to 1.0% in June, exceeding expectations at 0.8%. The core index rose at the same rate, against the market consensus at 0.5%, rising from 0.7% in May. 

Weekly Market Recap - US Inflation

Recent inflation numbers make it more difficult for the Federal Reserve to stick to its perspective that inflation pressures are transitory. The surprising data supports calls for a sooner removal of the massive monetary stimulus the Fed has injected into the economy. 

The FOMC Meeting Minutes released last week showed some officials expect the conditions for beginning to reduce the pace of asset purchases to be met earlier than they had anticipated. While other members saw that incoming data is not providing a clear signal about the underlying economic momentum. Fed officials agreed to continue assessing the economy’s progress and maybe begin discussing their plans for adjusting policy and asset purchases in the upcoming meetings. 

Federal Reserve Chair Jerome Powell said during his testimony on the Semi-Annual Monetary Policy Report before the House Financial Services Committee that the U.S. economic recovery still hasn’t progressed enough to begin tapering monthly asset purchases. He added that inflation is likely to stay high in the coming months before moderating. “At our June meeting, the committee discussed the economy’s progress toward our goals since we adopted our asset purchase guidance last December,” Powell stated. “While reaching the standard of ‘substantial further progress’ is still a ways off, participants expect that progress will continue.”

CAD: Bank of Canada Cuts Bond Purchases for Third Time

In its July meeting, the Bank of Canada kept the key interest rate at a record low of 0.25%. The bank announced a third cut to its weekly asset purchases to C$2 billion, reflecting the bank’s confidence that growth would rebound strongly in a more sustainable manner. BoC stated earlier that the economy should pick up in the third quarter, after the slowdown caused by the third pandemic wave in the first half of 2021. 

However, the bank downgraded economic forecasts and now the economy is expected to grow 6.0% in 2021, instead of 6.5% earlier. While the 2022 growth estimate was revised up from 3.7% to 4.6%. Inflation is expected to remain at or above 3% through the rest of 2021, before easing back to the 2% target by 2022. 

The central bank has confirmed a flourishing economic outlook now after downside risks associated with the pandemic have significantly diminished. 

Canada Financial news

CNY: China’s GDP grew 7.9% in the second quarter

China has reported weaker GDP growth for Q2. Growth numbers came in slightly below expectations, while retail sales and industrial production grew faster than forecast in June. The Chinese economy expanded by 7.9% between April and June. On a quarterly basis, GDP rose 1.3%. Economists explain that despite the downside and structural risks, the Chinese economy is still on track for recovery. 

NZD: RBNZ Surprisingly ends QE

The Reserve Bank of New Zealand Surprisingly announced that its QE programme will end on 23 July. The decision reflects a brighter economic outlook that no longer requires extensive monetary stimulus. The economic activity recovered to above pre-pandemic levels, as well as solid growth in both household spending and investments. The bank stated that inflation will be monitored in Q2 and Q3, as more persistent consumer price inflation pressure is expected to build over time. Now, market participants are pricing a 25bp rate hike in August (65%) and an October hike (86%). 

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