Connect with us

Markets

Poloz and the Urgency of a July Rate Hike

Published

on

canada
  • Poloz and the Urgency of a July Rate Hike

There is nothing in the Bank of Canada’s market-moving statements last week to indicate an interest rate hike is imminent, but investors aren’t taking chances.

The central bank’s next decision on July 12 is now a toss up, with traders assigning a 50 percent chance of an increase. Before Governor Stephen Poloz and his top deputy Carolyn Wilkins talked openly about the prospect of raising rates, odds were close to zero for a July hike and investors hadn’t priced in a full 25 basis point increase until the end of 2018.

Why the sudden urgency?

Part of the explanation may be that after being caught short by Poloz in the past, investors have become “twice shy” with the bank. The last time Poloz changed direction on rates — in January 2015 — he went from a change in tone (a deputy’s speech) to an interest rate cut in a matter of eight days. The cut was unanticipated and investors complained about message confusion.

Compared to that move, Poloz can reasonably argue he’s left investors plenty of time to ponder a rate increase.

“We got a rate cut surprise in January 2015 with very little softening up of the ground,” said Michael Gregory, an economist at Bank of Montreal. “Therefore the Bank of Canada is saying, ‘We may or may not go in July, probably won’t, but if we do be warned.”

Accommodating Banker

In fact, by choosing to soften the ground last week during a deputy’s speech, Poloz is only fueling speculation he’s itching to move. If he wanted to raise rates later this year, then he could have set the stage at next month’s decision, which coincides with new quarterly forecasts and a press conference.

This is a central banker, after all, who has a reputation for being accommodative, and who only a few months ago was talking about rate cuts. By the time his seven-year term is done, Poloz will probably have kept borrowing costs on average at lower levels than any of his eight predecessors — a legacy shared by many of his contemporaries in other countries.

“You can argue Steve has been more accommodating, so must feel really confident in the economy’s prospects if he’s itching to go,” said Andrew Spence, head of liquid alternatives at Scotia Institutional Asset Management and a former adviser at the Bank of Canada.

In other words, the fact Poloz has moved so quickly into what is for him uncharted territory may be a signal he’s determined to move. Talk of higher rates may suggest an underlying change has taken place.

Tightening Bias I

Of course, just because there’s a particular bias, it doesn’t mean rates will move in that direction. A lot depends on what inflation does. Take 2013 as an example.

When he took over at the Bank of Canada in June of that year, Poloz inherited a tightening bias from his predecessor, Mark Carney. But it didn’t last long as inflation continued to remain sluggish.

At his first rate decision six weeks later, Poloz kept the bias but toned it down. In October, amid a deteriorating global growth outlook, Poloz dropped the bias altogether.

That year, quarterly GDP growth was robust, averaging 3.6 percent, but inflation was hovering around 1 percent. Inflation concerns won the day. (Not surprising given the Bank of Canada’s mandate.)

Today, it’s a similar story. In the last three quarters, growth has averaged 3.5 percent, while inflation is running at just 1.5 percent.

Inflation Matters?

That’s why last week’s changes were such a surprise, given how much inflation does matter. Could the new language mean the central bank’s modeling — at the current pace of growth — is beginning to forecast inflation well beyond the Bank of Canada’s 2 percent target.

As recently as May, the bank said low inflation was a sign of the economy’s excess slack. In her June 12 speech, Wilkins said it measured the “lagged effects” of excess capacity.

That’s a big change in three weeks, and makes consumer price inflation data due Friday — the last set before the July 12 decision — particularly important.

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

Crude Oil

Oil Prices Steady as Israel-Hamas Ceasefire Talks Offer Hope, Red Sea Attacks Persist

Published

on

markets energies crude oil

Amidst geopolitical tensions and ongoing conflicts, oil prices remained relatively stable as hopes for a ceasefire between Israel and Hamas emerged, while attacks in the Red Sea continued to escalate.

Brent crude oil, against which Nigerian oil is priced, saw a modest rise of 27 cents to $88.67 a barrel while U.S. West Texas Intermediate crude oil gained 30 cents to $82.93 a barrel.

The optimism stems from negotiations between Israel and Hamas with talks in Cairo aiming to broker a potential ceasefire.

Despite these diplomatic efforts, attacks in the Red Sea by Yemen’s Houthis persist, raising concerns about potential disruptions to oil supply routes.

Vandana Hari, founder of Vanda Insights, emphasized the importance of a concrete agreement to drive market sentiment, stating that the oil market awaits a finalized deal between the conflicting parties.

Meanwhile, investor focus remains on the upcoming U.S. Federal Reserve’s policy review, particularly in light of persistent inflationary pressures.

Market expectations for any rate adjustments have been pushed out due to stubborn inflation, potentially bolstering the U.S. dollar and impacting oil demand.

Concerns over demand also weigh on sentiment, with ANZ analysts noting a decline in premiums for diesel and heating oil compared to crude oil, signaling subdued demand prospects.

As geopolitical uncertainties persist and market dynamics evolve, observers closely monitor developments in both the Middle East and global economic policies for their potential impact on oil prices and market stability.

Continue Reading

Crude Oil

Oil Prices Sink 1% as Israel-Hamas Talks in Cairo Ease Middle East Tensions

Published

on

Crude oil - Investors King

Oil prices declined on Monday, shedding 1% of their value as Israel-Hamas peace negotiations in Cairo alleviated fears of a broader conflict in the Middle East.

The easing tensions coupled with U.S. inflation data contributed to the subdued market sentiment and erased gains made earlier.

Brent crude oil, against which Nigerian oil is priced, dropped by as much as 1.09% to 8.52 a barrel while West Texas Intermediate (WTI) oil fell by 0.99% to $83.02 a barrel.

The initiation of talks to broker a ceasefire between Israel and Hamas played a pivotal role in moderating geopolitical concerns, according to analysts.

A delegation from Hamas was set to engage in peace discussions in Cairo on Monday, as confirmed by a Hamas official to Reuters.

Also, statements from the White House indicated that Israel had agreed to address U.S. concerns regarding the potential humanitarian impacts of the proposed invasion.

Market observers also underscored the significance of the upcoming U.S. Federal Reserve’s policy review on May 1.

Anticipation of a more hawkish stance from the Federal Open Market Committee added to investor nervousness, particularly in light of Friday’s data revealing a 2.7% rise in U.S. inflation over the previous 12 months, surpassing the Fed’s 2% target.

This heightened inflationary pressure reduced the likelihood of imminent interest rate cuts, which are typically seen as stimulative for economic growth and oil demand.

Independent market analysts highlighted the role of the strengthening U.S. dollar in exacerbating the downward pressure on oil prices, as higher interest rates tend to attract capital flows and bolster the dollar’s value, making oil more expensive for holders of other currencies.

Moreover, concerns about weakening demand surfaced with China’s industrial profit growth slowing down in March, as reported by official data. This trend signaled potential challenges for oil consumption in the world’s second-largest economy.

However, amidst the current market dynamics, optimism persists regarding potential upside in oil prices. Analysts noted that improvements in U.S. inventory data and China’s Purchasing Managers’ Index (PMI) could reverse the downward trend.

Also, previous gains in oil prices, fueled by concerns about supply disruptions in the Middle East, indicate the market’s sensitivity to geopolitical developments in the region.

Despite these fluctuations, the market appeared to brush aside potential disruptions to supply resulting from Ukrainian drone strikes on Russian oil refineries over the weekend. The attack temporarily halted operations at the Slavyansk refinery in Russia’s Krasnodar region, according to a plant executive.

As oil markets navigate through geopolitical tensions and economic indicators, the outcome of ongoing negotiations and future data releases will likely shape the trajectory of oil prices in the coming days.

Continue Reading

Commodities

Cocoa Fever Sweeps Market: Prices Set to Break $15,000 per Ton Barrier

Published

on

Cocoa

The cocoa market is experiencing an unprecedented surge with prices poised to shatter the $15,000 per ton barrier.

The cocoa industry, already reeling from supply shortages and production declines in key regions, is now facing a frenzy of speculative trading and bullish forecasts.

At the recent World Cocoa Conference in Brussels, nine traders and analysts surveyed by Bloomberg expressed unanimous confidence in the continuation of the cocoa rally.

According to their predictions, New York futures could trade above $15,000 a ton before the year’s end, marking yet another milestone in the relentless ascent of cocoa prices.

The surge in cocoa prices has been fueled by a perfect storm of factors, including production declines in Ivory Coast and Ghana, the world’s largest cocoa producers.

Shortages of cocoa beans have left buyers scrambling for supplies and willing to pay exorbitant premiums, exacerbating the market tightness.

To cope with the supply crunch, Ivory Coast and Ghana have resorted to rolling over contracts totaling around 400,000 tons of cocoa, further exacerbating the scarcity.

Traders are increasingly turning to cocoa stocks held in exchanges in London and New York, despite concerns about their quality, as the shortage of high-quality beans intensifies.

Northon Coimbrao, director of sourcing at chocolatier Natra, noted that quality considerations have taken a backseat for most processors amid the supply crunch, leading them to accept cocoa from exchanges despite its perceived inferiority.

This shift in dynamics is expected to further deplete stocks and provide additional support to cocoa prices.

The cocoa rally has already seen prices surge by about 160% this year, nearing the $12,000 per ton mark in New York.

This meteoric rise has put significant pressure on traders and chocolate makers, who are grappling with rising margin calls and higher bean prices in the physical market.

Despite the challenges posed by soaring cocoa prices, stakeholders across the value chain have demonstrated a willingness to absorb the cost increases.

Jutta Urpilainen, European Commissioner for International Partnerships, noted that the market has been able to pass on price increases from chocolate makers to consumers, highlighting the resilience of the cocoa industry.

However, concerns linger about the eventual impact of the price surge on consumers, with some chocolate makers still covered for supplies.

According to Steve Wateridge, head of research at Tropical Research Services, the full effects of the price increase may take six months to a year to materialize, posing a potential future challenge for consumers.

As the cocoa market continues to navigate uncharted territory all eyes remain on the unfolding developments, with traders, analysts, and industry stakeholders bracing for further volatility and potential record-breaking price levels in the days ahead.

Continue Reading
Advertisement




Advertisement
Advertisement
Advertisement

Trending