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[Quick Facts]

1. Bank of Canada unexpectedly raises interest rates due to the overheated economy.

2. Yellen: Inflation is easing as some sectors slow and the labor market remains strong.

3. The U.S. trade deficit widens to the largest in six months.

4. The market has fully digested the expectation of a July Fed rate hike.

5. U.S. natural gas futures prices have risen for a fourth straight session.

6. Bank of England faces huge pressure to raise rates as the U.K. inflation rate will top the developed countries this year.

[News Details]

Bank of Canada unexpectedly raises interest rates due to the overheated economy

The Bank of Canada went against market expectations and restarted interest rate tightening measures, saying the economy is too hot. The Bank of Canada has raised interest rates to 4.75%, the highest level since 2001. According to the bank's rate statement, the excessive demand in the economy overall appears to be more persistent than expected. The statement, however, was not accompanied by a new set of forecasts. Since the conditional pause in rate hikes was announced in January, policymakers have warned that further rate hikes may be necessary. While some Canadians are feeling the pinch of rising borrowing costs, the central bank's move suggests that officials are concerned that economic growth will not slow enough without another rate hike.

Bank of Canada Governor Tiff Macklem and other officials pointed to elevated three-month moving measures of underlying price pressures as a key reason for their move. There were no forward-looking comments in the statement, suggesting that policymakers were not yet sure whether the rate hike would ultimately be a tweak or the start of a new round of hikes.

Yellen: Inflation is easing as some sectors slow and the labor market remains strong

The U.S. economy is strong amid robust consumer spending but some areas are slowing down, U.S. Treasury Secretary Janet Yellen said on Wednesday. She expects continued progress in bringing inflation down over the next two years.

While banks may struggle with commercial real estate and face some consolidation, the financial system has ample liquidity, and, overall, banks should be able to withstand any stress.

Yellen also said that inflation can subside while maintaining a strong labor market, with unemployment in the 4% range.

The U.S. trade deficit widens to the largest in six months

The U.S. trade deficit widened in April to the largest in six months as imports rose and exports fell. The goods and services trade deficit widened 23% in April from a month earlier to $74.6 billion, compared with an estimated deficit of $75.8 billion, according to data released by the U.S. Department of Commerce on Wednesday. The data were not adjusted for inflation. Imports of goods and services rose 1.5% to $323.6 billion, while exports fell 3.6% to $249 billion. Imports of automobiles and parts, industrial supplies, cell phones, and other household goods increased, while exports of oil and jewelry decreased. The widening trade deficit means trade will be a drag on second-quarter GDP.

The market has fully digested the expectation of a July Fed rate hike

The U.S. Treasury bond market has fully priced in that the Federal Reserve will make its last rate hike in July 2023. The interest rate on swaps associated with the July meeting climbed to 5.33% on Wednesday, 25 basis points higher than the current effective federal funds rate of 5.08%.

The June swap shows 10 basis points left for tightening before next week's Fed meeting, suggesting most traders think the Fed will "pause to raise rates" in June. The December swap rate is about 25 basis points lower than July's, meaning the Fed will cut rates by 25 basis points by the end of the year.

Next week, all eyes will be on CPI data, and inflation is still well above the Fed's target. Therefore, they may choose to "pause interest rate hikes." But there is no doubt that it isn't a guarantee of not raising rates in the future.

U.S. natural gas futures prices have risen for a fourth straight session

U.S. natural gas futures prices have risen for a fourth straight session. Bulls appear to be returning to the natural gas market as they anticipate a hot summer and the hurricane weather will give support to natural gas demand. U.S. natural gas prices have fallen nearly 50% so far this year, but the U.S. Energy Information Administration (EIA) said in its monthly outlook report released yesterday that the natural gas market could rebound over the summer as production declines slightly, power plants begin using more natural gas, and consumers and businesses start using air conditioners. Lower natural gas prices are also leading power plants to use more natural gas and less coal.

Bank of England faces huge pressure to raise rates as the U.K. inflation rate will top the developed countries this year

According to the Organization for Economic Co-operation and Development (OECD), the U.K. inflation rate will top the developed countries this year, with its headline inflation rate projected at 6.9% in 2023, above the 6.6% average. In the latest OECD Economic Outlook, Only Argentina and Turkey are expected to have a higher headline rate than the U.K. this year. This underscores the pressure on the Bank of England, which raised interest rates by another 25 basis points in May, bringing the benchmark rate to 4.5%. At the time, the Bank recognized that inflation in the first quarter of the year was "higher than expected." mainly due to rising food prices.

There is growing evidence that price pressures are being generated within the U.K., which has risen interest rate expectations. The market expects that interest rates will rise further and peak at 5.25%, 75 basis points higher than the previously projected 4.50%. Interest rates will not start to fall until the second half of next year.

[Focus of the Day]

UTC+8 20:30 U.S. Initial Jobless Claims