Bank of Canada Leaves Rates Unchanged

Yesterday, the Bank of Canada met market expectations by leaving rates unchanged at 4.5%.

This marks the first major central bank in the West to cease further monetary tightening, as Ottawa cited inflation falling in line with expectation as a key influence behind the decision. In January, inflation eased to 5.9%, down from a peak of 8.1% though remains well above their target rate. Given concerns over growth and Canada’s house price inflation, the central bank have been concerned about an overly restrictive monetary policy given its implication on mortgages and economic activity.

Canada is expected to register 1.5% growth over 2023 according to the IMF, though given the country’s vast commodities sector, any growth will be heavily contingent on global demand – not least from China whose growth this year is the subject of considerable debate. Nevertheless, unlike the UK, Canada’s relative energy independence will also help alleviate any spike in wholesale energy prices, helping to shield against inflationary pressures for households and businesses. Furthermore, despite the BoC’s monetary tightening, Canada’s labour market remains resilient with mid-February data indicating that the net change in employment surged to 150,000 against market expectations of 15,000, demonstrating how easing inflation is not coming as a result of a slowdown in the labour market.

USDCAD rose some 0.3% on the announcement, as investors also factor in Powell’s hawkish comments earlier in the week. Here, Powell stated that “if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.” Therefore, given that these comments follow the Fed conducting a less aggressive 25bpt rate hike in February, markets weighed on the prospect of the central bank’s proclivity to opt for a more aggressive 50bpt hike at the FOMC later this month – as they did in May and December of 2022 (which came alongside 75bpt hikes in June, July, September and November).

Supermarket Shortages

This week, Henry Dimbleby has said that the UK’s “weird supermarket culture” has exacerbated shortages of fruit and vegetables in recent weeks. The co-founder of Leon Restaurants and the Sustainable Restaurant Association chiefly cited problems with fixed price contracts between suppliers and retails which lead some produces to favour selling produce elsewhere when there is a lack of supply as a leading cause of shortages. Dimbleby wrote “If there’s bad weather across Europe, because there’s a scarcity, supermarkets put their prices up – but not in the UK. And therefore, at the margin, the suppliers will supply to France, Germany, Ukraine,”

Recently a whole host of supermarkets have announced to limit the amount of certain fruit and vegetable items a poor weather on the continent and North Africa causes supply issues. Hardest hit has been tomatoes, peppers and cucumber. This comes as the food and farming minister, Mark Spencer has continued to host meetings with the chiefs of UK supermarkets to discuss the latest issues.

According to wholesalers, importers and retailers that spoke with the BBC “the picture is nuanced, with the UK facing specific issues. For instance, it has lower domestic production and more complex supply chains.” Some groups have also expressed how rising energy prices have exacerbated costs to farmers, as well as labour shortages in the industry.

This morning has seen the latest inflation data from China indicate that it fell to 1% on an annualised basis – well below forecasts of 1.9%. This marked the slowest inflation since February 2022, and is indicative of easing energy prices. Given that China is the world’s largest importer of crude oil, the easing of prices has helped alleviate inflationary pressures. Nevertheless, core prices which excludes food and energy, increased 0.6% on an annualised basis, after a rise of 1% on the last print. As we looked at earlier in the week, the CCP are setting a modest 5% target for growth over the course of 2023. This comes after a difficult year for China as far as growth is concerned with Beijing recording that the Chinese economy expanded just 3% over 2022. The Chinese Premier Li Keqiang citied a host of domestic and international reasons why growth will likely continue to be under pressure this year, not least covid, the implications of Evergrande’s vast debt and souring Sino-US relations.

Equities Update

Yesterday saw further pressure on equities as investors continue to digest the prospect of a hawkish Fed which has seen the market upwardly revise a terminal rate of around 5.6%. Nevertheless, investors also considered Powell’s comments on the health of some of the data including the labour market and growth. As such the S&P 500 ended yesterday 0.14% marginally higher while the tech heavy Nasdaq also gained 0.4%. Elsewhere, the Dow Jones lost 0.18%, while the FTSE 100 also closed 0.27% lower.