On Wednesday, the Bank of Canada is widely expected to raise rates again before signalling an end to its yearlong hiking campaign.  

Most analysts said the bank will announce a 25-basis point increase to its overnight rate, elevating it to 4.5%, the highest level in over a decade. There are outlying bets that the bank will keep rates at current levels.   

Economists at TD Securities wrote, “The December announcement strongly implied that we were close to the end of the tightening cycle. Specifically, the statement said that the ‘Governing Council will be considering whether the policy interest rate needs to rise further’ (emphasis ours), whereas previous communiqués declared that the Council expects that rates ‘will need to rise further’.” 

Despite this widely held view, mixed data leaves the door open for BoC Governor Tiff Macklem to tighten rates beyond January. (LiveSquawk - Continue Reading)

The Federal Reserve’s quantitative-tightening program risks being propelled toward an early end as US politicians bicker in Washington over raising the national debt limit, according to some economists and bond-market participants.

By shrinking its bond portfolio by up to $95 billion a month, the central bank is draining liquidity from the US financial system — complementing its interest-rate hikes in the battle to control inflation. An early end to QT could therefore provide the US economy with some relief.

Through a complex series of reactions, constraints imposed on the Treasury Department by the debt limit could end up amplifying some of the impact of QT later this year. (Bloomberg - Continue Reading)

With the Federal Reserve’s Feb. 1 interest-rate decision a week away, traders in the options market are contemplating a scenario in which the rate hike it’s expected to deliver ends up being the last one of the tightening cycle.

Ahead of next week’s policy meeting, activity in options tied to the Secured Overnight Financing Rate has mostly been geared toward hedging against dovish outcomes, as well as outright bets that stand to benefit if investors scale back expectations for additional Fed tightening in coming months. Already, about half a percentage point of rate cuts are priced in for the second half of the year. 

The swaps market has over the last week been steadily pricing around 48 basis points of rate hikes over the next two policy meetings. That implies a small chance — approximately 8% — that if the Federal Reserve raises its benchmark rate by a quarter point next week, it could be the central bank’s final move in a tightening cycle that has marked the most aggressive action against inflation in several decades. (Bloomberg - Continue Reading)

The U.S. economy got off to a weak start in 2023. Business conditions contracted again in January as demand for goods and services fell for the fourth month in a row, S&P surveys showed.

The S&P Global “flash” U.S. services sector index rose to a three-month high of 46.6 from 44.7 in December. The service side of the economy employs most Americans.

The S&P Global U.S. manufacturing sector index, meanwhile, edged up to 46.7 from a 31-month low of 46.2 at the end of last year.

Any number below 50 suggests a contracting economy, however.

The S&P surveys are among the first indicators in each month to assess the health of the economy. (MarketWatch - Continue Reading)