Markets range bound ahead of key central bank updates

OVERNIGHT

Asian equity markets are mixed this morning. Japanese indices are down sharply and China is close to unchanged but some other markets have posted decent gains. Chinese May trade numbers showed a combination of much weaker than expected export growth but stronger than forecast imports. Australian GDP rose by only 0.2% in Q1, its smallest rise since Q3 2021. German April industrial production posted only in a modest rise of 0.3% but March was revised up sharply although it still shows a drop of 2.1%. In the UK, the Halifax May house price index fell 1% from a year ago its first annual decline since 2012.

THE DAY AHEAD

The rest of today’s data calendar is light with nothing of note in the UK. In the Eurozone, May Italian retail sales will provide an update on consumer activity in one of the larger economies in the region but it is unlikely to have much impact on interest rate expectations.

In the US, already released data for trade in goods suggests that the overall trade deficit will have widened significantly in April. The advanced numbers showed goods imports up by 1.8% on the month, while goods exports fell by 5.5%. These outcomes are an early indication that international trade is unlikely to provide a boost to Q2 GDP growth.

The Bank of Canada is set to provide a monetary policy update today. Interest rates have been left unchanged at 4.50% since January, having been raised by 425 basis points over the previous eight meetings. The consensus expectation is that rates will stay at 4.50% today. However, a sizeable minority of economists are predicting a hike in response to stickier than expected inflation, stronger than forecast economic growth and a resilient labour market. 

The Australian central bank has already raised interest rates this week after ‘pausing’ earlier this year. A hike today from the BoC would be a further warning to markets that, even if the US Federal Reserve as is expected leaves interest rates unchanged next week, that does not necessarily mean that rates have peaked.

Early Thursday the RICS house price balance will provide another indication of the state of the UK housing market ahead of the Bank of England’s interest rate review. Also, Japanese Q1 GDP growth is expected to be revised up modestly.

MARKETS

Bond yields in the Eurozone, the UK and the US were little changed yesterday as markets wait for the key central bank updates scheduled for the next two weeks. In currency markets, sterling was down modestly against the US dollar but moved higher against a generally weaker euro.