The Bank of Canada became the next central bank to defy expectations by restarting its interest rate hiking cycle on Wednesday after Australia’s central bank surprised markets with a hike just a day earlier. Equity markets mostly traded lower as fears spread that the US Federal Reserve could also surprise with an interest rate hike next week.
The Bank of Canada raised its key interest rate by 25 basis points to 4.75%, the highest level since 2001. The central bank said sticky inflation was to blame for the hike. Investors had widely expected the central bank to keep rates steady after pausing in January. The Bank of Canada move comes just one day after Australia’s central bank similarly raised rates despite markets expecting no change. Canada’s benchmark equity index, the S&P/TSX Composite, finished the day down 0.36% after the announcement.
Weak economic data from the US also pressured stock markets with data released Wednesday showing the trade deficit grew in April due to both lower exports and increased imports. The trade deficit came in at 74.6 billion US dollars, up from 60.6 billion in March. Increased imports suggests strong demand from US consumers, which has been backed up other data showing strong consumer spending in recent months, despite higher interest rates and signs of weakening economic growth.
In New York, stocks were mostly under pressure on Wednesday with interest rate-sensitive tech stocks leading losses. The tech-heavy Nasdaq-100 fell 1.75% to 14,303.29 points. The Dow Jones Industrial, which has lagged other US indices this year, managed to pull off a 0.27% gain, finishing the session at 33,665.02 points. The S&P 500 lost 0.38%, closing at 4,267.52 points.
The negative sentiment from US markets spilled over to stock markets in the Asia-Pacific region on Thursday. In Japan, the Nikkei 225 continued to pull back from a multi-decade high reached earlier this week, falling 1.4% on Thursday despite a revised annualized gross domestic product figure for the first quarter of 2.7%, which largely beat market expectations. Hong Kong's Hang Seng Index fell .29% and markets in mainland China were likewise trading in negative territory. The Shanghai Composite was marginally lower, and the Shenzhen Component slipped 0.27%. South Korea’s Kospi lost 0.7%.
On Wednesday, the Organisation for Economic Co-operation and Development (OECD) followed the world bank’s move a day earlier and raised its global economic outlook for 2023 slightly. It now expects the global economy to expand by 2.7%, up from its last forecast of 2.6% growth published in March. Falling energy prices and China’s reopening are bolstering growth prospects, but stubborn inflation and high interest rates are keeping a lid on economic expansion.
In Switzerland, the unemployment rate dropped to 1.9% in May from 2.0% in April. Unemployment in the key groups aged 15-24 and 50-64 both fell during the month. The benchmark Swiss Market Index nevertheless lost 1.05% on Wednesday.
Corporate news in focus: No major corporate news scheduled today.
Economic data in focus: Euro-area gross domestic product (11:00 CET), weekly US initial job claims (14:30).
Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi
Source: LGT Bank (Switzerland) Ltd.