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Bank of Canada cuts rates

The Bank of Canada (BoC) became the first Group of Seven central bank to cut its benchmark interest rate on Wednesday, just one day before the European Central Bank (ECB) is expected to do the same. Despite recent signs of economic weakness, business activity in the US was confirmed to be well in expansionary territory on Wednesday. Equities rallied with tech stocks leading the way.

Shane Strowmatt, LGT
Temps de lecture
5 minutes
Canadian flag
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The BoC lowered its benchmark overnight rate by 25 basis points to 4.75%, citing falling inflation, which came in at 2.7% in April, not far off its 2% target. The central bank said further cuts are likely to come if inflation continues to ease, but possible increases to housing prices and wage growth could derail those projections. The move was in line with market expectations. It follows similar monetary policy decisions by the Swiss National Bank in March and Sweden’s Riksbank in May and comes one day before the European Central Bank is expected to begin its rate cutting cycle. The Canadian dollar fell versus the US dollar and euro immediately following the announcement.

US PMIs defy recent weak data

US ISM Services Purchasing Managers’ Index (PMI) increased by 4.4 points to 53.8 in May, the highest monthly increase in nine months. The index is now back in expansionary territory above the level of 50. The S&P Global Composite PMI for May, which was also released on Wednesday, confirmed the relative strength of the US economy with a reading of 54.5, up 0.1 points from its flash estimate and higher than April’s 51.3 reading. Altogether, the PMI data suggests the US economy remains in better shape than some macroeconomic releases had recently suggested, such as a high level of job vacancies and a downward revision to first-quarter gross domestic product.

Nvidia tops market cap of USD 3 trillion

In New York, stocks struggled to start Wednesday but the narrative of earlier cuts by the Fed, set off by data showing a high level of US job vacancies the day before, took over later in the session. Wednesday’s ADP National Employment Report confirmed the cracks in the labour market, showing nonfarm private sector employment increasing by 152,000 jobs in May, down from April’s 188,000. May’s reading was below market expectations and marked the second month of declines. The government publishes labour market data on Friday.

Following the release of Wednesday’s soft data, the "bad news is good" narrative took over on Wall Street, driving microchip-related stocks in particular. Nvidia became the world’s second-most valuable company on Wednesday, gaining more than 5% before trading ended. It became the third company in the world after Microsoft and Apple to break a market capitalisation of USD 3 trillion. Other chip-related winners included ASML (+9.5%), AMD (+3.9%) and Qualcomm (+3.7%). The Nasdaq-100 closed with a gain of more than 2% while the Dow Jones Industrial was up 0.3% and the S&P 500 shot up 1.2%.

Positive sentiment spills over to Asia

Hopes of rate cuts by the ECB on Thursday and the weak US labour market data drove positive sentiment in the Asia-Pacific region on Thursday. In Tokyo, the Nikkei 225 was trading 0.8% higher. Shares of Japanese investment company SoftBank shot up more than 5% after major investor Elliott Management called for a share buyback programme. SoftBank shares closed up 4.6% on Wednesday. In Australia, the S&P/ASX 200 was also up 0.8% despite a 2.5% fall in exports on the year in April to the lowest level since 2021. The drop was mostly due to lower exports of metal ores and minerals, which are vital for the Australian economy. Chinese stocks were the only losers in the region with the Shanghai Composite falling 0.4% and Hong Kong's Hang Seng Index down 0.2%. Markets in South Korea were closed for a public holiday.

Corporate and macroeconomic calendars

Corporate news in focus: Netflix annual general meeting.

Economic data in focus: Swiss unemployment rate, German industrial orders, euro-area retail sales, European Central Bank interest rate decision, US weekly initial jobless claims.

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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi
Source: LGT Bank (Switzerland) Ltd.

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