This week, financial markets will be closely watching the Bank of Canada as it approaches a pivotal rate decision, with investors largely expecting a significant 50 basis point cut. Following recent softer inflation data, this decision could further widen the interest rate differential with the U.S. Federal Reserve, impacting the Canadian dollar. Alongside this, the global economic landscape is marked by mixed signals, with stronger-than-expected U.S. retail sales, subdued European growth, and inflation data from major economies shaping investor sentiment and central bank actions.

Last Week:

• Earnings Season Kicks Off: Last week saw a strong start to the earnings season, with many companies surpassing expectations and pushing U.S. equity indices to record highs. Meanwhile, China’s latest round of stimulus measures underwhelmed investors, and the European Central Bank (ECB) cut rates by 25 basis points (bps), contributing to a week filled with significant economic developments.

• UK CPI Inflation Falls: UK inflation, measured by the Consumer Price Index (CPI), fell to 1.7% year-over-year in September, its lowest in three years. This drop strengthened the likelihood of a 25 bps rate cut by the Bank of England in November, with an additional cut possible in December, as inflation trends below the bank’s 2% target.

• ECB Cuts Rates: The ECB implemented a 25 bps rate cut, the first back-to-back reduction in over a decade, amid weaker inflation and sluggish growth, especially in Germany. Markets are now anticipating another 50 bps cut by December, depending on further inflation data.

• U.S. Retail Sales Surprise: U.S. retail sales data outperformed expectations, increasing by 0.4% from August to September, pushing U.S. Treasury yields and the dollar higher. Despite this, the U.S. Federal Reserve is still expected to cut rates by 25 bps in its next meeting, following September’s 50 bps reduction.

Week Ahead (October 21-26, 2024)

Key Focus: Bank of Canada (BoC)

The Bank of Canada’s interest rate decision on Wednesday will be the central event this week. A 50 bps rate cut is widely expected, following softer inflation data in September, which saw CPI inflation fall to 1.6%. If the BoC follows through with this cut, it will mark the fourth consecutive reduction, bringing the overnight rate down to 3.75%.

• Employment Growth and Inflation: Despite strong job growth, with over 46,000 jobs added in September, the unemployment rate remains elevated at 6.5%, though largely due to increased immigration. Inflation remains subdued, with gasoline prices driving down overall CPI numbers.

• Growth Concerns: Canada’s GDP growth slowed to 0.2% in July, with August’s figures suggesting a stall. Economists predict that Q3 growth will fall short of the BoC’s forecast, which may further support the case for a 50 bps cut.

Investors will closely monitor the rate statement and the BoC’s updated economic projections. If the BoC opts for a smaller 25 bps cut instead, this could lead to a reversal in the short positioning of the Canadian dollar, potentially driving USD/CAD lower.

• Monday, October 21:

  • China’s Loan Prime Rate updates will be the highlight, with expectations of further cuts to stimulate the market.
  • The Federal Reserve’s Lorie Logan and Neel Kashkari will provide insights during their speeches later in the day.

• Tuesday, October 22:

  • PMI Data Releases for October will come from the Eurozone, UK, and U.S., providing early signals on the health of the manufacturing and services sectors.
  • BRICS Summit continues in Kazan, where key central bank figures, including the Bank of England’s Andrew Bailey and ECB’s Christine Lagarde, are expected to speak.

• Wednesday, October 23:

  • The Bank of Canada’s rate decision is scheduled for 1:45 PM GMT, followed by a press conference. The market is pricing in a 50 bps cut, but a smaller 25 bps cut could surprise traders.
  • Additional central bank commentary will come from Christine Lagarde and Andrew Bailey.

• Thursday, October 24:

  • U.S. Weekly Unemployment Claims will be released, with markets watching closely after last week’s decline to 241,000.
  • ECB Rate Decision is anticipated later in the day, with potential implications for the euro and broader markets.

• Friday, October 25:

  • Focus will shift to Japanese CPI data, while in Europe, Germany’s IFO Business Climate Index will provide insight into business sentiment.
  • North America will release significant data, including Canadian Retail Sales and U.S. Durable Goods Orders.