Stocks drop as hot data drives rate hike bets, US data impresses, BOC tightens as expected

US stocks turned negative as expectations grew that the Fed won’t be easing up on its rate-hiking campaign after both solid US economic data and aggressive rate hiking talk by the Bank of Canada. The US economy is still looking pretty good and that means the Fed may need to stick with the half-point rate hike pace beyond the summer. Everyone expects economic activity to soften over the next couple of months, especially since inflation risks remain elevated and now that the Fed has begun shrinking its USD 8.9 trillion dollar balance sheet.

The mood on Wall Street is turning very negative as the economy is headed for a rough patch. Comments from JPMorgan CEO Dimon that the economy is headed for a “hurricane” are also weighing on sentiment.

Russia technically defaulted and that triggered a massive payout on as much as USD 3.2 billion swaps.  The missed interest payment of USD 1.9 million in a late bond payment made this happen.  Eventually traders expected Russia to default, but this happened a lot sooner than anyone expected.  ​

Last week’s stock market rebound appears to be in jeopardy since the Fed might not get any justification for a couple more months to become more conservative with the tightening of policy.

US data

The ISM manufacturing report and job openings data suggest the economy is cooling but still fairly strong.  The ISM report showed manufacturing activity remained robust in May.  The headline manufacturing gauge printed at 56.1, higher than both the consensus estimate of 54.5 and the April reading of 55.4.  New orders, backlog of orders and production all rose, while prices paid and employment declined.

The JOLTS report reminded traders that despite all the fears of economic weakness, the labor market is still strong.  Job openings posted a smaller-than-expected decline as job openings in the service sector surpassed positions available in the goods-producing sector. If the labor market remains robust, inflationary pressures won’t ease quickly at all.

BOC hikes by 50-bps

This was an easy rate decision for the Bank of Canada.  The battle against inflation is heating up and the BOC seems positioned to deliver more super-sized rate hikes in the coming months.  The decision to raise its key interest rate by 50 basis points to 1.50% was widely expected given the last meeting saw the largest increase in 22 years.

The Bank warned that it could be more forceful if needed and that comment alone sent global bond yields higher.  ​

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