The Bank of Canada announced a 50 basis point rate cut to 3.75% on October 23, in line with market expectations, marking the largest rate reduction since the onset of the COVID-19 pandemic in March 2020.

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Bank of Canada Governor Tiff Macklem stated that price pressures are no longer broad-based, and the central bank’s focus is now on maintaining stability. While consumer and business investment spending has picked up, overall economic activity remains weak. Though this may help ease price pressures, with inflation now within the target range, the bank is keen to see stronger economic growth moving forward.

Tiff  Macklem further noted that if the economy performs as expected, the Bank of Canada will continue to lower rates to keep inflation on target and support demand. However, the timing and pace of future rate cuts will depend on incomming information, and adjustments will be made incrementally.

Looking ahead, the central bank forecasts that economic growth will gradually recover to around 2% by 2025, with further growth to approximately 2.5% in 2026. This is primarily driven by stronger consumer and business investment in a lower interest rate environment. The Bank of Canada also expects residential investment to rebound as housing demand increases, while exports should rise on the back of robust U.S. demand.

On inflation, the central bank anticipates some fluctuations in the coming months but expects it to remain within the target range as upward pressures on housing and service prices ease. However, if consumer and business spending grows more slowly than expected, inflation may still face some downside risks.

(Source: Bank of Canada, TrendForce)

Last week, following TSMC’s release of better-than-expected third-quarter earnings, the U.S. S&P 500 index hit a new record high. In the bond market, U.S. Treasury yields remained largely unchanged, with the 10-year minus 2-year yield spread holding at 13 bps. Meanwhile, the U.S. dollar index continued to rise to around 103, reflecting the weakened economic outlook in Europe, which has led the European Central Bank (ECB) to adopt a more accommodative stance.

Key Economic Data Review for Last Week:

U.S. Retail Sales (September): Retail sales in September grew by 0.4% month-over-month (previous: 0.1%), surpassing the market expectation of 0.3%. Core retail sales increased by 0.7% (previous: 0.3%). Overall, U.S. consumer spending remains robust. According to a Federal Reserve survey, the current growth in retail sales is likely driven by higher-income groups, whose asset prices have risen significantly due to the wealth effect during the pandemic, making their consumption more resilient.

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Eurozone Interest Rate Decision: As expected, the ECB cut interest rates by 25 bps, bringing the deposit facility rate, the main refinancing rate, and the marginal lending facility rate down to 3.25%, 3.40%, and 3.65%, respectively. The ECB indicated that inflation is expected to rise in the coming months before falling back to the target range next year. Recent data, however, shows that economic growth has been weaker than anticipated, particularly in the manufacturing sector and exports. Although easing policy restrictions and rising real wages may boost economic growth, overall risks to growth remain tilted to the downside.

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China’s Monthly Data & GDP (10/18): China’s September economic data showed initial signs of improvement. Retail sales grew by 3.2% year-over-year (previous: 2.1%), exceeding the market expectation of 2.5%. Industrial output grew by 5.4% year-over-year (previous: 4.1%), also beating the market expectation of 4.6%. However, third-quarter GDP grew by 4.6% year-over-year (previous: 4.7%), with cumulative GDP growth for the first three quarters at 4.8%, still below the full-year target of 5.0%.

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Key Economic Data Review for This Week:

China LPR (10/21): In mid-September, the People’s Bank of China (PBoC) implemented a series of large-scale monetary easing policies, including interest rate cuts, reserve requirement ratio (RRR) reductions, and housing loan rate cuts. At the end of September, the PBoC also lowered the 7-day reverse repo rate by 0.2% to 1.5%. The market expects that the 7-day reverse repo rate will guide the 1-year and 5-year Loan Prime Rates (LPR) down by 25 bps to 3.1% and 3.6%, respectively.

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Canada Interest Rate Decision (10/23): In its September monetary policy decision, the Bank of Canada cut interest rates by 25 bps to 4.25%. With inflation and growth risks in Canada continuing to rise, the market expects the central bank to implement its fourth consecutive rate cut this month, with the possibility of a larger 50 bps cut this time.

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According to a Bloomberg report on September 12, the Chinese government is encouraging local carmakers to export knock-down kits to their overseas factories, where key car components are produced in China and then shipped to the destination markets for final assembly. This strategy aims to avoid punitive tariffs on Chinese cars, while ensuring that advanced EV technologies remain within China.

In recent months, Chinese electric vehicles have faced tariff barriers in Europe and the U.S. On May 14, the White House announced an increase in tariffs on Chinese EV imports to 100%. The European Union imposed additional tariffs on pure electric vehicles from China starting July 4. On August 26, per a report from Reuters, Canada also announced a 100% tariff on Chinese electric vehicles.

To avoid these tariffs, Chinese car manufacturers are setting up production facilities abroad. For instance, BYD signed a USD 1 billion investment agreement with the Turkish government on July 8 to build a factory in Turkey with an annual production capacity of 150,000 electric vehicles, expected to start operations by the end of 2026.

Reportedly, it’s hinted that the new factory may facilitate BYD’s entry into the European market, given Turkey’s customs union agreement with the EU. Turkey also imposed a 40% tariff on Chinese cars in June. Regarding this matter, BYD declined to comment.

The report from Bloomberg also claims that, in July, China’s Ministry of Commerce held a meeting with several car manufacturers.

During this meeting, the Ministry suggested keeping key EV technologies within China and instructed that car manufacturers should avoid making any automotive-related investments in India.

Additionally, companies planning to invest in Turkey were advised to notify both the Ministry of Industry and Information Technology, which oversees China’s EV industry, and the Chinese embassy in Turkey.

The Ministry of Commerce indicated that countries inviting Chinese car manufacturers to set up factories are typically those considering or implementing trade barriers against Chinese vehicles. Officials reportedly advised attendees not to blindly follow trends or trust investment offers from foreign governments.

The Ministry’s guidance to keep critical production within China may hinder the global expansion efforts of these manufacturers, who are seeking new customers to offset intense competition and sluggish domestic sales, factors that are impacting their profitability.

This measure could also affect European countries that have been courting Chinese manufacturers, hoping to attract job opportunities and boost their local economies.

Read more

• [News] EU Plans to Cut Tariffs on China-Made Tesla EVs from 20% to 9%, with Final Decision Expected in October
• [News] Punitive Tariffs on Chinese EVs by US Reportedly to Further Hinder BYD, Leapmotor and Others’ Global Expansion Plan, while EU Investigation Persists

(Photo credit: BYD)

Last week, a series of U.S. employment data fueled concerns about a potential economic recession, causing the S&P 500 to drop 4.2%, marking its worst weekly performance since January 2022. U.S. 2-year and 10-year Treasury yields fell, reflecting market expectations of a more aggressive rate cut path for the rest of the year, with the 10-year/2-year Treasury yield spread turning positive. The U.S. dollar index also declined as expectations for more significant Federal Reserve rate cuts rose. Below is a recap of key economic data from last week:

• United States ISM PMI: The U.S. Manufacturing PMI for August came in at 47.2 (previous 46.8), remaining in contraction territory for the fifth consecutive month. This continued to reflect the restrictive monetary policy and uncertainties around the U.S. election, dampening corporate investment sentiment. Meanwhile, the U.S. Services PMI for August was 51.5 (previous 51.4), marking two consecutive months of expansion, with all sub-indices in expansionary territory.

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• United States Employment Report: The U.S. unemployment rate for August was 4.2% (previous 4.3%), in line with market expectations. Nonfarm payrolls increased by 142,000 (previous 89,000), falling short of market expectations of 164,000. Additionally, nonfarm payrolls for June and July were revised downward, signaling further cooling in the U.S. labor market.

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• Canada Monetary Policy: On September 4, the Bank of Canada (BoC) announced a 25 basis point rate cut, marking the third consecutive rate cut since June. Although inflation has returned to the target range, the BoC has begun to express concerns about the risk of deflation due to economic weakness. As a result, markets now expect that if the Canadian economy continues to deteriorate, the BoC may adopt a more aggressive rate-cutting approach.

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Key Data to Watch This Week

• China CPI (September 9): China’s July CPI rose 0.5% year-on-year (previous 0.2%), driven primarily by food prices due to extreme weather. Excluding food and energy, core CPI was 0.4% (previous 0.6%). The market expects August CPI to rise to 0.7%, supported by seasonal demand during the summer and government policies promoting service consumption.

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• United States CPI (September 11): U.S. CPI for July increased 2.9% year-on-year (previous 3.0%), while core CPI, excluding food and energy, rose 3.2% (previous 3.3%), both in line with market expectations and marking the lowest growth since April 2021. According to the Cleveland Fed’s CPI forecast, August CPI is expected to fall to 2.56%, with core CPI projected to ease to 3.21%.

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• Eurozone Monetary Policy (September 12): The ECB left rates unchanged during its July meeting, mainly due to rising wages, which kept services inflation elevated. However, recent data now supports a rate cut, with August’s harmonised index of consumer prices (HICP) falling to 2.2% year-on-year (previous 2.6%). Additionally, adjusted wage growth, which has been a key driver of inflation, dropped to 3.5% in the second quarter (previous 4.7%). As a result, markets widely expect the ECB to cut rates again in September.

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The Bank of Canada (BoC) announced a 25 basis point rate cut on September 4, in line with market expectations, marking the BoC’s third consecutive rate cut since June. The BoC noted that CPI growth across its components has returned to historical range, with core inflation  nearing the target range. Although housing and service inflation remains elevated, it has begun to slow down, and there are currently few signs of significant inflationary pressure in Canada.

The BoC is now placing greater emphasis on signs of economic weakness. Recent data indicate that economic growth is slowing, and the unemployment rate has risen due to an increase in labor supply and a slowdown in hiring, which is easing inflationary pressures and introducing downside risks to inflation.

When asked about the pace of future rate cuts, BoC Governor Tiff Macklem stated that if inflationary pressure exceeds expectations, the central bank will maintain its current pace of rate cuts (25 basis points). However, if the economic condition worsens and inflation falls more rapidly, the BoC may accelerate the pace of rate cuts (50 basis points).

According to a report by Reuters, some economists predict that economic weakness could prompt the BoC to implement a 50 basis point rate cut in October or December.

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