How markets are traders are reacting to Canada’s latest
Markets immediately responded to today’s inflation report by sending the Canadian dollar higher, while Canadian bond yields spiked as traders scaled back bets on the odds of another interest rate cut in July.
According to LSEG data , swaps markets are putting 45 per cent odds now on a second rate cut by the Bank of Canada on July 24. They stood at 65 per cent prior to the 830 am ET inflation report. Some 50 basis points of additional easing is now priced into the market by the end of this year, which is modestly less than before this morning’s inflation data.
The loonie rose about two-tenths of a cent, to 73.29 cents US, while both the two year and five year bond yields jumped 10 basis points. While those are quite large daily moves in the bond market, they only bring those yields back to where they were earlier this month, with the five year now at 3.464 per cent.
This is a large enough move in bond yields to likely put pressure on interest rate sensitive stocks when equities open at 930 am ET in Canada. Here’s how implied probabilities of future interest rate moves stand in swaps markets, according to data from LSEG as of 846 am ET. The Bank of Canada overnight rate is 4.75 per cent. While the bank moves in quarter point increments, credit market implied rates fluctuate more fluidly and are constantly changing. Columns to the right are percentage probabilities of future rate moves.
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