Introduction
Welcome to this week’s market pulse. As always, we stay on top of everything that’s happened in financial markets, so that you don’t have to. Attentively reading this issue will allow you to start the next trading week a step ahead of your peers, filled in on everything you need to know. Despite summer, there’s still been plenty happening in financial markets so let’s get into it.
Global Macro
Bank of Canada Rate Statement
This week’s sole central bank to have an interest rate meeting was the BoC, as the bank followed consensus and held rates steady at 2.25%. Moreover, the bank is expected to keep rates at this level for the following year as growth outlooks improve, while inflation, excluding energy prices, seems to be reaching target levels.
Canadian Inflation Data since 2016
American Inflation
The Core Consumer Price Index (CPI) provided a big surprise this week in the right direction. Against a consensus of 2.8%, the measure came in at 2.6%, while the headline number came in at 3.5% year-over-year. It’s hard to see at first why this would be good news, as headline inflation is now even further from the 2% target than before.
Month-over-month headline CPI
Because of this, markets are now much more certain that the Fed will hold rates at its July meeting, coming up on July 29th. Just last week, the hawkish comments along with a deteriorating picture put odds at 65% for a rate hold and 35% for a 25bps rate hike.
Right now, due to the effects of the better-than-expected CPI, those odds are 90/10 in favour for a rate hike.
Equities
Stocks have been hit by a classical case of summer seasonality, confirming the “Sell in May and go away” cliché that has been repeated for so many years as indices are residing below their May highs. However, this certainly doesn’t mean that stocks cannot rally, as seasonality is just a pattern, not a guarantee.
S&P 500 on the Daily Timeframe
Stocks in general have been dealing with some headwinds the last two weeks, as the Middle East conflict resumed, and sentiment has gotten tired of all the AI hype, leading to some profit taking and rotation into less loftily valued stocks. Right now this is a range first and foremost, not necessarily a topping pattern.
Forex
With the BoC reporting this week, the Canadian Dollar deserves a deeper look. Following the rate announcement were a more dovish path became clear, the pair logically went down as the CAD weakened. Due to this move, it’s now sitting at a solid, but tight support range, consisting of old highs.
USD/CAD on the Daily Timeframe
Above current price, there’s a resistance range from 1.4117–1.4140 which is the pair’s first upside target. Beyond that initial hurdle, the next target becomes the current year’s high at 1.4248.
Commodities
Switching over to an often overlooked part of the market, wheat has just created a textbook perfect Swing Failure Pattern, as the pair swipes a clean prior swing high, and closes convincingly back below it.
Wheat on the Daily Timeframe
Not only that, but the pair also closes as a shooting star, a pattern that indicates buyers attempted to push price up, but got absorbed by sellers who aggressively pushed price back down, indicating that buyers are now trapped and eager to get out of their position, adding even more future selling pressure
Because of this candlestick pattern, we now have a couple of areas of interest. First off, the low of the shooting star itself, located at 669’4 as the primary zone of interest. As a last-chance for the pattern to play out, 682’6 is also a key level from where price still could very well react lower. If price were to regain this 682’6 and flip it into support, it would likely lead to pattern failure, in which case the high of the shooting star at 698’2 becomes the upside target.
Conclusion
One-sentence summary of the week:
CAD sells off on a dovish BoC, while cool CPI cements the Fed's rate-hold base case.