Will the Bank of Canada follow the RBA route and raise interest rates?

European markets managed to end yesterday's session on a positive note despite some disappointing economic data and an unexpected interest rate hike in Australia, which may be the first in a series of rate hikes by other central banks in the coming days.

Short-term growth US bond yields, seems to suggest that markets are not only pricing in further rate hikes, but that could change if economic data continues to disappoint, as it has in some cases.

A revival in China on fumes

While the easing of Covid restrictions late last year resulted in a solid rebound in economic activity, this surge in economic activity has run into some problems over the last two months.

Chinese trade showed signs of a recovery in economic activity in March, with exports growing strongly by 14,8%, while imports also improved, albeit still negative. This rebound in economic activity is already slowing down.

There was no improvement in April's import figures as they worsened with a sharp drop of -7,9%, although some of this may be due to lower prices in some areas rather than lower volumes. Export growth slowed to 8,5% in April, while the latest manufacturing and services PMI data also pointed to an economy showing signs of a slowdown in economic activity.

Along with growing concerns about a slowdown in the Chinese economy, today's foreign trade data for May proved to be a big disappointment and reinforced these fears. Exports fell by 7,5%, the lowest level in a year. While imports were 4,5% lower compared to the previous year. The trade balance was $65,81 billion ($92 billion forecast).

While the import data was better than expected, the drop in exports to negative numbers for the first time in 3 months is a real cause for concern, suggesting that while domestic demand is starting to pick up, global demand is starting to weaken.

What will the Bank of Canada do?

After yesterday's surprise by Rebuildables markets another interest rate hike of 25 basis points, today is the turn Bank of Canada, which signaled in April that it would keep interest rates unchanged at 4,5% as policymakers pondered what impact recent interest rate hikes had had on the Canadian economy.

Since then, the Canadian economy has shown that it is holding up well, while inflation appears to be picking up again. April's CPI increased to 4,4% yoy, while core prices also strengthened. With a stable situation on the labor market, after positive employment reports in March and April and a drop in the unemployment rate to 5% and wages to 5,2%, the prospect of another interest rate hike remains high.

The Bank of Canada (BoC) is expected to announce its next monetary policy decision today at 16:00 p.m. PT.

The Bank of Canada kept rates unchanged at the two previous meetings and admittedly did not directly say that the cycle of rate hikes was over, but the lack of action in recent months indicated that this is the end of the tightening cycle

The interest rate market gives as much as 48% chance of a 25 basis point rate hike at today's meeting.