Bank of Canada Resumes Rate Rises; Recession in Eurozone; Breaking Up With Superlow Mortgage Rates Is Hard to Do

Bank of Canada Resumes Rate Rises; Recession in Eurozone; Breaking Up With Superlow Mortgage Rates Is Hard to Do By James Christie

Good day. The Bank of Canada ended a short-lived pause in interest-rate increases yesterday and lifted rates by a quarter-point on stronger-than-expected consumer spending and mounting worries that inflation could get stuck at elevated levels. Some economists believe the central bank isn't finished with rate increases and anticipate another quarter-point lift when senior officials deliberate next month. In Europe today, the EU's statistics agency said that the eurozone's economy slipped into recession at the start of the year, as high energy and food prices following Russia's invasion of Ukraine hit household spending. Meanwhile, our Pro Take column this morning looks at one consequence of the Federal Reserve's interest-rate raising campaign: a mortgage-rate lock sidelining many potential home sellers who are enjoying 3% mortgages.

Now on to today's news and analysis.

Top News Bank of Canada Lifts Rates to 22-Year High, Ending Four-Month Pause

The Bank of Canada on Wednesday raised its target for the overnight rate to 4.75% from 4.50%, marking a 22-year high. In January, the Bank of Canada was the first major developed-world central bank to declare a timeout on rate increases-after an aggressive campaign that raised borrowing costs by 4.25 percentage points over a 10-month period-to assess the impact of sharply higher rates on the economy. The belief among central bank officials was that economic activity and inflation would decelerate through 2023.

The economic data have said otherwise , forcing Canada's central bank and its global peers to rethink how high interest rates need to go to cool inflation. "Overall, excess demand in the economy looks to be more persistent than anticipated," the central bank said explaining its decision.

S&P 500's Climb Toward Bull Market Thwarted by Canada Rate Move Canada's Rate Rise Could Spread Like Wildfire to the Fed (Barron's) Inflation Drags Eurozone Economy Into Recession

The EU's statistics agency said the combined GDP of the countries that share the euro fell at an annualized rate of 0.4% during the three months through March, having also declined in the final three months of last year.

Pro Take: Homeowners Don't Want to Give Up Low Mortgage Rates, Squeezing Inventory By Bob Fernandez

Millions of homeowners refinanced mortgages during the pandemic, locking in superlow mortgage rates. That wave of refinancing is now gnarling the Federal Reserve's inflation fight by squeezing inventory and propping up the prices of homes for sale.

Mortgage rates have more than doubled since early 2022, when the Fed started raising interest rates to tackle inflation, and homeowners today don't want to relinquish their 3% mortgages, or can't afford to. That means they are staying put in current homes instead of considering a sale, and inventory has plummeted. Read more .

U.S. Economy China's Share of U.S. Goods Imports Falls to Lowest Since 2006

Americans imported more goods from abroad in April and were less reliant on products from China, another sign of strong U.S. economic momentum, with the share of goods shipments from China at its lowest level since 2006 .

U.S. Struggles to Turn Steel Imports 'Green' With Tariffs

As a candidate, President Biden promised U.S. steelworkers he would levy tariffs on steel imported from countries that fail to meet climate obligations. That is proving to be easier said than done.

Key Developments Around the World Brazil Is Key to Slowing Warming. Its Carbon Market Has Struggled.

With Brazil struggling in its efforts to create a regulated carbon market , the country's new president is moving to scrap his predecessor's approach and start anew. But success is still far from guaranteed.

India's RBI Holds Policy Rate Steady as Inflation Moderates

India's central bank maintained its policy rate on Thursday as domestic inflation has moderated. Reserve Bank of India Gov. Shaktikanta Das said the monetary-policy committee unanimously decided to maintain its policy repo rate at 6.50%.

Financial Regulation Roundup SEC's Gensler Had Crypto in His Sights for Years

The Securities and Exchange Commission is unleashing a barrage of enforcement actions against crypto's biggest middlemen, in a fight that has existential stakes for the companies and could define Chairman Gary Gensler's legacy .

Who Is Brian Armstrong? Coinbase CEO Is Taking On the SEC

Brian Armstrong is on a collision course with regulators. Depending on whom you ask, his approach represents a bold stance that will change history or reckless posturing by a Silicon Valley crypto bro overdue for a smackdown.

https://urldefense.com/v3/__http://Binance.US__;!!F0Stn7g!E4FcFpko7TXj6IKkyNYyH81AfGiuZeO-HElW_nOxD7cJNIyY17_sKDPJ50E40oklGt1og6-sxfdh3Qz1nAPSGlau9LC4_LGuX86MNJn6$ Was Deeply Unprofitable in 2022, Documents Show

The U.S. arm of Binance lost $181 million last year , according to documents filed Wednesday by the Securities and Exchange Commission, which sued the world's largest crypto exchange and its founder on Monday.

How the Binance CEO Operates: Weigh the Risk, Calculate the Reward

Companies on Defensive as EU Rolls Out Class-Action Lawsuits

Class-action lawsuits are set to roll out throughout the European Union this month as the bloc requires each of its members to make it easier for consumer groups to bring actions targeting alleged corporate wrongdoing .

Forward Guidance Thursday (all times ET)

8:30 a.m.: U.S. weekly jobless claims

3:25 p.m.: Speech by Bank of Canada's Beaudry to Greater Victoria Chamber of Commerce

Friday

8:30 a.m.: Canada labor force survey for May

Research ECB's Inflation Forecasts to Give Signal on Peak Policy Rates

Further convergence of the European Central Bank's staff inflation forecasts to the 2% inflation target would signal that the peak in key interest rates has almost been reached, Elmar Voelker, senior fixed income analyst at Landesbank Baden-Wuerttemberg, writes in a note. The ECB's inflation projections for 2024 and 2025 in particular have an impact on monetary policy, he says. For the eurozone government bond market, this would prepare the ground for higher bond prices after moderate weakness in recent days, he adds. Bond yields move inversely to prices. The ECB's next monetary policy meeting is scheduled for June 15, with quarterly staff forecasts to be released.

-Emese Bartha

One-Third of U.S. Home Buyers Paying in Cash

One-third of home purchases in the U.S. in April were made in cash, up from 30.7% a year earlier, and the highest share in nine years, according to an analysis by Redfin. All-cash purchases are making up a bigger portion of the home buying pie for one major reason: higher mortgage rates are deterring home buyers who take out mortgages more than they are deterring all-cash buyers. Overall home sales fell 41% from a year earlier in April in metro areas included in Redfin's analysis, which comprised 40 of the most populous U.S. metros. That compared with a 35% decline for all-cash sales. Mortgage rates are near their highest level in 15 years, sidelining many would-be home buyers, especially those who need to take out a mortgage. Competition among home buyers is a smaller but still noteworthy reason for the uptick in all-cash sales.

-Chris Wack

Commentary Sequoia Faces Up to the New U.S.-China Reality

The breakup of venture capital giant Sequoia Capital signifies the end of an era , one in which investors and tech entrepreneurs in the world's two largest economies embraced each other for mutual benefit, Jacky Wong writes.

Basis Points Treasury Secretary Janet Yellen warned on Wednesday about the potential for banks to feel strain from their exposure to weakening commercial real-estate valuations. (MarketWatch) Total consumer credit rose $23 billion in April, up from a revised $22.8 billion gain in the prior month, the Federal Reserve said Wednesday. That translates into a 5.71% annual rate, up from a revised 5.69% gain in the prior month. It is the fastest pace of credit growth since November. (MarketWatch) Canada's goods-trade surplus with the rest of the world widened in April as a rebound in crude oil exports, shipments of motor vehicles and increased exports of gold to the U.S. outweighed a dip in imports. Canada posted a merchandise-trade surplus of 1.94 billion Canadian dollars, the equivalent of about $1.45 billion, and March's surplus was revised down by C$741 million to C$231 million, Statistics Canada said. (Dow Jones Newswires) Japan's economy expanded at a faster pace than initially estimated in the January-March quarter thanks to stronger spending by companies, revised government data showed Thursday. (DJN) Car sales in China, the world's biggest auto market, continued to recover in May, as rollouts of new models and discounts offered by dealers and local authorities boosted purchases. (DJN) The Turkish lira tumbled to a record low after Turkey's new cabinet signaled an attempt to stabilize the country's troubled economy, including scaling back an expensive effort to defend the local currency. Feedback Loop

This newsletter is compiled by James Christie in San Francisco.

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06-08-23 0715ET