Everything You Need to Know on Monday: Hot U.S. Inflation Signal Throws Bank of Canada a Curveball

Good morning mooers! Here are things you need to know about today's market:

● S&P/TSX 60 Index Standard Futures are trading at 1,324.30, up 0.25%.

● Hot U.S. inflation signal throws Bank of Canada a curveball

● Crude oil prices stabilize after volatile first half-month as focus returns to fundamentals, Commerzbank says

● Policy that sealed Honda EV deal opens new chapter in industrial strategy

Today, the Canadian dollar is trading at 73.25 cents US, a slight increase from Friday.

The S&P/TSX 60 Index Standard Futures (SXF) are currently trading at 1,324.30, which is up 0.25% from the previous close.

The Bank of Canada‘s upcoming interest rates decision just got more complicated after United States economic data out this week showed growth slowed while inflation remained elevated.

U.S. gross domestic product came in at 1.6 per cent for the first quarter, missing Bloomberg estimates for GDP of 2.5, and slowing significantly from the 3.4 per cent annualized rate recorded in the last quarter of 2023. Meanwhile, the U.S. Federal Reserve’s preferred gauge of core inflation climbed 0.3 per cent in March and 2.8 per cent year over year, causing markets to push predictions for the central bank’s first interest rate cut out to December, with some now forecasting no cut at all in 2024.

The possibility of increased hawkishness south of the border poses a wrinkle for the Bank of Canada — which many expect will cut rates in June — due to worries that too wide a spread between interest rates here and in the U.S. could hurt the Canadian dollar. That in turn would make it more expensive to buy goods from the U.S., Canada’s largest trading partner, reigniting the inflation the Bank of Canada hoped to cool.

The price of Brent crude oil has stabilized slightly below US$90 per barrel as interest turned back to supply and demand fundamentals, Commerzbank said in a Friday note.

The oil market has calmed down after the sharp price fluctuations in the first half of the month as tensions between Israel and Iran have subsided and the geopolitical risk premium has abated, the bank noted.

On the supply side, investors are focused on OPEC+ oil production and will monitor Reuters and Bloomberg's publishing of surveys on OPEC output in April. These are expected to show if OPEC members complied with agreed production targets, Commerzbank said.

In the first quarter, compliance has been mixed with a significant deviation for Iraq in particular. If this continues in April, it could weigh on the oil price, the bank said.

Honda Motor Co. Ltd.’s announcement last week that it’s building a $15-billion “vertically integrated” electric-vehicle and battery-cell manufacturing complex in Ontario has opened a new chapter in the country’s industrial strategy for the energy transition.

Previously, Canada had attracted European companies to build battery cell plants here by matching the production tax credits offered in the United States through the Inflation Reduction Act (IRA).

But the federal government has turned the page by introducing a new 10 per cent tax credit for any company that invests across the electric-vehicle supply chain, including the often-ignored midstream segment of active cathode material production. That comes on top of a proposed 30 per cent tax credit on the cost of machinery and equipment needed for the plants.

The two tax credits for Honda are expected to amount to $2.5 billion in federal support, and Ontario Premier Doug Ford said his province has also agreed to provide $2.5 billion in direct and indirect support.

The combined $5 billion may fall short of what production tax credits under the IRA can offer, but Jean Marc Leclerc, chief executive of Honda Canada Inc., said it’s a compelling package.

“What needs to be said about an investment tax credit is it’s guaranteed,” he said. “What we have here is something we can actually count on.”

Source: BNN Bloomberg, Financial Post, MT Newswire