Biden Inauguration & Bank Of Canada: The Odds Of A Micro Cut

It’s a big week for the financial markets. The Congressional hearings for Janet Yellen’s confirmation as Treasury secretary began today (there’s no guidance on how fast the panel will vote on her nomination) and tomorrow, Joe Biden will be sworn in as the 46th President of the United States. There are 3 central bank monetary policy announcements, PMI reports from countries around the world and Australia’s labor market report. With less than 24 hours to go before Trump leaves office, investors are optimistic. The rally in equities and currencies shows little concern about violence and punishing policies. The greenback traded higher against all of the major currencies except for the Swiss Franc. Janet Yellen is expected to be confirmed easily and her initial comments reinforce the Biden Administration’s focus on Main Street over Wall Street. Investors are looking for generous fiscal spending. She also confirmed that they will not go soft on China warning that they are prepared to use their full array of tools to challenge the Asia Giant’s “abusive, unfair and illegal practices.”

Before the inauguration begins, UK and Canadian consumer price reports will be released followed by the Bank of Canada’s monetary policy announcement. Fueled by low interest rates, inflation has been rising slowly across the globe and we are looking for those signs in Wednesday’s UK and Canadian CPI reports. However even if prices in Canada increase as suggested by IVEY PMI, some market participants are looking for a micro cut from the central bank. With interest rates at 0.25%, a micro cut would reduce interest rates less than a quarter point.

The big question is what are the odds of a micro cut from the Bank of Canada? We know that the central bank is not a fan of negative interest rates. In November, Governor Tiff Macklem suggested further easing or “a lower floor” could help the economy if it weakens further. According to the table below, an aggressive second virus wave caused widespread deterioration in the economy at the end of the year. Canada reported job losses for the first time since April, core retail sales growth stagnated and manufacturing activity contracted. The January numbers should be just as ugly.

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