Global equity markets moved higher over the week ended August 23. Markets increasingly expect the U.S. Federal Reserve Board (“Fed”) to begin lowering interest rates at its September meeting. In Canada, the S&P/TSX Composite Index advanced, led by the Real Estate sector. U.S. equities rose over the week. Yields on 10-year government bonds in Canada and the U.S. dropped. The price of oil finished lower, while the price of gold ticked higher.
Canada’s inflation rate drops in July
Canada’s inflation rate was 2.5% in July, down from the 2.7% rate in June, matching economists’ expectations. July saw Canada’s lowest inflation rate since March 2021, suggesting efforts by the Bank of Canada (“BoC”) have helped to bring down inflation.
The growth in prices for food and shelter slowed in July compared to the previous month. Shelter costs were expected to come down as the BoC lowered interest rates. Canada’s core inflation rate, which excludes volatile items such as energy and food prices, softened in July.
Retail sales in Canada dropped by 0.3% in June, their second consecutive decline. This was also the fifth decline in six months in 2024, suggesting tight financial conditions are weighing on Canadian households.
Amid slower inflation, modest economic growth and a labour market losing momentum, the BoC seems poised to cut interest rates again, potentially at a third consecutive meeting in September.
Last Thursday, concerns about Canada’s economy heightened when Canadian National Railway Co. and Canadian Pacific Kansas City Ltd. were unable to reach an agreement with the union, resulting in a lockout. According to the Railway Association of Canada, the two railways ship $1 billion worth of goods each day. However, the federal government stepped in and forced a binding arbitration, which put both railways back into operation.
Fed appears set for a September rate cut
The Fed released the minutes from its last meeting, which took place on July 31.
Fed officials noted the risks to the labour market have increased, while risks to inflation have decreased, which signalled the possibility of a rate cut in September.
Some officials pushed for a rate cut in July but ultimately decided to hold off amid a relatively strong economy and still elevated inflation. The Fed is still seeking more assurance that inflation will reach its 2% target.
However, downwardly revised payroll data showed job additions were less than originally reported over the year-end period ended March 2024, which reinforced bets of a September rate cut.
In a speech at the Jackson Hole Symposium, Fed Chair Jerome Powell noted that a rate cut is nearing given that it is looking more likely inflation will indeed sustainably return to the Fed’s 2% target. He also noted that the pace of rate cuts will be dependent on the development of economic conditions.
European business activity picks up in August
Business activity in Europe rose in August, largely in response to a strengthening services sector, which is helping to prop up the overall economy.
A preliminary estimate of the Hamburg Commercial Bank (“HCOB”) Eurozone Composite Purchasing Managers Index rose to 51.2 in August from 50.2 in the previous month.
The increase was driven by a stronger services sector, which was partially offset by a still weak manufacturing sector. Manufacturing sector activity continues to be hindered by weak demand.
Rising demand in the services sector has been a significant contributor to elevated inflationary pressures in Europe. And inflationary pressures picked up in July. A final estimate showed Europe’s inflation rate was 2.6% in July, accelerating from the 2.5% rate in June.
With business activity stable but still facing several risks, and inflation trending downward, the European Central Bank is likely to keep lowering interest rates in the months to come.
Exports from Japan climb higher
Japan’s economy saw exports increase by 10.3% year-over-year in July, accelerating from the 5.4% annual increase in June.
Exports have grown over the past eight months, due in part to the weaker yen, which is making Japanese goods less expensive relative to other currencies. Shipments of vehicles and machinery increased.
Despite the increase in exports, Japan’s economy ran a trade deficit in July. Imports rose by 16.6% year-over-year in July, which was the largest increase since the beginning of 2023.
Moving into August, foreign orders for Japanese manufactured goods declined, weighing on Japan’s manufacturing sector. The sector contracted for a second straight month in August, according to a preliminary estimate.
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