Global equity markets finished lower over the week ended July 26. Declines were driven by a falling U.S. equity market, as investors questioned the valuation of artificial intelligence stocks amid concerns that progress is not as far along as believed. In Canada, the S&P/TSX Composite Index advanced, led by the Real Estate sector. Yields on 10-year government bonds in Canada and the U.S. declined over the week. Oil and gold prices moved lower.
BoC cuts rates for second straight time
In a widely expected move, the Bank of Canada (“BoC”) reduced its benchmark overnight interest rate by 25 basis points (“bps”) to 4.50%.
This was the second straight rate cut from the BoC, with inflationary pressures continuing to moderate and economic conditions slowly deteriorating.
In its outlook, the BoC noted that it sees inflation continuing to moderate in 2024 before reaching its 2% target in 2025.
The BoC’s concern has shifted from inflation to the Canadian economy and labour market. Canada’s central bank sees some downside risks to Canada’s economy.
Signs point to the BoC cutting rates again in 2024. The BoC noted that each rate decision will be dependent on economic data at the time, suggesting there is no set timeline for cutting rates.
U.S. GDP growth tops expectations
Gross domestic product (“GDP”) in the U.S. expanded by 2.8%, annualized, in the second quarter of 2024, according to a preliminary estimate.
This topped the 2.0% rate of growth economists had expected, benefiting from the relatively robust U.S. consumer, who pushed personal spending up 2.3%.
Real estate investment, meanwhile, contracted in the second quarter. Demand has waned with the U.S. Federal Reserve Board (“Fed”) keeping rates higher for longer. Inventory has also been soft, weighing on market activity.
The personal consumption expenditure price index (“PCE”) ticked lower to 2.5% in June from 2.6% in May. Core PCE was unchanged in June at 2.6%.
The Fed looks poised to begin cutting interest rates in 2024, with inflation moderating and slower GDP growth compared to last year. But the relative strength of the economy suggests the Fed might be able to direct the U.S. economy through a soft landing.
European business activity weakens
A preliminary estimate showed business activity in Europe eased in July.
The Hamburg Commercial Bank (HCOB) Eurozone Purchasing Managers Index declined to 50.1 in July from 50.9 in the previous month. This marked the lowest reading since contracting in February 2024.
Services sector activity slowed for a third straight month, while the manufacturing sector contracted for a 16th consecutive month.
Both sectors have been hindered by relatively weak demand amid tight financial conditions.
But demand in Europe might see some improvement in the months to come. The European Commission reported that consumer confidence increased in July, largely in response to falling inflation and the recent rate cut from the European Central Bank. A more confident consumer could lead to higher spending.
PBOC looks to stimulate economy
At its July fixing, the People’s Bank of China (“PBOC”) lowered its one- and five-year loan prime rates (“LPR”) by 10 bps to 3.35% and 3.85%, respectively.
The one-year LPR serves as a reference rate for household and corporate loans. The PBOC hopes this might help spur spending activity. The five-year LPR is a reference rate for mortgages. China’s property market has struggled considerably over the past few years.
Later in the week, the PBOC continued to loosen policy by reducing its one-year medium-term lending facility (“MLF”) by 20 bps to 2.30%. The MLF references the rate the PBOC charges China’s big banks.
China’s central bank has taken action to help stimulate economic conditions in China and improve liquidity.
The Chinese yuan weakened over the week relative to the U.S. dollar.
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