Global equity markets gained over the week ended June 14. The U.S. Federal Reserve Board’s (“Fed”) midweek decision to hold interest rates steady took the spotlight in terms of economic announcements, even though it was widely expected. Favourable U.S. inflation data was also released. The S&P/TSX Composite Index declined, with weakness in the Communication Services sector. U.S. equities advanced over the week. Yields on 10-year government bonds in Canada and the U.S. declined. Gold and oil prices climbed.
Fed holds steady although inflation eases
Wednesday was the big Fed decision day, and the Federal Open Market Committee decided to hold the federal funds rate target range at 5.25%–5.50%. Earlier that day, data was released indicating that core inflation in the U.S. fell to 3.4% in May. Lower costs for transportation services and new vehicles contributed to the decline.
In the press conference accompanying the decision, Fed Chair Jerome Powell highlighted that inflation was easing modestly towards the 2% target.
Policymakers lowered the number of interest rate cuts they were forecasting. They anticipated one cut in 2024 and four in 2025. The Fed’s next meetings are in July and September, and economists believe that the first rate cut is more likely in September than in July.
The Fed's decision to hold was widely anticipated by the market. At the start of 2024, market consensus anticipated a regular and fairly quick pace of interest rate cuts. Expectations have shifted markedly.
BoC isn’t concerned about diverging policy
Bank of Canada (“BoC”) Governor Tiff Macklem addressed the potential for Canada’s interest rate policy to diverge from that of the U.S.
The difference between the BoC’s policy rate and the upper bound of the federal funds rate is 75 basis points, and it is set to diverge further if the BoC continues to cut and the Fed continues to hold.
Macklem acknowledged a “limit” between how much the paths could diverge but said that the rates were not near this limit yet.
The BoC was the first central bank of the G7 group of countries to lower interest rates, and the move may open the way for others to cut ahead of the Fed.
The strength of the U.S. economy and its labour market contrasts with the weaker economic situation in Canada and other G7 countries.
U.K. economy struggles to grow
In April, gross domestic product (“GDP”) growth in the U.K. was flat. In March, GDP growth was 0.4%.
Extended rainy weather contributed to weaker retail sales, with more customers electing to stay at home. The wet conditions also led to slower construction activity. The volume of rain was 55% higher than average in April.
Manufacturing activity declined. However, services activity increased for the fourth month in a row. Construction declined by 1.4% in April.
Retail sales dropped by 0.5% in April, the second decline over the past three months.
Unemployment in the U.K. also rose to 4.4% in the period from February to April 2024. GDP trends and the health of the labour market will be important considerations for the Bank of England as it deliberates over its interest rate decision for next week.
Summer weather and the start of widely anticipated sporting events such as the UEFA European Championship could generate more activity at pubs and restaurants.
European elections impact market sentiment
Political risks in financial markets were in focus last week. Following the European Parliament elections, French President Emmanuel Macron called a surprise election.
The election adds an element of uncertainty to financial markets that wasn’t well anticipated and has renewed concerns about the high levels of debt in France.
French and European equities declined, and the euro lost value against the U.S. dollar
Europe has been recovering from shocks to energy supply chains and elevated inflation.
Inflation in Europe was 2.6% in May, higher than expected. Earlier in June, the European Central Bank (“ECB”) cut interest rates, but ECB President Christine Lagarde highlighted that it may still be necessary to hold rates again for periods of time.
Investors assessed new risks in Europe alongside the political uncertainty in France. European Union policymakers announced that they would be implementing up to 48% tariffs on Chinese imported electric vehicles.
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