Global equity markets finished slightly higher over the week ended June 7. Investors were encouraged by two major central banks lowering interest rates. However, this optimism was partially offset by a strong labour market report in the U.S., which pushed back bets of when the U.S. Federal Reserve Board (“Fed”) might start lowering interest rates. The S&P/TSX Composite Index finished lower, dragged down by the Materials sector. U.S. equities advanced over the week. Yields on 10-year government bonds in Canada and the U.S. declined. Oil and gold prices finished lower.
BoC lowers key interest rate
After two years of aggressive rate hikes, the Bank of Canada (“BoC”) lowered its key interest rate for the first time in four years.
The BoC’s benchmark overnight interest rate was reduced by 25 basis points (“bps”) from 5.00% to 4.75%. Canada’s central bank believed the rate cut was needed amid softer inflationary pressures and a slowdown in economic activity.
The BoC noted that more rate cuts are likely but didn’t signal when further rate cuts will occur. Rather, each decision will be data dependent.
Despite the lack of timing on more cuts, interest rates are likely to go lower before the end of the year. This could help reignite consumer spending and may be a tailwind for demand in Canada’s real estate market. Equity investors reacted positively to the news, while government bond yields declined. Yields at the shorter end of the curve fell further than longer-term yields.
Statistics Canada reported the economy added a meagre 26,700 jobs in May. The unemployment rate increased to 6.2%, suggesting Canada’s labour market is losing momentum.
U.S. job gains top expectations
The U.S. economy added 272,000 jobs over the month of May, benefiting from strong gains in the retail trade industry and the leisure and hospitality industry.
May’s gains outpaced the 180,000 job gains estimated by economists and the previous month’s downwardly revised 165,000 job additions.
Still, the unemployment rate edged higher to 4.0% in May, its highest level since the beginning of 2022. May’s increase was due in part to a drop in the participation rate.
Hiring at private businesses appears to be slowing. ADP reported that private businesses added 152,000 jobs in May, below the 188,000 jobs in the previous month. This was the lowest number of job additions since January 2024.
The Fed appears likely to pass on lowering interest rates at its meeting this week. Although the Fed still appears poised to begin lowering rates this year, this report raised bets it might be later in 2024. Equity markets were shaky after the report, while government bond yields moved higher.
ECB begins cutting interest rates
The European Central Bank (“ECB”) reduced its policy interest rate by 25 bps to 4.25%. This marked the first rate cut from Europe’s central bank in eight years.
Coming out of the pandemic, inflation in Europe surged higher, prompting the ECB to aggressively raise interest rates over 2022 and 2023. Now, the ECB appears to be entering a period of loosening policy.
The ECB’s rate cut comes amid a marked slowdown in Europe’s inflation rate, while the economy has been challenged by tight financial conditions over the past year.
The ECB didn’t give any indication on the timing of more rate cuts, but noted more cuts are possible this year, depending on the path of economic conditions in Europe.
In a separate report, retail sales in Europe dropped in April, suggesting consumers may still be feeling the pinch from high inflation and borrowing costs. As a result, the ECB might need to cut rates further to help fuel consumer and business spending, which should help overall growth.
OPEC+ could scale back production cuts
At its June meeting, the Organization of the Petroleum Exporting Countries and allies (“OPEC+”) announced it may begin scaling back its production cuts in October 2024. Currently, OPEC+ has two tranches of cuts – mandatory cuts for all members and voluntary cuts for certain members. The plan calls for eliminating voluntary production cuts of 2.2 million barrels of oil per day.
However, OPEC+ warned the plan could change depending on the path of central banks in the upcoming months and how economic conditions could change. These developments could change the demand for oil, warranting changes to the organization’s plan.
Increasing the supply of oil could imbalance the market, particularly if demand doesn’t increase as well. This could put downward pressure on prices.
Any downward pressure on oil prices could help Canadian households and ease some inflationary pressures. However, this is likely to have a negative impact on the potential profitability of oil-producing firms here in Canada.
Oil prices fell over the week. The Energy sector on the S&P/TSX Composite Index also finished lower.
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