Global equity markets finished lower over the week ended May 31 in response to uncertainty about how soon and how deep central banks will cut rates this year. Mixed economic data also weighed on sentiment over the week. The S&P/TSX Composite Index fell, hindered by weakness in the Utilities sector. U.S. equities also dropped over the week. Yields on 10-year government bonds in Canada and the U.S. increased. Oil and gold prices finished the week largely flat.
Canada’s GDP impacts rate cut expectations
Canada’s gross domestic product (“GDP”) expanded by 1.7% in the first quarter of 2024, compared to economists’ expectations of a 2.2% increase.
Expansion was also revised down to 0.1% from 1.0% for the fourth quarter of 2023.
The overall GDP data suggests that the Canadian economy is facing a challenge to grow.
Slower-than-expected expansion raised some economists’ expectations for an interest rate cut by the Bank of Canada (“BoC”) in June.
Still, natural resources have softened the impact on economic growth as an important component of Canada’s exports.
Canada’s economy has benefited from higher commodity prices in 2024, which should support Canadian equities. Materials and Energy were the top-performing sectors so far in 2024.
Oil and gold prices have moved higher this year. A flight to relative safety amid geopolitical tensions has helped push gold prices higher. Oil prices have advanced in response to geopolitical tensions and lower supply. The Organization of the Petroleum Exporting Countries and allies are likely to keep their production cuts in place for longer in 2024 as they seek to balance the oil market.
U.S. PCE holds steady
The U.S. core personal consumption expenditures (“PCE”) index, which is the U.S. Federal Reserve Board’s (“Fed”) preferred inflation measure, climbed by 0.2% in April in comparison to a 0.3% increase in the previous month.
On an annual basis, PCE inflation held steady at 2.7% and the related core rate maintained 2.8%, the lowest since March 2021.
The government attributed the largest component of inflationary pressure to the services sector, including housing, travel and medical attention.
On a monthly basis, food prices retreated by 0.2%. However, energy costs increased by 1.2%.
The report suggested that consumers were more carefully monitoring their spending habits, and the ability of consumers to support the economy in the long term will likely be questioned.
Overall, the latest inflation data from the U.S. sends some signals to the Fed that inflationary pressure could be easing and raises potential for an interest rate cut.
The next interest rate announcement by the Federal Open Market Committee will take place in June, the week after the BoC’s decision.
China’s manufacturing activity shrinks
Relatively weak domestic and global demand weighed on China’s manufacturing sector over the month of May.
The NBS Manufacturing Purchasing Managers Index fell to 49.5 in May from 50.4 in April. May’s decline surprised economists who were expecting an increase to 50.5.
A drop in new orders, export orders and employment dragged down manufacturing activity over the month. The swings in China’s manufacturing sector activity show the challenges facing China’s economy, highlighting how sensitive it is to domestic and global demand changes.
China’s government recently announced a bond issuance to raise money to help its economy, including manufacturing capabilities.
This should provide a tailwind to China’s manufacturing sector as the year progresses, but any slowdown in global economic activity could continue to weigh on China’s economy.
Tight credit conditions persist in Europe
High borrowing costs have taken a bite out of consumer credit demand in Europe. Loans to consumers rose by 0.2% year-over-year in April, which was the weakest pace of growth since 2015.
Loans to non-financial companies from banks rose by 0.3% year-over-year in April, down from the 0.4% annual increase in the previous month.
A flash estimate showed Europe’s inflation rate inched higher to 2.6% in May, which was slightly above expectations. Tight financial conditions are clearly hindering European consumers, even impacting demand for credit. This is likely to persist as financial conditions remain tight.
However, the European Central Bank (“ECB”) is expected to begin lowering interest rates at its June meeting, which might ease some of the pressure on European consumers and businesses.
The number of rate cuts this year could be lower than expected if the ECB believes inflationary pressures are proving sticky, particularly if consumer activity reignites after its first rate cut.
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