Global equity markets ended the week lower as higher-than-expected inflation in the U.S. raised expectations that the U.S. Federal Reserve Board (“Fed”) would start lowering rates later in 2024. In Canada, the S&P/TSX Composite Index declined, dragged lower by the Health Care sector. U.S. equities edged lower. Yields on 10-year government bonds in Canada and the U.S. increased. Gold prices moved higher, while the price of oil fell over the week.
BoC keeps policy rate unchanged
At its first meeting of the second quarter of 2024, the Bank of Canada (“BoC”) announced it was holding its benchmark overnight interest rate steady at 5.00%.
With inflation risks persisting in Canada’s economy, the BoC believes it needs to push back on rate cuts for now and hold its interest rate at restrictive levels.
The BoC wants to see inflation on a sustainable path to its 2% target, but it acknowledged that the recent runup in commodity prices could put upward pressure on inflation. Canada’s central bank expects inflation of around 3% in the first half of 2024, before coming back to its 2% target in 2025.
Still, the BoC noted it is seeing economic conditions that could warrant a rate cut. Markets are expecting a rate cut by this summer.
Elsewhere, the European Central Bank held its policy interest rate steady at 4.50%, but it expects to carefully consider a rate cut as early as June given expectations of slower inflation and weaker economic growth.
U.S. inflation rate above expectations
The path of the U.S. inflation rate to the Fed’s 2% target stumbled in March.
The annual inflation rate in the U.S. was 3.5% in March, increasing from the 3.2% rate in February, and above the 3.4% rate economists had expected.
Upward pressure came from a rise in gasoline prices, which advanced by 1.3% year-over-year in March following a 3.9% decline in February. The price growth for food and shelter remained elevated in March.
Markets reacted negatively to the news, believing the higher-than-expected inflation rate in March will push back Fed interest-rate cuts until later in 2024
China’s trade activity contracts
Trade activity in China fell in March, pointing to an economy still struggling for traction amid relatively weaker demand both domestically and from abroad.
Exports from China fell by 7.5% year-over-year in March, the first decline since October 2023.
Imports also declined, falling by 1.9% year-over-year in March, disappointing economists who were expecting an increase.
The drop in imports sheds more light on the relatively weak demand prevailing in China’s economy. This has hindered economic growth over the past year.
Still, China’s economy saw a trade surplus of US$58.6 billion (C$80.5 billion) in March.
U.K. gross domestic product edges higher
Gross domestic product in the U.K. expanded by 0.1% in February, which matched expectations, but slowed from the 0.3% increase in January.
The economy benefited from a rise in the services sector over the month, which offset a decline in the construction and mining industries.
Industrial production was also a key contributor to growth over the month. Industrial output rose by 1.1% in February, its biggest increase since June 2023.
Economic activity in the U.K. seems to be picking up after several quarters of weak economic growth. Still, challenges persist, particularly for consumers who are facing ultra-tight financial conditions.
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