Global equity markets fell over the week ended April 19 on growing expectations that the U.S. Federal Reserve Board (“Fed”) will not begin lowering interest rates until later in 2024. In Canada, the S&P/TSX Composite Index dropped, hindered by weakness in the Real Estate sector. U.S. equities posted a relatively sharp decline over the week. Yields on 10-year government bonds in Canada and the U.S. increased. Gold prices moved higher, while the price of oil declined.
Canadian federal budget released
The Canadian federal government released its annual budget for 2024, with a focus on supporting younger generations of Canadians.
The federal government projects a deficit of $38.9 billion in 2024–2025, but this will eventually be reduced to $20.0 billion in 2028–2029.
There will be an ongoing focus on increasing the supply of homes. Home prices have surged higher over the last few years, driven by robust demand.
The government also has substantial money earmarked for environmental, health care and artificial intelligence initiatives.
From a tax perspective, the government will increase the inclusion rate on capital gains from 50% to 66% for high-net-worth individuals, corporations and trusts, which is expected to bring in an additional $19.4 billion in tax revenue over the next four years.
Canada’s inflation rate rises in March
Canada’s inflation rate was 2.9% in March, edging higher from the 2.8% rate posted in February. March’s increase matched economists’ expectations.
Rising prices for gasoline and housing costs contributed to March’s increase.
Housing costs have been driven higher by rising interest rates, which has increased the costs of managing a mortgage.
Conversely, core inflationary pressures, which exclude volatile items such as food and energy, softened in March, albeit slightly.
The result reinforces the Bank of Canada’s (“BoC”) belief that the path to 2% might not be smooth. Markets expect the BoC to begin lowering interest rates this summer, due in part to moderating core inflation and a weakening labour market.
U.S. retail sales top expectations
Despite tight financial conditions, U.S. consumers proved their relative strength again in March.
Retail sales in the U.S. increased by 0.7% in March, topping the 0.4% rise economists had expected. This marked the second straight increase after jumping by 0.9% in February.
E-commerce sales increased over the month, as did sales at gasoline stations, food and beverage stores, and building and garden equipment retailers.
Consumer demand remains relatively robust in the U.S., which has helped prop up economic activity. A strong consumer could keep inflationary pressures relatively elevated, which could contribute to the Fed keeping interest rates higher for longer.
China’s economy expands in Q1
China’s first-quarter growth appears to be putting its economy on track to meet the government’s 2024 target of 5%.
China’s economy expanded by 5.3% year-over-year in the first quarter of 2024, which was its quickest pace of growth since the second quarter of 2023.
China’s economy benefited from stimulus measures from the government and People’s Bank of China. Furthermore, a rise in spending during the Lunar New Year holiday added to growth over the quarter.
Despite the upbeat growth result, underlying data suggests China’s economy may still be on fragile ground. Domestic demand has waned outside of the holiday season pick-up, while the property market continues to struggle under a mountain of debt concerns.
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