Global equity markets fell over the week as geopolitical tensions weighed on investor sentiment. Oil prices surged higher leaving investors to wonder about the path of inflation. In Canada, the S&P/TSX Composite Index advanced, led by the Materials sector. U.S. equities declined over the week. Yields on 10-year government bonds in Canada were largely unchanged, while those in the U.S. increased. Oil and gold prices both rose over the week.
Capital requirements could hurt Canadian banks
The capital requirements implemented by the Office of the Superintendent of Financial Institutions (“OFSI”) in 2023 could hurt Canadian banks’ competitiveness against foreign competitors, according to RBC CEO Dave McKay.
OFSI implemented the new capital requirements per the final requirements of Basel III, which was developed after the Financial Crisis in 2008. Basel III was created by the Basel Committee on Banking Supervision to protect banks and consumers, and to reduce risk in the banking industry. It called for certain capital requirements for international banks to absorb potential losses and maintain enough liquidity to meet obligations.
While Canada has stepped forward and implemented the final set of requirements, other major markets have been moving at a slower pace. In March, U.S. Federal Reserve Board (“Fed”) Chair Jerome Powell said the Fed is looking at changes to the requirements of Basel III, believing it may negatively impact American households.
Europe is in the process of implementing the final requirements. In the meantime, European banks are not faced with the same restrictive requirements as Canadian banks. McKay noted this could hurt Canadian banks’ international operations.
The impact could be felt by shareholders of Canada’s major banks if revenues decline and profits shrink.
North American labour markets diverge
The Canadian economy shed 2,200 jobs in March, surprising economists who were expecting the economy to add 25,000 jobs. Full- and part-time jobs were lost over the month. The food services and retail industries eliminated jobs over the month.
Canada’s unemployment rate rose to 6.1% in March, its highest rate since October 2021. With inflation already slowing and signs the labour market could be cooling off, the Bank of Canada may be in a position to soon begin cutting interest rates.
The data was much different in the U.S., where the economy added 303,000 jobs in March, topping expectations. The government and the construction industry added a high number of jobs. The U.S. unemployment rate fell to 3.8% in March.
A separate report from ADP showed private businesses in the U.S. added 184,000 jobs in March, which was well above expectations.
The U.S. labour market results could keep the Fed on the sidelines from cutting interest rates this quarter.
China’s business activity points to stabilizing economy
Growth in China’s business activity accelerated in March, reflecting some stabilization in China’s economy, which has struggled for traction amid relatively muted domestic demand and a weak property market.
The NBS Composite Purchasing Managers Index rose to 52.7 in March from 50.9 in February, marking its fastest pace of growth since May 2023.
China’s services sector posted another expansion in activity, benefiting from stronger new orders and falling input costs.
Manufacturing sector activity drove growth in March. Manufacturing activity expanded for the first time since September 2023, boosted by higher new orders and output
European inflation edges lower
According to a flash estimate, Europe’s inflation rate ticked lower to 2.4% in March from 2.6% in the previous month. March’s rate also came in below the 2.5% rate economists had estimated.
If the estimated rate holds, it will match the inflation rate in November 2023, which is the lowest in over two years. Food prices moderated in March, while energy prices continued to decline.
Looking at the labour market, Europe’s unemployment rate held steady in February at a record low of 6.5%.
In signs the European economy is slowing, retail sales fell by 0.5% in February, the third straight month of no growth.
With inflation coming down and the European consumer appearing to be in a relatively weak position, the European Central Bank appears poised to begin lowering interest rates this year.
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