Your weekly commentary – For the week ended August 25Global equity markets were relatively unchanged over the week ended August 25 as the U.S. Federal Reserve Board (“Fed”) guided that monetary policy will stay restrictive for longer to bring inflation back to its 2% target. The S&P/TSX Composite Index ended relatively flat with weakness in the Health Care and Financials sectors. U.S. equities, as measured by the MSCI USA Index, ended the week higher. Yields on 10-year government bonds in Canada and the U.S. declined slightly. Fed Chair Jerome Powell highlighted tighter banking standards and slower loan growth during his speech at Jackson Hole. The price of oil declined, while gold prices rose.
Fed to keep at it until the job is done
Powell’s speech at Jackson Hole provided key insights into the Fed’s stance on monetary policy ahead of its next interest rate decision in September.
Looking back over the path of the U.S. economy, Powell attributed the largest inflation shocks to the pandemic and the impact of the Russia-Ukraine conflict. These events led to overly strong demand and constrained supply.
Powell reiterated the Fed’s mandate to lower inflation to its 2% goal. The Fed intends to hold rates at restrictive levels until policymakers are confident that inflation is trending down.
Two recent months of positive inflation readings are not being considered enough to confirm this trend, and more data will need to be assessed.
Canada issues retail sales update
In June, retail sales grew by 0.1% to $65.9 billion, driven by new car sales, according to Statistics Canada (“StatsCan”).
Motor vehicle and parts dealers recorded a 2.5% rise, led by new car dealers’ 2.9% gain.
However, core retail sales, excluding specific sectors, decreased by 0.9% in June, indicating that consumer spending may be slowing. StatsCan reported that retail sales in the second quarter were largely unchanged but sales volume fell by 0.8%.
General merchandise stores and food and beverage retailers observed declines of 1.4% and 0.9%, respectively.
There is some concern about consumer spending power for the second half of 2023. StatsCan’s preliminary estimate for July is for a 0.4% gain in retail sales.
Europe’s manufacturing outlook weakens
HCOB’s Eurozone Manufacturing Purchasing Managers’ Index (“PMI”) moved up to 43.7 in August from July’s 42.7. This was higher than forecasts of 42.6. However, the index has been in contractionary territory for over a year.
New orders continued to decline at one of the fastest paces since the global financial crisis.
Employment decreased, and factories lowered raw material inventories. Manufacturers’ output expectations for the future declined for the sixth consecutive month.
HCOB’s Flash Composite PMI is also considered to be a good measure of underlying economic health. The index fell to 47.0 in August from 48.6 in July. In addition, a large component of activity consisted of companies working through and completing old orders with backlogs declining.
Chinese property developer Evergrande files for bankruptcy
Roughly two years ago, Evergrande defaulted on interest payments on bonds, bringing into focus a growing debt crisis in China’s real estate industry.
Evergrande is also an electric vehicle maker, as well as a property developer, and its debt burden has been impacting its EV business.
Last week, the company filed for bankruptcy in the U.S. as much of its debt is held by investors outside of China.
Real estate comprises roughly 30% of China’s gross domestic product, and the bankruptcy demonstrates the worsening state of the property debt crisis.
A knock-on effect of the situation is that several of the largest real estate developers in China are finding it increasingly challenging to find funds to complete projects.
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