Global equity markets finished lower over the week ended August 4 as Fitch’s rating downgrade of U.S. debt weighed on investor sentiment. The Information Technology sector dragged down the S&P/TSX Composite Index. U.S. equities, as measured by the MSCI USA Index, finished the week in negative territory. Yields on 10-year government bonds in Canada and the U.S. rose, mainly in response to the rating downgrade. The price of oil ticked higher, while gold prices declined.
Canada’s economy loses jobs
For the second time in three months, the Canadian economy lost jobs in July, suggesting the labour market may be losing some steam.
Canada lost just over 6,000 jobs in July, which follows 59,900 job additions in June. The part-time sector lost jobs, while the full-time sector was largely unchanged.
Among industries, construction and public administration lost a relatively higher number of jobs over the month.
Canada’s unemployment rate ticked higher to 5.5%, its highest level since January 2022.
With Canada’s labour market appearing to soften, it could ease some pressure on the Bank of Canada to keep raising interest rates.
Fitch cuts rating on U.S. debt
Fitch Ratings downgraded U.S. government long-term foreign-currency debt from AAA to AA+ with a stable outlook.
Earlier this year, Fitch expressed concern about U.S. debt as the government haggled over the debt ceiling. Fitch is concerned about the U.S. government’s growing debt levels and fiscal responsibility amid several disagreements over the debt ceiling.
Fitch expects the U.S. deficit to climb to 6.3% of gross domestic product (“GDP”) this year amid expectations of high spending, tax cuts and slower economic growth.
U.S. debt was last downgraded from AAA to AA+ in 2011 by S&P Global, where it remains today.
U.S. lawmakers, including Treasury Secretary Janet Yellen, mostly downplayed the rating downgrade. In comments to Bloomberg, market strategists and economists said they believe this will have little impact on financial markets over the medium term.
European economy returns to growth
According to a flash estimate, Europe’s GDP expanded by 0.3% in the second quarter of 2023, which follows a revised reading of no growth (0.0%) in the first quarter.
Strong consumer spending contributed to growth over the quarter, but the pace of growth was muted as consumers continued to grapple with elevated inflation and rising borrowing costs.
Among the largest European countries, Germany’s economy stalled over the quarter, while Italy’s economy contracted. GDP in France and Spain expanded.
Another flash estimate reported Europe’s inflation softened to 5.3% in July, matching expectations and down from the 5.5% rate in June. Europe’s inflation rate is coming down but remains well above the European Central Bank’s target.
BoE hikes rates again
The Bank of England (“BoE”) raised its key interest rate by 25 basis points to 5.25%, its highest level since 2008.
The U.K. central bank went ahead with its fourteenth consecutive rate hike amid elevated inflationary pressures and a relatively robust labour market.
In its new projections, the BoE expects inflation to moderate to 5% by the end of this year and to reach its 2% goal by the second quarter of 2025.
The BoE believes its rate currently stands at restrictive levels and is willing to keep it at these levels to bring inflation back down to its target.
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