Your weekly commentary – For the week ended January 19

Global equity markets finished relatively flat over the week ended January 19. Investors analyzed economic data to predict when, and by how much, central banks may begin cutting interest rates. In Canada, the S&P/TSX Composite Index dropped, dragged down by the Materials sector. Conversely, U.S. equities advanced. Yields on 10-year Canadian and U.S. government bonds increased sharply over the week. Oil prices edged higher, while the price of gold declined.

Canada’s inflation rate picks up

• Canada’s annual inflation rate accelerated in December, its first increase since August 2023.

• Canada’s inflation rate rose to 3.4% in December from 3.1% in November, matching economists’ expectations. Contributing to December’s increase was a rise in prices for gasoline and shelter.

• Core inflationary pressures, which exclude more volatile items, remained at elevated levels.

• The results suggest inflation is moving in line with the Bank of Canada’s (“BoC”) expectations, and the path to 2% inflation might not be even.

• Still, December’s increase did little to change expectations that the BoC will begin to reduce interest rates at some point this year.

U.S. consumers showed strength in December

• U.S. consumers continued to demonstrate their relative strength over the holiday season as retail sales rose by 0.6% in December.

• December’s increase marked the second straight monthly rise after a 0.3% rise in November.

• Sales climbed higher for clothing, building materials and sporting goods. Additionally, e-commerce sales rose by 1.5% over the month.

• U.S. consumer spending benefited from a strong labour market and pent-up savings, which is helping to prop up U.S. economic growth.

China’s economic growth beats 2023 target

• Gross domestic product in China expanded by 5.2% year-over-year in the fourth quarter of 2023, outpacing its 4.9% growth in the previous quarter.

• Its 2023 pace of growth topped the government’s target economic growth of around 5%.

• Despite the increase in the fourth quarter, concerns about China’s economy persist. Relatively weak domestic demand has contributed to deflationary pressures. Furthermore, China’s property market continues to struggle under the weight of extremely high debt levels.

• In response, market participants are hoping for the government and central bank to take further steps to ease policy and support the economy.

• The People’s Bank of China reduced its key interest rate on several occasions in 2023 seeking to improve liquidity and kickstart economic activity.

Rise in European inflation

• Europe’s inflation rate rose to 2.9% in December from 2.4% in November.

• While a higher rate in December was expected, it illustrates that inflationary pressures are broad-based and relatively persistent. The decline in energy prices slowed substantially in December, while prices for services and food remained elevated.

• High inflationary pressures are expected to persist, according to the European Central Bank (“ECB”). The ECB released the minutes to its last meeting noting officials believe interest rates at restrictive levels are needed to help bring inflation down further. The full effect of tighter monetary policy has not yet been felt by the economy.

• The ECB also expressed concern that market expectations of the bank lowering interest rates may negatively impact its battle against inflation.

• As expectations of rate cuts heightened, bond yields fell, while equity markets posted a strong return. As such, ECB officials appear intent on scaling back investors’ rate cut expectations.