Global equity markets finished lower over the week ended July 15. The decline was largely in response to a higher-than-expected inflation reading in the U.S., which raised the prospect of further aggressive action by the U.S. Federal Reserve Board (“Fed”) in taming inflation. Investors considered whether the Fed might raise the federal funds rate by 100 basis points (“bps”) at its July meeting. In Canada, the S&P/TSX Composite Index declined, dragged down by the Information Technology sector. The S&P 500 Index was pulled down by the Communication Services sector. The tech-heavy NASDAQ Composite Index also fell. Yields on 10-year government bonds in Canada and the U.S. fell. Oil prices dropped largely in response to demand concerns. Gold prices also finished lower.
Bank of Canada surprises with aggressive increase
The Bank of Canada (“BoC”) raised its benchmark overnight interest rate by 100 bps to 2.50% at its meeting on July 13.
This exceeded the 75-bps rate increase that economists expected and was the largest increase since 1998.
Officials balanced risk to the Canadian economy against the risk of persistent inflation.
The BoC raised its outlook for inflation while lowering its growth expectations. The BoC signaled it would remain aggressive toward surging inflation.
Highest rate of inflation since 1981
The U.S. annual inflation rate reached 9.1% in June, its sharpest pace of growth since November 1981.
The increase exceeded the 8.8% rate economists expected, with energy and food prices continuing to push higher.
Meanwhile, the core inflation rate, which excludes the more volatile energy and food prices, was 5.9% in June, slowing from May’s 6.0% rate.
The results raised odds the Fed will remain aggressive in its efforts to tame inflation, with a potential 100-bps rate increase at its July meeting.
Higher prices help retail sales growth
Higher prices pushed U.S. retail sales up by 1.0% in June, slightly ahead of the 0.9% increase economists expected and rebounding slightly from the 0.1% decline in May.
Gasoline sales were a major contributor to the increase, rising by 3.6%, buoyed by higher prices at the pump. Other increases came from sales at furniture stores and food services.
While the increase was mostly positive, much of the gains were driven by higher prices amid soaring, record-high inflation.
Quarterly economic growth falls
China’s gross domestic product fell 2.6% in the second quarter of 2022 compared to the first quarter. The decline was its first drop in quarterly economic growth since the first quarter of 2020, at the onset of the pandemic.
The year-over-year rate slowed to 0.4% in the second quarter, following a 4.8% increase in the first quarter.
Ongoing lockdown restrictions amid a surge in COVID-19 cases weighed on China’s economy.
The National Bureau of Statistics of China warned the economy would be challenged by slowing global economic activity and tightening monetary policies.
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