Global equity markets finished slightly higher over the week ended July 28. Sentiment was largely mixed after the U.S. Federal Reserve Board (“Fed”) raised its policy interest rate, but its comments signalled the potential to hold steady at its next meeting. The Bank of Japan (“BoJ”) announced it would be more flexible in its yield curve control policy. In Canada, the S&P/TSX Composite Index fell, dragged down by the Communication Services sector. U.S. equities, as measured by the MSCI USA Index, ticked higher. Yields on 10-year government bonds in Canada and the U.S. rose over the week. The price of oil moved higher, while gold prices dropped.
Strong services sector lifts Canada’s economy
Canada’s economy expanded by 0.3% in May, ticking higher from the 0.1% rate of growth posted in April.
Canada’s services sector was a critical contributor to growth over the month, rising by 0.5%.
Conversely, the goods-producing sector detracted from growth.
The outlook does not appear to be too promising. Statistics Canada estimated Canada’s gross domestic product declined by 0.2% in June, which would be its first drop since last December.
The Fed returns to raising rates
After its July meeting, the Fed announced it is raising the target range for its federal funds rate by 25 basis points (“bps”) to 5.25%–5.50%.
July’s increase brings the Fed’s key interest rate to its highest level since 2001 as it looks to bring inflation down to its 2% target.
The Fed reiterated its commitment to meeting its price and employment goals, stating that it would monitor incoming data at its upcoming decisions. Currently, markets are expecting the Fed to hold steady in September.
Across the Atlantic, the European Central Bank (“ECB”) also raised its policy interest rate by 25 bps to 4.25%. The ECB noted it was staying open to all possibilities at its next meeting, including pausing if necessary.
Meanwhile, the BoJ held its policy interest rate steady at −0.10% but noted it would make its yield curve control policy more flexible as it seeks to improve its monetary stimulus program.
U.S. consumer confidence ticks higher
Amid ultra-tight financial conditions and concerns over the global economy, U.S. consumer confidence remains relatively strong.
The Conference Board Consumer Confidence Index rose to 117.0 in July from 110.1 in the previous month, its highest level since 2021.
Consumers’ sentiment toward the current environment and expectations for the future both rose in the month, buoyed by the belief that the labour market will remain robust.
Consumers are hopeful the U.S. economy may avoid a recession this year, and they could be right. A preliminary reading showed the U.S. economy rose by 2.4% annualized in the second quarter, above the first quarter’s 2.0% growth.
Business and consumer spending were key drivers of economic growth in the second quarter.
European manufacturing sector sinks in July
A flash estimate showed that European manufacturing sector activity shrank for a twelfth consecutive month in July, this time reaching its lowest level since 2020.
The HCOB Eurozone Manufacturing Purchasing Managers Index fell to 42.7 in July from 43.4 in the previous month.
The sector continues to be hindered by slowing demand, both domestically and from abroad. New orders fell again, which helped push down output over the month.
In Europe’s largest economy, Germany, manufacturing activity shrank at its fastest pace since May 2020.
The challenges in Europe’s manufacturing sector are weighing on economic growth across the continent.
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