Global equity markets finished higher over the week ended June 30. Investors weighed comments from central bank officials about rates needing to go higher against data pointing to the global economy avoiding a recession this year. The S&P/TSX Composite Index advanced, led by the Health Care sector. U.S. equities, as measured by the MSCI USA Index, posted a gain. Oil prices ticked higher, while the price of gold fell. The yield on 10-year Government of Canada bonds declined, while the yield on 10-year U.S. Treasury bonds moved higher
Slowdown in Canada’s inflation rate
Canada’s inflation rate showed more signs of easing in May, falling to 3.4%, which was Canada’s lowest rate of inflation since June 2021.
Contributing to the slowdown was a sharp drop in gasoline prices, partly due to the high base year in 2022 when energy prices surged higher amid Russia’s invasion of Ukraine.
On the other hand, mortgage costs grew quickly, largely in response to higher interest rates, as the Bank of Canada (”BoC”) lifted rates at a quick pace over the past year.
The drop in inflation brings it closer to the BoC’s earlier projections for 2023, which may help cap how the BoC proceeds with its tightening policy.
U.S. PCE reaches lowest level since 2021
The U.S. personal consumption expenditure price index (“PCE”) slowed in May to 3.8%, its lowest level since April 2021.
A drop in energy prices pulled down the U.S. Federal Reserve Board’s (“Fed”) key inflation gauge. The core PCE also ticked lower in May.
Personal spending eased, growing by only 0.1% in May compared to a 0.6% increase in April.
The slowdown in PCE and spending may suggest the U.S. economy is losing steam. The U.S. consumer has been a critical driver of growth, so a slowdown in consumer strength could hinder economic growth.
Central bankers say there are more rate hikes to come
Plenty of comments from major global central banks at a conference in Portugal last week pointed to more rate increases in 2023.
Fed Chair Jerome Powell commented that he sees the potential for at least two more rate hikes this year.
He also added he does not expect the U.S. economy to fall into a recession this year. A third and final estimate showed the U.S. economy expanded at an annualized pace of 2.0% in the first quarter.
It was much the same from the European Central Bank (“ECB”). President Christine Lagarde says inflation is too high, and much too soon to say the ECB has reached peak rates. The ECB’s battle against inflation is poised to continue this year.
China’s manufacturing sector struggles for traction
Manufacturing activity in China contracted again in June.
The third straight contraction in China’s key manufacturing sector suggests the economy is struggling to grow at a strong pace as tighter financial conditions weigh on global demand.
A drop in new orders and export orders hindered the sector. Employment growth also contracted for the fourth consecutive month.
Industrial profits are suffering amid high costs and muted demand. From January 2023 to May 2023, industrial profits dropped by 18.8% compared to the same period last year.
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