Global equity markets were shaky over the week, finishing largely flat. Investors continue to dissect economic data to make predictions on when interest rate cuts will begin. In Canada, the S&P/TSX Composite Index declined, dragged down by the Health Care sector. U.S. equities edged higher. 10-year government bond yields in Canada fell, while those in the U.S. moved higher. Oil and gold prices declined over the week.
Canada’s inflation rate comes down
Inflationary pressures in Canada subsided further April, raising expectations the Bank of Canada (“BoC”) might soon begin lowering interest rates. Canada’s inflation rate was 2.7% in April, matching economists’ expectations, and down from the 2.9% rate in March.
Price growth for food and shelter slowed in April. At the same time, prices fell for clothing. Conversely, gasoline prices increased, contributing to April’s rate remaining above the BoC’s 2% target.
Core inflation measures also softened over the month of April.
Tight financial conditions are weighing on Canadian households. Retail spending dropped by 0.2% in March, its third consecutive drop to begin 2024.
The data suggests the BoC may be closing in on an interest rate cut. It’s becoming more possible that the BoC might be preparing for a 25-basis-point rate cut as early as June.
U.S. business activity reaches highest level since 2022
A preliminary estimate from S&P Global showed business activity in the U.S. expanded at its fastest pace since April 2022, showing the resilience of the world’s largest economy despite tight financial conditions.
The S&P Global U.S. Composite Purchasing Managers Index rose to 54.4 in May from 51.3 in the previous month. The increase came as a surprise to economists who were expecting it to fall to 51.2.
Gains were seen in both the manufacturing and services sectors. The manufacturing sector expanded for a fifth straight month, benefiting from strong output and a rise in employment.
Services sector activity drove May’s gains. A rise in new business contributed to the stronger services sector activity over the month.
U.K. inflation comes in above expectations
Like Canada, the U.K. saw its inflation rate decline in April. However, unlike Canada, it didn’t fall as much as expected, pushing back expectations of when the Bank of England (“BoE”) will start dropping interest rates.
The U.K. inflation rate fell to 2.3% in April from 3.2% in the previous month. It was the lowest rate of inflation in the U.K. since July 2021.
However, it was above the 2.1% rate economists had expected. As a result, market participants revised their projections of when the BoE will begin cutting interest rates to later in the year.
The core inflation rate also dropped, reaching 3.9% in April, which was also above economists’ expectations of a 3.6% rate.
U.K. households are clearly feeling the pinch, dragging down spending. Retail sales slid by 2.3% in April, their second straight monthly decline.
China’s government looks to stimulate economy
At its May fixing, the People’s Bank of China (“PBOC”) held its one- and five-year loan prime rates (“LPR”) steady at 3.45% and 3.95%, respectively.
The PBOC felt it was appropriate to leave its LPRs at all-time lows as it seeks to help support China’s economic activity.
While the PBOC held steady, China’s government introduced new stimulus measures to help its economy, including the property market.
China’s government announced it was selling 1 trillion yuan (C$193 billion) of long sovereign bonds. While the government hasn’t outlined the exact uses for the funds, they’re expected to be used to help kickstart economic activity and improve credit conditions.
The government also announced it was taking action to help support China’s ailing property market, including easing mortgage rules.
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