Your weekly commentary – For the week ended May 5
Global equity markets finished lower over the week ended May 5. Investor sentiment was frayed over ongoing concerns about the global financial sector and what impact that may have on the global economy. In Canada, the Energy sector dragged down the S&P/TSX Composite Index. Oil prices declined while the price of gold advanced. Yields on 10-year government bonds in Canada and the U.S. both finished largely unchanged.
The Fed shows its intention to pause
The U.S. Federal Reserve Board (“Fed”) kept raising rates at a tenth consecutive meeting, lifting its federal funds rate by 25 basis points (“bps”) to a target range of 5.00%-5.25%. This is its highest level since 2007. Economists widely expected the move.
The Fed removed a key line from its statements referring to the need for more rate increases, which signalled to investors its intentions to begin pausing interest rates hikes.
However, the Fed will continue to monitor data, so another rate increase may still be possible.
The Fed noted that the recent troubles of a few U.S. regional banks are contributing to tightening credit conditions, which may slow the economy and inflation. JPMorgan Chase & Co. acquired First Republic Bank after it reported deposits fell 42% in the first quarter, which weighed on customer and investor confidence.
With inflation still high and the labour market tight, the likelihood of a rate cut, at least in the near term, seems minimal.
The ECB slows the pace of its rate increases
For the seventh straight time, the European Central Bank (“ECB”) raised its key interest rate to tame elevated inflationary pressures.
This time, the ECB slowed the pace of its interest rate hike to 25 bps, taking its main refinancing rate to 3.75%.
ECB President Christine Lagarde commented that Europe’s central bank must still fight inflation, suggesting it may keep lifting rates.
The ECB also announced it would end its reinvestments under the Asset Purchase Program in July.
Europe’s economy has stalled in recent quarters, which has led the ECB to maintain a watchful eye on growth while it combats high inflation.
Canada adds more jobs
In April, the Canadian economy added 41,000 jobs, topping the 20,000 job additions economists had expected.
Jobs were added in the part-time sector, while full-time employment fell during the month. The wholesale and retail trade industry added the most jobs during the month.
Canada’s jobless rate remained unchanged at 5.0% in April.
Despite the better-than-expected job numbers, the result likely does little to adjust the Bank of Canada’s expectations to hold steady, at least in the near term.
China’s manufacturing activity shrinks
Manufacturing activity in China contracted in April, surprising economists expecting an expansion.
The Caixin China Manufacturing Purchasing Managers Index fell to 49.5 in April from 50.0 in March. Economists were expecting a reading of 50.0.
This marks the first contraction since January owing to a drop in new orders and employment. Output, meanwhile, slowed in April.
China’s manufacturing sector was hindered by weaker economic conditions both domestically and from abroad.
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