Global equity markets ticked lower over the week ended October 6 as investors weighed all economic data, seeking clues on the next move by central banks. Robust labour market data in Canada and the U.S. heightened expectations that their respective central banks could raise rates further. In Canada, the S&P/TSX Composite Index declined, posting weakness in the Energy sector. U.S. equities, as measured by the MSCI USA Index, finished higher. Oil and gold prices fell. The yield on 10-year government bonds in Canada and the U.S. increased over the week.
Canadian manufacturing contracts again
Canada’s manufacturing sector continued to show signs of weakness in September, which has weighed on the overall health of Canada’s economy.
The S&P Global Canada Manufacturing Purchasing Managers Index fell to 47.5 in September from 48.0 in August (a reading below 50 denotes contraction), marking its sharpest contraction since 2020.
Canada’s manufacturing sector has contracted for five months, mainly in response to moderating demand amid tight financial conditions. New orders declined in September.
The drop in new orders weighed on production levels, which forced manufacturers to reduce employment levels.
North American labour markets remain strong
The Canadian and U.S. labour markets strengthened in September, which immediately heightened expectations the Bank of Canada and U.S. Federal Reserve Board may lift interest rates.
The Canadian economy added over 63,000 jobs in September, with solid gains in the educational services industry. Canada’s jobless rate was 5.5% in September, matching August’s rate.
The story was much the same in the U.S., where the economy added 336,000 jobs, well above economists’ expectations. The unemployment rate was unchanged at 3.8% in September.
Wage growth was elevated in September but slowed compared to the previous month. In more signs of the tight labour market in the U.S., job openings in the U.S. increased by 690,000 in August.
European retail sales post sharp drop
Higher borrowing costs and elevated inflation took a bite out of European consumers in August as retail sales declined by 1.2%, the second consecutive monthly decline.
Spending on gasoline and on food, drinks and tobacco dropped over the month.
While spending fell, the pressure on the consumer does not appear to be coming from the labour market. Europe’s unemployment rate ticked lower to 6.4% in August, matching June as the lowest rate ever recorded. The number of unemployed persons dropped in August.
Despite a relatively strong labour market, the European economy struggled for traction amid tight financial conditions domestically and abroad.
The European Central Bank (“ECB”) makes its next interest rate announcement on October 26. The drop in retail sales may give the ECB pause to consider how high it can go with rates.
Global economic outlook remains uncertain
The United Nations Conference on Trade and Development (“UNCTAD”) believes the global economy might expand by 2.5% next year, with growth finishing 2023 at 2.4%.
In its most recent report, UNCTAD projects that the global economy will expand next year, but that growth will not be even across the world, with some economies poised to struggle more than others.
Europe is of particular concern for UNCTAD, believing it may be on the verge of a recession. The U.S. may avoid a recession, but high debt and tight financial conditions could affect economic growth. The organization projects Canada’s economy to expand by 1.3% this year and 1.0% in 2024.
Emerging markets economies could be negatively impacted by tight financial conditions in more advanced economies and by the growing wealth gap, according to UNCTAD.
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