The slowdown in the U.S. labour market boosted the odds the U.S. Federal Reserve Board (“Fed”) could be close to the end of its interest rate hikes, which helped boost sentiment and lift global equity markets higher. The S&P/TSX Composite Index benefited from the strong performance of the Information Technology sector. Stocks in the U.S. also climbed higher. Oil and gold prices both advanced at relatively rapid paces. Yields on 10-year government bonds in Canada and the U.S. fell partly due to lowering expectations of much higher interest rates and a deep recession.Canada’s GDP slumps in the second quarter
Canada’s gross domestic product (“GDP”) shrank at an annualized pace of 0.2% in the second quarter of 2023, following a downwardly revised 2.6% expansion in the previous quarter.
Canada’s economy was dragged down by falling housing investment and a decline in net exports. Consumer spending rose at a relatively slow pace of only 0.2%.
The result accentuates the impact higher interest rates from the Bank of Canada (“BoC”) are having on households and businesses, weighing on economic activity.
The BoC makes its next rate announcement on September 6. With inflation coming down, the labour market losing steam and Canada’s economy showing weakness, the BoC may opt to stay on the sidelines at this meeting.
Looking ahead, Statistics Canada estimated there was no growth in Canada’s economy in July.
U.S. labour market momentum moderating
The U.S. economy added 187,000 jobs in August, just above last month’s total. Despite the increase in jobs, the U.S. unemployment rate rose to 3.8% in August, its highest level since February 2022.
ADP reported that U.S. businesses added 177,000 jobs in August, down from the previous month and the lowest number of job additions since March. Most jobs were added in the education and health industry.
In signs the tight labour market may be loosening, albeit slightly, there were 8.8 million job openings in July, its lowest figure in over two years.
The personal consumption expenditure price index (“PCE”), a preferred inflation gauge of the Fed, rose to 3.3% in July from 3.0% in June, driven in part by relatively strong demand, with U.S. personal spending rising by 0.8% over the month.
While the labour market may be slowing, inflationary pressures persist, which could give the Fed more fuel to raise interest rates.
China’s business activity climbs higher
Business activity in China expanded faster in August than in July, raising hopes China’s economy may be poised for relatively strong growth. China’s economy has struggled amid lockdown restrictions and waning demand over 2023, so investors keep searching for signs of a potential turnaround and hope this manufacturing data could be it.
The NBS Composite Purchasing Managers Index rose to 51.3 in August from 51.1 in the previous month.
Underlying this was an improvement in the critical manufacturing sector, which contracted in August but was slower than in July. The slower contraction heightened expectations for the sector and China’s broader economy in response to a rise in new orders and output, which had previously slumped in 2023.
The services sector expanded in August for an eighth consecutive month.
No change in Europe’s inflation rate
A flash estimate showed Europe’s inflation rate was unchanged in August at 5.3%. The drop in energy prices slowed while the price growth for food, alcohol and tobacco moderated. The rate remains well above the European Central Bank’s (“ECB”) 2% target.
Europe’s labour market remained relatively strong in July, with the unemployment rate at 6.4%.
Consumer confidence fell in August, mainly in response to concerns over household’s financial situation amid tight financial conditions. There is still much uncertainty about economic conditions in Europe.
The data points to more rate increases from the ECB, and comments from ECB President Christine Lagarde at Jackson Hole reinforced these expectations.
Lagarde noted the ECB will likely need to keep lifting rates to pull down inflation. Investors are expecting higher rates for much longer in Europe.
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