Global equity markets fell over the week ended September 8, with comments from central bankers pointing to the likelihood of more rate increases. Economic data released over the week was mixed, with many major economies seeing service sector activity improving but factory-related data posting weakness. The S&P/TSX Composite Index finished lower, dragged down by the Information Technology sector. Equity markets in the U.S. also declined. Oil prices advanced while the price of gold fell. Yields on 10-year government bonds in Canada and the U.S. ticked higher over the week.The BoC holds steady
As was widely expected, the Bank of Canada (“BoC”) held its benchmark overnight interest rate steady at 5.00%, its highest level since 2001.
The BoC’s rate hold came in response to the Canadian economy slowing, particularly in the second quarter when the economy shrank. Meanwhile, inflation continues to soften.
Still, September’s rate hold does not mean monetary tightening has ended. Canada’s central bank could still lift interest rates, depending on incoming economic data.
Rate cuts do not appear likely, at least in the short term, meaning interest rates will remain higher for longer.
Late in the week, Statistics Canada announced Canada’s economy added 39,900 jobs in August, reversing the drop in employment from July. The unemployment rate held steady at 5.5%. Despite some recent softness in Canada’s labour market, August’s data shows it is still relatively strong, with tight conditions.
The U.S. service sector expands at a quicker pace
Service sector activity in the U.S. expanded more quickly in August compared to July, benefiting from stronger new orders, employment and business activity.
The ISM Services Purchasing Managers Index rose to 54.5 in August from 52.7 in July, beating expectations and marking its highest reading since February 2023.
The U.S. service sector is helping to prop up the U.S. economy, particularly with the manufacturing sector continuing to perform at lacklustre levels.
The strength in the service sector compared to the weakness in the manufacturing sector may be pointing to an overall shift in consumer spending from tangible goods to more experience-related expenditures.
China posts fourth straight decline in exports
Exports from China suffered another decline in August, falling by 8.8% year‑over‑year. August’s decrease was, however, smaller than July’s 14.5% drop.
This was the fourth consecutive decline amid a drop in shipments of aluminum and grain. Exports to the U.S., Europe and other Asian countries slumped in August.
The drop suggests still relatively muted consumer and business demand globally, weighing on China’s economy.
Imports also fell, but at a slower pace, dropping by 7.3% year-over-year. China’s trade surplus ended August at US$68.4 billion (C$92.9 billion), narrowing from the previous month.
Meanwhile, activity in China’s service sector moderated in August to its slowest pace since December.
Factory orders slump in Germany
Factory orders in Germany dropped by 11.7% in July, the sharpest decline since April 2020, at the onset of the pandemic.
This was the first drop in four months as orders for transportation equipment, electronics and machinery fell over the month. Domestic and foreign demand were muted during the month, weighing on orders.
The drop in factory orders is another negative for this critical sector of Germany’s economy, the largest in Europe. Germany’s economic activity has weakened over the last several quarters, partly due to its struggling manufacturing sector.
Across Europe, retail sales dropped by 0.2% in July, reversing two straight monthly gains.
Finally, a third and final estimate showed Europe’s economy expanded by 0.1% over the second quarter of 2023, matching the first quarter’s growth rate.
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