A bit of a choppy week with anticipation of the Fed rate decision being the main focus. Crude oil prices, which are often considered a barometer of global demand and economic activity, declined by roughly 20% in the first quarter of 2023 on an annual basis. In the corresponding period in 2022, the Russia-Ukraine conflict drove oil prices to multi-year highs.

• Concerns regarding the economic recovery in China and the US banking segment contributed to lower oil prices. This week, the price of West Texas Intermediate fell below US$69 a barrel.
• Statistics Canada reported that Canadian exports fell by 0.7% month-on-month to $63.6 billion as energy product shipments declined due to lower crude oil prices.
• Demand for jet fuel decreased in the US in the first quarter of 2023 compared to the first quarter of 2019. Although more US passengers were flying compared to before the pandemic, there was less international travel.
• Manufacturing activity in China fell unexpectedly in April based on the manufacturing purchasing managers’ index of 49.2, raising concerns about a lack of market demand. Domestic demand was weaker than expected even though domestic travel increased and spending could jump during May holidays. China’s economy is expected to be one of the largest contributors to global oil demand in 2023.
• The Organization of Petroleum Exporting Countries surprised markets in April by announcing cuts of approximately one million barrels a day for the remainder of 2023, likely in anticipation of reduced demand

Weakness in global demand, including manufacturing in China, will likely contribute to lower oil prices. Risks to the global energy sector, in which Canada ranks as the sixth-largest crude oil producer, seem to be growing. However, as the market experienced in 2022, unexpected shocks to supply or demand networks can be profound. Therefore, it’s important to keep investing to benefit from price pullbacks, which can help elevate returns over the long run.

Economic announcements are set to dominate the headlines, starting with US banking regulators’ takeover of First Republic Bank. The news came just days ahead of the US Federal Reserve Board’s (Fed) highly anticipated interest-rate decision

• On the weekend, banking regulators assumed control of First Republic Bank. JPMorgan Chase agreed to assume deposits after the second-largest banking failure in US history.
• Canada’s manufacturing activity expanded in April, supported by higher staffing levels. The S&P Global Manufacturing Purchasing Managers’ Index (PMI) rose to 50.2.
• The next BoC interest-rate decision is on June 7.
• US factory activity dropped for the sixth consecutive month due to slowing global demand as input prices increased.
• Markets took a break with fewer trading sessions in Europe and Asia due to the May 1 holiday

The failure by First Republic Bank is the third by a US bank in two months. However, the risk of tensions spreading to Canadian banks seems limited given our tight regulatory and risk-averse environment.

As expected, the US Federal Reserve Board (Fed) raised interest rates by 25 basis points. Searching for further insights, investors focused on the Fed guidance and market commentary that accompanied the announcement.

• The Fed announced its tenth consecutive interest rate increase, bringing the federal funds rate to a target range of 5.00% to 5.25%.
• Key inflation and jobs data were cited as the rationale for the increase. Although March job openings declined, the labour market remained tight. The consumer price index reached 5% in March, still more than double the Fed’s inflation target.
• Services, including travel and childcare costs, are driving inflation, according to the Bureau of Labor Statistics. Food, energy and commodity prices moderated.
• Roadmap for next rate decision outlined. Fed policymakers said incoming data would be monitored to assess the aggregate effect of monetary policy, including its lagged impact on economic activity. Restoring price stability remained the priority.
• Tighter lending standards are likely to influence hiring and inflation. However, Fed Chair Jerome Powell reiterated that the US banking system was sound and resilient and that lessons could be learned from recent events.
• April jobs data on Friday will provide more insight into US labour market trends and how much economic activity might be cooling. Separately, oil prices fell as the demand outlook in the US and China dipped.

As always, give us a call if you have any concerns or questions, or if you’d like to book a portfolio review. Please note: we will also update you on any new information regarding the Mackenzie breach. In the meantime, setting up the credit inquiry alerts seems like a great temporary solution and I can, at the very least, assure you that the team will not release any information regarding your accounts to anyone but you.