Jordan Dawes
June 30, 2023
Weekly Market Update
A final reading of U.S. economic growth revealed the economy expanded faster than earlier estimates had shown. All signs point to the U.S. economy avoiding a recession, but uncertainty persists ahead, given a softening global economy, tight financial conditions, and the likelihood of more interest rate increases.
- A third and final reading showed U.S. gross domestic product expanded at an annualized pace of 2.0% in the first quarter of 2023. This is up from an earlier estimate of a 1.3% expansion but still below the 2.6% increase in the fourth quarter of 2022.
- The increase in the U.S. economic growth rate was mainly in response to an upward revision in consumer spending and net exports. Despite tighter financial conditions, the U.S. consumer remains relatively resilient.
- The U.S. consumer has been the main driver of economic growth in the U.S., benefiting from a robust labour market.
- On the other hand, real estate investment fell over the quarter. The U.S. real estate market has weakened over the past year, but demand may be picking up. The National Association of Realtors announced U.S. pending home sales fell in May, primarily due to a low number of houses for sale.
- U.S. Federal Reserve Board (“Fed”) Chair Jerome Powell recently commented the U.S. is likely to avoid a recession in 2023. That may give the Fed the opportunity to raise interest rates as it seeks to curb high inflationary pressures.
Statistics Canada released Canada’s CPI data for May, revealing Canada’s inflation rate dropped to 3.4% year-over-year. Inflation in Canada continues to move downward but remains at elevated levels and above the Bank of Canada’s (BoC) 2% target. The BoC has aggressively raised rates over the past year to help curb inflationary pressures.
- Canada’s annual inflation rate was 3.4% in May, which matched expectations based on a survey of economists by Bloomberg. May’s reading was Canada’s lowest rate of annual inflation since June 2021. The core inflation rate, which excludes more volatile items such as energy and food prices, also slowed in May.
- Driving May’s slowdown was an 18.3% year-over-year decline in gasoline prices. The sharp drop was partly due to a high base year last May when the conflict in Ukraine helped push up oil prices. The price growth for clothing slowed in May. On the other hand, mortgage costs were markedly higher for a second straight month, mainly in response to rising interest rates.
- Canada’s inflation rate has fallen significantly over the past year. The rate of inflation reached a post-pandemic high of 8.1% in June 2022, but the efforts of the BoC to raise interest rates at a rapid pace have contributed to the slowdown in price growth.
Attention now turns to Canada’s central bank. Canada’s next rate decision is on July 12. With prices still above its target, the economy growing at a relatively strong pace, and a robust labour market, the BoC may raise rates again. But May’s inflation reading may relieve pressure on the BoC to raise interest rates.
Despite the decline, inflation remains elevated and impacts many Canadian households and businesses. This reading has created some uncertainty about the BoC’s next move. Economic conditions and expectations change quickly, which could impact your portfolio. Preparation is key. Ensure your portfolio has exposure to different asset classes and countries that can help it perform through potentially challenging environments.
As always, give us a call if you have any questions, or would like to book a portfolio review and have a safe and sun-filled long weekend - Happy Birthday Canada!
Source: CIBC Morning Market Brief