Michael Watkins
July 21, 2023
Weekly Market Update
It has been a very positive week in the North American markets. Statistics Canada reported that Canada’s inflation rate moderated for a second straight month. After reaching multi-decade highs in mid-2022, inflation has steadily dropped due in part to the aggressive rate increases by the Bank of Canada (BoC). Attention now turns to what the BoC might do next.
- Canada’s annual inflation rate softened to 2.8% in June, its lowest level since 2021 and lower than the 3.0% year-over-year rate expected by economists, based on a survey by Bloomberg.
- A sharp decline in gasoline prices drove June’s decline. In June 2022, gasoline prices were soaring amid geopolitical tensions in Ukraine. Compared to May, the increase in food prices remained unchanged at 8.3%. Food prices remain ultra-high, weighing on many Canadian households.
- Rising mortgage costs were again a key contributor to Canada’s elevated inflation rate. In recent months, mortgage costs have been a critical driver of inflation in response to the BoC’s aggressive rate hikes over the past year, which have pushed up borrowing costs.
- At its last meeting, the BoC reiterated its commitment to pulling down inflation to its 2% target. However, the BoC projected inflation to run above 3% over the summer, putting June’s figure below expectations, which might lessen expectations for more rate hikes. Still, inflation remains elevated despite coming down.
Price pressures in the Canadian economy are indeed easing but providing little relief to many Canadians grappling with much higher prices compared to a couple of years ago. While the BoC raises interest rates to ease these price pressures, it also raises borrowing costs, making for tight financial conditions for Canadians.
Across the pond, the United Kingdom’s inflation rate dropped to its lowest level in 15 months, according to data from the Office for National Statistics (ONS). Annual consumer price growth in June cooled to 7.9% from the previous month’s 8.7%, marking the first lower-than-expected reading in five months.
- The ONS attributed the drop in the inflation to falling gas prices for motorists and a smaller increase in grocery bills. Transport prices declined 1.8% in June versus a 1.2% decline in May.
- The UK’s inflation remains elevated, in contrast to the US and Canada, where the Consumer Price Index dipped back to 3% and 2.8% in June, respectively. However, Wednesday’s UK data indicates closer alignment with international peers. In response, economists recalibrated expectations for the Bank of England’s terminal interest rate of this cycle towards a lower peak.
- In Europe, Eurostat’s preliminary data revealed that consumer prices in June rose 5.5% year-over-year, the slowest increase since January 2022.
- Volatility in bond yields, which have repeatedly repriced interest-rate expectations, could persist as market dynamics continue to evolve.
- A lower UK energy price cap, which limits household energy bills, is expected to contribute to a further decline in inflation in July.
Given these developments, it is important to monitor the impact of cooling inflation in the UK and beyond. The UK has faced steeper inflationary pressure than other developed economies. However, the trending alignment with international peers could have implications for investment strategies and asset allocation decisions.
Meanwhile in Asia, China’s gross domestic product (GDP) expanded over the second quarter of 2023. While the expansion was a positive for the world’s second-largest economy, digging deeper into the results shows that economic activity remains relatively muted. China’s economy has been hindered in 2023 by lockdown restrictions, waning global demand and ongoing challenges in its domestic property market.
- China’s economy expanded by 6.3% in the second quarter of 2023 compared to the same period last year. However, the relatively strong growth rate was inflated in response to the low base quarter in 2022 when several cities across China were facing strict lockdown restrictions, slowing economic activity considerably.
- Comparing quarter-over-quarter results, China’s GDP expanded by 0.8% in the second quarter, softening from the 2.2% pace of growth in the first quarter. Weighing on growth over the second quarter was a still weak property market and a drop in exports, suggesting global demand might be waning.
- Domestic demand is also relatively weak. Retail sales rose by 3.1% year-over-year in June, which was the slowest pace of annual growth since dropping in December 2022. Industrial production advanced at an annual rate of 4.4% in June, faster than in May.
- The government’s target of 5% growth in 2023 appears to be at risk. China’s central bank, the People’s Bank of China, recently reduced interest rates looking to spur economic growth. Expectations are heightening the government could step forward with even more stimulus measures
The results in China show the relatively uneven economic growth worldwide. While some economies might be growing, others are slowing or even contracting. Canada’s economy proved relatively resilient in the first quarter of 2023 but there were some pockets of weakness.
As always, please give us a call if you have any questions, or if you’d like to get together for a portfolio.
Source: CIBC Morning Market Brief