Michael Watkins
July 28, 2023
Weekly Market Update
Another positive week in the markets, with the American S&P 500 ticking up to new heights. And despite ultra-tight financial conditions, U.S. gross domestic product keeps chugging along. A preliminary estimate showed the U.S. economy expanded in the second quarter of 2023 faster than the first quarter. The world’s largest economy is proving its relative resilience despite uncertain economic conditions elsewhere.
- According to a preliminary estimate, the U.S. economy expanded at an annualized pace of 2.4% in the second quarter of 2023, which topped the 1.8% annualized growth rate expected by economists, based on a survey by Bloomberg. U.S. gross domestic product grew by 2.0% in the first quarter.
- A significant contributor to growth in the second quarter was robust business spending. Businesses made substantial investments in the second quarter despite high borrowing costs and product prices.
- The U.S. consumer continued to be a strong growth driver, pushing household spending higher over the quarter. However, consumer spending did slow in the second quarter over the last, suggesting tight financial conditions might be weighing on many American households. The rise in business and consumer spending was partially offset by a drop in net exports and the continued decline of real estate investment.
- The U.S. Federal Reserve Board (Fed) raised its federal funds rate by 25 basis points on Wednesday, noting the American economy is growing moderately. The relatively strong U.S. economy and still high inflation could push the Fed to keep lifting interest rates.
Many economists and market participants predicted the U.S. economy would fall into a recession. However, a strong labour market, which is propping up the U.S. consumer, is helping the American economy avoid a recession. Still, there is much uncertainty as growth slows in other areas.
The U.S. Federal Reserve Board (Fed) concluded its two-day meeting this week by announcing it was raising its federal funds rate. At its June meeting, where it paused interest rates, the Fed suggested that more interest-rate hikes were likely, making this rate increase widely expected. The Fed is committed to bringing down inflation to its 2% target.
- The Fed raised the target range for its federal funds rate by 25 basis points to 5.25%–5.50%. The federal funds rate now stands at its highest level since 2001.
- The increase marked the Fed’s eleventh over the last twelve meetings. The Fed held steady at its previous meeting in June as it saw inflation softening. However, with persistent inflationary pressures and the economy growing moderately, the Fed returned to raising interest rates.
- While the U.S. central bank focuses on meeting its inflation and employment targets, it will carefully monitor the impact of monetary policy on the economy as it makes future rate decisions.
- Based on comments from the Fed, the door remains open for more rate increases this year as it assesses developments in inflation, the labour market and U.S. economic growth. Incoming data will drive the Fed’s decisions at upcoming meetings, with the next one in September.
The decision and subsequent statements from the Fed point to a substantial likelihood of more rate increases this year. The Bank of Canada has also returned to raising interest rates and could be inclined to keep pace with the Fed to avoid any negative impacts from a considerable divergence between their respective interest rates.
Turning to the bigger picture, the International Monetary Fund (IMF) released its July World Economic Outlook this week. The organization upped its outlook for global economic growth in 2023. Still, the IMF sees many risks that could derail growth this year.
- The IMF now projects the global economy is expected to expand by 3.0% over 2023, higher than its 2.8% projection back in April. July’s higher figure still falls short of the 3.5% growth in the global economy in 2022.
- The IMF’s higher projection comes as the U.S. debt ceiling was resolved, along with troubles in the global banking sector, which helped alleviate significant risks to the global economy. But the economic agency believes higher borrowing costs, ongoing geopolitical tensions and weakness in China’s economy pose considerable risks to the global economy.
- The outlook projects Canada’s economy is expected to expand by 1.7% in 2023 and 1.4% in 2024. While Canada might avoid a deep recession, growth will remain relatively slow on a historical basis. The IMF sees the U.S. economy growing by 1.8% this year and 1.0% next year.
- While higher interest rates are weighing on economic growth, they’re also helping central bankers fight against inflation. The IMF believes inflation will soften this year and next, reaching 5.2% in 2024.
Despite higher projections from the IMF, the expected global growth rate remains well below the averages seen over the past few decades. Historically, short-term blips in the global economy’s health have been followed by periods of relatively strong growth, similar to financial markets, so keep investing and stay invested.
As always, please give us a call if you have any questions, or if you’d like to get together to review your portfolio.
Source: CIBC Morning Market Brief