Michael Watkins
August 11, 2023
Weekly Market Update
It looks like the markets are trying to shrug off negative perceptions as they inch up to close out the week. In economic news, the latest trade data from Statistics Canada indicates that falling exports contributed to a second consecutive monthly trade deficit in June. The trade imbalance has raised concerns about the potential impact on Canada’s economic growth in the second quarter of 2023. Conversely, exports contributed to growth in the first quarter of 2023. Here are some key takeaways from the report:
- Canada’s trade deficit expanded to $3.73 billion in June, a significant increase from May’s $2.68 billion deficit. This marked the largest trade deficit since October 2020. Economists estimated a $2.79 billion deficit for June.
- Exports, a critical driver of economic growth, declined by 2.2% to $60.7 billion in June, month-on-month, representing the lowest exports since the beginning of 2022. The drop was attributed to decreased exports of metals and industrial machinery.
- Imports also declined, falling by 0.5% in June. The decrease in imports was primarily due to a decline in purchases of energy products.
- Experts suggest that weakening exports might negatively impact Canada’s second-quarter economic growth, which could depend more heavily on domestic demand for support.
- However, consumer spending resilience “appears to be slowly cracking under the pressure of higher interest rates,” as highlighted by CIBC economist Andrew Grantham.
Canada’s balance of trade figures for July will be released in September, and Statistics Canada expects the data to be impacted by the port strike in British Columbia and flooding in Nova Scotia.
Turning to our neighbours to the South, low consecutive monthly increases in the U.S. core Consumer Price Index point to some moderation in inflationary trends. The data will be taken into consideration by the U.S. Federal Reserve Board (Fed) before its next meeting in September.
- U.S. annual inflation rose to 3.2% in July from 3% in June according to the U.S. Bureau of Labor Statistics. The increase was the first uptick in a year, led by higher housing costs.
- Last year’s peak inflation is a favourable comparison. July’s rate is far below the 9.1% peak in 2022, although still above the Fed’s 2% target.
- Core Consumer Price Index up by 0.2% for second consecutive month. This represents the smallest monthly increases in a row for over two years. Some economists consider core inflation, which excludes food and energy costs, to be a better indicator of price trends.
- Pressure on supply chains has eased. Following the reopening after the pandemic, shipping ports and manufacturers were overwhelmed by demand, which contributed to inflation. The backlogs have been reduced but pressure has shifted to services, due to worker shortages.
- Improved semi-conductor chip supply impacts auto market. Consumers who previously opted for used vehicles due to chip shortages, which restricted supply, are looking at the new vehicle market again.
Staying informed and adapting in response to economic indicators is an important hallmark of prudent investing. However, context is crucial. For example, although overall inflation picked up in July, it is far below the peak from 2022. Fed Chair Jerome Powell also highlighted the emphasis on assessing the core inflation metric as a measure of inflationary trends. These data points provide more insight into the Fed’s likely interest-rate path, with many analysts forecasting a pause in September.
Finally, across the Pacific, consumer prices in China declined in July on an annual basis for the first time in over two years. On a monthly basis, consumer prices edged up by 0.2% in contrast to forecasts for a 0.1% decline. Lacklustre domestic demand has weighed on economic activity in China.
- In July, China’s Consumer Price Index (CPI) dropped by 0.3% year-over-year according to China’s National Bureau of Statistics. This marks the first deflationary reading since February 2021.
- China’s Producer Price Index fell by 4.4% year-over-year in July. The tenth consecutive monthly drop was steeper than forecasts of a 4.1% decline.
- The cost of food, transportation and household goods receded. Pork prices fell by 26% annually, while vegetable prices declined by 1.5%. Transportation costs fell by 4.7%.
- Imports and exports declined more than expected. According to China’s General Administration of Customs, exports declined by 14.5% in July compared to the previous year, while imports fell 12.4% in U.S.-dollar terms.
- Other areas of concern include challenges in the real estate market in China and youth employment, with over 11 million university graduates expected to enter the workforce in 2023.
The combination of the decline in CPI and weaker international demand might increase pressure on policymakers in China to look at ways to support economic activity. Analysts expect challenges in international trade to persist given higher borrowing costs and living expenses, which could weigh on demand for commodities. According to the United Nations Comtrade database on international trade, Canadian exports to China were US$22.04 billion in 2022. As a major global importer, trade volumes in China are likely to have a wider impact on the global economy.
As always, please give us a call if you have any questions, or if you’d like to book a portfolio review.
Source: CIBC Morning Market Brief