Michael Watkins
August 25, 2023
Weekly Market Update
Retail sales for June did not expand much from the previous month, in line with the view that the consumer-driven economy could be slowing. A slowdown in retail sales might impact the Bank of Canada’s next interest-rate decision and could be a leading indicator of weaker economic growth.
- Retail sales in June increased by 0.1% to $65.9 billion, driven by spending at auto and parts dealers, which grew 2.5%, according to Statistics Canada.
- After excluding autos, the data reveals a different story. A deeper analysis reveals that retail sales, when excluding the automotive sector, declined by 0.8%. This decline was more substantial than anticipated and the most significant drop since February.
- More details and yearly comparison. Sales in food and beverage retailers dropped by 0.9%. Sales at general merchandise retailers declined by 1.5%. Annually, sales in June fell by 0.6%.
- Statistics Canada estimates a 0.4% increase in retail sales for July. However, the rise in unemployment to 5.5% in July is expected to have restricted consumer spending.
In the US, mortgage applications for the week ended August 18, 2023, fell to the lowest levels since 1995. The yields on US 10-year Treasury bonds and Canada’s five-year Treasury bonds, which impact their respective mortgage rates, are hovering around 16-year highs. Servicing higher mortgage debt by reducing spending on other discretionary household items could become an underlying theme in North America. In addition, the major Canadian banks began releasing earnings reports yesterday, and market observers will look for indicators about the impact of higher interest rates on revenue.
Financial markets today will likely be focused on Jackson Hole, where US Federal Reserve Board (Fed) Chair Jerome Powell will provide the Fed’s latest assessment of the US economy. This could offer a hint about the direction of the Fed’s interest-rate decision in September. In Canada, according to CIBC economists, rising unemployment might prompt the Bank of Canada (BoC) to consider pausing interest-rate increases in September. The unemployment rate reached 5.5% in July, rising for three straight months, and employment vacancies have fallen.
- Rewinding back to 2022. Last year, Powell’s message was quite clear that the Fed’s plan to raise interest rates would lead to “some pain” in terms of economic challenges. This year, Powell’s speech is likely to address the symposium’s theme of “Structural Shifts in the Global Economy.”
- The balancing act. Market participants will be keen to gain insight into the current state of the US economy. Investors could also learn how well the Fed believes its monetary policy is working to curb inflation while at the same time avoiding a steep recession.
- Higher for longer? The US and Canadian economies have demonstrated resilience to the record-breaking interest-rate increases through robust consumer spending and relatively low unemployment levels. This could mean that interest rates remain higher for longer.
- Progress with inflation. Since last year, inflation has cooled to just over 3% in Canada and US from over 8% and 9%, respectively. The Fed is likely to acknowledge this progress.
Inflation isn’t the only issue challenging central banks. While more insight could be gained today in Jackson Hole about the US Federal Reserve Board’s take on its battle against inflation, China is facing the prospect of an issue at the other end of the spectrum – deflation. Also, consumer confidence and spending in China has fallen in response to pressures on the property market and youth unemployment.
- The People’s Bank of China lowered its key interest rate. The one-year loan prime rate was decreased from 3.55% to 3.45%. This rate typically influences outstanding and short-term loans.
- However, the five-year loan prime rate remained unchanged at 4.2%. Analysts were expecting a decline in the longer-term rate, which influences mortgage rates.
- Evergrande, the giant Chinese real estate property developer, filed for bankruptcy protection in the US last week. It defaulted on its debts in 2021. Based on the group’s website, it has over 13,000 property projects throughout China. Monetary policy management by policymakers in China was expected to address challenges in the real estate industry.
- Consumer price inflation in China decreased by 0.3% in July on an annual basis. Several investment banks have downgraded their economic growth forecasts for 2023 and 2024 in response to the property market slowdown and slowing global demand.
As always, please give us a call if you have any questions, or if you’d like to get together for a portfolio review.
Source: CIBC Morning Market Brief