Michael Watkins
September 01, 2023
Weekly Market Update
It’s a case of bad news being good news this week. The Canadian economy contracted in the second quarter, making a Bank of Canada hike at next week's meeting very unlikely now. The -0.2% annualized quarterly change was in stark contrast to the consensus expectation of 1.2%, and the Bank of Canada's forecast of 1.5%. A sharp drop in housing investment compounded slower inventory investment and sluggish export growth, while consumption growth slowed to 0.2% annualized from the torrid 4.7% pace seen in the first quarter, showing that consumer resilience to higher interest rates has faded. Adding to the dismal report was the advance GDP estimate for July, which suggested a flat month for GDP, adding to the evidence that the Canadian economy does not need higher interest rates.
Over in the Eurozone, data from Germany has given the European Central Bank (ECB) more information to digest ahead of potential interest-rate adjustments at its next policy meeting on September 14. Germany’s consumer price inflation rate moderated but remained above 6%. Persistent inflation might impact consumer sentiment in Europe.
- Germany’s consumer price inflation rate moderated slightly to 6.1% year-over-year in August, a marginal decline from the previous month’s 6.2%. Although this matched the 14-month low recorded in May, it is still well above the ECB’s 2.0% target.
- The core inflation rate, which excludes volatile elements, was 5.5%, matching July’s level. The services component was 5.1%, while the commodities component was 7.1%, driven by energy costs.
- On a monthly basis, consumer prices went up by 0.3% in August, mirroring the previous month’s increase.
- Lower external price pressures could help inflation fall in coming months. On an annual basis, import prices in July fell by the largest margin since 1987.
Incoming economic data will fuel discussions on whether the ECB will continue raising interest rates. The ECB has so far lagged the US Federal Reserve Board’s (Fed) pace of rate increases. Economic activity in the US will likely inform the Fed’s next rate decision. The latest estimate for gross domestic product growth in the US was 2.1% in the second quarter of 2023, according to the Bureau of Economic Analysis.
In 2022, Europe’s gas purchases were close to €400 billion, according to the International Energy Agency. This resulted in one of Europe’s largest trade deficits in the third quarter of 2022. However, the trade balance has since shifted.
- High energy prices led to sustained high purchases of energy products. The region’s fossil fuel import requirements and the impact of the Russia-Ukraine conflict contributed to high energy costs.
- Europe experienced a record €155 billion deficit in the third quarter of 2022. This was partially due to the need to replace Russian gas supplies.
- More stable energy markets led to a recovery in the trade balance. Sales of vehicles, food and drinks increased globally, offsetting energy products.
- Europe’s trade balance moved to a surplus, ending six straight quarters of deficit. In the second quarter of 2023, Europe experienced a surplus of €1 billion, according to Eurostat. Energy product imports dropped by 15.6% in the second quarter of 2023, contributing to the trade balance recovery.
Europe’s trade balance has transformed from last year, largely due to external market forces. As the trade balance shifts, so does the financial landscape. Canada’s energy sector is also strongly influenced by international market dynamics. Although domestic wildfires and higher levels of maintenance lowered oil production in the second quarter of 2023, production is expected to increase by 8% over the next two years.
As always, please give us a shout if you have any questions, or if you’d like to get together for a portfolio review.
Source: CIBC Morning Market Brief