Michael Watkins
September 08, 2023
Weekly Market Update
It was all about the possibility of a hike this week, but the Bank of Canada (BoC) maintained its key interest rate at 5%, opting against increasing rates as the Canadian economy entered a slowdown in the second quarter of 2023. Signals of less excess demand and the delayed effects of earlier interest-rate hikes were important factors in the decision. The BoC has bumped up interest rates ten times since March 2022.
- Policymakers are keeping an eye on inflation. Although the BoC kept interest rates unchanged, continued concerns about inflation were highlighted. Policymakers emphasized a readiness to raise rates further if required.
- Canada’s inflation rate in July stood at 3.3%, a slight increase from the previous month’s 2.8%. Projections are for inflation to hover around 3% over the medium to long term.
- The Canadian economy unexpectedly contracted by 0.2% in the second quarter of 2023. Weaker growth for some period of time is considered necessary to help reduce price pressures.
- The BoC will hold two more meetings in 2023, giving the central bank two more opportunities to adjust interest rates. Trends around excess demand and inflation expectations will likely be key components of its evaluation.
The rate hikes that the BoC has implemented since March 2022 are expected to continue to impact the economy after a delay. The results could include slowing consumer demand and less business investment.
Looking at the bigger picture, investors and economists have focused their attention on the global central banks that are making interest-rate announcements in the coming weeks. Central banks such as the Bank of Canada (BoC), US Federal Reserve Board (Fed), European Central Bank (ECB) and Bank of England (BoE) have lifted rates at an aggressive pace since the beginning of 2022. With inflation coming down and economic conditions relatively wobbly, central bankers must carefully consider their actions.
- In an interview this week, Fed Governor Christopher Waller noted the Fed could tread carefully at its upcoming meeting in response to inflation softening. The governor believes the Fed does not have to raise rates at its upcoming meeting; instead, it can monitor incoming economic data and make decisions accordingly.
- The Fed will announce its interest-rate decision on September 20. Based on a survey by Bloomberg, economists are currently expecting the Fed to hold steady at 5.25%–5.50%.
- In Europe, the ECB will make its next announcement on September 14. The ECB’s key interest rate currently stands at 4.25%. In a speech on Monday, President Christine Lagarde gave no clear direction on the next action by Europe’s central bank. Meanwhile, the BoE makes its next rate announcement on September 21.
Regardless of how these central banks act at their upcoming meetings, it is safe to assume that interest rates are poised to stay relatively higher for longer. All have signaled that their fight against inflation might not yet be over.
Turning to the Eurozone, gross domestic product (GDP) growth in Europe for the second quarter of 2023 was just 0.1% quarter-over-quarter. The rate matched that from the previous quarter and highlights the overall challenge faced by the region’s economy. Easing global demand has affected the European export market and raised concerns about a slowdown. The latest figures might also impact growth forecasts for 2024.
- On an annual basis, economic activity grew by 0.5% in the second quarter. This compares to 1.1% in the first quarter.
- Weaker exports weighed on the manufacturing sector. Exports fell by 0.7% in the second quarter from the previous quarter. Germany and Italy both faced slower manufacturing activity.
- In terms of spending, household consumption remained steady. Government spending rose by 0.2% in contrast to the 0.6% decline from the previous quarter.
- In the second quarter, employment in Europe rose by 0.2%. Youth unemployment, which includes individuals under the age of 25, was a record-low 13.9% in July, down from over 25% in 2013.
- The European Central Bank will assess this information before its meeting on September 14. Policymakers will consider whether another interest-rate increase is warranted to combat inflation.
The European economy appears to be balanced on the line between expansion and contraction.
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Source: CIBC Morning Market Brief