Michael Watkins
May 03, 2024
Weekly Market Update
A bit more green on the screen this week, as we watch central bankers around the globe discuss when they’re going to be looking at rate cuts. In economic news, Statistics Canada (StatsCan) reported that Canada’s economy expanded in February, but at a slower pace compared to January. Recent data has shown that tight financial conditions are hindering both consumer and business activity, which has weighed on Canada’s economic growth. But slower growth and lower inflation might be what the Bank of Canada (BoC) needs to begin lowering interest rates.
- Canada’s gross domestic product (GDP) grew by 0.2% in February over the previous month. February’s growth was a slowdown from the 0.5% increase posted in January. Year-over-year, the economy expanded by 0.8% in February.
- Canada’s economy benefited from a stronger oil and gas extraction industry. The industry has benefited from strong extraction along with higher prices for oil. The transportation industry also grew in February, driven by higher railroad activity. Conversely, the manufacturing sector hindered overall growth. The sector continues to be weighed down by relatively weak domestic and global demand.
- Looking ahead, StatsCan estimates that economic growth stalled in March, suggesting Canada’s economic activity weakened as the first quarter progressed. The BoC projected Canada’s economy to grow by 2.8%, annualized, but March’s estimate points to growth of only 2.5% in the first quarter.
- Canada wasn’t the only major economy to report GDP results this week. An advanced estimate showed Europe’s economy expanded by 0.3% over the first quarter of 2024, up from the 0.1% decline in the fourth quarter of 2023. Europe’s annual inflation rate was estimated at 2.4% in April, unchanged from March. Europe’s economy has been particularly hard hit over the past several quarters with demand drying up, both domestically and from abroad.
February’s softer growth rate suggests tight financial conditions are weighing on consumers and businesses. The slowdown in economic growth, along with softer inflationary pressures, could nudge the BoC to begin lowering interest rates. The benchmark overnight interest rate stands at 5.00%, with markets currently expecting a potential rate cut this summer.
South of the border, the US Federal Reserve Board (Fed) concluded its meeting by announcing it was holding its policy interest rate steady. The move was widely expected by markets in response to choppy yet still elevated inflation, a robust labour market and relatively resilient economic growth. Interest-rate cuts might still be on the horizon, it is just a matter of when.
- The Fed held its federal funds rate steady at a target range of 5.25%–5.50%. This marks its sixth straight rate hold. The Fed is keeping its rate at restrictive levels in its ongoing efforts to bring down inflation.
- The Fed doesn’t appear to be in a rush to lower interest rates, given current economic conditions. The Fed believes inflation remains a risk and is seeking more proof that inflation will sustainably move to its 2% target.
- Fed Chair Jerome Powell noted the central bank is willing to keep rates high for as long as necessary. Elevated inflation and a robust labour market have stalled the Fed’s path to bringing inflation down to its target.
- The Fed also announced it would slow the pace of its quantitative tightening. The Fed will reduce the cap on allowing US Treasures on its balance sheet to mature.
- Attention now turns to the US labour market over the rest of the week. The US Bureau of Labor Statistics is set to release US labour market data, including job changes and the unemployment rate, on Friday. Yesterday, ADP reported that US private businesses added another 192,000 jobs in April.
While rate cuts from the Fed seem to be a bit off in the distance, investors were optimistic that the comments didn’t suggest there might be another rate hike. This appears to be the peak of interest rates for the Fed in the current cycle.
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Source: CIBC Morning Market Brief