- Economies are working through challenges
- Economic activity was muted worldwide.
- Canada’s economy shrank in the second quarter of 2023. U.S. growth was lacklustre.
- China’s economy struggled to gain traction. The People’s Bank of China (“PBOC”) reduced rates to help increase business activity.
- U.S. debt in the spotlight
- Several rating agencies expressed concern over the U.S. government as higher interest rates and growing debt could affect the economy.
- Fitch Ratings downgraded the U.S. government’s long-term foreign-currency debt rating from AAA to AA+.
- S&P and Moody’s downgraded several regional banks on concerns about the property market amid higher interest rates.
- Inflation ticking higher
- Inflation in Canada and the U.S. ticked higher.
- Oil prices rose in response to production cuts by the Organization of Petroleum Exporting Countries (“OPEC”).
- The growth in food prices eased.
- The Bank of Canada (“BoC”) and the U.S. Federal Reserve Board (“Fed”) expressed their willingness to keep raising interest rates if inflation stays high.
Central banks take a pause
The BoC, Fed and Bank of England (“BoE”) held interest rates steady at their second meetings of the quarter. The central banks opted to monitor how their current interest rates impact inflation, the economy and the labour market.
These central banks are taking a “wait and see” approach as economic activity moderates.
At its last meeting, the Fed hinted at another interest rate increase this year. This helped push equity markets lower.
Central banks are focused on slowing inflation while avoiding a deep recession for their respective economies.
How are significant economies doing?
- The U.S. economy grew by an annualized 2.1%
- China’s economy expanded by 6.3% year-over-year
- Europe’s economy grew by 0.1%
- The U.K. economy posted a 0.2% expansion
- Japan’s economy grew at an annualized pace of 4.8%
Global financial markets move lower
Global equity markets were largely down over the quarter
- Global equities declined.
- Expectations that central banks may keep raising interest rates weighed on sentiment.
- Equities in Canada, the U.S., Europe, Japan, China, EAFE and emerging markets fell. Equities in the U.K. advanced.
- Major indices in the U.S. – S&P 500 Index, NASDAQ Composite Index and Dow Jones Industrial Average – finished lower.
Global yields moved higher
- Global bond prices declined as yields moved higher, with interest rates expected to remain relatively high.
- Canadian bond yields moved higher. That's because the BoC is allowing interest rates to remain higher, for longer. It's part of the BoC's strategy to bring down inflation
- Oil prices increased as OPEC reduced production. Demand for oil was relatively robust as the global economy remains resilient.
- Gold prices declined.
Monetary policy decisions of central banks
- The BoC raised its benchmark overnight interest rate in July by 25 basis points (“bps”), to 5.00%. It paused on that rate in September.
- The Fed raised the target range of its federal funds rate by 25 bps at the first meeting. It then held at 5.25%-5.50% at its second meeting.
- The BoE lifted its key interest rate by 25 bps to 5.25% at its July meeting. The rate stayed unchanged at its second meeting.
- The European Central Bank (“ECB”) raised its interest rate at both meetings during the quarter. The ECB’s key interest rate ended at 4.50%.
- These central banks indicated they are willing to lift rates further to bring inflation down.
How is the Canadian economy doing?
Canada’s economy remains resilient despite facing several challenges
- Canada’s economy shrank by 0.2% (annualized) in the second quarter of 2023 as a result of falling housing investment and net exports.
- Canadian consumers showed resilience despite high borrowing costs and inflation. Consumer spending, a key component of Canada’s economy, increased by 0.2% over the second quarter.
- Canada’s inflation rate rose to 4.0% in August 2023, due in part to higher mortgage and rental costs.
- Canada’s labour market remains relatively strong as the economy added jobs and wages grew. Canada’s unemployment rate is still running at historically low levels.
- Canadian equities fell alongside global equities. While the Communication Services and Utilities sectors fell, the Health Care and Energy sectors gained.
- Canadian bond prices declined while yields moved higher. The yield on the benchmark 10-year Government of Canada bond increased.
- Foreign nations have invested heavily in Canadian financial market securities in the past few years. This showcases Canadian financial markets’ proven safety record for safe long-term investing.