Your weekly commentary – For the week ended May 3

Global equity markets finished largely flat over the week ended May 3. Investors were encouraged by strong earnings results, but the spectre of the U.S. Federal Reserve Board (“Fed”) pushing back potential rate cuts weighed on sentiment. In Canada, the S&P/TSX Composite Index fell, dragged down by the Materials sector. U.S. equities increased over the week. Yields on 10-year government bonds in Canada and the U.S. decreased. The price of oil and gold dropped over the week.

Canada’s economy grows at slower pace

• Canada’s gross domestic product expanded by just 0.2% in February, slowing from the 0.5% increase in January.
• February’s increase was below the 0.3% expansion economists and Statistics Canada (“StatsCan”) had estimated.
• The economy benefited from a strong warehousing and transportation industries, but this was partially offset by a drop in the manufacturing and construction industries.
• StatsCan estimated that economic growth was flat in March. This points to annualized growth of 2.5% in the first quarter, which would be below the Bank of Canada’s (“BoC”) projection.
• Canada’s economic conditions are slowing as 2024 progresses. However, this ignited expectations the BoC may be closing in on an interest rate cut.

Further rate hikes from the Fed unlikely

• The Fed announced it was holding its federal funds rate steady at a target range of 5.25% - 5.50% at a sixth consecutive meeting. While the Fed acknowledged inflation is coming down, it is still seeking more proof that inflation will sustainably return to its 2% target.
• The Fed believes its rate is at restrictive levels, which should help put a lid on inflationary pressures, but they persist at elevated levels. Fed Chair Jerome Powell noted the Fed is likely done raising interest rates.
• The Fed also announced it would slow the pace of shrinking its balance sheet. It reduced the cap on the amount of U.S. Treasuries it will allow to mature.
• With still elevated inflation, a robust labour market and resilient economic growth, the Fed is likely to keep rates higher for longer to avoid reigniting economic growth and inflation too soon.
• Looking at the labour market in April, job additions slowed but the overall market remains relatively robust. The economy added 175,000 jobs in April, which was below expectations. The unemployment rate edged higher to 3.9%.

European economic growth rebounds in Q1

• The pace of growth of Europe’s economy picked up in the first quarter. In response, the European Central Bank seems likely to cut interest rates at a moderate and gradual pace this year, particularly if inflation remains above its target.
• A flash estimate showed Europe’s economy expanded by 0.3% in the first quarter, rebounding from a 0.1% contraction in the fourth quarter of 2023. First-quarter growth was the fastest since the third quarter of 2022.
• Europe’s largest economy, Germany, expanded by 0.2% in the first quarter after shrinking by 0.5% in the previous quarter.
• Advanced data also showed Europe’s inflation rate was unchanged at 2.4% in April. Core inflationary pressures, however, softened to 2.7% in April from 2.9% in March.

China’s economy remains shaky

• Manufacturing activity in China slowed in April. Still, it remained close to March’s level, which was the highest in a year.
• The National Bureau of Statistics of China (“NBS”) Manufacturing Purchasing Managers Index dropped to 50.4 in April from 50.8 in March.
• Manufacturing activity in China has weakened over the past couple of years, hindered by relatively weak demand domestically and from abroad. This was reflected in lower new and export orders in March.
• China’s services sector activity also slowed, resulting in overall business activity expanding at a slower pace in April compared to March.
• The slowdown in manufacturing activity highlights the lack of traction China’s economy has been able to establish. Despite continuing to grow, China’s economy continues to face many challenges.

Market performance – as at May 3, 2024

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