Debt Ceiling Agreement Likely This Week
At the close of business last Friday, global equities were higher on the week as investors realized a deal on raising the debt ceiling in the US was likely to be done before the deadline. The yield on the US 10-year Treasury note was higher at 3.683 up marginally from a week ago, while the price of a barrel of West Texas Intermediate crude oil was steady at $71.55. Volatility, as measured by the Cboe Volatility Index (VIX), was marginally higher at 16.81 against a backdrop of rangebound equity markets.
CANADIAN ECONOMIC NEWS
The Canadian real estate market is showing signs of recovery as home prices nationally have increased 17% so far this year.
Thankfully, West Jet and its pilots reached an agreement last Friday morning to avert a strike. Air fares increased dramatically leading up to Friday morning, but we expect these fares to come back to normal levels soon.
Our inflation rate, which peaked at 8.1% last year, marginally increased from 4.3% to 4.4%. largely due to higher prices for gasoline. We believe the rate remains on course to hit 4% in June and then steadily drop to the 2% level by mid-2024.
US ECONOMIC NEWS
As of Thursday’s close, the market capitalization of Apple Inc. exceeded that of the entire small-cap Russell 2000® Index.
Market concern eased late in the week, with investors less worried that the Department of the Treasury will default on its debt in early June if the nation’s statutory debt limit is not raised before it exhausts its cash on hand. On Thursday, investors cheered comments from Speaker of the House of Representatives Kevin McCarthy, who said he hopes to have legislation raising the debt cap on the House floor this week. Buoyed by optimism over an agreement, US equities closed Thursday at their highest levels since August.
The odds of a June rate hike by the US Federal Reserve were lower. Futures markets now reflect about a 25% chance of a June hike while several rate cuts later this year have now been priced in. Fed Chair Jerome Powell indicated that credit stress stemming from the regional banking crisis suggests rates may not need to rise as high as they otherwise would have. Those comments reduced the odds of a June hike.
According to the Fed, US consumer debt passed $17 billion for the first time at the end of the first quarter.
The US Department of Energy announced plans to buy three million barrels of sour crude oil to replenish the Strategic Petroleum Reserve. The stockpile currently stands at its lowest level since 1983.
EUROPEAN ECONOMIC NEWS
The European Union raised its 2023 GDP outlook modestly to 1% from an earlier 0.8% forecast.
In the United Kingdom, growth in private sector pay rose 7% year over year in April while public sector earnings rose to a 20-year high of 5.6%. The unemployment rate rose to 3.9%, up 0.1%.
European natural gas prices have fallen to less than 10% of the peak seen when Russian supplies were cut off last summer. They now trade down at levels not seen since June 2021.
JAPAN, CHINA and EMERGING MARKETS ECONOMIC NEWS
China’s economic recovery has lost momentum, increasing calls for the country’s government to provide economic stimulus. Retail sales rose 18.4% in April, but that was below expectations of a bounce back of at least 22%. Industrial production rose 5.6% from a year ago but fell 0.5% month over month amid falling demand for steel and cement, materials necessary for infrastructure projects. Chinese property firms continue to focus on repairing balance sheets rather than starting new projects. Unemployment among young people has risen to 20.4%.
This past week, Japanese equities reached their highest levels since shortly after Japan’s equity bubble burst in 1989. Improved corporate governance and renewed interest on the part of foreign investors have bolstered share prices so far in 2023 while Q1 GDP growth of 1.6% doubled economists’ forecasts. Inflation in Japan rose at its fastest pace in more than four decades in April.