Interest Rates Likely On Hold
At the close of business last Friday, global equities were little changed from our last newsletter three weeks ago. Going forward, we are encouraged on upbeat AI-related earnings reports. The yield on the US 10-year Treasury note was little changed at 4.24% while the price of a barrel of West Texas Intermediate crude oil was steady at $79.60. Volatility, as measured by the Cboe Volatility Index (VIX), fell to 16.5 from 18.5.
CANADIAN ECONOMIC NEWS
The Bank of Canada will make its next interest rate announcement on September 6th. Next Friday September 1, we will get Canada’s second-quarter GDP report. This report is expected to show a sharp slowdown in economic growth. Then, it is expected to show the economy growing at a 1.1% pace in the second quarter, which is down remarkedly from 3.1% in the first three months of 2023. This could mean that the Bank of Canada is likely to pause its interest rate hikes.
US ECONOMIC NEWS
US Federal Reserve Chair Jerome Powell said Friday morning that inflation is too high and that while progress on reining it in is welcome, there is still a long way to go. The Fed, he said, intends to maintain restrictive policy until inflation declines substantially. Powell reiterated that 2% is and will be the Fed’s inflation target, dismissing speculation that the central bank could tolerate a higher inflation rate. He acknowledged that there could still be significant further drag from past rate hikes, but said that if the labour market does not soften, monetary policy may have to respond. Equity markets reacted positively to Powell’s observation.
Data released this past week showed that preliminary purchasing managers’ surveys in the US softened further in July. The composite PMI fell to 50.4 in July from 52. The PMI data, particularly in the US, have stood in sharp contrast to unexpectedly resilient hard data.
EUROPEAN ECONOMIC NEWS
Survey and sentiment readings are often referred to as “soft data.” Things that can be counted, such as retail sales and non-farm payrolls, are examples of hard data. Downcast data released this past week showed that preliminary purchasing managers’ surveys in the euro zone softened further in July. In Europe, the composite PMI fell to 47 from 48.6, a level that suggests growth is close to stalling. In the US, the composite fell to 50.4 in July from 52. The PMI data, particularly in the US, have stood in sharp contrast to unexpectedly resilient hard data.
JAPAN, CHINA and EMERGING MARKETS ECONOMIC NEWS
A slew of economists lowered their 2023 growth forecasts for China this past week. A consensus is forming that GDP growth will likely fall short of the government’s 5% target. Officials have undertaken a fresh series of targeted steps to shore up growth, including cutting the People’s Bank of China’s one-year loan prime rate by 0.1% to 3.45%. However, the PBOC curiously left the mortgage-sensitive five-year LPR unchanged despite a slump in the housing market.
Regarding housing, Goldman Sachs estimates that Chinese property developers must liquidate $2 trillion worth of unsold inventory. Caixin reported this week that the government is considering empowering the PBOC to set up an emergency liquidity tool that will allow banks to provide low-cost funds to local government financing vehicles. LGFVs have been a major source of concern as their credit woes have increased due to their outsized reliance on land sales for property development. The move is seen as a short-term fix that could forestall a crisis but do little to reduce a large debt overhang. A plan to allow provincial governments to take on some LGFV debt is also in the works. Late in the week, China eased mortgage rules and floated the idea of reducing the transaction tax on stock trading by 50%.
