The week in the markets –
June 30, 2023

Canadian inflation continues to slow 

Equity markets edged higher during the week, rebounding from the prior week’s dip. Canadian inflation for May (as measured by the Consumer Price Index) met market expectations, with a 0.4% month-over-month increase and a 3.4% year-over-year increase. While inflation remains above the Bank of Canada’s target of 2%, the latest report marks a continued trend lower from the lofty levels of last year and the lowest level for headline inflation since June 2021.

It remains to be seen whether inflation is at a level that will satisfy the Bank of Canada enough to maintain its overnight rate at 4.75%. While we don’t believe inflation will be returning to 5% in the near future, neither do we believe that it will drop back to 2% before the end of the year. At the very least, we don’t think inflation will subside enough before year-end for the Bank of Canada to consider interest rate cuts. An easing of the interest rate environment is more likely in 2024 at the earliest, with a continued risk of further rate increases in the back half of 2023.

In the United States, data continues to show a resilient economy, despite the interest rate increases by the U.S. Federal Reserve over the past year. GDP growth for the first quarter was revised up to 2% (from earlier predictions of  1.3%), while this week’s U.S. jobless claims showed a decline, primarily driven by states like California and Texas, where employment opportunities are abundant.

The European Central Bank (ECB) hosted a forum in Sintra, Portugal this week, with prominent speakers from the world’s major economies, including Federal Reserve Chair, Jerome Powell, President of the ECB, Christine Lagarde, Governor of the Bank of England, Andrew Bailey, and Governor of the Bank of Japan, Kazuo Ueda. The group emphasized their data-dependent approach to determining central bank policy rates and their mandate to maintain inflation stability at the target rate of 2%.

There were few clues as to where they see rates going in the short-term, and they said they would determine policy on a meeting-by-meeting basis. “Although policy is restrictive, … it may not be restrictive enough and it has not been restrictive for long enough,” U.S. Federal Reserve Chair Powell said, leaving the door open for more increases. He noted  that holding off on a rate increase earlier this month was a move to take stock of how the rate hike campaign is affecting the economy.

Similar to the U.S., eurozone countries, Japan and the U.K. have tight labour markets and strong consumption as continuing themes and don’t see a recession as the likely outcome of their aggressive tightening. ECB President Lagarde summed up the groups’ sentiment, saying there is “not enough tangible evidence that underlying inflation is stabilizing and moving down.”

In the week ahead, we’ll look at ISM manufacturing data, which is a great metric for economic expansion or contraction and a key indicator of the state of the economy.

For more insights, listen to our podcast, where we examine the potential impact of inflation on the economy.