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Global equity markets finished largely unchanged over the week ended September 4. Investors remained relatively cautious amid ongoing geopolitical and trade tensions. Meanwhile, markets were left wondering if the U.S. Federal Reserve Board (Fed) would raise interest rates. A key Fed official said he would be willing to hold interest rates steady if inflation shows signs of moving back to target, while the stronger-than-expected labour market report may open the door for a Fed rate hike. In Canada, the S&P/TSX Composite Index inched lower, dragged down by the information technology sector. U.S. equities posted a tiny gain. Yields on 10-year government bonds in Canada and the U.S. increased over the week. The price of oil increased, while the price of gold declined.
Bank of Canada closely monitoring fresh trade war
At its September meeting, the Bank of Canada (BoC) held its policy interest rate steady at 2.25%, marking the seventh straight decision without a change.
Inflation has been running near 3.0%, mostly due to higher energy prices, while core inflation, which strips out more volatile items, remains closer to the BoC’s 2% target.
Canada's economy grew faster than expected last quarter, helped by consumer spending, housing activity and business investment, though the job market stayed relatively soft, with unemployment holding at 6.4%.
Trade tensions with the U.S. and elevated oil prices tied to global conflicts remain key risks the BoC is watching closely, believing they could put upward pressure on consumer prices.
The BoC did not give any clear indication on the path of interest rates this year. This wait-and-see approach suggests the BoC sees the Canadian economy as resilient enough to hold interest rates steady for now, but if energy prices or tariffs push inflation higher, an interest rate hike could still be on the table.
Canadian and U.S. job growth head in opposite directions
Statistics Canada reported the Canadian economy lost 41,700 jobs in August, missing expectations for a small gain and ending a four-month stretch of relatively strong hiring.
Job gains in manufacturing were offset by losses in the public sector and business services. The full-time sector lost a significant number of jobs, while the part-time sector posted smaller job losses.
Canada’s unemployment was 6.4% in August, unchanged from July. The jobless rate remains at its lowest level in two years.
South of the border, U.S. employers added a stronger-than-expected 162,000 jobs in August, and the unemployment rate held steady at 4.1%, suggesting the American job market remains relatively solid.
The report suggests Canada’s labour market cooled off following several months of strong improvement, while the labour market in the U.S. appears to have stabilized after some lacklustre months. The relatively strong labour market report in the U.S. may have the Fed thinking about an interest rate hike, but that will largely depend on the incoming inflation report for August.
European inflation reaches multi-year high
Driven by another jump in energy prices, Europe’s annual inflation rose to 3.3% in August from 2.9% in July, moving further above the European Central Bank's (ECB) 2% target.
Energy prices climbed by 14.3% from a year ago amid ongoing global oil and gas price pressures, stemming from the conflict in the Middle East.
The core inflation, which excludes more volatile food and energy prices, eased slightly to 2.4% in August. Services price growth also slowed, suggesting broader price pressures haven't spread much further beyond energy products.
Producer prices jumped by 1.6% in July from the prior month and were up by 5.8% on a year-over-year basis, largely due to energy costs, a sign inflationary pressures could persist.
This energy-driven inflation puts pressure on the ECB to keep raising interest rates, which could hinder overall economic activity in Europe. The ECB is in a difficult position with lacklustre economic growth and elevated inflationary pressures.
Slower contraction for China’s manufacturing sector
Manufacturing activity in China improved slightly in August but remained contractionary. China's official NBS Manufacturing Purchasing Managers’ Index rose to 49.8 in August from 49.2 in July, remaining below the 50-point line that separates growth from contraction.
Production and new orders improved and moved back into expansion, though rising raw material costs squeezed manufacturers’ profit margins.
Weak manufacturing in China matters globally because China is the world’s largest manufacturer, so softer demand there can mean fewer orders for trading partners and softer prices for raw materials and commodities worldwide.
China’s non-manufacturing sector, which covers services and construction, also remained below 50, unchanged from July, suggesting broader economic activity is still soft.
Continued sluggishness in China, which has one of the world’s biggest economies, adds to global growth concerns, though the incremental improvement in factory activity suggests conditions may be stabilizing rather than worsening further.
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