Market Watch: September 2023

After a strong performance in the first half of 2023, global financial markets faced some challenges in the third quarter. Economic data indicated a decline in growth prospects as services activity started to align with the already weak manufacturing sector. Additionally, inflationary pressures continued to ease globally, leading investors to believe that we may be nearing the peak of the global hiking cycle. The tight oil market also posed obstacles for the global economy, with Brent crude oil prices increasing by 28% during the quarter. The decision by Saudi Arabia and Russia to extend voluntary oil output cuts until year-end was a significant factor driving this price increase. Higher oil prices could negatively impact consumer spending and reignite inflation concerns for central banks.

The S&P/TSX Total Return Index was down 3.33 percent in September as Canada’s Q2 economic growth disappointed, inflation surged to 4.0 percent, and BoC maintained rates at 5.0 percent.

Canada’s economy contracted at an annualized rate of 0.2 percent in Q2, significantly worse than the initial estimate of a 1 percent increase reported last month. Consumer spending showed a further slowdown, with the 0.2 percent uptick in Q2 being the smallest since the pandemic-related lockdowns in Q2 of 2021. Business investments did see an increase, partly driven by a surge in aircraft purchases. However, the GDP was reduced by temporary factors such as the federal worker’s strike.

The Canadian labor market is showing signs of weakening, marked by a rising unemployment rate and a slowdown in wage growth. Despite this, there was a notable increase in jobs last month, exceeding economists’ predictions. The economy added 60,000 jobs in June, primarily driven by an upswing in full-time positions. However, with more individuals entering the job market and the population growing, the unemployment rate has reached 5.4 percent, its highest point in over a year.

Canada experienced a notable increase in headline inflation in August, reaching 4.0 percent year-over-year. The surge in energy prices played a significant role in the overall figure. However, the inflationary pressures were not confined to the energy sector alone. Core inflation measures, excluding food and energy, also showed increases. Specifically, the CPI-median saw a 0.44 percent month-over-month rise, resulting in a year-over-year figure of 3.9 percent and 4.1 percent, respectively.

On monetary policy, the Bank of Canada (BoC) kept its key rate steady at 5.0 percent. This was in line with expectations, as there is growing evidence that the economy has slowed down in recent months. The BoC remains primarily concerned about inflation risks and has expressed its readiness to raise interest rates further to manage underlying price pressures.

The S&P 500 Total Return index was down 4.77 percent in September as the US economy grew steadily, inflation eased, and the Fed signaled at least another potential rate hike.

The economic growth in terms of GDP for Q2 2023 remained at a 2.1 percent annualized rate, meeting economist expectations. Business investment in factories received a significant upward revision, aligned with the Biden administration’s efforts to boost semiconductor manufacturing domestically. Growth projections for the Q3 2023 quarter are currently as high as 4.9 percent.

The US government narrowly avoided a shutdown with a short-term funding deal, securing funding until November 17. However, it did not include aid for Ukraine, a setback for Democrats. The bill, supported by more Democrats than Republicans, was passed in the House despite opposition from some hard-liner Republicans. Only nine senators dissented in the Senate vote.

The US economy added 187,000 jobs in August, higher than the anticipated 170,000 jobs. The health care, leisure, hospitality, social assistance, and construction sectors saw job growth, while transportation and warehousing experienced declines. However, the unemployment rate surged to 3.8 percent. Although it remains low, it has reached its highest point since early 2022 in August.

US inflation showed signs of easing in August, with prices excluding food and energy rising less than 4 percent for the first time in over two years. However, overall prices remain elevated due in part to higher gasoline costs. Rising oil prices suggest a lengthy path to the Fed’s 2 percent inflation target. The PCE price index increased in August and, over the year, has advanced by 3.5 percent.

Regarding monetary policy, the Federal Reserve maintained its key rate, signaling a potential hike later this year amidst ongoing inflation and a robust economy. Investors anticipate a modest quarter-point increase by year-end, bringing the range to 5.5 percent to 5.75 percent. Fed Chair Jerome Powell emphasized a cautious approach, underlining the need for sustained inflation decline.

The MSCI ACWI Ex-US Total Return Index was down 3.11 percent in September as the UK economy faced its largest monthly contraction in 2023 as its services sector struggled.

The UK economy shrank by 0.5 percent in July, the largest decline this year, following a 0.5 percent growth in June. The services sector led the contraction, with a 0.5 percent decrease, mainly due to a 3.4 percent drop in health activities and a 3.4 percent decline in computer programming. Output contracted despite fewer backlogs, leading to job cuts. Input inflation remained strong, but competition limited price increases. Companies remained somewhat confident about future business conditions.

The Euro Area’s economic growth in 2023 is projected to be 0.8 percent, down from the earlier estimate of 1.1 percent, due to persistently high inflation affecting consumption and tight monetary policy restraining economic activity. This weaker growth is expected to continue into 2024, with a GDP projection of 1.3 percent, down from the earlier estimate of 1.6 percent. Germany, the largest economy, is expected to contract by 0.4 percent in 2023 and grow by 1.1 percent in 2024.

China experienced positive economic growth as retail sales and industrial production exceeded expectations and rebounded. Additionally, the forward-looking manufacturing NBS PMI re-entered the expansion zone in September, reaching 50.2, indicating a positive outlook for the sector. Non-manufacturing activity also demonstrated accelerated growth at 51.7. Despite ongoing concerns about real estate distress, Beijing took steps by easing banks’ reserve requirement ratios.

The Portfolio Management Team