Canada Economy Watch for the week ended Sept 23
Global equity markets fell over the week ended September 23 as the U.S. Federal Reserve Board (“Fed”) lifted its federal funds rate by 75 basis points (“bps”) and suggested it is likely to move even higher this year. Investors considered how that might drag down the global economy. The S&P/TSX Composite Index fell, posting declines in all 11 sectors. U.S. equities, as measured by the S&P 500 Index, also declined. The yield on the 10-year U.S. Treasury Bond advanced over the week, and moved above 3.70% for the first time in over a decade. The price of oil and gold declined.
Canada’s inflation rate subsides
- There was some relief for Canadian consumers in August after Canada’s inflation rate eased to 7.0%. Economists expected a 7.3% rate of inflation.
- A slowdown in gasoline price growth contributed to the lower inflation rate.
- Based on the average of the three measures, the core inflation rate ticked lower in August.
- On a monthly basis, consumer prices fell 0.3%, the first decline since December 2021.
Despite the slowdown, Bank of Canada (“BoC”) Deputy Governor Paul Beaudry later commented it is still too high, suggesting the BoC will continue to raise interest rates.
The U.S. Fed will keep on raising rates
- The Fed announced it was raising its federal funds rate by 75 bps at a second consecutive meeting, taking the target range to 3.00%-3.25%.
- It’s the fifth straight rate hike by the Fed in their efforts to bring down inflation.
- While acknowledging the risks to the U.S. economy, the Fed did reiterate its resolve to bring inflation down to its 2% target, suggesting more rate increases are on the way.
Fed officials expect the federal funds rate to move above 4.0% this year.
Big drop in gasoline sales
July retail sales in Canada fell 2.5%, declining at the quickest pace since April 2021. The decline was bigger than the 2.0% drop economists expected
- Gasoline sales tumbled by 14.2% over the month, largely in response to the drop in fuel prices.
- The lower sales were primarily broad-based, with nine of 11 subsectors posting a decline, suggesting consumer spending pared back amid higher prices and rising rates.
- Conversely, Statistics Canada estimated retail sales may have risen 0.4% in August.
- On a regional basis, sales were down in seven provinces, with the principal decreases stemming from Ontario (-5.0%), Quebec (- 1.5%), British Columbia (-1.5%) and Saskatchewan (-3.7%). Alberta posted an increase for its part (+0.8%). In real terms, retail sales declined 2.0% m/m. Finally, Statistics Canada’s early estimate for August suggests a 0.4% increase in nominal sales.