September 2024 market update

Introduction

Global equity markets moved higher over September. Several central banks lowered interest rates during the month, hoping to help prop up their respective economies. This included the U.S. Federal Reserve Board (“Fed”), which decided on a jumbo rate cut of 50 basis points (“bps”). Global inflation continues to moderate, but concerns are heightening that it could inch higher in the months to come, given energy prices could see a pickup due in part to low base year prices in 2023. Global economic activity remains lacklustre. Rising services sector activity is being offset by ongoing weakness in the manufacturing sector. Unemployment rates around the world are moving higher, signalling weak labour market conditions.

Canada’s main index, the S&P/TSX Composite Index, posted a gain over the month, led by the Health Care and Utilities sectors. U.S. equities also advanced. Yields on 10-year government bonds in Canada and the U.S. dropped. Oil prices fell over the month, while the price of gold finished higher.

Canadian spending picks up after rate cuts

Data showed that Canadian households gained confidence after the Bank of Canada (“BoC”) lowered interest rates in June. Retail sales in Canada rose by 0.9% in July, marking the biggest increase in sales since April 2023. Sales increased for motor vehicles and parts, which are sensitive to interest rates. Sales also increased at food and beverage retailers. The outlook appears relatively positive. Statistics Canada estimated that retail sales rose by another 0.5% in August.

Still, there is a bit of caution around the results as financial conditions remain tight, squeezing many Canadian households. At its September meeting, the BoC lowered its benchmark overnight interest rate by another 25 bps to 4.25%. The BoC noted that recent weakness in the labour market, lower inflation and slower economic activity contributed to its third consecutive rate cut. The BoC will closely monitor incoming data ahead of its upcoming decisions. Canada’s central bank also cautioned that inflation falling too far below its 2% target is a concern for officials. Prevailing economic conditions in Canada are calling for support, which is likely to lead to another rate cut from the BoC this year.

The Fed begins with a jumbo rate cut

At its September meeting, the Fed lowered interest rates for the first time since 2020. And its rate cut was a big one. The Fed lowered the target range for its federal funds rate by 50 bps to 4.75%–5.00%. Markets were expecting a rate cut of 25 bps. Fed officials are seeing signs of inflation moderating and are becoming more confident that inflation will sustainably reach the Fed’s 2% target. While falling inflation was a major contributor to the outsized rate cut, recent weakness in the U.S. labour market helped drive the Fed’s decision. Over the past few months, job additions have fallen short of expectations, and the unemployment rate has climbed to its highest level since October 2021. The Fed also released its quarterly outlook, expecting the personal consumption expenditure price index to fall to 2.3% this year, versus its earlier projection of 2.6%. Furthermore, the Fed expects the U.S. economy to grow by 2.0% this year compared to its previous projection of 2.1%. Given this revised outlook, Fed officials are expecting another 50 bps of rate cuts this year.

PBOC introduces massive stimulus support measures

China’s economy has struggled for traction in 2024, putting into question the feasibility of the government’s 5% economic growth target this year. In response, markets have been calling for the government and People’s Bank of China (“PBOC”) to enact stimulus measures to help support China’s economy. The PBOC stepped up and announced several measures it hopes will help boost domestic demand and improve China’s troubled property market. The PBOC announced it will reduce its seven-day reverse repo rate by 20 bps and its one-year medium-term lending facility by 30 bps. The PBOC also announced it would reduce its reserve requirement ratio by 50 bps, which it subsequently implemented on September 27. These moves are meant to increase liquidity in the system and raise loan activity. They could also offer a solution to the Chinese economy’s ongoing challenges with domestic demand. In response to the troubled property market, the PBOC announced it would lower mortgage rates and reduce the minimum down payment for a second home. Investors welcomed the PBOC’s intentions to help stimulate the economy. Chinese equity markets moved higher over the month.

Economic growth stalls in the U.K.

Gross domestic product in the U.K. posted no growth (0.0%) in July, marking the second straight month of stalling growth. Additionally, growth in the second quarter was 0.5%, down from the 0.7% pace of growth in the first quarter. The U.K. economy was weighed down by a weak manufacturing sector. Manufacturing sector activity in the U.K. has been soft amid weak domestic and foreign demand. Conversely, services sector activity has contributed to growth. Consumer spending has moderated, with households grappling with elevated inflation and high borrowing costs. In response, the Bank of England (“BoE”) lowered its policy interest rate by 25 bps to 5.00% at its August meeting. Then, the BoE held steady at its September meeting. While there are signs the economy needs a bit of support, the BoE believed the rate hold was warranted as it seeks more certainty that it has put a lid on inflation. Still, the BoE is expecting to lower interest rates again. The U.K. inflation rate was 2.2% in August, matching July. While getting closer to the BoE’s target, the U.K. central bank believes there could be some upward pressure on oil prices in the months to come, which could keep inflation at relatively elevated levels. The BoE is likely to lower interest rates again in the fourth quarter, with consumers needing some support.