At the close of business last Friday, global equities rallied on the week after a drop in the US inflation rate spurred speculation that the peak of the US Federal Reserve’s tightening cycle could come after an additional hike late this month. As a result, the yield on The US 10-year note fell to 3.77% from 4.04% a week ago. The price of a barrel of West Texas Intermediate crude oil extended its rise to $76.50, up nearly $4.50 on the week. Volatility, as measured by the Cboe Volatility Index (VIX), fell to 13.7 from 15.4 last Friday.

CANADIAN ECONOMIC NEWS

As expected, the Bank of Canada hiked rates 0.25% to 5% on Wednesday and said it doesn’t see CPI returning to target until mid-2025. Policymakers were concerned that progress toward their inflation target could stall. The bank expects CPI to hover around 3% for the next 12 months and is prepared to hike again, if necessary. Our opinion is that our central bank is focused on getting inflation back to 2% as quickly as possible and if it means triggering a recession, they will pivot and start reducing interest rates rapidly. The major problems are a strong labour force and consumers still spending. We need to see a decline in hiring and consumers to curtail their spending. We should note that it is often young families at a lower end of disposable family income that are really feeling the pain of these rate increases and this is not likely to change anytime soon, according to our Bank of Canada commentary.

US ECONOMIC NEWS

The Fed’s Beige Book showed that economic growth increased slightly since the last update, that labour demand remained healthy and that employers reported having difficulty finding workers. Prices increased at a modest pace overall while some districts noted a slowing in the pace of inflation, the report said.

Markets have rallied in the wake of a significant decline in US inflation readings in June. At the headline level, prices fell a percentage point from May to June, with the Consumer Price Index rising 3% from a year earlier from 4% in May. The closely watched core reading fell more than expected, to 4.8% from the 5.3% rate posted the month prior. Equities have rallied strongly on rising hopes that the Fed will halt its tightening cycle after a final 0.25% hike on 26 July. Markets have nearly priced-out the additional hike that Fed policymakers pencilled in when they met in June. Bond yields tumbled after the data with the 10-year yield shedding around 0.18% to 3.77% after the data.

Exchange operator Nasdaq announced late Friday, 7 July, that the Nasdaq 100 Index will undergo a special rebalance late this month to reduce the index’s concentration, where the top five constituents accounted for a nearly 43.8% weighting in the index at Monday’s close. Their weighting recently reached 48%, a level that triggered the rebalance. It will become effective before the market opens on 24 July. Changes to the index will force funds that track it to adjust their portfolios and sell shares of companies that have their weight in the index reduced. This is the third special rebalance in the index’s history, with the others taking place in 1998 and 2011.

EUROPEAN ECONOMIC NEWS

We noted this past week that the euro zone is expected to move to a restrictive fiscal stance in 2024 as energy subsidies are cut and budget deficits are pared.

Pay in the United Kingdom grew faster than expected in the three months prior to May. During this period, employees’ regular average pay, which excludes bonuses, grew at an annual rate of 7.3%, the highest growth on record when the BOE and the government are calling for wage restraint to bring down inflation. On Thursday, the government reported that the UK economy shrank 0.1% in May, a smaller contraction than economists had expected.

JAPAN, CHINA and EMERGING MARKETS ECONOMIC NEWS

In a sign of weakening global demand, exports from China fell 12.4% year over year in June, the largest fall since February 2020, at the beginning of the pandemic. The decline followed a 7.5% fall in May. Imports fell 6.8%, following a 4.5% fall in May. Also this week, China June PPI fell 5.4% year over year, raising deflation concerns.

We believe that President Xi Jinping’s recent regulatory crackdown has negatively affected foreign direct investment flows to China. FDI fell to $20 billion in the first quarter of 2023 from $100 billion in 2022, as foreign companies weighed the risks of running afoul of China’s expanded anti-espionage law amid worries that even routine business activities, such as market research, could be construed as spying. There is a growing perception that doing business in China has become riskier, and that is helping choke off the flow of capital into the country.