Your weekly commentary – For the week ended January 26

Global equity markets rose over the week ended January 26, with investors believing central banks will begin to ease their policy stance in 2024. The S&P/TSX Composite Index advanced, benefiting from the strong performance of the Energy sector. U.S. equities also advanced over the week. Yields on 10-year government bonds in Canada and the U.S. increased. Oil prices moved higher, while the price of gold finished lower.

BoC points to the end of its hiking cycle

• The Bank of Canada (“BoC”) kicked off its 2024 schedule by holding its benchmark overnight interest rate steady at 5.00%. The move was widely expected by markets.

• The BoC believed its interest rate needed to stay at restrictive levels amid concern that inflationary pressures could remain elevated throughout 2024.

• The BoC expects inflation to run near 3% over the first part of 2024, before coming down to its 2% target in 2025. Canada’s central bank expects growth to be relatively muted in the short term.

• The BoC offered some hope to market participants, signalling that interest rates have likely peaked. There is a strong likelihood that rate increases have ended should the economy progress in line with the central bank’s expectations.

• The door appears to be open for some rate cuts in 2024.

U.S. economic growth better than expected

• An advanced estimate showed U.S. gross domestic product grew at an annualized pace of 3.3% in the fourth quarter of 2023, which exceeded economists’ expectations of 2.0% growth.

• Fourth-quarter growth was, however, a slowdown from the 4.9% annualized increase in the third quarter.

• The U.S. consumer continued to be a strong contributor to growth over the quarter, brushing aside tight financial conditions. However, the pace of growth in spending was weaker in the fourth quarter over the third quarter.

• Exports and real estate investment also contributed to growth over the quarter.

• The results raised hopes the U.S. Federal Reserve Board might be able to avoid a U.S. recession despite relatively high interest rates.

European business activity continues to shrink

• For the eighth consecutive month in January, business activity across Europe shrank, demonstrating the impact tight financial conditions are having on households and businesses.

• In a preliminary estimate, the HCOB Eurozone Composite Purchasing Managers Index was at 47.9 in January, up slightly from the 47.6 reading in December (a reading below 50 signifies a contraction).

• The services sector contracted at its fastest pace in four months, weakened by another drop in new orders and output.

• The manufacturing sector fared no better, contracting for a tenth straight month. New orders fell during the month, as did employment.

Major central banks make first announcements of 2024

• The BoC wasn’t the only central bank to make announcements. The European Central Bank (“ECB”), Bank of Japan (“BoJ”) and People’s Bank of China (“PBOC”) all held meetings last week.

• The ECB held its policy interest rate steady at 4.50%, as widely expected. The ECB maintained its stance that restrictive interest rates are still needed to help bring inflation down to its target.

• The BoJ also held steady at its January meeting, keeping its key interest rate at −0.10%. There is the potential to raise interest rates, but the BoJ commented it would only do so if it did not disrupt economic conditions.

• Finally, the PBOC held its one- and five-year loan prime rates steady at its January fixing. However, it reduced its reserve requirement ratio by 50 basis points hoping to lift sentiment and support China’s economy.