At the beginning of last week, Chinese stocks lost over 8.5% of their value in one day, the largest daily drop since 2007. This affected global stock markets, which were down for the day. The Chinese authorities thought that after having injected liquidity into the market and placed limits on sales of shares, they would be able to gradually reverse their interventions, with little impact on Chinese stock prices. In reality, this only exacerbated market volatility.
In the U.S. last week, the main economic news item was the Fed’s decision to keep its key interest rate unchanged at 0.25%. The committee mentioned that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. This is consistent with the testimony given by Janet Yellen to the U.S. Congress on July 15, 2015, when she said that if the economy evolves as the members of the FOMC expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target. So over the last month, the Fed seems to have opened the door slightly to making an initial rate increase (the first in nine years) sometime between now and the end of the year. The market gives 40% odds on such an increase occurring in September and 60% odds that it will occur between now and the end of the year. To better determine the timing of such an increase, investors will be paying close attention to the economic indicators released between now and the next meeting of the FOMC, focusing in particular on the employment figures.
In economic news, the GDP indicator for the second quarter, released on Thursday, was 2.3%, slightly short of market expectations. It is interesting to note that despite the strength of the U.S. dollar, exports made a positive contribution to growth for the first time in three quarters. Firstquarter GDP growth was also revised upwards, from -0.2% to 0.6%. Investors became more optimistic on hearing this news, and the DXY index was up 0.60% by the end of the day on Thursday.
On Friday the markets learned that the Canadian economy had posted negative growth of -0.2% for May; investors had been expecting it to be unchanged. Economists were surprised to see the weakness in the services and industrials sectors, in addition to setbacks in the energy and manufacturing sectors. Canadian GDP fell for the fifth consecutive month, bringing the country dangerously close to a technical recession (i.e. negative GDP growth for two or more quarters). The economy now needs to grow by over 1% in June if Canada is to avoid a recession. This will be difficult to achieve given the country’s economic performance since the beginning of the year.
The currency market remained highly volatile last week, with the daily trading range of the USD/CAD and the EUR/USD exceeding 100 points almost every day. But on the week, despite strong daily movements, the changes in the Canadian dollar and the euro against the U.S. dollar were cancelled out. In terms of interest rates, the volatility was also undeniable, particularly in the longterm portions of the North American swap rate curves. Concretely, 10 year interest rates in Canada and the U.S. ended the week down by approximately 5 basis points, while the decline in the 5 year rates was less important.
This week, in addition to releases of U.S. indicators on non-farm payrolls and unemployment, we will have more details on consumer spending and the U.S. trade balance. In Canada the economic news will include releases of the manufacturing PMI indicator and the unemployment rate.