The week in the markets -
June 2, 2023

Is an economic soft landing on the horizon?

• The Canadian economy showed stronger-than-expected growth in Q1 2023.
• U.S. job openings surpassed 10.1 million.
• The global economy witnessed manufacturing contraction, including in the U.S.

The Canadian economy expanded in the first quarter of 2023 at an annualized rate of 3.1%, stronger than consensus estimates of 2.5% and the Bank of Canada’s prediction of 2.3%. Gross domestic product (GDP) data stalled at the end of last year, but this Q1 bounce shows a resiliency in the economy. The GDP report also showed a turnaround in the housing market as well as healthy consumer behaviour. Annualized household spending rose by 6.1% for goods (driven by motor vehicles and clothing sales) and 5.3% for services, (led by food, alcohol and travel).

In the U.S., job openings exceeded 10.1 million, an increase of over 350,000 new jobs compared to a month ago. Led by retail, health care and transportation, the demand for workers continues to outstrip supply, which in turn drives up wages and boosts inflation. The strong GDP growth in Canada and tight labour supply in the U.S. could suggest another potential rate hike from central bankers. However, the uncertainty from the U.S debt-ceiling drama, along with stress in the banking sector could lead some U.S. Federal Reserve officials to hold rates at current levels. Next week, we’ll be looking at the Bank of Canada’s rate decision, followed by the U.S. Federal Reserve’s the week after.

Additionally, in the U.S., the Institute for Supply Management (ISM) manufacturing data for May showed factory activity shrinking for a seventh consecutive month, as new orders contracted. The gauge came in at 46.9 (showing contraction) and was consistent with weaker manufacturing data from other parts of the world. The increase in consumer spending over the past year  leaned more towards services rather than goods.

In Europe, we witnessed a decline in inflation as France joined Germany and many other nations in slower year-over-year price growth. Many of these countries experienced a decline in energy costs compared to last year when energy prices spiked due to the invasion of Ukraine. The inflation data is welcome news for the eurozone, as the European Central Bank potentially nears the end of its tightening cycle, with one more possible increase before pausing.

In China, slower economic growth in May led to cautious sentiments about the country's short-term outlook. While manufacturing activity contracted at a faster pace and services expansion moderated, it’s important to note that China's post-COVID-19 recovery has been characterized by a gradual rebound (a much different experience compared to many developed economies). Efforts to stimulate the economy and boost confidence are being considered, including potential interest rate cuts and reductions in bank reserve requirements.

Overall, uncertainty from the recently negotiated debt-ceiling in the U.S., along with weak manufacturing data, mixed in with full employment and positive wage growth, seem to point to an economic soft landing.