Prices increased as expected in August while the annual inflation rate declined to its lowest level since February 2021, according to a Labor Department report Wednesday that sets the stage for a Federal Reserve interest rate cut in a week.
The consumer price index, a broad measure of goods and services costs across the U.S. economy, increased 0.2% for the month, in line with the Dow Jones consensus.
That put the 12-month inflation rate at 2.5%, down 0.4 percentage point from the July level and compared to the estimate for 2.6%.
However, so-called core CPI, which excludes volatile food and energy prices, increased 0.3% for the month, slightly higher than the 0.2% estimate. The 12-month core inflation rate was 3.2%, in line with the forecast.
China CPI, PPI, aggregate yuan financing, new yuan losses and trade surplus
Japan real GDP and bank lending
Germany retail sales
(10 a.m. ET) U.S. wholesale inventories for July.
(3 p.m. ET) U.S. consumer credit for July.
Earnings include: Oracle Corp.
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Tuesday September 10
Japan machine toll orders
Germany CPI
England employment
(6 a.m. ET) U.S. NFIB Small Business Economic Trends for Survey for August.
(8:10 a.m. ET) Bank of Canada governor Tiff Macklem speaks at the Canada-U.K. Chamber of Commerce in London (with press conference to follow at 9:30 a.m.)
Earnings include: GameStop Corp.
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Wednesday September 11
UK GDP, services index, industrial and manufacturing production and trade deficit
(8:30 a.m. ET) U.S. CPI for August. The Street expects an increase of 0.2 per cent from July and up 3.2 per cent year-over-year.
Earnings include: Dollarama Inc.; Transcontinental Inc.
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Thursday September 12
ECB Monetary Policy Meeting
(8:30 a.m. ET) Canada’s national balance sheet and financial flow accounts for Q2.
(8:30 a.m. ET) Canadian building permits for July. Estimate is a rise of 10.0 per cent month-over-month.
(8:30 a.m. ET) U.S. initial jobless claims for week for Sept. 7. Estimate is 232,000, up 5,000 from the previous week.
(8:30 a.m. ET) U.S. PPI for August. Consensus is a rise of 0.2 per cent from July and up 1.8 per cent year-over-year.
(12 p.m. ET) U.S. flow of funds for Q2.
(2 p.m. ET) U.S. budget balance for August.
Earnings include: Adobe Systems Inc.; Empire Co. Ltd.; Kroger Co.
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Friday September 13
China industrial production, retail sales and fixed asset investment
Japan and Euro zone industrial production
(8:30 a.m. ET) Canada’s capacity utilization for Q2.
(8:30 a.m. ET) Canadian wholesale trade for July.
(8:30 a.m. ET) U.S. import prices for August. The Street expects a decline of 0.3 per cent from July but up 0.7 per cent year-over-year.
(10 a.m. ET) U.S. University of Michigan Consumer Sentiment for September.
Oil prices fell to an 18-month low of Friday, weighed down persisting concerns about the outlook for oil demand.
Data showing a much less than expected increase in private sector as well as non-farm payroll growth in the U.S. and the possibility of increased oil supply from Libya weighed on oil prices.
West Texas Intermediate Crude oil futures for October ended down by $1.48 or about 2.1% at $67.67 a barrel, the lowest settlement since March 2023. WTI crude futures shed about 8% in the week.
Brent crude futures ended lower by $1.63 or about 2.2% at $71.06 a barrel.
The Labor Department said non-farm payroll employment climbed by 142,000 jobs in August compared to economist estimates for an increase of 160,000 jobs.
The report also said the increases in employment in June in July were downwardly revised to 118,000 jobs and 89,000 jobs, respectively, reflecting a net downward revision of 86,000 jobs.
Meanwhile, the Labor Department said the unemployment rate edged down to 4.2% in August from 4.3% in July.
BRP Inc. DOO-T -3.56%decrease reported its second-quarter profit and revenue fell compared with a year ago and cut its guidance for the year as it said it faced a challenging retail environment.
The maker of Ski-Doo snowmobiles and Sea-Doo watercraft says it earned $7.2-million or nine cents per diluted share for the quarter ended July 31, down from a profit of $338.7-million or $4.26 per diluted share a year earlier.
Revenue in the quarter totalled $1.84-billion, down from $2.78-billion in the same quarter last year.
On a normalized basis, BRP says it earned 61 cents per diluted share in its latest quarter, down from a normalized profit of $3.21 per diluted share a year ago.
In its outlook, BRP says it now expects revenue for the year to total between $7.8-billion and $8.0-billion, down from earlier guidance for between $8.6-billion and $8.9-billion.
The company also says it now expects its normalized earnings per diluted share to come in between $2.75 and $3.25 for the year, down from earlier guidance for between $6.00 and $7.00.
U.S. employment increased less than expected in August, but a drop in the jobless rate to 4.2 per cent suggested an orderly labour market slowdown continued and probably did not warrant a big interest rate cut from the Federal Reserve this month.
Nonfarm payrolls increased by 142,000 jobs last month after a downwardly revised 89,000 rise in July, the Labor Department’s Bureau of Labor Statistics said on Friday. Economists polled by Reuters had forecast payrolls increasing by 160,000 jobs after a previously reported 114,000 gain in July. Estimates ranged from 100,000 to 245,000 jobs.
The smaller-than-expected increase in payrolls likely does not signal a deterioration in labour market conditions.
August payrolls have a tendency to initially print weaker relative to the consensus estimate and recent trend before being revised higher later. Hiring typically picks up in the education sector, which is anticipated by the model that the government uses to strip out seasonal fluctuations from the data.
The start of the new school year, however, varies across the country, which can throw off the so-called seasonal factors. The initial August payrolls counts have been revised higher in 10 of the last 13 years. Layoffs remain at historic low levels.
The drop in the unemployment rate followed four straight monthly increases, which had lifted it near a three-year high of 4.3 per cent in July. Early on Friday, financial markets saw a roughly 43 per cent probability of a half-point rate cut at the Fed’s Sept. 17-18 policy meeting, according to CME Group’s FedWatch Tool. The odds of a 25 basis point rate reduction were around 57 per cent.
Average hourly earnings increased 0.4 per cent in August after falling 0.1 per cent in July. Wages increased 3.8 per cent year-on-year after advancing 3.6 per cent in July. Still-solid wage growth continues to underpin the economy through consumer spending.
Canada’s unemployment rate continued to trend higher in August – reaching 6.6 per cent – as the job market slowdown hits workers and job seekers unevenly.
Statistics Canada’s labour force survey on Friday showed the economy added a modest 22,000 jobs last month, lagging the pace of population growth.
The jobless rate increased from 6.4 per cent in July.
Employment last month rose in educational services, health care and social assistance and finance, insurance, real estate, rental and leasing.
Meanwhile, it fell in the other services category as well as professional, scientific and technical services, utilities and natural resources.
As the job market continues to weaken under the weight of high interest rates, students and recent immigrants are shouldering much of the pain.
Students returning to school in the fall faced a particularly challenging summer job market this year. Their unemployment rate rose to the highest level since summer 2012, excluding the pandemic summer of 2020.
Between May and August, the unemployment rate for students was 16.7 per cent on average, up from 12.9 per cent last year.
“Much of the unemployment rate increases to-date have come from longer job searches for new labour market entrants (particularly students) but layoffs are also rising under the surface,” wrote RBC assistant chief economist Nathan Janzen in a client note.
The summer job market was even more difficult for Black, Chinese and South Asian students, who faced considerably higher unemployment rates.
Black students had the highest unemployment rate of 29.5 per cent, up a whopping 10.1 per cent from summer 2023.
The latest rise in unemployment comes days after the Bank of Canada delivered its third consecutive interest rate cut and signalled more would likely be on the way.
Governor Tiff Macklem has repeatedly said the central bank wants economic growth to pick up again, acknowledging the job market has slowed down significantly.
As finding work becomes more challenging, the number of unemployed people grew to 1.5 million in August, a 22.9 per cent jump from the same month last year.
Friday’s report notes that of those who were unemployed in July, 16.7 per cent had transitioned to work in August, a smaller share than in August 2023.
“From the Bank of Canada’s perspective, higher unemployment coupled with persistent declines in per-capita GDP will reinforce that inflation will continue to drift lower and clearly argues for further interest rate cuts from what are still elevated levels,” said Janzen.
Despite the marked slowdown in hiring, workers have continued to enjoy rapid wage growth, with many of them restoring their pre-pandemic purchasing power.
Overall, average hourly wages in August were up five per cent from a year ago, reaching $35.16.
However, recent immigrants’ wage growth has been flat.
Statistics Canada says average hourly wage growth for those who landed in Canada over the last five years decreased by 1.3 per cent on a year-over-year basis.
Meanwhile, more established immigrants saw their average hourly wages increase by 6.3 per cent.
Canadian-born workers’ wages have risen six per cent over that period.
The Bank of Canada lowered its benchmark interest rate for a third consecutive time on Wednesday and reiterated that economic growth needs to pick up so that inflation doesn’t fall too much, paving the way for additional rate cuts in the coming months.
In a widely anticipated move, the central bank reduced its trend-setting policy rate to 4.25 per cent from 4.5 per cent. The private sector expects several more cuts over this year and 2025 as part of an easing cycle that brings borrowing costs to less onerous levels.
Inflation has cooled off substantially over the past two years, in part because higher interest rates have forced some households and businesses to curb their spending.
But in the final stages of their inflation fight, central bankers are worried about downside risks to the economy and the potential for inflation to overshoot the 2-per-cent target on the way down – concerns that were repeated on Wednesday after being raised at the July announcement.
“With inflation getting closer to the target, we need to increasingly guard against the risk that the economy is too weak and inflation falls too much,” Governor Tiff Macklem said in the prepared remarks of his opening statement on Wednesday.
“We want to see economic growth pick up to absorb the slack in the economy so inflation returns sustainably to the 2-per-cent target,” he added.
On Friday, Statistics Canada reported that real gross domestic product grew at an annualized rate of 2.1 per cent in the second quarter – stronger than private sector and central bank estimates.
The Bank of Canada noted the economy grew by about 2-per-cent annualized in the first half of 2024. “That’s a healthy rebound from the near-zero growth we had in the second half of 2023,” Mr. Macklem said.
But the GDP results received a lukewarm reaction from Bay Street analysts. A faster pace of government spending helped to drive the expansion, and in per-capita terms, output declined for a fifth consecutive quarter. Real GDP stalled in June and July, according to early estimates.
“Recent indicators suggest there is some downside risk to this pickup,” Mr. Macklem said.
The central bank’s latest projections from July show GDP growth accelerating in the second half of the year, then continuing to pick up in 2025 and 2026. The BoC will update its economic projections at the next rate decision on Oct. 23.
In his statement, Mr. Macklem said it is “reasonable to expect further cuts in our policy rate,” provided that inflation subsides as expected.
Inflation is no longer the economic threat it once was. After peaking at roughly 8 per cent in the summer of 2022, the annual rate of consumer price index (CPI) growth has slowed to 2.5 per cent, as of July. Central bankers are increasingly confident that inflation is on the right path down, and they expect to reach the 2-per-cent target next year.
Today’s inflation reflects a push-pull dynamic of opposing forces, Mr. Macklem explained. “Overall weakness in the economy continues to pull inflation down. But price pressures in shelter and some other services are holding inflation up.”
The remedy for inflation – much higher interest rates – has harmed the economy in various ways. Job creation stalled in June and July, and the unemployment rate has risen to 6.4 per cent from a historic low of 4.8 per cent two summers ago. It’s been especially tough for young people and recent immigrants to find work.
Consumers have dialled back their spending in a big way. On a per-capita basis, household spending fell in the second quarter – the sixth decline out of the previous eight quarters. Even with borrowing rates on the decline, many homeowners will be renewing their mortgages at higher interest rates in 2025 and 2026, a risk to household finances.
Still, it appears that many households are preparing for that scenario. The household savings rate reached 7.2 per cent last quarter, more than triple the quarterly average from 2015 to 2019, according to Friday’s GDP report.
Heading into Wednesday’s announcement, traders were expecting a flurry of rate cuts from the Bank of Canada over this year and next. Interest rate swaps, which capture market expectations of monetary policy, were pricing in six cuts by June or July of 2025, according to Bloomberg data. That would take the benchmark interest rate to 3 per cent.
The U.S. Federal Reserve will likely start lowering rates soon, too. Traders are pricing in two percentage points of easing by next summer, with the process starting at the Sept. 18 decision. The target range for the federal funds rate is currently 5.25 per cent to 5.5 per cent.
Fed chair Jerome Powell recently teed up a rate cut at the Jackson Hole economic conference. “The upside risks to inflation have diminished. And the downside risks to employment have increased,” he explained in a speech. “The time has come for policy to adjust.”
With the Fed heading into an easing cycle, this has reduced pressure on the Bank of Canada for taking a divergent path for monetary policy, which had put downward pressure on the Canadian dollar. Mr. Macklem has previously said that the central bank wasn’t close to testing the limits of policy divergence.
U.S. and Canadian stocks slumped on Tuesday, at the start of one of the market’s historically worst months, ahead of data likely to influence how much the Federal Reserve will lower interest rates.
All three U.S. major indexes and the S&P/TSX Composite Index recorded their biggest daily percentage declines since early August. The CBOE Volatility Index, Wall Street’s fear gauge that measures market expectations of stock market swings, jumped 33.2% to 20.72, the biggest daily percentage gain and highest close since early August.
Market sentiment weakened as Institute for Supply Management data on Tuesday showed U.S. manufacturing remained subdued despite a modest improvement in August from an eight-month low in July.
September is widely regarded as one of the worst months for stock market performance based on data stretching back to the 1950s, said Jason Browne, president at Alexis Investment Partners in Montgomery, Texas.
“We had a weak ISM report come out [Tuesday] morning, but we do believe seasonality is a big factor here especially when you’ve had such a solid performance for the year until the end of last month,” Browne said. “Everybody is reporting about how September is such a horrible month and that tends to feed on itself.”
The so-called Magnificent Seven megacap technology stocks, which have led this year’s rally, slumped. Nvidia dropped nearly 10%, shedding US$279 billion from its market capitalization, which finished at US$2.65 trillion.
Alphabet fell 3.6%, Apple lost 2.7% and Microsoft shed 1.8%. The Philadelphia SE Semiconductor index fell 7.8%.
Nine out of 11 S&P 500 sectors fell, led by declines in technology, energy, communication services and materials.
Traders are awaiting several labor market reports ahead of Friday’s non-farm payrolls data for August.
The Fed’s meeting on Sept. 17-18 will be closely observed following Chair Jerome Powell’s recent support for easing monetary policy.
Odds of a 25-basis point interest rate cut are at 63%, the CME Group’s FedWatch Tool showed, while those for a bigger 50 bps reduction are at 37%.
The Dow fell 626.15 points, or 1.51%, to 40,936.93, the S&P 500 dropped 119.47 points, or 2.12%, to 5,528.93 and the Nasdaq Composite slid 577.33 points, or 3.26%, to 17,136.30.
Boeing dropped 7.3% after Wells Fargo downgraded the aircraft manufacturer’s shares to “underweight” from “equal weight.”
The Canadian benchmark index ended down 303.73 points, or 1.3%, at 23,042.45, its worst day since Aug. 2.
Materials led sectoral losses with a 4.2% drop as gold prices declined. Copper prices fell to a two-week low and the energy sector fell 2.1% after oil prices dropped more than 3% on news of sluggish economic growth in China.
China’s manufacturing activity sank to a six-month low in August as factory gate prices tumbled and owners struggled for orders, an official survey showed.
Markets will be watching the Bank of Canada’s policy meeting on Wednesday, in which it is widely expected to lower its policy rate by 25 basis points for the third time in a row.
In Canadian economic data Tuesday, manufacturing activity rose to a five-month high to 49.5 in August as production and new orders fell at slower rates.
Declining issues outnumbered advancers by a 2.52-to-1 ratio on the NYSE, which had 297 new highs and 83 new lows. On the Nasdaq, 946 stocks rose and 3,315 fell as declining issues outnumbered advancers by 3.5 to 1.
Volume across U.S. exchanges totaled 12 billion shares, up from nearly 11 billion for the 20-day moving average.
The economy grew at an annualized rate of 2.1 per cent in the second quarter – beating the Bank of Canada’s forecast – but continued to shrink on a per-person basis.
Statistics Canada’s real gross domestic product report on Friday said growth was supported by higher government spending, business investment in engineering structures as well as machinery and equipment and household spending on services.
Meanwhile, the economy posted declines in exports, residential construction and household spending on goods.
Economic growth halted toward the end of the quarter as the real gross domestic product was essentially unchanged for June. A preliminary estimate suggested the economy remained flat in July as well.
The data comes ahead of the Bank of Canada’s interest rate decision on Wednesday.
Economists are widely expecting the central bank to lower its key policy rate by a quarter of a percentage point, which would bring it to 4.25 per cent.
Bank of Canada governor Tiff Macklem said at the last interest rate announcement that the central bank was cutting interest rates in part to help the economy bounce back.
While high interest rates have not pushed the economy into a recession, it continues to lag strong population growth.
On a per person basis, the economy shrank for a fifth consecutive quarter.
The labour market is also showing signs of economic weakness as the unemployment rate keeps trending higher.
Canada’s unemployment rate was 6.4 per cent in July, with youth and recent immigrants disproportionately affected by the slowing job market.
