Central banks around the world work to balance economic slowdowns with interest rates

On this edition of Market Week in Review, Zoe Warganz, Analyst, ESG and Active Ownership, and Shailesh Kshatriya, Director, Investment Strategies, take a world tour of central banks and economic numbers.

U.S. PMI numbers contract further

Starting in the U.S., Kshatriya noted that numbers from the U.S. Institute of Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) "are pointing toward a slowdown of the U.S. economy." The ISM PMI fell further into contraction territory, to 46.3 from 47.7 (keeping in mind that below-50 is contraction territory and above-50 denotes expansion). According to Kshatriya, all components in the PMI fell below fifty for the first time since 2009, indicating a broad-based deterioration in the manufacturing sector. "However, it's the service side of the economy that has been most resilient, as we know. But even that is showing signs of slowing." The service-sector PMI fell to 51.2 from 55.1, so while it is still in the expansion zone at above-50, the month-over-month drop was noticeable.

U.S. labor demand loosens

What about the U.S. labor market? Based on the March 2023 JOLTS report (Job Openings and Labor Turnover Survey), there was some loosening of labor demand taking place. The U.S. Federal Reserve is keeping a close eye on these numbers, which ticked down to 1.7, from around 2.

"The takeway," said Kshatriya, "is that the stepdown in the services PMI plus the manufacturing PMI falling further into contraction territory and modest loosening of the labor demand, as suggested by the JOLTS report, suggests that tighter financial conditions are starting to have an effect on the U.S. economy"

Canadian labor market maintains resiliency

The Canadian economy has proven to be resilient. "And as relates to the jobs numbers for March, the Canadian economy added 35,000 jobs," said Kshatriya, much more than the 12,000-jobs consensus estimate and nearly double the typical 18,000-jobs-per-month average. The Canadian unemployment rate also held steady at around 5%. Wage growth numbers, along with the monthly change in hours worked, also eased in March. In addition, the Business Outlook Survey conducted by the Bank of Canada (BOC) indicates that labor market tightness is also easing, in part due to a surge in immigration. The Bank of Canada policy meeting is next week and Kshatriya noted that the BOC has transitioned its policy from rate hikes to a conditional pause. "A strong labor market and better-than-expected GDP growth in January and possibly in February means that it's still too soon for the BOC to be messaging easing its policy outlook at this point."

Australian central bank holds steady. New Zealand raises rates.

"There's a bit of a dichotomy going on between the RBA and the RBNZ," Kshatriya said. "The Reserve Bank of Australia did decide to hold their policy rate unchanged at 3.6% and that was broadly as expected by the markets." Similar to the Bank of Canada, the RBA has gone on a conditional pause, as the Australian economy is showing signs of slowing. Home prices have declined and Australian PMIs in both the manufacturing and services sectors are below fifty, suggesting that a slowdown is coming. Kshatriya noted: "Core inflation is at 6.9% While that's down from peak levels, it's still above the 2-3% targeted range." Philip Lowe, Governor of the RBA, "has kept the option to hike again if conditions warrant, but for the time being, they are likely to stay on the sideline," said Kshatriya.

Switching to the Reserve Bank of New Zealand, it's been one of the more aggressive developed-markets central banks and they continued to act that way this week. The RBNZ hiked rates by 50 basis points, more than the consensus expectation of 25 basis points. Headline inflation in New Zealand is running above 7%, significantly above the 1-3% targeted range. "What's interesting," said Kshatriya, "is that the New Zealand economy may be slowing a little bit more than the RBNZ has projected, however inflation is a primary concern for the central bank and that ultimately led to the more hawkish decision."

In the form of a final summarizing point, Kshatriya said, "While the banking turmoil in the U.S. caught the market's attention over the last couple of weeks, inflation remains a prominent issue for most central bankers."