08:16 AM EDT, 08/06/2024 (MT Newswires) -- Last week's market action was heavily influenced by the United States Federal Reserve's interest rate decision, Chair Jerome Powell's subsequent press conference and Friday's US employment report, said TD.

Canada's bond market mirrored the rally of the US Treasury (UST), rising throughout the week and accelerating on Friday, noted the b ank. Given the inverse relationship to prices, Canada's 10-year and five-year government bond yields fell by roughly 30 basis points.

On Canada's economic front, the key report was the monthly gross domestic product (GDP) by industry, stated TD. Growth exceeded expectations, showing a 0.2% month-on-month growth in May, with the advance estimate for June suggesting a 0.1% m/m increase. Assuming no revisions, this report solidifies expectations that Q2 GDP will be stronger than previously anticipated, around 2.2% annualized, and growth in Q3 is now looking a bit stronger than TD had expected at the time of its June forecast.

The Bank of Canada (BoC), on the other hand expects a solid out turn for the economy in Q2, forecasting 2.8% growth in its recent Monetary Policy Report.

Economic growth was broad-based in May, with both goods-producing and services-providing sectors expanding. The most significant contributions came from non-durable manufacturing, particularly oil refineries, which rebounded after maintenance work in April, pointed out the bank.

On the services side, aside from the public sector's significant contribution, the largest impacts came from accommodation & food services as well as finance & insurance, driven by investment activity in bonds and mutual funds. An interesting detail highlighted by Statistics Canada was the increase in arts, entertainment, & recreation sector, which was bolstered by three Canadian teams playing in the NHL playoffs in May.

While these contributions are noteworthy, some of them share a common characteristic of being temporary effects. So while the report shows that there is still resilience in the economy, the momentum isn't strong enough to push economic growth above trend levels.

For another perspective, consider the state of the Canadian consumer. Higher frequency data on consumption, including spending at retail stores and restaurants, as well as TD's card spending data, indicates a more cautious consumer who may still be spending, but without extravagance.

In addition, one factor masking consumer weakness is population growth, which has exceeded estimates for several quarters and partly explains positive economic surprises. In fact, when adjusted for price and population gains, retail spending has weakened since the start of the BoC's hiking cycle and contracted for most of this year. With new government restrictions on non-permanent residents taking effect, slower population growth is likely to become a headwind for the economy, according to TD.

This week it's Canada's turn for jobs numbers. Canada has been seeing cooler labor market conditions for a while now. The BoC will be focused on the degree of slack in the labor market and wage growth trends as it calibrates the pace of interest rate cuts. Market consensus suggests that the BoC is likely to proceed with a third consecutive rate cut in September, added the bank.