| | Close
May 15 | Close
May 8 | Weekly
Change | Net Weekly
Change % |
DJIA | 49,526.17 | 49,609.16 | -82.99 | -0.17% |
Nasdaq | 26,225.14 | 26,247.07 | -21.93 | -0.08% |
S&P 500 | 7,408.50 | 7,398.93 | +9.57 | +0.13% |
| S&P TSX | 33,833.35 | 34,077.76 | -244.41 | -0.72% |
Source: Globe & Mail
The Yield Also Rises
Douglas Porter, CFA
BMO Chief Economist
Welcome to the big leagues, Mr. Warsh. The
freshly-confirmed Fed Chair assumes his new role in the midst of rapidly
rising inflation concerns, which have sparked a significant sell-off in
bond markets globally. The sustained back-up in long-term yields has
finally broken the preternatural serenity in equities, which saw the
S&P 500 crack the 7,500 level for the first time on Thursday. A series
of increasingly problematic U.S. inflation readings for April was capped by
a late-week run-up in oil prices to $105, and aggravated by mounting fiscal
concerns in some major economies. A side dish of political uncertainty in
Britain has further fanned the sell-off in Gilts, arguably the epicentre of
bond market woes. This week’s much-hyped U.S.-China Summit may have
generated a few sales of soybeans and jets, but did nothing to open the
Strait of Hormuz—and, simply, it’s the lack of oil flow and its inflation
implications that are the number one concern for markets.
The bond market sell-off was led by Britain, where 10-year
yields shot up more than 25 bps this week to above 5.15%, the highest since
2008 and about 50 bps higher than the peak in the 2022 Liz Truss fiasco. A
new bout of political turmoil is making a tough situation worse, with PM
Keir Starmer clinging to his post following a rough result for Labour in
local elections. But the U.K. is far from a rogue outlier, as Japan’s
long-term yields have rocketed amid a slumping yen, with 30-year yields flirting
with 4% (they had a 1-handle less than two years ago) and 10s punching
above 2.7% after a decade of averaging almost zero. Even bond markets with
better fiscal fundamentals and/or somewhat milder inflation trends are
being caught in the yield upswing, with German 10-year bunds rising 16 bps
this week to 3.17%, up 50 bps since the war began.
U.S. Treasuries were naturally right in the thick of the
global sell-off, with 10-year yields approaching 4.6% on Friday, up more
than 20 bps in a week and now up 60 bps from pre-war lows. While the global
back-up did no favours, there were plenty of homegrown concerns driving
yields higher as well this week. The all-important April CPI kicked off
proceedings, coming in a bit hot with core prices rising 0.4%, lifting the
annual rate two ticks to 2.8%. The headline inflation rate was 3.8%, its
highest in almost three years and a tad above consensus. While that didn’t
fuss markets much, the concern is that the ongoing upward pressure in oil
and, thus, gasoline continues in May, which would push headline inflation
above 4% in next month’s read. Not helping, the PPI came in very hot, with
the headline jumping 6.0% y/y, and even core was much higher than consensus
at 5.2% y/y. Import prices added some insult to that injury by soaring 1.9%
in April, lifting the yearly rate to 4.2%.
Meantime, most of the growth indicators suggested that
activity is holding up. Notably, retail sales matched expectations with a
0.5% advance last month, on top of the 1.6% pop in March. True, the results
are fattened by higher pump prices and the associated spending at service
stations. But even ex-gasoline, sales were up 0.3% in the month and 3.7%
y/y, with consumers supported by tax refunds and wealth gains flowing from
record equities. Manufacturing activity rose 0.6% in April, and has managed
a respectable 1.2% volume gain over the past year. A jump in the Empire
State factory survey to a four-year high in May points to further gains, no
doubt aided by the relentless AI spending boom.
Where do these many cross-currents leave the outlook for
Fed policy, as Kevin Warsh assumes the mantle? In his testimony to the
Senate, the incoming Chair presented a vision of how an AI productivity
boom could dampen inflation and thereby open the door for lower short-term
rates. He has also made the case in the past that reducing the Fed’s
balance sheet could be countered by lower short-term rates. While these are
the stuff of interesting academic debates, the reality on the ground for
the U.S. economy is headline inflation of almost 4%, core inflation near
the very top of the acceptable zone, a job market that seems to be firming,
a consumer that keeps spending, and an equity market that (almost) won’t
quit.
Accordingly, the bond market is voting against Mr. Warsh
and the prospect of near-term rate cuts—indeed, it’s now pricing in strong
odds of a rate hike by early next year. The persistence of oil prices above
$100, and the seeming absence of a near-term exit route from the Strait
closure has prompted a forecast change on the Fed call. Running against the
market, we still look for two trims in the coming year, but now see the
first cut only at the very end of 2026, and the second early next year
(both pushed back three months from the previous view). But, clearly, that
call is predicated on the Strait reopening in the next few months, and oil
retreating reasonably heavily by later this year. Suffice it to say, our
conviction on that view is weakening by the day.
Frank and Mark.
Source: Globe & Mail, BMO Capital Markets, Bank of Canada, Bloomberg.
Canada
In Canada, the housing market remains sluggish even through
the springtime demand bump in April. Affordability continues to put a damper on
demand, especially in Southern Ontario, and especially with the thick cloud of
economic uncertainty hanging in the air. With the BoC seemingly comfortable
remaining on hold—and if anything, sounding more hawkish in the last
meeting—we’re unlikely to see much relief on the affordability front anytime
soon.
YTD, the TSX is up 6.69%, and the benchmark 10-year yield ended the week to yield 3.57%.
U.S. & Global
Markets seemed to shrug off the Iran war with an eye on
U.S.-China trade relations. While the Middle East ceasefire remains fragile and
oil prices remain elevated, attention turned to Beijing. The long-awaited
meeting of the minds (or Presidents Xi and Trump) seemed to go smoothly despite
warnings about staying away from topics like Taiwan. Adding to some mid-week
bullishness was another sturdy retail sales report highlighting that consumers
continued to weather the headwinds in April. Unfortunately, the headwinds seem
to be growing, with inflation reportedly coming in hotter than even lofty
expectations on all sides (consumers, producers, and imports).
That push-and-pull left most major equities higher on the
week, with the notable exception of the FTSE 100 as turmoil is growing around
the future of UK PM Starmer. Elsewhere, despite a pullback on Friday,
tech-heavy names gained as the NASDAQ led North American indices. Tech was also
the driver of the S&P 500’s over-2% gain, although it was notably the
weakest link on the TSX (extending a months’ long streak of underperformance).
In the latter index, a big step up in materials led a more modest 0.6% increase
through the week.
Beyond the economic data, last week also saw Kevin Warsh
officially voted in as Fed Governor and as Chair. He is, of course, leading a
deeply divided Committee. Granted, Governor Miran (consistently the most
dovish) has vacated his seat to make room for Warsh. Still, there were three
other dissenters at the last meeting that took on a more hawkish tone. This
week’s round of data is only going to bolster their argument, making it all the
more difficult to convince FOMC voters that a cut is needed, at least for now.
Given these developments, we changed our Fed call this week and now expect the
first cut in December with a follow-up move in March.
YTD, the DJIA is up 3.04%, the NASDAQ is up 12.84%, and the S&P 500 is up 8.22%. The 10-year Treasury yield ended the week to yield 4.47%.
Source: BMO Capital Markets
The Good:
Core Wholesale Trade Volumes +1.7% (Mar.); Manufacturing
Sales Volumes +1.0% (Mar.); Housing Starts +16.5% to 279,317 a.r. (Apr.);
Global Investors bought a net $4.6 bln in Canadian securities
(Mar.).
The Bad:
Existing Home Sales -4.0% y/y (Apr.)—and MLS Home Prices
-4.2% y/y; New Motor Vehicle Sales -6.6% y/y (Mar.).
The Good:
Retail Sales +0.5% (Apr.)—and control measure strong at
+0.5%; Industrial Production +0.7% (Apr.)—and Capacity Utilization climbs
to 76.1%; NFIB Small Business Optimism +0.1 pts to 95.9 (Apr.); Empire
State Manufacturing Survey +1.4 pts toan ISM-adjusted 58.0 (May).
The Bad:
Consumer Prices +0.6% m/m, +3.8% y/y (Apr.); Producer
Prices +1.4% m/m, +6.0% y/y (Apr.); Import Prices +1.9% m/m, +4.2% y/y
(Apr.); Existing Home Sales +0.2% to 4.02 mln a.r. (Apr.)—well below
expected; Budget Surplus narrowed to $215 bln (Apr.)—vs. last year; Initial
Claims +12k to 211k (May 9 week)—but still very low.
Wierd News
Source: Associated Press
Museum’s ‘Knight Rider’ replica car got a speeding
ticket. It hasn’t gone anywhere in years
It’s a mystery on the streets of New York City. What
traffic law violator with unpaid fines is driving a black Pontiac Trans Am
that looks like the car with the talking computer from the 1980s TV series
“Knight Rider,” and even has the same license plate?
Officials at an Illinois museum are among the people who
would like to know. The Volo Museum near Chicago, which has a replica of
the show’s Trans Am that hasn’t moved from its exhibit in years, recently
received a $50 traffic ticket from the Big Apple, alleging its car was
doing 36 mph (59 kph) in a 25 mph (40 kph) zone in Brooklyn on April 22.
The ticket came complete with traffic camera photos
showing a black Trans Am with the California license plate KNIGHT, the same
plate as the car on the show and the novelty one on the museum’s
unregistered car. The license plate is also connected to five other unpaid
traffic violations in New York City since late 2024, city records show.
How the city linked the plate to the museum was not
immediately clear. City officials did not immediately respond to email and
phone messages Wednesday.
“The fact that we’re legally tied to a movie prop is
interesting,” said Jim Wojdyla, the museum’s marketing director. “We’re
known for having our Hollywood cars from TV and movies, but I have no idea
how we got registered from a ticket in New York to the plates in California
to the Volo Museum in Illinois. We’re still trying to figure it out.”
The museum has requested a hearing challenging the
ticket.
“It’s really amusing,” Wojdyla said. “We want to find
out who this Knight Rider guy is because, birds of a feather. We just want
to know is this from a museum, is this just a guy that built this car as a
hobby? And it looks pretty damn accurate. We’d like to meet those guys.”
“Knight Rider” starring David Hasselhoff as a crime
fighter aired on NBC from 1982 to 1986 and featured KITT, the black Trans
Am with a snarky talking computer. (KITT stands for Knight Industries Two
Thousand). Around 20 KITTS were built for the show but only five of the
originals remain, Road & Track magazine has reported.
There are also numerous replicas around, including the
museum’s. The Facebook group Knight Rider KITT Car Club for people who own
replicas has nearly 19,000 members.
According to the California Department of Motor
Vehicles, a person with the last name Knight renewed their registration for
the state plate KNIGHT in March.
New York City is authorized by state law to operate up
to 750 cameras with speed detectors. When a camera catches a speeder, it
records photos of the vehicle and its license plate. Staff at the city’s
Department of Transportation review the violations and mail tickets to the
vehicle owners if the vehicles were going more than 10 mph (16 kph) over
the speed limit, the city’s website says.
The Volo Museum is having fun with the ticket trouble on
its social media sites. It recently changed its header on its Facebook page
to “Home of the Knight Rider KITT that famously got a speeding ticket in
New York City without ever leaving its exhibit in Illinois!”
“Does anyone have Hasselhoff’s number? He owes us
$50!!!!” one of its posts says.