| | Close
Apr 24 | Close
Apr 17 | Weekly
Change | Net Weekly
Change % |
DJIA | 49,230.71 | 49,447.43 | -216.72 | -0.44% |
Nasdaq | 24,836.60 | 24,468.48 | +368.12 | +1.50% |
S&P 500 | 7,165.08 | 7,126.06 | +39.02 | +0.55% |
| S&P TSX | 33,904.11 | 34,346.29 | -442.18 | -1.29% |
Source: Globe & Mail
AI Wins Another War
Douglas Porter, CFA
BMO Chief Economist
Is history rhyming again? A year ago, markets and analysts
were squarely focused on the roiling trade war; equities were on the defensive
until late April; and, almost everyone was marking down their economic
forecasts. But something funny happened on the way to a downturn—markets
promptly reversed course, rallying strongly through the second half of the
year, and the global economy ended up doing just fine with 3.4% growth for all
of 2025. As it turned out, a tidal wave of spending on AI infrastructure saved
the day, heavily supporting U.S. GDP growth, driving tech stocks higher, and
compensating for any bite from the trade war. It also helped that almost all countries
quickly succumbed to U.S. tariff demands, and chose not to retaliate, avoiding a
full-fledged trade war.
Fast forward to this year. Markets and analysts have been
squarely focused on the war with Iran over the past eight weeks. Equities
initially corrected in March, yields backed up, and economists boosted
inflation projections and were holding the axe over their growth forecasts for
2026. Yet, even with the conflict unresolved, oil prices hovering near $100
(and up more than 50% from pre-war levels), and inflation already having taken
a big step up in many economies, markets have largely shaken off this war, too.
And we can yet again largely point to the relentless wave of spending on AI’s
backbone as a primary factor behind the rebound. Tech stocks have led the snap-back;
after correcting by 13% in a matter of weeks, the Nasdaq has since surged 19%
from the late-March lows to a fresh record high this week, to stand a towering 60%
above the lows hit just over a year ago.
It’s not just the equity market that’s getting a lift from
AI spending, as it’s also quite evident in the economic data. And, it’s
certainly not confined to the U.S, as a variety of Asian economies have
reported an absolute surge in exports over the first quarter of 2026. Japan was
the latest, revealing that sales abroad managed to gather steam in March,
rising 11.7% y/y. But that was a modest gain compared to some of the emerging
economies. In US$ terms, China’s exports popped 14.7% y/y in Q1, while Thailand
and Vietnam were up 18-19%. Even more impressively, Singapore was up 35% y/y in
Q1, South Korea jumped 38% and Taiwan’s exports soared 49% y/y. The common
factor behind these astonishing increases was tech gear, and often led by chips.
The Economist reports that China’s memory chip exports were up 174% y/y in Q1, and
at $46 billion, now represent the single biggest export item for that economy.
We have previously noted that, since the war erupted, there
has been a deep split between manufacturing activity (solid) and services
(softening) in many major economies. That split fits perfectly well
with the point that factories are still running strong to meet all the AI
demand, while services have been chilled by consumer caution amid higher fuel
prices. That theme seems to be continuing deep into April. The preliminary PMIs
for this month showed consistent strength across the board in manufacturing,
even as services largely stumbled. For example, the Euro Area’s factory PMI
rose to a 47-month high of 52.2 while services slumped to just 47.4, a 62-month
low, while Japan’s pair of PMIs was 54.9 and 51.2. The U.S. and U.K. ran a tad
against trend with small gains in services, but both also reported even
stronger advances in factory activity (to 54.0 in the U.S. and 53.6 in the
U.K.). Looking through all of those figures, the main point is that factory
activity remained quite robust in April, even as consumer confidence and, in
many cases, business sentiment took a turn for the worse. We would point to
rollicking demand for everything related to the AI buildout as a primary factor
for the resiliency of manufacturing activity globally.
Notably, consumer spending appears to be holding up remarkably
well in many major economies, even with the sag in confidence. At the top of
the list, U.S. retail sales fired up 1.7% in March, even as gasoline prices were
soaring at a record monthly pace. Yes, the headline figure was juiced by the
jump at the pumps. But, all the commentary was around how consumers would be forced
to divert other spending to pay for fuel. Yet, sales outside of gas stations
were up 0.6% m/m in March, hardly a sign of consumers turning tail. U.K. retail
sales excluding fuel also topped downbeat expectations with a modest 0.2% m/m
gain last month. The flash reading for Canada also points to a 0.6% increase in
March sales, although that may just offset price increases. Still, the early
read in most economies is that consumers are hanging in there so far.
Looking ahead, the key question for policymakers is whether
the conflict can be resolved in time to avert another big step up in oil prices
and keep consumers on track. While the current stalemate in the Strait is not
overly rattling oil, many analysts have noted that true physical shortages are
poised to emerge very soon if the crude doesn’t begin to flow from the Gulf. As
much as the equity market wants to move on from the conflict, a renewed spike
in oil beckons if the U.S. and Iran can’t soon reach some kind of arrangement
on the Strait. And even the AI boom may not be able to override another sharp
run-up in energy costs.
Frank and Mark.
Source: Globe & Mail, BMO Capital Markets, Bank of Canada, Bloomberg.
Canada
The TSX dipped 1.3% last week alongside a sharp pullback in
materials. Inflation was very well
behaved in March. Headline inflation jumped to 2.4% y/y in the month, and is
headed higher in April given tough base effects (i.e., the consumer carbon tax
was removed a year ago), but core measures continued to fade. Core inflation
trends have ebbed to the low-2% range from a year ago as of March, and all four
major measures (median, trim, CPIX and ex-food & energy) saw three-month
annualized rates at 2% or lower. Absent the conflict in Iran, this would have
kick the door open for the central bank to consider easing. We see both the
Bank of Canada and Federal Reserve on hold on April 29.
Canadian consumers are keeping the economy afloat in choppy
waters. Apart from government expenditures, the only other major GDP component
to expand last year was consumer spending, by 1.7% on a Q4/Q4 basis. These two
weighty items (at over one-fifth and one-half of the economy, respectively)
more than offset declines in business investment (due to trade-policy
uncertainty), exports (due to U.S. tariffs), and residential construction (due
to the slumping Ontario and B.C. housing markets) to keep real GDP growth just
above the waterline (0.7%). Moreover, despite severe winter weather early this
year, retail sales volumes jumped 5.7% annualized in the first two months of Q1
from Q4, likely marking the best quarter since before the trade war.
YTD, the TSX is up 6.91%, and the benchmark 10-year yield ended the week to yield 3.49%.
U.S. & Global
Equity markets were mixed last week with volatility settling
down, and equity investors seemingly putting the conflict in Iran behind them
despite ongoing uncertainties. The S&P 500 rose 0.5%, with energy and
technology leading the pack. The April mini-correction proved short-lived, and
the index is again galloping along in record territory.
Despite the trade war and Iran conflict, the market keeps
finding a footing thanks to the large-scale AI buildout, strong productivity
growth and robust earnings. This week’s economic data were relatively thin but
supportive. U.S. retail sales rose 1.7% in March on the back of higher pump
prices, but core sales were also up a strong 0.7%. It was early in the
proceedings, but the consumer wasn’t buckling under higher oil prices last
month. Meantime, the job market looks sturdy with ADP payrolls rising by just
under 55k in the four weeks through April 4. In an environment where little net
new job growth is needed to balance the market, this is a solid print.
Earnings have also been strong out of the gate for the Q1
reporting period. So far, about 140 companies in the S&P 500 have reported,
with 81% topping analyst expectations. That leaves consensus earnings growth on
track for 16% y/y, or 17% y/y excluding energy. After the mini-correction, that
leaves the S&P 500 trading around 21x forward earnings. Because of
better-than-expected results over much of the past year, and upward earnings
revisions to the forward year, valuations are little changed from where they
were a year ago despite the strong gain in the index. With everything going on
in the macro economy, exceptionally solid earnings shouldn’t be overlooked.
The FOMC is expected to keep policy rates unchanged on April
29, with the target range for the fed funds rate at 3.50%-to-3.75%. This will
mark the third straight pause after three consecutive quarter-point cuts during
the final three confabs of 2025. A hold heralded the new year against the
background of a stabilizing labour market and with policy rates “within a range
of plausible estimates of neutral.” It initially afforded the Fed more time to
better assess tariffs’ ultimate inflation impact. Then, the spike in oil prices
that heralded March pumped the risks of both faster inflation and slower
growth, making a more compelling case to play the ‘waiting game’.
YTD, the DJIA is up 2.43%, the NASDAQ is up 6.86%, and the S&P 500 is up 4.67%. The 10-year Treasury yield ended the week to yield 4.30%.
Source: BMO Capital Markets
The Good:
Retail Sales Volumes +0.3% (Feb.) —StatCan estimates nominal
sales grew 0.6% in March; Manufacturing Sales +3.5% (Mar. A); Wholesale Trade
+1.3% (Mar. A); Ottawa posted a budget deficit of $25.5 bln (Apr.- to-Feb.)—better
than expected.
The Bad:
Consumer Prices +2.4% y/y (Mar.)—but BoC’s preferred cores
average a 5-year low of 2.25%; Industrial Product Prices +2.4%; Raw Material Prices
12.0% (Mar.); New Housing Price Index -0.2% (Mar.) Construction Investment
-2.1% (Feb.).
The Good:
Retail Sales +1.7% (Mar.)—biggest jump in a year; and
control measure +0.7%; ADP Private Sector Employment +54,750 (4 wks to Apr. 4);
Business Inventories +0.4% (Feb.); Pending Home Sales +1.5% (Mar.).
The Bad:
Chicago Fed National Activity Index -0.20 (Mar.); Initial
Claims +6k to 214k (Apr. 18 week); U of M Consumer Sentiment still muted at
49.8 (Apr. F)—and inflation expectations stay elevated.
Wierd News
Source: Associated Press
1 million bees make for bumper-to-buzzer traffic on a
Tennessee highway ramp
KNOXVILLE, Tenn. (AP) — Travelers on an East Tennessee
interstate were forced to brake for workers — and drones, perhaps even a queen
— when a truck carrying about 1 million bees crashed Friday.
The swarm shut down an exit of Interstate 40 in Knoxville,
said Mark Nagi, Tennessee Department of Transportation regional spokesperson.
There were no injuries, he said.
“The ramp from I-40 East to Henley Street is back open but
the truck is destroyed and the bees are… well… buzzing,” Nagi posted, along
with a photo of a person in beekeeper garb. “Unless you are dressed in this
outfit please stay in your vehicles in this area.”
Later Friday, Nagi confirmed that all of the bees had been
moved from the area and the truck was removed.
What could not be as easily quelled were the puns.
“So, this is the buzz around town?” U.S. Rep. Tim Burchett
wrote on social media. “This stuff just writes itself.”
The Virginia Department of Transportation commiserated on
social media. Its northern division reminisced about a 2018 crash that
similarly released a swarm of bees on Interstate 495, prompting the advice,
“Please roll up your windows.”