| | Close
Apr 2 | Close
Mar 27 | Weekly
Change | Net Weekly
Change % |
DJIA | 46,504.67 | 45,166.64 | +1,338.03 | +2.96% |
Nasdaq | 21,879.18 | 20,948.35 | +930.83 | +4.44% |
S&P 500 | 6,582.89 | 6,368.85 | +214.04 | +3.36% |
| S&P TSX | 33,108.22 | 31,960.65 | +1,147.57 | +3.59% |
Source: Globe & Mail
To the Moon
Douglas Porter, CFA
BMO Chief Economist
Markets have been whipsawed by almost every twitch in the
conflict with Iran; and, specifically, by every bounce in oil prices. After a
brief head-fake lower, oil then made like Artemis II and rocketed higher late
in the week, with nearby WTI briefly soaring above $113/barrel on Thursday
morning. President Trump’s speech did little to soothe concerns that the war
could drag on—”another two to three weeks”, but also “back to the Stone
Age”—and thus the Strait may remain blocked for some time yet, with no new
plans on that front. Accordingly, crude promptly vaulted to its highest level since
June 2022 and nearly double the level prevailing in the first week of this
year. This latest sprint follows a 41% surge in the monthly average price in
March, which triggered a record 26% rise in U.S. retail gasoline pump prices.
Now, we are all bracing for impact on the inflation
readings, and the wait will not be long. U.S. CPI for March is the headline
release for the coming week (due Friday April 10), with the spike in gasoline
expected to drive overall prices up 1.0% m/m which will, in turn, lift the
yearly inflation rate a point to 3.4%. The preliminary result from the Euro
Area showed a broadly similar move in March, with prices jumping 1.2% m/m,
lifting the annual inflation rate six ticks to 2.5%. Canada’s inflation rate
will look very similar to Europe, with gasoline prices also rising by a record
21% last month, which could lift CPI by more than 1% in March alone, kicking
the annual inflation rate to about 2.6% (from 1.8%).
How long inflation stays at this higher level, or rises even
further from here, of course all depends on how long oil prices remain
elevated. With the turn of the calendar to April, we have carefully reviewed
our scenarios this week (see Art Woo’s Focus Feature for the details),
discarding the most optimistic outlook, and adjusting the weights on the
various potential outcomes. As a result, we are lifting our assumption on average
WTI prices this year by $10 to $85/bbl, and by almost as much next year to
$77.5. To be clear, this change was in the works even prior to the latest spike
in prices, although that move gave our call one last upward nudge, especially
to next year’s projection.
Given our estimate that every 10% rise in oil adds about 0.2
ppts to headline inflation, we revised up our call on U.S. and Canadian average
inflation this year. Adding a bit of juice is the fact that oil is not the only
commodity being heavily affected by the conflict, as fertilizer and aluminum
prices have also jumped. Meantime, some product prices, such as diesel and jet
fuel, have risen even more steeply than gasoline, in an echo of developments
when Russia invaded Ukraine in 2022. Thus, we are now looking at average U.S.
inflation this year of 3.4% (peaking at nearly 4% in the spring), up from 2.5%
before the conflict began. We are a bit more contained in Canada, but even
there, the estimate for this year is now above 3% versus 2.4% in the days of
yore (five weeks ago).
On the growth front, the impact on the outlook is a bit more
nuanced. We have previously noted that the models suggest roughly a one-tick
trim in GDP growth for every 10% rise in oil. But it’s not quite that
linear—smaller moves have little impact (indeed, a modest increase in crude oil
prices is arguably even a positive for Canadian growth). But as oil forges
higher and global activity becomes more disrupted, as financial markets shudder
on inflation concerns, and as consumers are rattled by rising gasoline prices,
the hit to growth can deepen more seriously than the mechanical estimates may
imply. At this point we have only been chipping away at our 2026 GDP growth
calls, trimming Canada to 1% and the U.S. to around 2%. But the axe is poised
above those estimates, and it may fall if financial markets and consumer
sentiment truly crack in coming weeks.
One reason we are holding our fire on large revisions on the
growth front is that the economies are mostly holding up well, so far. Echoing
the trend seen in the rest of the industrialized world, U.S. manufacturing
activity actually firmed last month, with the factory ISM rising to a sturdy
52.7—the best reading in almost four years. Consumers have not turned tail
either: March auto sales were solid at 16.4 million units, or in line with last
year’s average. The job market seems to be holding up fine—noting that this is
written a day before payrolls—with ADP reporting 62,000 new jobs and jobless
claims easing to barely above 200k last week. As a result, we still look for
U.S. GDP growth to hover around 2% in Q1, and dip just a bit below there in the
next two quarters. Perhaps reflecting the muted impact on activity so far, the
Conference Board found that consumer confidence somehow edged up last month,
even amid all the grumbling around $4 gasoline.
Frank and Mark.
Source: Globe & Mail, BMO Capital Markets, Bank of Canada, Bloomberg.
Canada
Last week’s data highlighted that the Canadian economy might
not be quite as weak as feared. January GDP surprised with 0.1% growth, while
the February flash estimate was shockingly strong at +0.2%. (We had previously
seen a plunge in hours worked… as if we weren’t skeptical of the employment
data already?) Ahead of those numbers, the risks appeared skewed heavily to the
downside for Q1 GDP growth, which was particularly concerning after Q4’s 0.6%
annualized contraction. After the January GDP report, we upgraded our Q1 GDP
forecast from +0.8% a.r. to +1.5%. Unfortunately, the surge in energy prices
will put a lot of pressure on consumers in March and April (so far), which
prompted an offsetting downgrade to Q2 growth. There’s little change on net
overall, but the decent momentum to start the year highlights Canada’s
resilience: the economy isn’t falling off a cliff. That’s not to say things are
going swimmingly for Canada either; but, it’s not as bad as feared.
YTD, the TSX is up 4.40%, and the benchmark 10-year yield ended the week to yield 3.46%.
U.S. & Global
U.S. economic resilience continues to impress. The economic
indicators released so far for March point to an expansion that continued at a
moderate pace despite rising gas prices and growing economic and inflation
uncertainty from the war with Iran and the closure of the Strait of Hormuz. If
growth is to survive this bout of rising inflation, it will need to be built on
a foundation of continued labour market balance and enough consumers spending
through the rise in prices. So far, the outlook appears manageable. Consumer
confidence unexpectedly improved in March, rising a bit to 91.8 from 91.0 in
February and a January low of 89.0. The entire gain was driven by a solid
4.6-point rise in the present situation index, even as future expectations held
up (by slipping only 1.7 points).
YTD, the DJIA is down 3.24%, the NASDAQ is down 5.86%, and the S&P 500 is down 3.84%. The 10-year Treasury yield ended the week to yield 4.31%.
Source: BMO Capital Markets
The Good:
Monthly Real GDP +0.1% (Jan.)—above expected and StatCan
estimates February grew 0.2%.
The Bad:
Merchandise Trade Deficit widened to $5.7 bln (Feb.); Auto
Sales -8.2% y/y (Mar.); S&P Global Manufacturing PMI -1.0 pts to 50.0
(Mar.).
The Good:
Retail Sales +0.6% (Feb.)—and Control Group +0.5%; ADP
National Employment +62,000 (Mar.)—but mostly health care; ISM Manufacturing
PMI +0.3 pts to a 43-mth high of 52.7 (Mar.)—unexpected increase FHFA House
Price Index +1.6% y/y; S&P Case- Shiller Home Prices +1.2% y/y (Jan.); Conference
Board Consumer Confidence Index +0.8 pts to 91.8 (Mar.); Auto Sales climbed to
16.4 mln a.r. (Mar.); Initial Claims -9k to 202k (Mar. 28 week).
The Bad:
Goods & Services Trade Deficit widened to $57.3 bln
(Feb.); Job Openings fall to 6,882k (Feb.); ISM Manufacturing Prices Index +7.8
pts to 78.3 (Mar.)—highest since June ’22; Business Inventories -0.1% (Jan.).
Wierd News
Source: Associated Press
A South African politician goes snorkeling in a giant
pothole to highlight city management failures
JOHANNESBURG (AP) — A 75-year-old woman running for mayor of
South Africa’s biggest city went snorkeling in a large, water-filled trench in
a suburban road in a stunt to draw attention to what she describes as years of
mismanagement by the city’s authorities.
Helen Zille, a well-known South African politician, wore a
wetsuit, a mask and snorkel, and a pink-and-white swimming cap as she
doggy-paddled through the pool of muddy brown water in an upscale Johannesburg
suburb. The pool has been there for about three years because a burst water
pipe hadn’t been properly fixed despite repeated attempts, she said.
Zille posted a video of herself in the trench that was
picked up and broadcast by television news channels. In it, she says
sarcastically, “And here we are with a free and wonderful Saturday-afternoon
snorkel.”
“I wonder if there are any fishes in here. Let me take a
look,” she added before dipping part of her head under the water.
Johannesburg is considered Africa’s richest city by private
wealth but has struggled with years of failed local government coalitions and
the degradation of services. It is known as the “City of Gold” after being
founded on huge gold deposits.
Residents in the city of around six million people often
face water and electricity cuts and broken infrastructure like burst water
pipes and damaged roads.
Zille, who was previously leader of South Africa’s
second-biggest party and mayor of the city of Cape Town, said she’ll stand in
local elections for mayor of Johannesburg.
The current mayor of Johannesburg said in a post on X on
Tuesday that the pothole was the result of a pipe “that had repeatedly failed
over the past three years” and it was fixed and the hole was filled in a day
after Zille’s stunt on Saturday.