| | Close
Mar 13 | Close
Mar 6 | Weekly
Change | Net Weekly
Change % |
DJIA | 46,558.47 | 47,501.55 | -943.08 | -1.99% |
Nasdaq | 22,105.35 | 22,387.67 | -282.32 | -1.26% |
S&P 500 | 6,632.19 | 6,740.02 | -107.83 | -1.60% |
| S&P TSX | 32,541.93 | 33,083.72 | -541.79 | -1.64% |
Source: Globe & Mail
Dire Strait
Douglas Porter, CFA
BMO Chief Economist
Amid the big swings in oil prices this week, and the related
moves in other markets, the key theme was a grinding acceptance that the
conflict with Iran will not end soon. And even if the President is correct that
the U.S. is “very complete” and is “ahead of schedule”, it’s quite evident that
Iran will have a big say through its control of the Strait of Hormuz. And its
tough stance there suggests the very real possibility that oil prices will stay
elevated and volatile for some time yet. While crude prices of above $95/barrel
have risen by over 40% from pre-war levels, the increase has actually been
somewhat contained by the record release of oil reserves by the G7.
Last week, we considered four different scenarios for oil
prices, and we have since tweaked those estimates and their weightings.
Overall, the initial call still holds up well, although we have bumped up the
average WTI price a bit further for 2026 to $75 (including an average of over
$90 for this month and next). As a result, we have nudged up our calls on U.S.
and Canadian inflation for this year a bit further yet (to 3.0% average
inflation stateside and just under that for Canada), and shaved GDP growth
estimates for both for this year. Naturally, we stand ready to adjust those
calls as needed in coming weeks as the oil outlook comes into better focus.
Looking at the net impact from the conflict on markets since
the end of February (i.e., the two-week change), what really stands out is the
upswing in bond yields right across the curve. Treasury yields have jumped 35
bps or more from 2s out to 10s, while the upswing in Canada has been even
larger. While stocks have wobbled, the S&P 500 is down a bit more than 3%
over the two weeks, and the TSX is off about 5%. The rebound in the U.S. dollar
gathered steam this week, with the euro now down almost 3% since the conflict
began, while the yen has weakened 2%, and even the Canadian dollar has nudged
down over 0.5%.
While this week brought little guidance on when the conflict
may end, it provided some clarity on where the economy stood ahead of the war.
On the inflation front, there was a morsel of good news from the U.S. CPI,
which provided no drama in its February reading. Headline inflation was stable
as mostly expected at 2.4%, while core stayed steady at 2.5%. Unfortunately,
the companion report for the PCE deflator for January suggested that the Fed’s
go-to measure was less calm, with core PCE up 3.1% y/y. As noted in this space
a few weeks back, it’s rare enough to have the PCE deflator running hotter than
the CPI, let alone a 0.6 ppt gap (only a handful of months have been there in
the past 40 years). Suffice it to say that the unusually large deviation
between the two major measures of inflation—especially at such a crucial juncture
on the inflation landscape—complicates the outlook for the Fed.
On the U.S. growth front, there were some mild pleasant
upside surprises from February existing home sales and January housing starts,
but the back-up in long-term yields casts serious doubt on the near-term
housing outlook. Exports also showed some pop at the start of the year,
dragging the trade deficit back down again, while initial claims are generally
low and stable—reinforcing the view that the recent big slowdown in job growth
is as much a supply story as weak demand. Even so, we have chipped away further
at our GDP call for this year, and the big downward revision to Q4 growth of
just 0.7% (from 1.4%) also weighed. As a result, we are now looking at 2.2% GDP
growth for all of 2026, down 3 ticks from the pre-war call.
Even with the softer growth backdrop, the upside risks to
inflation have carved into expectations of Fed rate cuts in coming months.
Before the conflict, markets were leaning to our view of three cuts, but are
now clinging to one cut for all of 2026. In light of the tougher inflation
backdrop, we too have removed one cut from this year, and now see the Fed
waiting until September for the next move (with a second trim in December). We
then expect rates to hold steady at 3.00%-to-3.25% through 2027… at least for
now. Next week’s FOMC will bring the full slate of refreshed economic
projections and the dot plot, a welcome clear opinion amid the fog of war.
Canada was pummelled with tough economic indicators this
week, amplifying the point of a stumbling start in 2026. A very weak jobs
report for February topped the list, with a whopping 83,900 decline and a
two-tick rise in unemployment rate to 6.7%. Even in percentage terms, the 0.4%
jobs drop is among the weakest ever (aside from the pandemic), ranking in the
same league as the 2009 downturn. Perhaps exaggerated by a tough winter, as
well as the ongoing steep slowdown in underlying population growth (the labour
force has dropped heavily for two months running), the key point is that
employment is now up only 0.2% from a year ago. True, the unemployment rate has
barely budged from last February, and is below last summer’s peak above 7%, but
the absence of job growth will weigh on spending.
Loaded on top, we also saw a 4.7% drop in exports and a 3%
drop in manufacturing sales in January, albeit both were heavily undercut by
down-time at a big auto plant. As a result, we have clipped our Canadian GDP
growth call this year by 3 ticks to 1%. Similar to the U.S., we are also
lifting our inflation outlook moderately to an average of 2.9% this year, with
a run above 3% likely in coming months (although next Monday’s CPI will look
quite tame for February below 2%).
Like the Fed, the Bank of Canada is universally expected to
keep rates unchangedat next week’s decision. But, the market’s symmetrical view
on the two central banks ends there. In contrast to the rate cut(s) expected
later this year by the Fed, the market is still leaning to the very real
possibility of a rate hike by the Bank of Canada in the second half of the
year. True, those expectations suffered a heavy blow from the weak jobs report,
but were not knocked out fully. To put it mildly, we believe that a rate hike
this year would be an extraordinarily bad policy decision. In a nutshell, here
are the reasons against the Bank even considering a hike:
• Employment has ground to a halt, and is now up just 0.2%
y/y (and it’s even weaker in the payroll survey; -0.2% y/y in December).
• Even prior to its Q1 stumble, GDP had risen just 0.7% in
the past four quarters, including two—count ’em two—separate negative quarters.
• Most measures of core inflation are cooling notably and
were headed back towards the Bank’s 2% target. Yes, headline inflation will be
driven above 3% by the spike in oil, but the Bank should look through that.
• The back-up in bond yields—5-year GoCs have jumped 40 bps
in the past two weeks alone to above 3%—will dampen an already soggy housing
market and is acting as a tightening move all by itself.
• Looming over everything is the ongoing uncertainty of the
USMCA, which is weighing heavily on capital spending plans and business
confidence.
Frank and Mark.
Source: Globe & Mail, BMO Capital Markets, Bank of Canada, Bloomberg.
Canada
Canadian inflation tends to be seasonally strong in the
first half of the year, and that held true in February. Gasoline prices jumped
4.5% in the month, and look to climb at least somewhat further in March (even
if Middle East tensions ease). Heating oil also saw a big increase in the
month. Other seasonally strong categories include household furnishings/equipment, with
appliances tending to push higher, while airfares and travel services are
usually firm as well. Shelter is expected to provide a modest offset, as
falling home prices continue to weigh on the category. Despite our call for a
sizeable 0.6% headline gain, an even larger increase a year ago means that
inflation will fall half a percentage point to 1.8%. Recall that last year’s
move was driven by the end of the GST/HST tax holiday which boosted prices.
Canada’s housing market continued to feel the chill in
February with little recovery in activity from tough winter conditions in
January. We expect national home sales slipped 7% y/y, extending a three-month
streak of m/m declines. Average home prices look to fall 2% y/y, while the
quality-adjusted MLS HPI could remain 5% below year-ago levels. Note that the
latter has been flat-to-declining on a monthly basis for a year and a half.
Affordability concerns continue to keep buyers on the sidelines, particularly
in B.C. and Ontario. With further rate relief unlikely, the housing market is
expected to remain subdued through the rest of the year.
YTD, the TSX is up 2.61%, and the benchmark 10-year yield ended the week to yield 3.48%.
U.S. & Global
It's all oil, all the time, and near-$100 prices for WTI
have pushed out expectations of Fed easing, while at the same time are chipping
away at growth forecasts. Suffice it to say, that's not a good combination for
the equity market. The S&P 500 slipped 1.6% on the week, with industrial
and financials down most, while the TSX also gave back 1.6%.
Oil price shocks are not new for the U.S. economy, but their
impact has evolved. There are a number of factors that will help cushion the
impact during this episode, and a few things still to worry about. We judge
that the net risks land on the upside for inflation and downside for growth,
although more moderately so than in the past.
The U.S. economy is less energy-intensive today than during
past oil price shocks. At roughly 20 million bpd of consumption, that’s less
than 0.7 barrels to produce $1,000 of real GDP (in 2025 dollars). That compares
to around 1 barrel 20 years ago; and more than 2 barrels during the bad days of
the 1970s shocks. If we scale the current surge in oil prices for the fact that
intensity is lower, it suggests there is plenty of room still between where we
are now and the type of shocks that seriously derailed growth or triggered
recessions. In fact, in those terms, you’d probably need to see WTI push to the
$120-to-$140 range to match the magnitudes seen during the Russian-Ukraine
conflict, the pre-GFC run-up or the early-1990s Iraq invasion of Kuwait.
The U.S. is also a major oil producer now, and a net
exporter of energy products, a stark change from decades past. The U.S.
produces a record 14 million barrels per day, up from just 5 million at the
onset of the financial crisis and around 7 million in the early 1990s. While
domestic production could be slow to respond as firms improve balance sheets,
production should chase prices higher—and U.S. production is agile.
Higher energy efficiency over time, and a general softening
in prices, have pulled the weight of energy in the U.S. CPI down to around
6.4%, the low end of the range (6%-to-12%) seen since the 70s. So, while there
will be immediate passthrough to headline inflation, the magnitude to start
should be at the low end. The stage of the cycle also matters, and it helps
that this shock is set against a backdrop that was seeing sturdy economic
growth (especially private domestic demand), healthy earnings, disinflation and
Fed easing.
On the flip side, while efficiency has improved, the U.S.
consumer still accounts for a near-record 68% of U.S. GDP. The confidence
impact of a drawn-out conflict, in addition to the direct impact on disposable
income and inflation expectations, still matters. On the household balance
sheet, equities and related holdings now make up a near-record 53% of financial
assets, leaving the consumer exposed to a deterioration in financial
conditions. The concern is that higher inflation prevents the Fed from easing,
thus removing an expected support for already-stretched valuations. Finally,
tools like the SPR can be used to dampen price movements, but those reserves in
the U.S. have thinned. This week’s announced 172 mln barrel release (400 mln by
the IEA in total) was swallowed by the market. Recall that the U.S. SPR was
already drawn down by more than 250 mln barrels during the Russia-Ukraine
conflict, and had only been rebuilt by less than a third. After this week’s
announcement, current levels will be running at around 240 mln barrels, the
lowest level since the early-80s.
YTD, the DJIA is down 3.13%, the NASDAQ is down 4.89%, and the S&P 500 is down 3.12%. The 10-year Treasury yield ended the week to yield 4.23%.
Source: BMO Capital Markets
The Good:
Average Hourly Wages +3.9% y/y (Feb.); Building Permits
+4.8% (Jan.).
The Bad:
Employment -83,900 (Feb.)—all full-time Jobless Rate +0.2
ppts to 6.7% (Feb.); Merchandise Trade Deficit widened to $1.3 bln (Jan.)—auto
exports weighed; Manufacturing Sales Volumes -3.9% (Jan.);Core Wholesale Trade
Volumes -1.5% (Jan.); Capacity Utilization -0.4 ppts to 78.5% (Q4).
The Good:
Employment -83,900 (Feb.)—all full-time Jobless Rate +0.2
ppts to 6.7% (Feb.); Merchandise Trade Deficit widened to $1.3 bln (Jan.)—auto
exports weighed; Manufacturing Sales Volumes -3.9% (Jan.);Core Wholesale Trade
Volumes -1.5% (Jan.); Capacity Utilization -0.4 ppts to 78.5% (Q4).
The Bad:
Real GDP revised down to +0.7% a.r. (Q4) —consumer spending
below expected; Real Personal Spending +0.1% (Jan.)—barely rises Core PCE Price
Index +0.4% (Jan.)—still elevated Core Durable Goods Orders unch (Jan.); Budget
Deficit widened slightly to $307.5 bln (Feb.)—from $307.0 bln a year ago; Building
Permits -5.4% to 1.376 mln a.r. (Jan.); NFIB Small Business Optimism -0.5 pts
to 98.8 (Feb.); U of M Consumer Sentiment -1.1 pts to 55.5 (Mar.)—weighed by
Mideast conflict.
Wierd News
Source: Associated Press
A giant steel pipe’s mysterious overnight growth spurt
baffles a Japanese city
TOKYO (AP) — A giant, underground pipe rose more than 10
meters (32 feet) out of a construction site in a busy area of the Japanese city
of Osaka, nearly reaching an elevated road overnight, unseen by any witnesses.
The steel pipe’s unexpected growth spurt was reported to
police early Wednesday by a pedestrian who saw broken pieces of asphault
falling from the cylinder, baffling people passing by and causing traffic
congestion.
One office worker who passed by the site told NHK public
television that he could not understand how it happened. Another man who works
nearby said he first wondered if a new road support might have been built
overnight.
The pipe, with a diameter of 3.5 meters (11.5 feet), towered
as high as 13 meters (42 feet) at one point, according to the Osaka
construction department.
The pipe’s unexpected elevation from the ground occurred at
a sewer construction site where workers had been connecting an existing sewer
line with a channel designed to hold excess rainwater to prevent flooding.
The pipe was being used as a retaining structure to keep the
surrounding soil from collapsing during the operation, officials said. A short
time earlier, workers had drained water from the pipe, which may have caused
the empty apparatus to float, they said.
By Thursday it had been lowered back to just several feet
above the ground after firefighters cut a hole on the side and injected water
to push it back into the ground.
City officials said they plan to cut the last 1.6 meters
(5.2 feet) of the pipe that remain visible, an operation that would cause a
road closure for several more days.