| Close
Jun 19 | Close
Jun 12 | Weekly
Change | Net Weekly
Change % |
DJIA | 51,564.70 | 51,202.26 | +362.44 | +0.71% |
Nasdaq | 26,517.93 | 25,888.84 | +629.09 | +2.43% |
S&P 500 | 7,500.08 | 7,431.46 | +68.62 | +0.92% |
| S&P TSX | 34,857.34 | 34,937.85 | -80.51 | -0.23% |
Source: Globe & Mail
A-Hiking We Will Go?
Douglas Porter, CFA
Chief Economist
Financial markets grappled with two nearly equal and
offsetting forces this week: the U.S. and Iran signed a Memorandum of
Understanding to halt the conflict, and Kevin Warsh chaired the FOMC for the
first time. The latter was widely perceived as more hawkish than expected, with
Mr. Warsh seemingly going out of his way to quash notions that he would risk
inflation by unduly aiming for lower rates. The market reaction to the FOMC
countered the relief from the latest dive in oil prices, as WTI dropped almost
10% on the week to around $77, its lowest level since early March. While still
well up from the pre-war levels (low $60s), that leaves crude roughly in line
with its long-run norms (in real terms).
On its own, the steep pullback in oil prices would normally
have carved deeply into rate hike expectations. After all, the primary reason
why we are all even talking about the possibility of hikes by some central
banks—and the reality of hikes by others, such as the ECB and RBA—is that
headline inflation has bounced on the oil price spike, with some threat of a
spillover to core. But if oil is now in full-scale retreat and close to
long-run norms, the casus belli for hikes disintegrates. Suffice it to say that
markets don’t quite see it that way in the wake of Warsh’s tough talk. Instead,
two year Treasury yields rose further this week to nearly 4.2%, up 20 bps in
the past three weeks and a whopping 80 bps since the conflict began. Put
another way, the market is back to pricing in nearly two quarter-point Fed rate
hikes by next spring.
The shifting perception on the Fed revived the U.S. dollar,
which rose almost 1% in trade-weighted terms this week and is again flirting
with its highest level of the past year. It was especially strong against
currencies whose central banks are on hold, such as the Bank of Canada and the
Bank of England, but it still rose nearly 1% against the euro even after last
week’s ECB rate hike. Of course, it doesn’t hurt the greenback’s cause that the
AI/tech boom rolls on, seemingly unabated. To wit, the Nasdaq rebounded 2½% in
this holiday-shortened week, largely reversing the minicorrection at the start
of the month. But even the Dow hit a record high, while the S&P 500 climbed
about 1% and is now up nearly 10% on the year.
We dig much deeper into the finer points of the FOMC (in
Michael’s Thought), but it is fair to ask: What exactly did Warsh signal that
made such a profound shift in views on the Fed outlook? Arguably, very little.
He simply reaffirmed, in an incredibly terse statement, that the Fed was on
hold and committed to controlling inflation, and that the vote was unanimous.
But perhaps more importantly it was what he didn’t say—there simply was no
suggestion that he was looking to lower rates, and no defence of such. And then
there were the economic forecasts (replete with higher core inflation) and the
dots. To be clear, we are very much in the skeptical camp when it comes to the
dot plot, as is Warsh, given that he chose not to contribute to the exercise.
But markets clearly seized on the fact that fully 9 of the 18 dots looked for rate
hikes in the second half of this year. Even by the end of 2027, there are as
many Fed officials seeing rates ‘higher’ as those who see them ‘lower’, from
current levels—quite a change from just three months ago.
However, before reading too much into these quasi
projections, we would make three points: 1) The most important dot, Warsh, was
not there to be counted, while the uber-dove Miran was removed. And while no
one can say for certain that he would be on the dovish side of the scale, his
earlier comments to the Senate suggested so. 2) It’s always crucial to note
that all 12 regional presidents can contribute dots and forecasts, but only 5
have a vote. And, traditionally, the presidents lean hawkish, which very much
seems to be the case now. So, while one can’t just automatically eliminate 7 of
the most hawkish dots to arrive at what the voters would say, it may not be
entirely wrong. 3) As always, the dots and forecasts are not set in stone…more
like porridge. As Warsh noted, they are done in pencils with large erasers. And
these calls may have been made $15 ago on oil prices.
Even with that myriad of caveats, we would readily allow
that there is next to no appetite among Fed officials for rate cuts in the
foreseeable future. Thus, even as we have shaved our oil price assumption based
on the details of the MOU—to an average WTI of $80 this year and $75 next (from
$85 and $77.5)—we have also further pushed back our call on Fed rate cuts.
(Yes, cuts, not hikes.) We now see the Fed waiting until the latter stages of
2027 before resuming trims. To briefly recap why we still lean lower, not
higher, on short-term rates: Current fed funds of 3.50%- to-3.75% are still
above neutral, and we see GDP growth easing to below potential next year on a
tighter turn in fiscal policy after the mid-terms, as well as some cooling in
AI spending growth. And, yes, we are also assuming that headline inflation
recedes notably in 2027 to closer to 2%, as the spike in oil prices fades from
memory.
Frank and Mark.
Source: Globe & Mail, BMO Capital Markets, Bank of Canada, Bloomberg.
Canada
The TSX was little changed on the week as the energy sector
sold off more than 4%. The apparent U.S.-Iran deal pulled oil prices down
sharply, with WTI sitting below $77 late Friday. That’s the lowest level since
early March, and down almost 30% from a month ago. No surprise then that the
Canadian energy sector, which was on a torrid run, has faded to the back of the
pack in recent weeks.
YTD, the TSX is up 9.92%, and the benchmark 10-year yield ended the week to yield 3.42%.
U.S. & Global
Equity markets rose again last week on the back of a
U.S.-Iran peace deal, but gains were tempered by a blunt and somewhat hawkish
Federal Reserve. The S&P 500 rose 0.9%, led by renewed strength in
technology and communication services. After a bit of a hiccup in recent weeks,
technology is again leading the pack with a 21% rally year-to-date, or more
than twice the 9.6% gain in the broad S&P 500. Large caps have also begun
to claw back into the game, outperforming with a 16% gain over the past three
months, although still lagging at 7.5% on the year. Last week’s massive SpaceX
IPO seems to have rekindled retail interest, while the AI trade booms on.
As the oil shock fades, investors turn their attention back
to underlying fundamentals, which remain bullish. That is, solid U.S. economic
growth, robust earnings, an AI story for investors to buy into, and central
banks firmly on hold in North America. The Bank of Canada said as much last
week, so all eyes turned to the Federal Reserve this week, and Kevin Warsh’s
first go as Chair.
The message was blunt—certainly not dovish, and arguably
more hawkish than the market had expected. First, the press statement came in
at a tight 130 words, a purposeful paring down from recent norms in the
230-to-260 range under Powell, and with more changes to simplify communication
likely coming. Meantime, anyone hoping for a dovish bias was let down. In fact,
the press statement tilted slightly hawkish, saying that “productivity growth
and capital investment are strong. Job gains have kept pace with the workforce,
and the unemployment rate has changed little”, but “inflation remains elevated
relative to the Committee's 2 percent goal”, and “the Committee will deliver
price stability”. For now, the Fed is firmly on hold, and that’s fine for
equity investors. But the bond market has gone ahead and priced in almost 50
bps of tightening by next spring.
YTD, the DJIA is up 7.28%, the NASDAQ is up 14.09%, and the S&P 500 is up 9.56%. The 10-year Treasury yield ended the week to yield 4.49%.
Source: BMO Capital Markets
The Good:
Existing Home Sales +5.5% (May); Manufacturing Sales Volumes
+1.8% (Apr.); Manufacturing New Orders +2.1% (Apr.); Foreign investors bought a
net $46.9 bln of Canadian securities (Apr.);
CFIB Business Barometer +3.3 pts to 49.6 (May).
The Bad:
Retail Sales +0.5% (Apr.) Population -0.5% y/y (Q2)—extends
historic decline; Wholesale Trade Volumes -0.3% (Apr.); Housing Starts -6.1% to
261,377 a.r. (May); MLS Home Price Index -4.1% y/y (May); New Home Prices -2.4%
y/y (May); Industrial Product Price Index +13.6% y/y; Raw Material Price Index
+33.4% y/y (May)—both at 4-year highs; Mortgage Credit slowed to +4.4%
y/y—16-month low (Apr.).
The Good:
Retail Sales +0.9% (May); Industrial Production +0.1%
(May)—but April revised higher to +0.9%; Capacity Utilization +0.1 ppt to 76.2%
(May); Pending Home Sales +3.8% (May); Initial Claims -4k to 226k (June 19
week) Philly Fed Index +3.4 pts to an ISM-adjusted 53.1 (June); Leading
Indicator +0.1% (May).
The Bad:
Import Prices +1.9% (May); Housing Starts -15.4% to 1.18 mln
a.r. (May); Building Permits -0.7% to 1.41 mln a.r. (May); NAHB Housing Market
Index -2 pts to 35 (June); Empire State Manufacturing Index -4.6 pts to an ISM-adjusted
53.4 (May).
Source: Associated Press
Brazilian soccer fans at the World Cup heed warning not to
dress Rocky statue in team gear
PHILADELPHIA (AP) — Brazil fans who went the distance up the
Philadelphia Museum of Art steps to pose with the Rocky statue left the
fictional fighter just as they found him.
Every Brazilian fan — in Philadelphia to watch their team
play Haiti on Friday at the World Cup — who stopped for a snapshot or a selfie
with the 9-foot-11, 1,300-pound beast left the statue dressed in only his
bronze trunks and boots.
No taking chances of getting hit by the Rocky curse.
Yes, the Rocky statue, long a symbol of resilience, heart
and the unbreakable bond between Rocky and the people of Philadelphia, has
taken a few more hits of late (even in retirement).
Visiting American sports fans have long learned the hard way
that dressing the statue with colorful jerseys, scarfs, hats, anything found in
your local Rally House, has only meant that team would suffer a knockout blow
at the home of the local Philly team.
Scoff all you want.
The bad fortune stretched to soccer when Ecuador fans took
over the Rocky steps and sang and danced and waved flags and ... dressed Rocky
in a team jersey and tied the country’s flag around the fictional fighter’s
neck.
It didn’t go well.
Amad Diallo scored in the 90th minute to lift Ivory Coast to
a 1-0 victory over Ecuador in its first World Cup appearance in a dozen years.
And there ain’t gonna be no rematch.
Brazil fans noticed the outcome and one of their fan groups,
the Green and Yellow Movement, urged visitors to keep their clothing to
themselves.
“ANTENCAO TORCEDOR!” the Instagram post warned.
Everyone is paying attention.
The translated text read: “It’s totally forbidden to put a
Brazil shirt on the Rocky statue in Philly!!!!!”
Even Visit PA cheekily got in on the fun and tried to warn
foreigners that — just like Ivan Drago learned the hard way — Rocky was not to
be messed with.
“Countless football teams (as in American Football, not
Fútbol — same curse, different sport) have all dressed the Rocky Statue in
their colors and gone on to lose,” the Instagram post said. “Ecuador dressed
Rocky last weekend Coincidence? Sadly, history says no.
“Philadelphia can’t wait to host you! (but Rocky does not
need your kit)”
Brazilian fans paid heed to the warning Thursday, and scores
of fans simply took the spot in front of the statue and raised their arms in
triumph just as Rocky did after so many fights, and many, many movies.
Hundreds of Brazilian fans swarmed the Rocky steps late in
the day and left the statue bare. Rocky was roped off as if inside the ring and
four “Rocky protectors” stood at each corner to keep enthusiastic fans at bay.
“This is a moment in Brazil,” said Lorival Guerreiro, who
traveled from Limeira, Brazil. “They promote this place to celebrate before the
game. The Brazilians come here to celebrate our team.”
When the bronze statue was left on the steps after filming
the “Rocky” movies, the museum fought to have it removed. It was eventually
relocated to South Philadelphia before returning to the bottom of the steps in
2006. The statue was a huge hit and became a point of pilgrimage for people
around the world.
According to the Philadelphia Visitor Center, about 4
million people visit the steps each year — rivaling the nearby Liberty Bell in
annual foot traffic. The pop culture icon was recently moved to the top of the
steps.
Roberto De Freitas, a native of Porto Alegre who now lives
in Florida and is attending his third World Cup, climbed the steps for a
photoshoot with perhaps Philadelphia’s most famous landmark. He was dressed in
Brazil’s colors — down to the green sneakers — and was set to attend Friday’s
game.
He hoped five-time World Cup champion Brazil would take a
page from Rocky’s corner and win some more.
“We have five titles,” De Freitas said. “We are trying to
get that sixth one.”
De Freitas had not yet heard of the Rocky curse but had no
plans to tempt fate once he learned of the potential consequences.
“That’s what they said,” he asked with a laugh. “I’m for
sure not going to do it.”
For the record, De Freitas said “Rocky” was his favorite of
all the movies in the series.
The Rocky Shop at the base of the steps was loaded with
tourists who snaked their way through fighter T-shirts and plush offerings of
Mr. T’s character, Clubber Lang. Peruvian sports journalist Jampool Cuadros
Estrada tried on a Rocky robe as a cameraman followed him around the store for
their latest World Cup report.
Philadelphia, home to nearly 6,000 Brazilian-born
immigrants, has a bit of a recent connection with the South American country.
The Philadelphia Eagles opened their Super Bowl championship season with a win
over the Green Bay Packers in Brazil in 2024.
Facing pressure to win its first World Cup title since 2002,
Brazil was outplayed early and needed Vinícius Júnior’s 32nd-minute goal to get
a 1-1 draw with Morocco on Saturday.
Brazil now needs to beware Haiti, the Western Hemisphere’s
poorest nation that qualified for the World Cup for the first time since 1974
and is a noted heavy underdog — just like Rocky.
“Brazil has the pressure. Haiti has the freedom,” Haitian
singer Wyclef Jean wrote on social media. “And sometimes freedom is the most
dangerous thing on the pitch. I can’t wait!!!!”