| | Close
Apr 12 | Close
Apr 5 | Weekly
Change | Net Weekly
Change % |
| DJIA | 37,983.24 | 38,904.04 | -920.80 | -2.37% |
| Nasdaq | 16,175.09 | 16,248.52 | -73.43 | -0.45% |
| S&P 500 | 5,123.41 | 5,204.34 | -80.93 | -1.56% |
| S&P TSX | 21,899.99 | 22,264.38 | -364.39 | -1.64% |
| | | | | |
Source: Globe & Mail
Higher for Longer, After All
Michael Gregory, CFA
BMO Deputy Chief Economist
This week, the market pared its expectations for Fed policy rate cuts. The odds of a first (quarter-point) action by June were reduced to 20% from around 50%, and the total amount of easing this year shrank to about 1¾ cuts from more than 2½, compared to last week. The catalyst was the CPI report, which showed a third consecutive 0.4% increase in the core index. This continues the pattern of expectations being reined in owing to data revelations of stubborn inflation and/or resilient growth.
Back in January, the market was pricing in more than three rate cuts by June, and six by year-end. The data trends were more friendly then. During the three months ending December, the monthly expansion in payrolls averaged 165k (at the time, but subsequently revised up to 212k). In December, the core CPI posted its seventh consecutive monthly increase in the 0.2%-to-0.3% range. Although still a tad on the high side and seemingly moving sideways (the annualized gain was 3.3% over the latest three months), the core PCEPI countered concerns coming in at 1.6%, matching the lowest three-month reading since 2020.
The trends then started turning less friendly so that by the three months ending March, the average growth in payrolls was topping 275k and the core CPI was inflating at a 4.5% annualized rate (March PCEPI figures are not yet released but the latest threemonth change was 3.3%). Chair Powell said this was going to be a “bumpy ride”, but 100k+ for job growth and 1.0 ppts+ for inflation are big bumps!
Nevertheless, the trends still have time to redeem themselves by the FOMC’s July 31 policy announcement. There are three employment and CPI reports ahead, along with four PCEPI readings, a full cycle of GDP data for Q1 and a first look at Q2. As such, we’re sticking with our forecast for an inaugural rate cut at July-end (but if May data fail to deliver, we’ll be pushing this to September). Importantly, we reckon the revealed bumpiness of this ride is now going to make the Fed even more cautious when it comes to the cadence of rate cuts. We expect a prevalence of two-meeting gaps between policy actions.
We’ve also pared our expectations for Fed rate cuts, projecting 50 bps in cumulative moves this year (down from 75 bps before), with December next on the docket, and 75 bps next year (down from 100 bps). This will push the rate cut campaign further out and less deep than it could have been. This is because we’ve lifted the projected terminal (neutral) rate by 25 bps to a range of 3.00%-to-3.25% (1%-to-1¼% in real terms), no longer judging that policy rates south of 3% are warranted unless the economy is underperforming its potential or to counter net growth headwinds.
Why the rise? Real policy rates are currently close to 2.6%, the highest level since the Great Recession, but the economy continues to emit signs of resilient growth and stubborn inflation. This suggests the economy can not only handle higher real rates, but they’re also warranted. Meanwhile, some secular disinflationary pressures are lessening as re-/near-/friend-shoring supplants unbridled globalization. And new secular inflation forces are forming, owing to climate change and the pursuit of net zero. And, not only might there be more inherent inflation risk, but America has morecredit risk too (according to the three major credit rating agencies). These point to higher real and nominal rates not only for longer, but for ever.
Frank and Mark.
Source: Globe & Mail, BMO Capital Markets, Bank of Canada, Bloomberg.
Canada
The TSX gave back 1.6% last week, as health care was trounced more than 12%, while higher-yielding names struggled. In the equity market, one can see this all playing out vividly when comparing cross border returns with and without currency exposure. The TSX has underperformed in the past year, up 6.5% versus the 24% jump in the S&P 500. But the C$-unhedged S&P 500 has seen returns juiced even higher to near 29%. Since early 2021, through the ensuing ups, downs, and ups in the market, the place for Canadian investors to be has been U.S. stocks in U.S. dollars.
The market views the June Bank of Canada meeting as about 50/50, after the Bank left rates unchanged this week, but earlier doesn't necessarily mean a lot more in terms of easing—there are just over two BoC moves now priced in for 2024. Still, as the BoC gets closer to easing while the Fed is seemingly stepping further away, the loonie is trading at the weakest level since November, especially with the leverage to oil prices just not what it used to be.
YTD, the TSX is up 4.49, and the benchmark 10-year yield ended the week to yield 3.65%.
U.S. & Global
Equity markets struggled last week as a tough U.S. inflation print further dialed back rate-cut expectations. The S&P 500 fell 1.6%, with financials, health care and materials posting the deepest declines. A mixed bag of early bank earnings also weighed late in the week.
The U.S. March CPI report was not pretty, with key shorter-term inflation trends deteriorating. Headline inflation accelerated to 3.5% y/y from 3.2% y/y in the prior month, while core inflation held firmer than expected at 3.8% y/y. The shorter-term metrics are where things get dicey, suggesting that inflation trends are getting worse, not better. Indeed, 6-month core inflation is now running hotter at 3.9% annualized, and 3-month core inflation is running even hotter still at 4.5% annualized. The 3-month annualized rate of ‘supercore’ inflation even popped above 8%. Needless to say, this is not the stuff of rate cuts, and the market reacted accordingly with higher yields and lower stocks.
Indeed, Fed easing expectations continue to get pushed out with a full rate cut now only priced in by September, and less than 50 bps total for 2024.
YTD, the DJIA is up 0.78%, the NASDAQ is up 7.75%, and the S&P 500 is up 7.41%. The 10-year Treasury yield ended the week to yield 4.52%.
Source: BMO Capital Markets
The Good: Existing Home Sales +0.5% (Mar.)—stable and MLS Home Prices little changed; Building Permits +9.3% (Feb.).
The Bad: No news is good news.
The Good: Initial Claims -11 k to 211k (Apr. 6 week); Producer Prices +0.2% (Mar.)—less than expected; Budget Deficit narrowed to $236.5 bln (Mar.).
The Bad: Consumer Prices +0.4% (Mar.)—and core metrics also pick up; Import Prices +0.4% (Mar.); NFIB Small Business Optimism -0.9 pts to 88.5 (Mar.); U of M Consumer Sentiment -1.5 pts to 77.9 (Apr. P)—and inflation expectations climb.
Source: Canoe.com
Depressed since pandemic, Halifax museum’s parrot being shipped to Ontario
HALIFAX — A parrot in Nova Scotia that has been showing signs of depression since the pandemic is moving to Ontario for a change of scenery and to make new friends.
Merlin has been the mascot of the Maritime Museum of the Atlantic in Halifax since 2006, but his routine was disrupted when COVID-19 emerged in 2020 and the museum closed.
A news release from the museum says the lack of interaction with visitors led Merlin to snip his feathers, a sign of stress, and the behaviour continued even after full museum operations resumed.
After consultation with a veterinarian, it was decided that Merlin would leave Halifax on April 15 to join a flock of fellow macaws — large members of the parrot family — at Safari Niagara in Fort Erie, Ont.
The release says Merlin will become part of a family of macaws that spend their days in a “lush, secure and stimulating environment.”
The museum says the 22-year-old Merlin is “quite talkative,” with the words “cracker” and “peek-a-boo” part of his regular vocabulary, and despite his depression, he “laughs on a regular basis.”
