| | Close
May 22 | Close
May 15 | Weekly
Change | Net Weekly
Change % |
DJIA | 50,579.70 | 49,526.17 | +1,053.53 | +2.13% |
Nasdaq | 26,343.97 | 26,225.14 | +118.83 | +0.45% |
S&P 500 | 7,473.47 | 7,408.50 | +64.97 | +0.88% |
| S&P TSX | 34,471.36 | 33,833.35 | +638.01 | +1.89% |
Source: Globe & Mail
All’s Well that Ends Well?
Douglas Porter, CFA
BMO Chief Economist
Well, we’re not sure if this is the end of the conflict
with Iran, and we’re definitely not sure that this ends well. But equity
markets are in no mood for such trifling details, not with the tidal wave
of spending on AI rolling on, with corporate earnings still blazing, and
with the prospect of a handful of massive IPOs in coming months. Even the
global back-up in bond yields only slowed the rapid market ascent for a few
days but barely caused it to break stride—the S&P 500 is now sitting on
an eight-week winning streak. Since bottoming in late March, the index has
powered up more than 17%, while the Nasdaq has popped 26%. To be clear,
that’s in the space of just 37 trading days; the only two stronger such
stretches in the past 20 years were bounces off extreme lows in 2009 and
2020. Even the Dow managed to rebound above 50,000, hitting a new record
high for the first time since early February.
Adding some fuel to the fire were unconfirmed reports
that the U.S. and Iran were close to an agreement. (We won’t trouble the
raging bulls with the small matter that we have heard that before, perhaps
seven or eight times, and doubts resurfaced Friday.) That slim thread was
still enough to clip oil prices by almost $8 for the week to around $97,
and calm bonds. The 30-year U.S. Treasury yield had closed at 5.18% on
Tuesday, its highest since June 2007, or just before the Great Financial
Crisis first broke wide open. At Tuesday’s peak, 10-year yields topped
4.67%, or up 70 bps from the pre-war low. Both of these bellwether yields
slipped about 10 bps from the high by week’s end, tempering some of the
rising global anxiety, but far from erasing the bigger picture.
Even with some slight moderation in oil prices and bond
yields, the market is more firmly leaning to the view that the Fed’s next
move is likely to be a rate hike, not a cut. The relentless rally in
equities, signs of firming job growth, and surprisingly hawkish Minutes
from the April FOMC all added to the mix. This presents Fed Chair Kevin
Warsh with a rather inconvenient truth—if he is still advocating for rate
cuts, as in his Senate testimony last month, he may be a lonesome dove. The
case for cuts simply is not there at the moment, and there are likely
precious few Fed voters who would even consider such a step at this point.
Governor Waller put an exclamation point on the shift in
view among Fed members in a speech Friday morning. The erstwhile dove
flatly stated that the easing bias should be removed from the Fed’s
statement and that he preferred no change in policy rates in the near term,
presumably until there was more clarity on the oil price and inflation outlook.
While he said that he wasn’t advocating for a hike, yet, he wouldn’t
hesitate to if “expectations became unanchored”. His key concern is that
inflation expectations could indeed ramp up as the Fed is now in the
process of missing its inflation target for a sixth year.
As if to amplify those remarks, the University of
Michigan reported at the same moment that consumer inflation expectations
took a big step up in May. The oneyear outlook ticked up to 4.8%, while the
five-year view jumped almost half a point to 3.9%. Aside from a flare-up
last spring around Liberation Day, that’s the highest reading on this
measure in more than 30 years—even during the big inflation bulge in
2021/22, it barely got above 3%. As Waller noted, it’s the fact that
relatively high inflation has persisted this long that has got consumers
re-thinking their longer-term view on inflation, and that’s bad news for
the Fed doves.
However, before reading too much into the UofM survey,
we would note that it also reported that household sentiment tanked in May
to 44.8. That’s the lowest level in more than 70 years of this survey;
lower than during the harsh recessions in 1982 and 2009, or during various
wars, the tech bust and 9/11, and during the pandemic. Seriously? Clearly,
the sentiment surveys are also taking on much more of a political bent in
recent years, and that could also be the case even for the inflation
opinion. The reality is that spending is still hanging in there, despite
the ostensibly dark consumer mood. Recall that retail sales were up 0.5%
m/m as recently as April, leaving them almost 5% above year-ago levels,
still comfortably north of inflation trends.
At the same time, initial jobless claims are hovering
around 200,000 and the ADP’s weekly jobs reading is steadily improving and
consistent with more payroll gains above 100,000 per month. As Waller
suggested, the job market is no longer his “chief concern” when setting
policy, and consumer spending hasn’t been dissuaded by higher oil prices.
It’s that very resiliency in spending that further reduces the chances of a
near-term Fed cut and emboldens the hawks. The near-total lack of support
for rate cuts—Waller went so far as to say it would be “crazy” to talk
about cuts now—is just one of the many issues that Warsh will be dealing
with in his first FOMC meeting in mid-June, as detailed in this week’s
Focus Feature. But we’ll just conclude by noting that stepping in as Chair
at a time of rollicking equity markets, a firming job backdrop, steady
consumer spending, but slightly above-target inflation is a lot more
enviable than dealing with flailing stocks, high unemployment, and too-low
inflation.
Frank and Mark.
Source: Globe & Mail, BMO Capital Markets, Bank of Canada, Bloomberg.
Canada
Canada’s international trade flows experienced a
reversal of fortune of sorts in Q1. The first couple of months reflected ongoing uncertainty
regarding the U.S. relationship, highlighted by the start of formal USMCA
discussions. But the late-February outbreak of the Iran war resulted in the closure of the
Strait of Hormuz—driving prices for key Canadian exports, especially
energy, higher. On cue, the merchandise trade deficit flipped to surplus in
March and looks to continue benefitting as long as activity through the Strait remains
restricted. Still, the Q1 shortfall likely widened due to softness in earlier
months. Meantime, the services account posted a small deficit following a surplus in the previous
quarter. Consequently, we expect the current account shortfall to
deteriorate to $2.5 billion ($9.9 billion a.r.) in Q1. That would weigh in
at a modest 0.3% of GDP, with the latter figure to be released the
following day, ahead of an
expected surplus in Q2.
The Canadian economy seemed to regain its footing at the
start of the year. We expect
real GDP to expand 1.5% a.r. in Q1 following a modest contraction in the
fourth quarter. Our call is a touch softer than the flash estimate
(+1.7% a.r.). Recall that swings in trade—like that in March—can drive
larger-than-normal differences between measures of GDP by industry (the flash estimate) and by
expenditure (next week’s release). Still, spending by governments and
consumers drove the first quarter’s recovery, with the latter hanging in there despite a softer
labour market and ongoing economic uncertainty. Business investment
likely pulled back from a rare increase in Q4, while housing activity
continues to struggle in some of the largest regions in the country. Net exports
look to drag on growth despite the energy shock, offset by an increase in
inventories, although we expect the former may support growth in Q2.
YTD, the TSX is up 8.70%, and the benchmark 10-year yield ended the week to yield 3.59%.
U.S. & Global
Equity markets rose last week on optimism, yet again, around
a deal between the U.S. and Iran. The S&P 500 rose 0.9%, led by health care
and utilities, while the TSX added 1.9%. Now, step back and picture it:
Earnings and productivity growth are running on the back of new technological
development; the spillover is driving strong growth across broader segments of
the U.S. economy; the IPO pipeline is stirring with firms looking to raise
capital and cash in on new business models; a prolonged period of disinflation
is giving way to upward pressure on core prices; and the Federal Reserve, which
had been easing/on hold, is staring down the barrel of potential rate hikes.
All the while, the equity market is whistling past the graveyard of rolling
global macroeconomic shocks, pushing record highs by the week, while drawing
more retail enthusiasm and leverage.
These were the late 1990s—the days of Savage Garden,
American Pie and the dot-com bubble. And yes, the parallels are striking. Past
episodes have taught us how these booms usually end—when excessive investment
and valuations are met by aggressive Fed tightening. They’ve also taught us
that, as we see today, these booms can run longer and drive more economic
growth than most initially think.
The biggest reason for equity market resilience in the face
of higher oil prices and rising yields is the relentless strength in earnings.
With the 2026Q1 reporting period now wrapped up, S&P 500 earnings grew a
massive 29% y/y. We’ve said it many times before in this space, but the AI boom
has driven combined spending on software, computer/ peripheral equipment and
data centres to above $1.3 trillion per year, up 25% from a year ago. The
spillovers across aspects of domestic demand have been wide, all while the
consumer has held resilient. Firms have generally also been able to protect or
expand margins alongside productivity gains. Real output per hour has grown
almost 3% annualized over the past three years—pandemic distortion aside, we’ve
only recently seen performances like that very early in the cycle, or during
the 1990s tech boom.
Where does that leave the economy and the equity market? For
the economy, the flow of capital investment remains robust and will continue to
support growth through 2026. That, combined with firming core inflation, leaves
it easy to see why the market has scrubbed out Fed easing for this year. True
late-1990s vibes would come if the Fed pivoted to rate hikes—the market is now
pricing that for December, but we’re not there yet. For now, stocks are rising
because reported earnings, and forward-year expectations, are growing. In fact,
the forward price-to-earnings multiple on the S&P 500 now sits around 21,
right in line with where it was a year, and about 28% on the index, ago. The
same holds true relative to 10-year Treasury yields, which are now little-changed
from a year ago. In Canada, the screaming relative valuation advantage has
narrowed, but stocks too have been rising because of underlying earnings—more
so from energy and financials than technology. The TSX now trades around 16x
forward earnings, also little changed from a year ago.
YTD, the DJIA is up 5.24%, the NASDAQ is up 13.35%, and the S&P 500 is up 9.17%. The 10-year Treasury yield ended the week to yield 4.59%.
Source: BMO Capital Markets
The Good:
Consumer Prices +2.8% y/y (Mar.)—better than expected
and cores stay around target; Building Permits +10.3% (Mar.); Residential
Mortgage Credit +4.6% y/y (Mar.).
The Bad:
Retail Sales Volumes -0.7% (Mar.)—and StatCan estimates
nominal sales grew only 0.6% in April; New Home Prices -2.3% y/y (Apr.)—but
good for inflation picture; Industrial Product Prices +11.4% y/y; Raw Materials
Prices +31.6% y/y (Apr.); CFIB Business Barometer -11.7 pts to 46.3 (May).
The Good:
ADP +42,250 (4-weeks to May 2); Initial Claims -3k to
209k (May 16 week); Building Permits +5.8% to 1.442 mln a.r. (Apr.);
Pending Sales +1.4% (Apr.); NAHB Housing Market Index +3 pts to 37 (May); Global
Investors bought a net $96.5 bln in U.S. securities (Mar.); Leading
Indicator +0.1% (Apr.).
The Bad:
Housing Starts -2.8% to 1.465 mln a.r. (Apr.); Philly
Fed Index -4.8 pts to an ISM-adjusted 49.7 (May); U of M Consumer Sentiment
revised down to a new record low of 44.8 (May)—and inflation expectations
jump.
Wierd News
Source: Associated Press
Cardinals manager Marmol buys tickets for fans to
continue shirtless revelry at Busch Stadium
ST. LOUIS (AP) — St. Louis Cardinals manager Oliver
Marmol believes in the “no shirt, no problem” mantra.
His club was boosted to a win over the Royals Friday
night and again on Saturday by a group of college players in the
right-field seats who took off and waved their shirts as they sang, chanted
and drew others into the fray.
Marmol loved it so much that he bought tickets for
shirtless revelers this weekend.
“Last night’s atmosphere was electric. Let’s run it back
this weekend,” Marmol said in a social media post. “I’ll buy tickets for
fans who want to sit in the right field Loge and bring the energy.”
It all began when the Stephen F. Austin club baseball
team, known as the Lumberjacks, was in nearby Alton, Illinois, for the
National Club Baseball Division II World Series. The Cardinals offered
tickets to the team, and 17 players attended.
By the time Yohel Pozo hit a walk-off single in the 11th
inning, the Lumberjacks had other fans — and even the mascot Fredbird —
joining in on the ruckus.
“Whoever started that in right field, I’ll do whatever I
need to do to make sure they come every game,” Marmol said Friday night.
“Because that was awesome. Not only them, but everybody that showed up
today. That was a fun environment.”
The college players were back Saturday, when they
shouted Marmol’s name numerous times along with “M-V-P!” when Jordan Walker
came to bat. Other fans in the stadium joined in on the fun.
“I heard it pretty clear,” Marmol said. “Welcome back to
Busch. It was cool to see them back. The environment was awesome. We feed
off that.”
Will he keep buying tickets?
“I’ll go broke,” Marmol quipped.
The “tarps off” trend — celebrating by taking a shirt
off and waving it — is not new to sports, but it was to Busch Stadium.
Friday night’s fans may have inadvertently created a new
tradition.
The fans sang soccer chants and shouted players’ names.
The stadium organist, Dwayne Hilton, played accompanying music and got
everyone involved.
The party had grown to multiple sections by the 11th
inning.
“It creates an environment where, it’s not only filling
this place up, it’s making it a tough place for other teams to come in and
play,” Marmol said Friday. “That was pretty damn cool. I’ll sign up for
that, any day.”
The Cardinals said Marmol bought right-field tickets for
both games this weekend, and all of them were snapped up by Saturday
afternoon.
The Lumberjacks returned to Busch Stadium after a
come-from-behind 9-8 win over Stony Brook earlier in the day.
St. Louis beat Kansas City 4-2 on Saturday and the
Cardinals rewarded the Lumberjacks, who were given swag bags of hats and
shirts.
They also were invited into the clubhouse and Marmol’s
office after the game. Several Cardinals posed for photos with them and
some even gave away bats and baseballs.
Masyn Winn, who is in his third full season, marveled at
the energy in the stadium.
“I’ve never been in a playoff but this was a playoff
atmosphere,” Winn said. “It’s hard not to have fun when the fans are like
that. We’ve got the best fans in the world but it seems like the younger
generation makes it more like a college atmosphere. I think it’s good for
the game.”
Freshman pitcher Caleb Cummings, of League City, Texas,
couldn’t believe his good fortune.
“I don’t even know what to say,” Cummings said. “It’s
the coolest thing that’s ever happened to me. We’re in the clubhouse. It’s
just crazy.
“The Cardinals are a great organization and led by a
great manager.”
Cummings is a St. Louis fan now.
“I didn’t think I’d ever switch. I’m a diehard Astros
fan but man, the Cardinals just showed me so much this weekend,” Cummings
said.
The college crew may be back Sunday, but they have their
own game to play at 7 p.m.