| Close
Jan 30 | Close
Jan 23 | Weekly
Change | Net Weekly
Change % |
DJIA | 48,892.47 | 49,098.71 | -206.24 | -0.42% |
Nasdaq | 23,461.81 | 23,501.24 | -39.43 | -0.17% |
S&P 500 | 6,939.03 | 6,915.61 | +23.42 | +0.34% |
| S&P TSX | 31,923.52 | 33,144.98 | -1,221.46 | -3.69% |
Source: Globe & Mail
New Year… New Prolonged Pause?
Michael Gregory, CFA
BMO Deputy Chief Economist
As expected, the Fed kept policy rates unchanged on January
28 with the target range for the fed funds rate at 3.50%-to-3.75%. This
followed quarter-point cuts in each of the past three confabs. And we are
starting to judge that this at-least three-month pause (the next meeting is
March 18) will last longer.
Recall that 2025 also began with a hold after three
consecutive cuts (worth 100 bps). The eventual nine-month pause reflected
heightened economic policy uncertainty and the stagflation risk posed by
tariffs. And there was recognition that policy rates were still on the
restrictive side, imparting an easing bias. Rate reductions resumed as the economic
policy picture clarified and, importantly, as the Fed began to judge that the “downside
risks to employment have risen” after being comparable with the upside risks to
inflation. This net risk tilt was similarly mentioned alongside each of the
past three rate cuts.
This month, with the Fed on hold, the net risk skew was
removed. The policy statement was also more upbeat on the economy. For example,
it said “economic activity has been expanding at a solid pace” versus
“moderate” before. And “the unemployment rate has shown some signs of
stabilization” versus having “edged up” before. Meanwhile, “inflation remains
somewhat elevated.” Less downside employment risk plus still somewhat sticky
inflation reduced the Fed’s easing appetite, particularly, as Chair Powell
noted in the press conference, with policy rates in the “range of plausible
estimates of neutral”. The FOMC’s latest median projection of the longer-run or
neutral fed funds rate is 3.00% implying an endgame of either 2.75%- to-3.00%
or 3.00%-to-3.25% (we’re leaning to the lower range). It could take a while to
get there, however (if at all).
Powell also said that “after this meeting, after the three
recent rate cuts, we’re well positioned to address the risks that we face on
both sides of our dual mandate.” This does not sound like a rate cut is being
teed up for the next meeting. Indeed, Powell said they “haven’t made any
decisions about future meetings” and will “be looking to our goal variables and
letting the data light the way for us.” We are waiting for the same data
beacons.
Bottom Line: We now look for the next Fed rate cut in June
(three months later than before). Amid economic momentum spilling over from the
second half of last year (thank you, wealth effect and AI/automation-related
capex), the rebound from Q4’s government shutdown, larger tax refunds, and new
tax cuts kicking in, the data will likely be lighting the way to a pause for at
least the next several months.
Frank and Mark.
Source: Globe & Mail, BMO Capital Markets, Bank of Canada, Bloomberg.
Canada
The TSX slid 3.7% last week, including a
3.3% drubbing on Friday alone alongside a sharp pullback in gold prices. After
flaring above $5,500 at one point during the week, the metal traded below the
$4,900 mark by late Friday.
The Bank of Canada held policy rates steady at 2.25% for a second consecutive
meeting this week. The policy statement, press conference and Monetary Policy Report
were for the most part non-descript. It’s clear that the Bank of Canada has done as
much as it’s willing to support the economy until there’s a material shock either way.
There were a few subtle dovish hints, but that’s more reflective of the uncertainty.
The Bank remains cautious on the economic outlook, with GDP growth expected to
be a modest 1.1% in 2026 and 1.5% in 2027. BMO is more upbeat at 1.4% and 2.2%,
though the latter is perhaps a tad optimistic. The BoC is anticipating a steady ramp up
in domestic demand, but that’s going to take more certainty on the outlook. Canadian
businesses are unlikely to pick up investment and hiring until they know how the trade
relationship with the U.S. will settle. Subdued hiring and anticipated inflammatory
headlines through USMCA negotiations will keep consumers on the defensive. That’s
particularly the case with the housing market likely to languish for the next few
years. The near-term outlook was mixed, with Q4 trimmed to flat (from 1%), while Q1
was introduced at a perky 1.8%. That comes after Q3 came in well above the Bank’s
forecast, and the prior few years saw huge upward revisions. Putting that all together,
the output gap estimate held steady at -1.5% to -0.5%. The subdued growth outlook
means the gap will only close slowly over the next two years.
YTD, the TSX is up 0.66%, and the benchmark 10-year yield ended the week to yield 3.43%.
U.S. & Global
Equity markets had a choppy week alongside even with
as-expected interest rate holds from both the Federal Reserve and Bank of
Canada. The S&P 500 added 0.3%, with strong gains in communication services
and energy holding the index in positive territory. Earnings results were mixed
across a number of big tech names such as Microsoft (negative), IBM (positive)
and Meta (positive).
The Federal Reserve left rates unchanged as widely expected,
and the communication did little to suggest that further rate cuts are
imminent. The policy statement was somewhat more upbeat on the economy, saying
that “economic activity has been expanding at a solid pace” versus “moderate”
before, while arguing that “inflation remains somewhat elevated.” The Fed is
also arguing that policy rates are within the “range of plausible estimates of
neutral”, leaving little urgency to move. Indeed, while the response to this
meeting was limited, the market now has the next full 25 bp rate cut priced in
for July, with 50 bps of easing by December.
Meantime, Kevin Warsh was announced as the next Fed Chair to
take over from Jay Powell when his term expires in May (confirmation pending).
Warsh has a variable history with respect to his policy leanings. He was
relatively hawkish in the wake of the financial crisis when he served on the
Board of Governors, but has recently been vocally more dovish. In a November
opinion piece penned in the Wall Street Journal, Warsh argued that growth will
run stronger on the back of the AI boom; inflation will run cooler thanks to
productivity gains; setting the stage for lower interest rates; although
simultaneously shrinking the size of the Fed’s balance sheet. By June, that
will leave three dovish-leaning Trump appointees on the FOMC (Warsh along with
Bowman and Waller), with Governor Cook’s case ongoing (potentially a fourth)
and Powell’s decision to remain on the Board still pending (potentially a
fifth). Ultimately policy comes down a 12-member FOMC vote, but incoming Chair
Warsh will drive the narrative (and the press conferences).
YTD, the DJIA is up 1.73%, the NASDAQ is up 0.95%, and the S&P 500 is up 1.37%. The 10-year Treasury yield ended the week to yield 4.24%.
Source: BMO Capital Markets
The Good:
Core Wholesale Trade +2.1% (Dec. A).
The Bad:
Monthly Real GDP unch (Nov.)—StatCan estimates Dec. grew
just 0.1%, signalling a Q4 dip; Merchandise Trade Deficit widened to $2.2 bln
(Nov.); Job Vacancy Rate unch at 2.6% (Nov.)—lowest since early 2017; CFIB
Business Barometer -0.5 pts to 59.5 (Jan.); Ottawa posted a wider budget
deficit of $26.4 bln (Apr.-to-Nov.)—vs. same period last fiscal year.
The Good:
Factory Orders +2.7%; Core Durable Goods Orders up a
still-healthy 0.4% (Nov.); Jobless Claims -1k to 209k (Jan. 24 week) S&P
Case-Shiller Home Prices +1.4% y/y; FHFA; Home Prices +2.0% y/y (Nov.); Chicago
PMI +11.3 pts to 54.0 (Jan.).
The Bad:
Producer Prices picked up to +0.5% (Dec.); Goods &
Services Trade Deficit widened to $56.8 bln (Nov.); Chicago Fed National
Activity Index -0.04 (Nov.); Conference Board Consumer Confidence Index -9.7
pts to 84.5 (Jan.).
Wierd News
Source: Associated Press
Freezing reptile dubbed ‘Lizard in a blizzard’ is rescued
after being buried in Rhode Island snow
PROVIDENCE, R.I. (AP) — Wildlife officials say a “lizard in
a blizzard” has been rescued after a man discovered the large cold-blooded
reptile buried in snow in Rhode Island, somehow surviving the frigid
temperatures.
According to the New England Wildlife Center, the Providence
man spotted the tegu lizard from his driveway on Tuesday. The reptile was
quickly brought it indoors and wrapped in a T-shirt to help conserve heat.
ET Reptiles, a reptile store based in Rhode Island, agreed
to pick up the tegu and take it to an animal hospital. There, veterinarians
found the tegu to be “extremely weak, underweight, and not moving well.” The
tegu’s tongue had also suffered frostbite and muscle weakness due to prolonged
exposure to the cold — a circumstance that leads to cell failure in
cold-blooded animals in low temperatures.
A small portion of the tegu’s tongue was amputated to help
with its recovery.
“He is now resting comfortably and finally warm, which makes
all the difference!” the wildlife center said in a social media post. “We will
be rooting for a good outcome and will share updates as we have them.”
The center says it’s unknown if the lizard escaped on its
own from wherever it was being kept or was abandoned.
The black and white lizards are native to South America and
have become popular in the pet trade. They have become known as an invasive
species in certain states, like Florida, as more owners who had intended to
keep them as pets abandon them into the wild. They can grow to 4 feet (122
centimeters) long.