Commentary

Volume 28, Issue 13
March 25, 2024.

 

Close
Mar 22

Close
Mar 15

Weekly
Change

Net Weekly
Change %

DJIA

39,475.90

38,714.77

+761.13

1.97%

Nasdaq

16,428.82

15,973.17

+455.65

+2.85%

S&P 500

5,234.18

5,117.09

+117.09

+2.29%

S&P TSX

21,984.08

21,849.15

+134.93

+0.62%

         

Source: Globe & Mail

 

Reddit or Not, Here Come Rate Cuts

Douglas Porter, CFA

BMO Chief Economist

 

This was always going to be a big week for central bank watchers; too bad everyone was looking at the wrong one(s) for direction. While the FOMC meeting was busy hogging the spotlight, and saying little that was new, and the BoJ finally did the expected and abandoned negative rates, some other lower-profile banks were actually getting on with rate cuts. Along with indications from Chair Powell that QT will be tapered before long, the reality of some global rate reductions added fuel to a fiery equity market, pushing the S&P 500 above 5200, and even helping the TSX reach a record high for the first time in two years on Thursday.

The Swiss National Bank became the first central bank in the developed world to trim, slicing its policy rate 25 bps to 1.5%, as the combination of slow growth and 1% inflation has chopped Switzerland’s nominal GDP growth to just 1.3% y/y. Soon after, the Bank of Mexico also delivered its first cut, of 25 bps to 11.0%. Mexico was a leader on the way up, first lifting rates in June 2021, and the full cycle saw 725 bps of hikes, outdoing the Fed by 200 bps in total. But Brazil has truly been in the vanguard, first tightening in March 2021—a full year before the Fed—and hiking rates by a staggering 1175 bps (from 2.0% to 13.75%). Brazil began cutting last August, and chopped another 50 bps this week to 10.75%.

The point of this brief trip abroad is that the emerging markets that sniffed out the inflation trouble early on, and responded accordingly, are now beginning to send out the almost-all-clear signal. And while the SNB wasn’t exactly early on the hiking side, its rate cut is an important development, acting as a counterpoint to the BoJ’s small rate hike this week (see Jennifer’s Thought for the details on Japan). Amid the wave of central bank news, bond yields reversed about half of last week’s heavy sell-off, with 2-year Treasuries backing off 14 bps to below 4.6%, and 10s skidding 10 bps to around 4.2%. Markets now expect a little more than three rate cuts this year from the Fed and the BoC, and the dot plot remains in sync with that call—just.

A notable aspect of the steadfast conviction that U.S. rates are coming down is that the economy, inflation, and financial conditions are hardly crying out for relief. This week’s thin set of data was generally stronger than expected, with home sales and starts well above expectations, the Philly Fed still in positive terrain, and jobless claims holding at low levels. In what may well qualify as irony, the U.S. leading indicator has turned positive for the first time in two years, just as the world is gearing up for rate cuts. Rising equity markets have turned the tide in the LEI, supported by building permits and hours worked in manufacturing. In light of the persistent strength in the U.S. economy, as well as stubborn underlying inflation, we have succumbed, and pulled one of the Fed rate cuts from our call, and now expect 75 bps of trims this year, beginning in July. It is by accident, not design, that this largely lines up with the Fed and market pricing.

Even with that small shift in our Fed call, we are maintaining our Bank of Canada call of 100 bps of cuts in 2024, beginning in June. While there are good arguments both ways, we have long been of the view that the BoC will move ahead of the Fed, just as they did on the way up. Leaning in the direction of our view:

1. Headline and underlying inflation is a bit cooler in Canada, with the lowside surprise in February driving an even bigger wedge. Looking at CPI ex food & energy—which admittedly is not the main core measure for either central bank, but is at least comparable—Canada is a full point lower at 2.8%.

2. Growth is clearly suffering much more in Canada, due to the much greater interest rate sensitivity of the consumer. While retail sales volumes managed a small 0.2% rise in January, the 1.5% y/y advance pales in comparison to 3% population growth. Taking out stable services, real consumer spending on goods in the past year has edged up just 0.6%, versus a U.S. rise of 3.4%.

3. The job market is less tight in Canada. Adjusted for measurement differences, Canada’s unemployment rate is more than 1 point above the U.S. rate of 3.9%. The job vacancy rate is back down to pre-pandemic levels, in part due to the surge in non-permanent residents.

It’s by no means a slam dunk that the Bank will cut first, however, and Governor Macklem has sounded a bit more hawkish than Powell in recent months. The main counterpoints are:

1. The ever-present threat of a housing snapback haunts Canadian policy. With affordability at its worst level in four decades, and shelter costs the main driver of lingering inflation, the last thing Ottawa wants to see is a fast rebound in housing sales and prices. This week’s February results showed some cooling after a winter bounce, but we all know this market is prone to roar when left to its own devices.

2. The Canadian dollar is already in a soggy state; it’s a bit more than 3% below its five-year average, and down nearly that much so far in 2024. With the market not expecting the Bank to be more aggressive, an earlier BoC move would undercut the loonie, adding to imported inflation.

3. The starting point for Canadian rates is lower, as the Bank hiked less through the cycle, and its policy rate is 25-to-50 bps below the Fed funds target. (Counter-counterpoint, that spread in short-term rates just happens to precisely match the current gap in headline inflation; so on that very narrow definition, real short-term rates are equal.)

In the grander scheme, this debate is akin to angels on the head of a pin, and the main point remains that rate relief is still on track for the middle of this year.

 

Frank and Mark.

 

Source: Globe & Mail, BMO Capital Markets, Bank of Canada, Bloomberg.

 

Canada

The TSX added 0.6% last week, touching a new record high at one point, led by health care but held back by weakness in consumer staples and telecom.  Canadian inflation came in softer-than-expected for a second month in a row, which continues to suggest the BoC will be in position to start cutting rates in June, slightly ahead of the Fed. Headline inflation cooled to 2.8% y/y in February from 2.9% in the prior month, and all of the key core inflation measures stepped down. On an 3-month annualized basis, the four major core inflation metrics all sport 2-handles or less. We’re getting closer to rate cuts.

Ottawa announced that it will publish nonpermanent resident (NPR) targets later this year. The goal will be to reduce the share of NPRs in the population, currently estimated at 2.5 million or 6.2%, to 5% over the next three years. If these targets are met, while permanent resident inflows continue as planned and net births follow recent trends, we judge that Canadian population growth could grind down closer to 1% from north of 3% today (read more). The precise profile of these targets remains to be seen, but presumably most of the pullback will take place in 2025-through-2027. Impacts could be felt in REITs and the consumer/telecom sectors, most of which underperformed this week.

YTD, the TSX is up 4.89%, and the benchmark 10-year yield ended the week to yield 3.43%.

 

U.S. & Global

Equity market rose last week with a combination of sturdy economic data and no major hawkish surprises by the Federal Reserve. The S&P 500 rose 2.3%, led by banks and telecom services, while another hot IPO (Reddit) shot out of the gates.

Global central banks were out in full force last week, with Japan ending negative interest rate policy, and a few others (e.g., Switzerland and Mexico) cutting rates. But all eyes were on the Federal Reserve, which left rates unchanged as widely expected. The press statement saw barely any change, but there was nuance in the dot-plot projection pointing to slightly less easing. The median FOMC member still sees 75 bps of easing this year, but somewhat less in 2025 (75 bps versus 100 bps previously) and a slightly higher longer-run neutral rate. The Fed also revised up growth projections meaningfully, and that combination of stronger growth and gradual interest rate reductions seems to be sitting well with equity investors. We see three 25-bp rate cuts from the Fed this year, commencing in July.

YTD, the DJIA is up 4.74%, the NASDAQ is up 9.44%, and the S&P 500 is up 9.74%.  The 10-year Treasury yield ended the week to yield 4.20%.

 

Source: BMO Capital Markets

 

The Good: Retail Sales Volumes +0.2% (Jan.)—and StatCan estimates Feb. nominal sales rose 0.1%; Consumer Prices slowed to +2.8% y/y (Feb.)—and core metrics eased; Industrial Product Prices -1.7% y/y; Raw Materials Prices -4.7% y/y (Feb.); MLS Home Prices +0.8% y/y (Feb.)—stabilizing; New Home Prices -0.4% y/y (Feb.)—good for inflation picture; Household Mortgage Credit +3.5% y/y (Jan.)—slowing; Conference Board’s Consumer Confidence Index +1.6 pts to 67.8 (Mar.); The Province of New Brunswick projects a $41 mln surplus (FY24/25).

 

The Bad: Existing Home Sales -3.1% (Feb.); Construction Investment -0.9% (Feb.); The Province of Saskatchewan projects a $273 mln deficit (FY24/25); The Province of Newfoundland & Labrador projects a $152 mln deficit (FY24/25); Ottawa posted a $25.7 bln budget deficit (Apr.-to- Jan.)—vs. $6.4 bln deficit in same period last year.

 

The Good: Existing Home Sales +9.5% to 4.38 mln a.r. (Feb.); Housing Starts +10.7% to 1.521 mln a.r. (Feb.); Building Permits +1.9% to 1.518 mln a.r. (Feb.); NAHB Housing Market Index +3 pts to 51 (Mar.); Initial Claims -2k to 210 (Mar. 16 week); Leading Indicator +0.1% (Feb.); Philly Fed Index +2.8 pts to an ISM-adjusted 48.0 (Mar.); Current Account Deficit narrowed to $194.8 bln (Q4).

 

The Bad:  Global Investors sold a net $79.8 bln in U.S. securities (Jan.).

 

Source: Canoe.com

Authorities seize ailing alligator kept illegally in N.Y home’s swimming pool

HAMBURG, N.Y. (AP) — An ailing alligator was seized from an upstate New York home where it was being kept illegally, state officials said.

Environmental conservation police officers seized the 750-pound (340-kilogram), 11-foot-long (3.4-meter-long) alligator on Wednesday from a home in Hamburg, south of Buffalo.

The home’s owner built an addition and installed an in-ground swimming pool for the 30-year-old alligator and allowed people, including children, to get into the water with the reptile, according to the state Department of Environmental Conservation.

The alligator has “blindness in both eyes” and spinal complications, among other health issues. The reptile was sent to a licensed caretaker until a place is found where it can receive permanent care, according to a release from the agency.

The owner’s state license to keep the alligator expired in 2021. The state determined at that time the alligator’s holding area failed to meet safety standards. Officers took action this week after learning the “extent at which the owner was seriously endangering the public,” according to a statement from the agency.

Tony Cavallaro, who told The Associated Press the alligator, Albert, had been with him since the 1990s, promised to fight for his return. Cavallaro said he treated the alligator like it was his kid and that he never put anyone in danger.

“I’m not dangerous. I’m not being unsafe with people,” Cavallaro said.

State environmental officials haven’t decided whether to bring charges.

Officials believe a lethargic 4-foot (1.2-meter) alligator found in Prospect Park Lake in Brooklyn in February 2023 was likely an abandoned pet.