By Scotia Wealth Management - The Zukiwsky Group

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Market Watch: June 18, 2021

Jun 18, 2021 | 2:01 PM

Big Picture

Fed Officials Pencil in Higher Rates for Late 2023; Gold Drops Sharply

U.S. stock indexes rose late in Monday’s session, sending the S&P and Nasdaq to new records as investors rotated back into key technology and growth stocks. By Monday’s close, the Nasdaq was up 105, the S&P added 7, and the Dow dropped 86. Meanwhile, the TSX closed up 19 points, thanks largely to a rally in Shopify shares.

All three major U.S. indexes were in the red Tuesday after fresh data showed that U.S. retail spending fell 1.3% in May, as consumers shifted from buying goods to services. The Dow lost 94, while the S&P and Nasdaq surrendered Monday’s gains, losing 8 and 101, respectively. In Canada, the TSX added 73 points, thanks largely to the energy sector, which saw a 2% spike in oil prices. However, the materials sector declined as copper prices slid to seven-week lows on reports that China would move to curb any further rallies.

U.S. indexes were in the red again Wednesday after Fed officials indicated expectations for higher interest rates by late 2023, a bit sooner than expected. The Fed cited an improved economic outlook, with overall growth expected to hit 7% this year. The Dow took the news hard, falling 267 points, while the S&P and Nasdaq dropped 23 and 33, respectively. In response to the Fed news, 10-year U.S. Treasury yields jumped to 1.56% (up from 1.49% on Tuesday), while the U.S. dollar index rose to a six-week high, and the loonie hit its weakest level since early May.

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It was a rough session for gold Thursday as the precious metal dropped sharply after the Fed’s revised dot plot showed two rates hikes by the end of 2023. Gold futures declined 4.5%, the largest drop in over 10 months. By Thursday’s close, the Dow was off 210 points, while the S&P was flat, and the Nasdaq gained 122 points. In Canada, the TSX lost 87 points, dragged down by the materials sector.

Mixed Week for N.A. Indexes

For the four trading days covered in this report, the Dow declined 656 points to close at 33,824, the S&P 500 lost 26 points to settle at 4,222, while the technology-heavy Nasdaq added 92 points to close at 14,161. In Canada, the TSX added 6 points to end at 20,144.

Strategy

Higher inflation may call for Fed lift-off next year according to James Bullard, President of the Federal Reserve Bank of St. Louis.

On Wednesday, the Federal Open Markets Committee (FOMC) published economic projections showing 13 of 18 participants expect to begin raising interest rates from their current near-zero levels by the end of 2023. That marked an increase from just seven participants who thought such a timeline for rate hikes would be appropriate back in March, the last time updated projections were published. In the new forecasts, seven participants penciled in a 2022 lift-off, up from four in March. In an interview with CNBC this morning, Mr. Bullard indicated he was among those that felt it would be appropriate to raise rates late next year.

The debate, for both monetary policymakers and market participants, now centres on what is going to happen next year and whether or not the price pressures seen in the last two months persist. Further, the interpretation and application of the Federal Reserve’s new inflation targeting mechanism that allows for periods of corrective overshoots to achieve average inflation of 2% over some time is critical. How each individual Committee members defines “some time” and at what level they are comfortable letting inflation run without action will inform individual, and the overall committee’s actions in the months ahead. Given the high degree of uncertainty and the dispersion of views, we think it is appropriate to look to the Chairman Jerome Powell for direction. Overall, Mr. Powell remains steadfastly of the mindset that price pressures will prove transitory and we interpret many of his comments to suggest that he has a higher bar of tolerance for above target inflation. Wednesday’s meeting and announcements changed very little for us and we think our assumptions for policy actions in the future are still valid.

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