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Market Watch: May 13

May 13, 2022 | 1:01 PM

Big Picture

Markets Struggle as U.S. Inflation Remains High

Equity markets remained volatile this week as investors assess a wide range of concerns—from inflation and rising rates to slowing global growth and the war in Ukraine. The ongoing market selloff continued Monday, with North American stock indexes sliding to new lows for 2022. The Dow dropped 653 points, the S&P 500 lost 132 and the Nasdaq plunged 521 points, or 4.3 per cent. In Canada, the TSX lost 633 points, closing below 20,000 for the first time since last summer. Meanwhile the loonie on Monday weakened to its lowest level in 17 months against the greenback (US77.01 cents).

It was another volatile session Tuesday as U.S. stocks swung between gains and losses. While the Nasdaq and S&P 500 recorded minor gains, the Dow and TSX sunk further by Tuesday’s close. In U.S. bond markets, 10-year U.S. Treasuries fell back to roughly 3 per cent after climbing to 3.2 per cent Monday.

Fresh Labor Department data released Wednesday showed that U.S. inflation for April declined slightly to 8.3 per cent (versus 8.5 per cent for March), with signs the nation’s economy continues to face upward price pressures. Prices rose yet again for groceries and other services, including airline fares, which jumped nearly 19 per cent in April from the prior month, the fastest pace on record. In response to the inflation numbers, U.S. stocks fell yet again. The S&P 500 declined 66 points; the Nasdaq dropped 373 points, its lowest close since November 2020; while the Dow fell 326 points, marking its largest five-day percentage decline in roughly two years. In Canada, the TSX lost 53 points, entering correction territory and recording its lowest closing level since July 2021. In U.S. bond markets, 10-Year Treasuries declined to 2.91 per cent, while 2-Year notes climbed to 2.63 per cent, as concerns over monetary policy and economic growth continue to mount.

It was another turbulent day for North American markets on Thursday, as inflation concerns continue to weigh on investor sentiment. After being down for most of the day, all three U.S. indexes finished with minimal gains or losses, with the Dow in the red for a sixth straight session. In Canada, weakness in mining shares and disappointing earnings from key Canadian insurers dragged the TSX down by 138 points.

Another Rough Week For North American Indexes

For the four trading days covered in this report, the Dow lost 1,169 points to close at 31,730, the S&P 500 dropped 193 points to settle at 3,930, while the tech-heavy Nasdaq sunk 773 points to close at 11,371. In Canada, the TSX lost 934 points to end at 19,699.

Strategy

U.S. inflation has likely peaked, but underlying breadth suggests high inflation could persist for some time U.S. consumer prices rose by more than forecast in April, building on economy-wide inflationary pressures that are weighing on households and spurring the Federal Reserve to raise interest rates aggressively. Headline CPI inflation printed at 8.3 per cent on a year-over-year basis, ahead of consensus at 8.1 per cent but down from March’s 8.5 per cent level. Core prices also surprised modestly to the upside (6.2 per cent vs. 6.0 per cent exp.) but was also lower than in March (6.5 per cent). CPI came down as expected by lower contributions from used cars and trucks, new vehicles and gasoline, due to base effects. These components made up 3.12 per cent of the 8.5 per cent in March. Now they represent 2.73 per cent of the 8.3 per cent. Rent of shelter still contributed 1.67 per cent to the headline.

Higher interest rates are already being flagged in the U.S. as slowing market activity, with fewer listings and longer listing-to-sale timeframes. The clear negative of the report is that monthly core inflation actually accelerated in April. On a month-over-month basis, headline CPI was 0.3 per cent, ahead of consensus at 0.2 per cent and down from 1.2 per cent, but core prices, which exclude food and energy, were up 0.6 per cent, ahead of consensus at 0.4 per cent and double March’s 0.3 per cent reading. Airline fares were up a whopping 18.6 per cent on the month, while the “other lodging away from home including hotels and motels” category jumped by 2 per cent.

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