Market Watch: August 25

Highlights:

• U.S. markets closed 0.84%1 higher after the Nvidia led tech rally lost its legs and hawkish comments from the Fed chair weighed on info tech stocks.

• Canadian markets shed most of their gains late in the week, closing 0.13%2 higher, with losses in the energy and financial sectors offsetting gains in the info tech and material sectors.

• European markets rose 0.24%3 despite European business activity contracting to its lowest level since 2020, with the eurozone’s Purchasing Managers Index (PMI) falling to 47.0 for August from 48.6 in July.

• Emerging market shares were flat, rising 0.03%4 as a result of ongoing concerns over China’s economic weakness and comments from Jerome Powell that there may be further rate hikes on the horizon.

GLOBAL BOND YIELDS VOLATILE FOLLOWING POWELL, NAGEL REMARKS

U.S. and Canadian sovereign bond yields were mixed for the week but moved higher Friday after Jerome Powell reiterated his stance on combatting inflation and warned there could be further rate hikes ahead. Powell also indicated that the Fed “intends to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.” These comments, combined with a surprisingly resilient U.S. economy, pushed 10-year U.S. Treasury yields to their highest level since 2007. Credit markets were little changed, with U.S. credit spreads flat to a couple of basis points wider, giving up some of the week’s strength.

Highlights:

• The 2-year U.S. Treasury yield rose 9 basis points (bps) while the 10-year yield fell 4 bps. The yield curve flattened somewhat in Canada, with the 2-year yield down 1 bp and 10-year down 8 bps.

• European yields also pushed higher Friday but closed lower following comments from European Central Bank Governing Council member Joachim Nagel highlighting that it is “much too early” to contemplate a pause on the ongoing monetary tightening cycle.

• The saga with the troubled Chinese real estate developer Country Garden is ongoing after the firm delayed a deadline for holders of a yuan bond to vote on its plan to extend payment as it seeks to avoid a default.

ECONOMIC SNAPSHOT

CANADIAN RETAIL SALES UP 0.1% IN JUNE, BOOSTED BY MOTOR VEHICLE AND PARTS DEALERS

Statistics Canada (StatCan) reported that retail sales rose 0.1% to $65.9-billion in June, lifted by sales at new car dealers. The subdued reading aligns with a potential second-quarter economic slowdown that economists forecast. Consensus estimates are projecting economic growth of 1.2% quarter-over-quarter annualized from 3.1% in the first quarter, with household consumption easing to 1.0% from 5.7% in the previous quarter.

Highlights:

• Retail sales rose in three of the nine subsectors, led by a 2.5% gain at motor vehicle and parts dealers as sales at new car dealers added 2.9%. Sales at gasoline stations and fuel vendors rose 0.3%, lifted by higher prices at the pump in June.

• Core retail sales, which exclude gasoline stations and fuel vendors and motor vehicle and parts dealers, fell 0.9% in June.

• Sales at general merchandise stores fell 1.4% and food and beverage retailers saw a drop of 0.9%. In volume terms, retail sales fell 0.2% in June.

U.S. HOME SALES FELL IN JULY, EXTENDING PROLONGED SLUMP

U.S. home sales fell in July for the fourth time in five months, extending one of the deepest housing slumps in recent memory. The combination of high mortgage rates, near-record home prices and limited inventory has been suffocating sales, which were down 16.6% from a year earlier in July. With U.S. mortgage rates last week rising back above 7% to a two-decade high, sluggish home sales activity is expected to continue.

Highlights:

• According to the National Association of Realtors (NAR), sales of existing homes, the majority of purchases, decreased 2.2% in July from the prior month to a seasonally adjusted annual rate of 4.07 million, the slowest monthly sales pace since January and the slowest July pace since 2010.

• Existing home sales fell the most month-over-month in the northeast, down 5.9%. The only region where sales rose was in the west, where they were up 2.7% from the previous month.

• The national median existing-home price rose 1.9% in July from a year earlier to US$406,700. It was the fourth time on record that this figure had risen over $400,000, NAR said.

GERMAN PRODUCER PRICES POST FIRST FALL SINCE LATE 2020

German producer prices decreased more than expected on the year in July, their first fall in over two-and-a-half years, as easing energy price pressures added to hopes that inflation in Europe’s largest economy could abate further. According to the Federal Statistical Office of Germany, July producer prices were down 6.0% compared with the same month last year when producer prices soared as a consequence of the war in Ukraine. Analysts had expected a drop of 5.1%

Highlights:

• It was the first year-on-year decline in producer prices since November 2020 and the sharpest decline since October 2009 during the financial crisis.

• Energy prices sank 19.3% in July on the year, as electricity prices slumped. Across all customer groups, electricity prices fell by 30.0%.

• With energy prices excluded, producer prices in July were 2.0% higher compared with the same month last year.

IN THE NEWS IN AI SPACE, NVIDIA PULLS AHEAD OF LEGACY CHIPMAKERS

Technology giant Nvidia handily beat both revenue and earnings per share (EPS) expectations for Q2, with sales more than doubling after record demand for its artificial intelligence (AI) chips. Nvidia’s main rival, AMD, appears to be falling further behind, while Intel also continues to miss out on the most significant trend in technology. Nvidia maintains its dominance in the AI space by not only having some of the best in-house software and AI training libraries its competitors lack but also by cultivating a large community of AI programmers who consistently invent using the company’s technology.

Behind the headline:

• Nvidia announced that revenue in the current quarter is expected to increase ~170% to approximately $16bn as companies like Alphabet, Amazon, Meta and Microsoft snap up its next-generation processors.

• Data center demand for Graphical Processing Units (GPU) which Nvidia specializes in are now the most important – and expensive – part of a data center buildout as opposed to Central Processing Units (CPU) which AMD and Intel traditionally specialize in.

• While it doesn’t produce GPUs or CPUs, the chip design company ARM filed for initial public offering (IPO) on Monday in what is expected to be one of the largest IPOs in recent years.

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1 S&P 500 Index CAD

2 S&P/TSX Composite Index CAD

3 Bloomberg Developed Markets ex N. America Large & Mid Cap Price Return Index CAD

4 Bloomberg EM Large & Mid Cap Price Return Index CA

by Scotia Wealth Management

Market Watch: August 25

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