Market Watch: September 1

• U.S. markets closed 2.36%1 higher after the release of U.S. non-farm payrolls fueled speculation that the U.S. Federal Reserve (Fed) will leave interest rates unchanged.

• Canadian markets also closed 2.42%2 higher on similar sentiment that the BoC will hold rates steady after the economy contracted throughout the second quarter.

• European markets rose 3.51%3 despite eurozone inflation remaining unchanged at 5.3% year-over-year in August.

• Emerging markets were resilient, rising 2.60%4 amid ongoing growth concerns in China as the country’s largest state-owned banks consider cutting deposit rates for the third time in a year.

SOVEREIGN YIELDS LOWER AS TRADERS DIGEST GROWTH, JOBS REPORTS

U.S. and Canadian sovereign bond yields were markedly lower for the week with the short end of the curve slightly outperforming after the release of soft economic and employment data in North America fueled speculation of a hold on interest rate hikes. U.S. Treasuries posted a fourth straight monthly loss in August amid Fitch’s decision to downgrade the U.S. sovereign credit rating to AA+ and the Treasury’s announced plans to ramp up its auction sizes more aggressively. Credit markets were mostly firm for the week as spreads were flat to a couple of basis points tighter, holding up some of Thursday’s strength.

Highlights:

• The 2-year U.S. Treasury yield fell 16 basis points (bps) while the 10-year yield fell 13 bps. In Canada, the 2-year yield was down 12 bp and 10-year down 13 bps.

• Uncertainty about the Fed and the BoC’s policy path continued to linger with the latter set to announce their interest rate decision on Wednesday.

• The U.S. investment-grade primary market was in holiday mode with only one borrower selling $1bn USD this week, bringing the August total to $68bn USD, 20% shy of initial estimates.

ECONOMIC SNAPSHOT

CANADA’S ECONOMY UNEXPECTEDLY CONTRACTS IN SECOND QUARTER

The Canadian economy began to buckle under the weight of higher borrowing costs in the second quarter, bolstering the case for the BoC to hold interest rates steady. According to Statistics Canada, economic activity fell at an annualized rate of 0.2% in the quarter, led by a drop in housing investment and a pullback in consumer spending. A preliminary estimate for July shows gross domestic product (GDP) growth was flat that month, suggesting that the economy is flatlining as it moves into the second half of the year.

Highlights:

The second quarter contraction was led by a 2.1% drop in housing investment, which included an 8.2% fall in new construction and a 4.3% decline in renovations.
Household spending slowed in the quarter, growing 0.1% compared to 1.2% in the previous quarter. Shoppers balked at new passenger cars, furniture, and outdoor recreation items.
Other drags on economic activity in the second quarter included a slowdown in business inventory accumulation, which grew at the slowest pace since the fourth quarter of 2021. Trade also weighed on GDP, with imports exceeding exports.

U.S. JOB OPENINGS SLIP IN LATEST SIGN LABOUR MARKET IS GRADUALLY SLOWING

U.S. job openings continued a downward trend, adding to signs a solid labour market is gradually cooling. The Fed is seeking signs of a better balance between supply and demand in the labour market, as it considers whether to continue an aggressive campaign of interest-rate increases aimed at lowering inflation by slowing the economy.

Highlights:

• According to the U.S. Labor Department, job openings declined 338,000 to a seasonally adjusted 8.8 million in July from the prior month. That was the lowest level of openings since March 2021.

• Job openings in July increased in the information, transportation and warehousing industries while declining in the professional and business services, healthcare and government sectors.

• The quits rate, or the number of job resignations as a share of total employment, edged lower to 2.3% in July from 2.4% the prior month. That matched the level the quits rate hovered near in late 2019 and early 2020, just before the onset of the pandemic.

CHINA’S ECONOMY SHOWS FRESH SIGNS OF WEAKNESS

China’s economy limped through August. A prolonged slump in the real estate market deepened. Manufacturing activity shrank for the sixth consecutive month in August, while services-sector activity slowed again as consumers continued to pare back spending, according to gauges of activity published by China’s National Bureau of Statistics. This new batch of data heaped further pressure on China’s policymakers to do more to revive crumbling growth, with a dizzying mix of targeted measures so far showing little effect.

Highlights:

• The official purchasing managers index for manufacturing posted a reading of 49.7 in August, an improvement on the 49.3 registered in July but still below the 50 mark that separates an expansion in activity from a contraction.

• A similar index for services declined to 50.5, from 51.5 a month earlier, marking the sixth month in a row of weakening activity. And sales at China’s biggest real-estate developers were down by a third from the same month a year ago.

• One brighter spot was construction, where an index of activity rose in August, signalling an expansion in activity as government spending on infrastructure picked up.

IN THE NEWS

U.S. REGULATORS ANNOUNCE PLAN TO STRENGTHEN REGIONAL BANKS

U.S. regulators unveiled a plan that would compel regional banks to issue new long-term debt, ensuring there is a layer of capital available to absorb losses for uninsured depositors in the event of a government seizure. The new rules are part of regulators’ response to the regional banking crisis that sprang up in March which saw three of the largest regional banks shutter, damaging the earnings of others and threatening to kick-off another financial crisis. The new requirements will lead to moderately higher funding costs for regional banks which will likely weigh on earnings. Once enacted, the industry will have three years to conform to the new rules.

Behind the headline:

The new rules would impact banks with at least $100bn USD in assets, forcing them to maintain long-term debt levels equal to 3.5% of average total assets or 6% of risk-weighted assets, whichever is higher.
Affected banks will also be discouraged from holding debt of other similar institutions to reduce contagion risk.
The impact should not be too significant however as regulators indicated that regional banks already hold ~75% of the debt they will be required to hold.

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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 CAD

by Scotia Wealth Management

Market Watch: September 1

ECONOMIC SNAPSHOT

IN THE NEWS

DISCLAIMER

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