Market Watch: September 22

Global equities decline as central banks hold rates steady

Equity investors digested the potential for an additional rate hike from the Federal Reserve (Fed) and the possibility of fewer cuts next year following the release of their Summary of Economic Projections report. In addition to the Fed’s decision to hold rates steady, the Bank of Japan, People’s Bank of China and Bank of England made similar decisions this week, impacting overall sentiment on the trajectory and pace of global economic growth. Though some of the week’s losses were recouped on Friday, overall markets posted a negative return for the week.

Highlights

U.S. markets closed -2.91% 1 despite the Fed’s report pointing towards a soft landing, indicating that investors were more concerned with the hawkish stance on monetary policy.

Canadian markets closed -4.06% 2 lower in a decline led by base metals and technology stocks in addition to broader anxiety around the Bank of Canada’s future monetary policy.

European markets fell -2.04%3, a 5-week low, on signs of weakness in the economy after Eurozone business activity slowed for a fourth consecutive month.

Emerging markets equities closed -1.69% 4 lower for the week as Chinese stocks continued to slide despite Beijing’s attempts to restore confidence and stability in the financial markets.

Bond yields rise to a decade-high

U.S. Treasury yields climbed throughout the week with yields on 2, 5, and 10-year U.S. government bonds rising to their highest levels in over a decade on the back of the hawkish stance of the Fed, coupled with data indicating a resilient economy and an uptick in inflation. Canadian 10-year yields traded at the highest levels since 2007, similar to their U.S. counterparts, as Canada’s consumer price index (CPI) rose 4.0% year-over-year in August, picking up from July’s increase of 3.3% and above the median consensus estimate of 3.8%, shifting market expectations for a Bank of Canada rate hikes in the future.

Highlights

The 2-year U.S. Treasury yield rose 13 basis points (bps) while the 10-year yield was up 21 bps. In Canada, the 2- and 10-year yields were up 27 bps and up 28 bps, respectively.

Credit spreads continued to remain narrow compared with historical levels as markets digested the possibility of enduring higher interest rates for a longer time.

Funds Inflows for Investment Grade (IG) and High Yield (HY) have deteriorated in August which may worsen in September as rates climb higher.

Weekly dashboard

The global week behind

Canadian retail sales rise in July, preliminary August reading shows decline

Statistics Canada (StatsCan) reported Canadian retail sales rose modestly in July, helped by the strength of sales at supermarkets and grocery stores. However, preliminary data for August points to a contraction of a similar amount, highlighting how households appear to be dialing back spending as higher interest rates start to bite into budgets. Consumers appear to be dialing back on spending mostly on vehicles and travel, as core retail sales – which excludes gasoline stations and fuel vendors as well as motor vehicle and parts dealers – was up much higher than the headline amount.

Highlights

Retail sales rose 0.3% in July to $66.1 bn, with sales rising in seven of the nine subsectors. While cautioning that the figure would be revised, Stats Can says early estimates for August point to a contraction in retail sales of 0.3%.

Growth came primarily from an increase in sales of food and beverages (+1.3%), beer, wine and liquor sales (+1.3%), and general merchandise (+1.8%), while the largest detractor was sales of motor vehicles and parts (-1.6%).

Core retail sales gained 1.3% in July, highlighting the areas where consumers are reducing spending the most as vehicle and fuel costs remain elevated amid high-interest rates and decreased output from OPEC+ members.

Fed holds interest rates steady, signals rates will stay higher for longer

The Fed held interest rates steady this week but left the door open to one more rate hike before the end of the year. Policy makers also signaled that they expect borrowing costs to stay elevated for longer than expected. Along with higher rate projections in the coming years, participants also sharply revised their economic growth projections upwards for 2023, more than doubling previous estimates from June. The Fed also continued to reduce their bond holdings – a process known as quantitative easing (QE) – which are now down by ~$815 bn USD since June 2022.

Highlights

The Fed left the federal funds rate at a 22-year high 5.25%-5.50%, in-line with market expectations.

FOMC participants’ assessment of appropriate monetary policy going forward, summarized in the quarterly “dot plot”, points to interest rates remaining around 5% through 2024, and 4% through 2025.

Economic growth projections were also significantly revised upwards as the economy remains resilient, with GDP now expected to increase 2.1% in 2023 and 1.5% in 2024.

Eurozone business activity shrinks in September

Eurozone business activity fell for a fourth consecutive month in September according to S&P’s preliminary Purchasing Managers’Index (PMI). The region’s manufacturing PMI reading also remained in contractionary territory – a reading over 50 indicates expansion and under 50 contraction – where it has been for over a year. The bloc’s largest economies, Germany and France, were the key drivers of the downturn; although the slump eased in Germany, conditions in France worsened. The eurozone’s economy managed to avoid recession following Russia’s invasion of Ukraine, but inflation, rising borrowing costs, and waning demand in key export markets like China continue to pose challenges for the region.

Highlights

The composite PMI remained in contraction territory at 47.1, slightly higher than expectations of 46.5 and the previous month’s reading of 46.7.

The composite PMI has averaged 46.9 in the last two months, far lower than the second quarter’s average of 52.3 which points to lacklustre growth for the third quarter.

The region’s manufacturing PMI registered a reading of 43.4 as factories continue to grapple with policy tightening by the European Central Bank.

In the news – Auto worker’s strike may have ripple Impact on suppliers

The United Auto Workers (UAW) union, representing about 150,000 autoworkers, launched a strike last week against the “Big 3” U.S.automakers – General Motors, Ford and Stellantis – impacting production simultaneously. As of Friday, there were nearly 13,000 workers who entered the eighth day of a stand-up strike, whereby not all union members strike at once, at three facilities, each operated by one of the three Detroit automakers.

Behind the headline

As the UAW demands a double-digit wage increase and cost-of-living adjustments, Wall Street analysts are tabulating the impact on the bottom lines for the automakers due to wage increases that now seem certain.

The strikes are expected to reduce the demand for copper and aluminium by 1.1 kilotons and 9.5 kilotons, respectively, each week the strike continues, which will have a knock-on effect on steelmakers.

The strike’s timing has had a substantial financial impact on tier-one and tier-two suppliers given the interruptions over the last three years, including the disruptive pandemic, supply chain issues, increasing wages and the ongoing global microchip shortages.

Hook, line and sinker

This week’s risk dashboard:

Gullible markets?
US core PCE inflation probably rose a little less thancore CPI
Eurozone CPI starts the march to the next ECBmeeting
CDN GDP and serial shocks
China PMIs could continue to stabilize
Read full publication from Scotia Economics
Deadline to avoid a US government shutdown
Banxico outlook complicated by the Fed’s shift
BanRep expected to hold again on elevated inflation
BoT may deliver another hike
Canada’s economy should be able to handle mortgage rate resets

(https://www.scotiabank.com/ca/en/about/economics/economics-p ublications/post.other-publications.global-week-ahead.september-2 2–2023.html)

The global week ahead

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Market Watch: September 22

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