Market Watch: November 17

Equity markets were once again positive for the week following the release of tame U.S. inflation data. This has given rise to expectations that monetary policy tightening may be over and put a bid under global equities; futures markets have even begun to price in a rate cut in mid-2024. U.S. Producer Price Index (PPI) data also helped to buoy equity markets as prices fell by the most in three-and-a-half years in October amid a sharp drop in gasoline, yet another indicator of subsiding inflation.

Highlights:

U.S. markets closed 2.32%¹ higher following subdued inflation and PPI data that shows continued progress on bringing inflation to heel.
Canadian equities rose 2.75%² amid U.S. inflation news but were somewhat tempered by the sharp decline in energy prices given the indexes outsized exposure to the sector.
Despite a drag from oil and gas stocks which detracted from weekly performance, European equities closed 4.23%³
Emerging markets returned 4.70%⁴ amid a generally risk on sentiment throughout global markets.

Treasury yields broadly lower as post-Fed-meeting rally continues

U.S. Treasury yields pulled back again for the week following CPI and PPI data that points towards a continued moderation of U.S. inflation, and by extension the prospect of peak interest rates. Despite the positive tone for risky assets, investment grade primary volume ran below expectations. Credit remains firm, both investment grade (IG) and high yield (HY), as spreads have compressed to the middle of the 5-month range.

Highlights:

The 2-year U.S. Treasury yield fell 18 basis points (bps) while the 10-year yield was down 19 bps. In Canada, the 2-year yield was down 14 bps and 10-year yield 18 bps.
Taking a step back and looking at the global fixed income categories’ relative performance, U.S. high yield and emerging markets investment grade debt is trading at some of the richest levels in a decade.
In contrast, U.S. mortgage-backed securities and European investment grade bonds are relatively cheap, according to Bloomberg.

Weekly dashboard

Canadian home sales, listings, prices contract during October

The Canadian real estate market continues to feel the effects of tighter monetary policy with the national market now tipping into buyers territory relative to historical deviations. The larger sales decline relative to new listings further eased the sales-to-new listings ratio, an indicator of how tight the market is, to a 10-year low. Two-thirds of local markets tracked experienced sales and listings declines, with sales falling in 20 of the 31 markets tracked, with declines of 10% or more in almost every major city. There are, however, some positive developments in the housing market; October housing starts were strong at 275k, the second highest print since September 2022. New home construction is more important to economic growth than resales as new home construction provides much more value-added to the economy.

Highlights:

Canadian home sales fell by 5.6% month-over-month (MoM) in October. The sales-to-new listings ratio now sits at 49.5%, below its long-term average of 55.2%, and substantially below its recent April peak of 68.3% or the January 2022 peak of 80%.
Listing declines were primarily confined to four markets; Okanagan-Mainline, Kitchener-Waterloo, Peterborough, and Lethbridge. Despite these listing contractions, listings are in line with their long-term historical averages.
Prices as measured by the MLS Home Price Index (HPI) edged down by 0.8% MoM, the second monthly decline in a row. There were significant regional differences, with prices rising in half of markets tracked, and declining in the other half.

U.S. inflation eased more than expected in October

Driven primarily by lower gasoline prices, the headline consumer price index (CPI) rose less than the previous period and below expectations. Markets responded positively to this news, with Treasury yields declining and stock futures increasing. In light of the progress being made on inflation, futures markets are now beginning to price in the first monetary policy rate cut for June 2024, compared to July prior to the reports release. Investors now largely believe that the U.S. Federal Reserve (Fed) is done with its monetary policy tightening campaign despite policy makers saying they remain open to further hikes if necessary.

Highlights:

Headline CPI rose by 3.2% YoY in October, below both the expected rise of 3.3% and the 3.7% rise in September. Prices remained flat MoM from September’s uptick of 0.4%.
Core CPI, which excludes volatile fuel and energy categories, eased to 4.0% YoY in October from 4.1% in September, and declined to 0.2% MoM from the previous 0.3%.
The super-core inflation gauge which measures the cost of services excluding housing and energy and is closely watched by policy makers advanced 3.7% YoY.

China retail sales, factory output increased more than expected

On the heels of policy makers’ recent announcements of further support to prop up declining growth, retail sales and industrial production rose faster than had been expected in October. Significant attention was paid to retail sales as that’s where many are expecting to see any signs of an economic pick up. The consumption data indicates that the economy continues to struggle, but that it is not as weak as many had expected, with consumer confidence ticking up.

Highlights:

Chinese retail sales surged 7.6% YoY in October, more than the 7.0% that had been expected. Industrial output also surprised to the upside, expanding 4.6% YoY, higher than the 4.4% forecast.
In September, Chinese policy makers enacted a slew of measures including loosening requirements for homebuyers. Despite this, investment in real estate development fell 9.3% YoY, highlighting the ongoing troubles for the sector.
Investors will be closely watching the November retail sales print to see if consumer spending can maintain pace. The October period encompasses China’s eight-day Golden Week holiday, one of the country’s busiest vacation periods.

In the news: Joe Biden and Xi Jinping secure subdued agreements in a long-awaited summit in San Francisco

As a part of the Asia-Pacific Economic Cooperation (APEC) forum in San Francisco, U.S. President Joe Biden and Chinese leader Xi Jinping met to discuss issues that have strained U.S.-Chinese relations. This is the first time the pair have spoken in person in more than a year since their last encounter in Bali, Indonesia, on the sidelines of another global summit. Though the agreements that were announced after a four-hour long meeting were modest, it marked a positive step towards easing political and economic tensions as well as contributing to global economic stability.

Behind the headline:

The leaders have agreed to resume high-level communication between the two militaries “on the basis of equality and respect”.
There were also pledges to increase direct flights early and expand exchanges in education, international students, sports and business sectors. This comes as positive news to air carriers as less than 10% of flights between the U.S. and mainland China have resumed post pandemic.
However, the discussions did not produce any notable breakthroughs on major economic issues such as U.S. export controls on advanced technology like semiconductors.

Was it all for naught?

This week’s risk dashboard:

Markets will monitor US holiday shopping
Market pressures on the BoC risk reigniting inflation
Canadian governments are driving inflation and rate hikes…
and cutting prematurely would embolden them to spend more
Premature BoC cuts would worsen housing affordability
Canadian federal fiscal update will probably heap on more spending…
but the provinces and municipalities are the bigger causes of inflation

Read in full: The Global Week Ahead

Canadian inflation to focus upon core gauges
BoC’s Macklem to speak on inflation’s costs
FOMC minutes will probably be stale
PMIs to inform Q4 global growth
Argentina’s election could create spillover effects
Riksbank may hike again
So will Turkey’s central bank
Chinese banks to leave LPRs unchanged
RBA minutes will probably be stale
Bank Indonesia might hike
SARB expected to be on hold
Global macro

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

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Market Watch: November 17

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