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By Scotia Wealth Management - The Zukiwsky Group

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Market Watch: February 23

Feb 26, 2024 | 10:32 AM

This week’s highlights

• AI rally propels global indices to new highs
• Bond yields rise as economic data, FOMC minutes dispel hopes of rate cuts
• Canada’s inflation rate fell to 2.9 per cent in January
• Strong services price increases lift U.S. producer inflation in January
• China slashes mortgage reference rates in bid to revive struggling property market
• In the news: Production surge and mild winter cause natural gas prices to plummet

Week in review

AI rally propels global indices to new highs

It was a positive week for equity indices the world over as a risk-on sentiment related to AI propelled stocks higher. While the week began with most indices trading on a downwards trajectory, Nvidia’s strong earnings release on Thursday turned the tides, leading to a global risk-on rally which continued for the day. The momentum tapered off throughout Friday, but major global indices continued to trend upwards and closed the week markedly higher.

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Highlights:

• U.S. markets moved 1.21 per cent¹ higher for the week following a raft of positive earnings reports. Nvidia’s strong earnings were in large part responsible for the gains, lifting AI-related chip stocks around the globe.
• Canadian markets were up 0.91 per cent² for the week with gains largely led by the energy sector following concerns over near-term supply tightness. Canada’s info tech was surprisingly weak despite the global rally in info tech shares.
• European markets closed 1.46 per cent³ higher, extending gains for a fifth week, buoyed by a spate of positive earnings reports and positive labour compensation comments from the European Central Bank (ECB) President.
• Emerging markets closed 1.59 per cent⁴ higher for the week, largely on the back of the AI rally, but also in part due to easing inflation prints from several Asian countries which has given their central banks breathing room to maintain policy rates.

Bond yields rise as economic data, FOMC minutes dispel hopes of rate cuts

U.S. Treasury yields were slightly higher for the week following the release of the most recent Federal Open Market Committee (FOMC) minutes. The 10-year benchmark is trading just below the three-month high, mainly due to recent macro data and Fed speakers pushing back on policy easing expectations. Credit spreads are firm amid risk-on sentiment, at or near the two-year lows. The primary market continues to see elevated volumes as investment grade new issuance is running 31 per cent higher than last year’s for the same period.

Highlights:

• The two-year U.S. Treasury yield rose 14 basis points (bps) while the 10-year yield was up 9 bps. In Canada, the two-year yield was down two bps while the 10-year yield was flat.
• The latest cross-asset analysis shows that U.S. investment and speculative-grade corporates remain at some of the tightest relative credit spreads of the past decade, followed closely by Emerging Markets investment-grade credit.
• Conversely, U.S. mortgage-backed securities and leveraged loans are the most discounted along with European investment-grade bonds that trade at a relative discount.

Weekly dashboard

Weekly Dashboard (Scotia Wealth Management)

Canada’s inflation rate fell to 2.9 per cent in January

Canada’s annual inflation rate fell to 2.9 per cent in January, not only much lower than analysts’ estimates but marking a return to the Bank of Canada’s target range. Financial analysts expected inflation to slow to 3.3 per cent from December’s 3.4 per cent when Statistics Canada (StatCan) reported its latest results. Instead, the annual change in the Consumer Price Index (CPI) surprised to the downside. Adjusted for seasonality, consumer prices fell 0.1 per cent in January from December, the first monthly decline since the spring of 2020. Core measures of inflation, which strip out volatile components of CPI, also showed some progress in January. The CPI, excluding food and energy, rose at a three-month annualized pace of 2.4 per cent, the lowest since April 2021. The central bank was expecting average annual inflation of 3.2 per cent in the first quarter.

Highlights:

• StatCan noted that an easing in grocery inflation was broad-based. Meat prices grew 2.8 per cent year-over-year, dairy products 1.5 per cent and fresh fruit 1.9 per cent. Weaker price hikes at earlier stages of the food supply chain telegraphed this trend.
• Gasoline prices fell four per cent over the previous year, which had a big effect on overall inflation figures. On a monthly basis, prices fell 0.9 per cent.
• Shelter remained a challenging area. Those costs rose 6.2 per cent year-over-year, picking up from six per cent in December. Rents jumped 7.9 per cent in January, up from 7.7 per cent in December.

Strong services price increases lift U.S. producer inflation in January

U.S. producer prices increased more than expected in January amid strong gains in the costs of services such as hospital outpatient care and portfolio management. The increase reported by the U.S. Labor Department was the largest in five months. The report followed on the heels of an above-expectations rise in consumer prices in January and prompted financial markets to dial back expectations on when the U.S. Federal Reserve would start cutting interest rates. Some economists cautioned against concluding that inflation was re-accelerating, noting that businesses typically raise prices at the start of the year.

Highlights:

• The producer price index (PPI) for final demand rose 0.3 per cent last month, the largest increase since August 2023, after declining a revised 0.1 per cent in December. Economists had forecast the PPI gaining 0.1 per cent following a previously reported 0.2 per cent drop.
• Services increased 0.6%, the largest rise since July 2023, boosted by a 2.2 per cent jump in hospital outpatient care. The surge in these costs was attributed to strong wage increases over the past year. Portfolio management fees surged 5.5 per cent, likely driven by higher stock market prices.
• There were also increases in wholesale prices of hotel and motel rooms and legal services. But the cost of transporting freight by road decreased one per cent.

China slashes mortgage reference rates in bid to revive struggling property market

China announced its biggest-ever reduction in the benchmark mortgage rate as authorities sought to prop up the struggling property market and the broader economy. The 25-basis point cut to the five-year loan prime rate (LPR) was the largest since the reference rate was introduced in 2019 and far more than analysts had expected. Beijing has stepped up efforts to rescue the ailing property sector, but the measures have come in fits and starts, weighing heavily on a sector that drives a quarter of the economy and the stock market. New home prices saw their worst declines in nine years in 2023, while the stock market languishes after hitting five-year lows.

Highlights:

• The five-year LPR was lowered 25 basis points to 3.95% from 4.20% previously, while the one-year LPR was left unchanged at 3.45 per cent. Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages.
• China last trimmed the five-year LPR in June 2023 by 10 basis points.
• More easing could be coming. Recent deposit rate cuts and the reduction in bank reserves give commercial banks space to reduce borrowing costs to support the economy.

In the news: Production surge and mild winter cause natural gas prices to plummet

Natural gas prices have recently plunged to a near-three-decade low as the world faces one of the warmest winters on record leaving demand for the heating fuel anemic. U.S. and Canadian producers have been cutting production to prop up prices, however relentless output gains including from oil companies that produce natural gas as an oil by-product have unleashed record supply. While the lower prices may be good for consumers, it is wreaking havoc on producers who have begun to curtail drilling programmes while reducing rig counts and has placed an incoming wave of new LNG plants at risk of being delayed or canceled altogether.

Behind the headline:

• The Henry Hub Natural Gas Spot Price reached a recent low of $1.59 USD/million btu, a level not seen since 1998. The average price per million btu over the prior 10- and 20-year period was $3.31 USD and $4.45 USD, respectively.
• The U.S. is expecting to pump 105 bn cubic feet per day (bcfd) of gas in 2024, up 2.5 bcfd from the prior year. This record production is against a backdrop of waning domestic demand which is expected to contract 0.79 bcfd to 88.38 bcfd in 2024 leaving a wide gap between supply and demand.
• Increased LNG exports are expected to help drain the excess supply throughout 2024 and bring prices back to a profitable level in 2025.

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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