Market Watch: March 1

The global artificial intelligence (AI) fueled rally continued at pace last week as several U.S. indices achieved new all-time highs, largely driven by investor confidence in mega-cap technology stocks. This optimism is fueled by expectations of slowing inflation and the anticipated growth in AI. Notably, the Personal Consumption Expenditure (PCE) index, the U.S. Federal Reserve’s (Fed) preferred inflation metric, met consensus forecasts highlighting the continued progress being made on reining in inflation.

Highlights:

U.S. markets moved 0.99%¹ higher for the week with the S&P 500 closing above the symbolic 5,100 for the first time and the tech-heavy Nasdaq surpassing its 2021 record high.
Canadian markets returned 0.78%² for the week with returns coming largely from the energy sector as oil prices rose 4.29% for the week on news that OPEC+ is considering extending voluntary oil output cuts into the second quarter.
European markets closed 0.64%³ higher with a less-than-expected drop in eurozone inflation failing to derail the risk-on rally. Headline eurozone inflation rose 2.6% in February, down from 2.8% in January, but below expectations.
Emerging markets closed 0.07%⁴higher for the week despite experiencing significant fund inflows. Investors remain cautious of emerging market equities as China grapples with waning domestic growth, among other issues.

Bond yields move lower following release of inflation and consumer sentiment data

U.S. Treasury yields were slightly lower but relatively stable following the Thursday release of January’s PCE index and Friday’s University of Michigan Consumer Sentiment index. Treasury yields have been trading within a relatively tight range for the last couple of weeks amid renewed concerns about inflationary pressures and dialing back of monetary policy expectations. Meanwhile, U.S. credit spreads are slightly off the recent lows as we have wrapped up two consecutive record months in primary market supply.

Highlights:

The 2-year U.S. Treasury yield fell 9 basis points (bps) while the 10-year yield was down 7 bps. In Canada, both the 2- and 10-year yields were down 5 bps for the week.
Headline PCE increased 0.3% month-over-month (MoM) and 2.4% year-over-year (YoY) while core PCE which excludes food and energy prices increased 0.4% MoM and 2.8% YoY. Consumer sentiment came in at 76.9 for February, slightly below the estimate of 79.6 and below January’s reading of 79.
Investment grade corporate credit ratios – tools used to determine whether entities are capable of fulfilling financial obligations – weakened for the fifth consecutive quarter in Q4 2023.

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Canada’s economy tops fourth-quarter growth forecasts

The Canadian economy expanded at an annualized rate of 1.0% in the fourth quarter, exceeding expectations, and gross domestic product (GDP) likely grew 0.4% in January, Statistics Canada (StatCan) reported. Month-over-month, real GDP remained essentially unchanged in December, missing a 0.2% growth forecast. The stronger than expected rebound in quarterly growth after the GDP contracted in the previous quarter shows the central bank could keep rates on hold for longer to fight inflation without leading the economy into recession. The Bank of Canada (BoC) expects economic growth to be modest in 2024 as the effects of past interest rate increases continue to restrain consumption and business investment.

Highlights:

The fourth-quarter growth rate was higher than the Bank of Canada’s (BoC’s) 0.0% forecast and the 0.8% growth rate expected by analysts.
Quarterly growth was fueled by a rise in exports as imports declined, StatCan said, adding that a decline in business investment was a moderating factor.
In an advance estimate for January, StatCan said increases in educational services and health care and social assistance were partially offset by decreases in mining, quarrying, and oil and gas extraction and transportation and warehousing sectors.

U.S. Federal Reserve’s preferred inflation gauge picked up in January

The U.S. personal consumption expenditures price index (PCE), the U.S. Federal Reserve’s (Fed) preferred inflation gauge, increased in January. The U.S. Bureau of Economic Analysis (BEA) reported that prices rose 0.3% from December to January, up from 0.1% in the previous month. But in a more encouraging sign, prices were up just 2.4% from a year earlier, down from a 2.6% annual pace in December and the smallest increase in nearly three years. Inflation has fallen steadily after having peaked at 7.1% in the summer of 2022.

Highlights:

Excluding volatile food and energy costs, prices rose 0.4% from December to January, up from 0.1% in the previous month. And compared with a year earlier, so-called “core” prices rose 2.8%, barely down from 2.9% in December.
Behind the monthly rise in inflation were rising costs for services such as hotels, health care and restaurant meals.
Incomes jumped 1% from December to January, led by a 3.2 % cost-of-living increase in Social Security and other government benefits. At the same time, the report showed that consumer spending rose just 0.2%. The result was that Americans saved slightly more last month.

German consumer confidence ticks up despite gloomy outlook

Germany’s consumer confidence improved slightly, driven by rising income expectations, even as sentiment remains subdued amid a weak economic climate. The forward-looking consumer-sentiment index, published this week by research group GfK and the Nuremberg Institute for Market Decisions (NIM), forecast confidence to rise slightly to minus 29.0 in March from minus 29.6 in February. Any rapid recovery in consumer spending isn’t expected, with inflation and the uncertainty among consumers needing to fall before they will invest or make large purchases again, the GfK/NIM report said.

Highlights:

The overall reading was driven by the measure for income expectations, which rose sharply, jumping 15.2 points to minus 4.8 points, the highest value since February 2022, ahead of Russia’s full-scale invasion of Ukraine.
However, the index for willingness to buy held relatively stable, while that of willingness to save ticked up to its highest value since the financial crisis of 2008.
Germany’s government recently cut its forecast for economic growth in 2024 to 0.2% from 1.3% previously.

In the news: Creditors seek liquidation of China’s largest developer, Country Garden

China’s Country Garden Holdings, a long-troubled property developer, faces a liquidation petition from creditor Ever Credit Limited. The petition is due to the non-payment of a $204M USD loan plus interest. The company is currently going through an offshore restructuring process which is not expected to be significantly impacted by the petition. However, the broader context reveals concerns about China’s real estate market, with the International Monetary Fund (IMF) predicting a 50% drop in demand for new housing over the next decade. Other major developers including China Evergrande have also faced debt-related struggles as the country seeks to prevent a further deterioration of the real estate industry.

Behind the headline:

Ever Credit is seeking what is known as a winding-up petition whereby a company is forced to cease operations and sell assets to repay creditors. It is unclear whether a winding-up order would improve the likelihood of creditor repayment.
Country Garden experienced a 74% decline in presales of unfinished apartments during the second half of 2023 compared to the prior year. Preliminary data indicates a 40% drop in sales during February’s Lunar New Year.
Since 2021, as many as 50 Chinese property developers have failed to meet their debt obligations as households have cut back sharply on purchases of apartments following a steep decline in housing prices.

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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by Scotia Wealth Management

Market Watch: March 1

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