Market Watch: March 8

Global indices were mixed for the week as the AI-induced optimism of the past couple weeks took a breather. The weekly narrative was largely defined by three events: the bailout of New York Community Bank, U.S. Federal Reserve (Fed) chair Jerome Powell signalling an openness to cut interest rates later in the year, and a strong jobs report that provided further evidence of a soft-landing. All these factors contributed to some volatility but the risk-on sentiment both in North America – and to a certain extent internationally – largely remained intact. However, on Friday, stocks pulled back as the AI-rally lost some momentum with major names like Nvidia giving up some of their weekly gains which pushed U.S. indices lower.

Highlights:

U.S. markets were -0.23%¹ lower for the week. While there was some volatility surrounding regional banks and AI names giving up some gains, comments from Jay Powell and a remarkably strong jobs report kept optimism high.
Canadian markets returned 0.91%² for the week as strong corporate earnings and surging metals prices kept optimism alive despite the hold from the Bank of Canada (BoC). While most sectors ended the week in the black, returns were mainly driven by the materials and financials sectors.
European markets closed 2.26%³ higher as GDP was reported stable for the fourth quarter while unemployment ticked marginally higher. Despite the relatively positive news, results were mixed across the bloc’s constituents.
Emerging markets closed 2.08%⁴higher, buoyed by prospects of U.S. rate cuts later in the year as well as continued tailwinds from AI-linked optimism which propelled many Asian markets to new highs.

Treasury yields lower following Fed comments and strong jobs report

U.S. Treasury yields are lower for the week, particularly at the long end of the curve, following comments from Jerome Powell that indicated an openness to easing rates later in the year as well as the release of the latest U.S. non-farm payrolls data. Though better than expected, the previous jobs report was revised materially lower, keeping Treasury yields anchored. Meanwhile, credit continues to be in demand with relatively tight spreads and an active primary market. Investment grade new bond issuance volumes exceeded weekly projections mid-week signaling strong demand while the latest update from Bloomberg suggests that high yield credit spreads remain attractive at current levels.

Highlights:

The 2-year U.S. Treasury yield fell 12 basis points (bps) while the 10-year yield was down 17 bps. In Canada, the 2- and 10-year yields were down 10 bps and 13 bps, respectively.
High yield credit spreads are currently around 327 bps compared to the model-implied 230-285 bps range due to equity strength and muted volatility.
The yearend projection for high yield points to wider credit spreads due to added volatility, a soft dollar, and mixed macro data, targeting a range of 355-416 bps, according to Bloomberg.

Weekly dashboard

Bank of Canada holds interest rate steady, offers few hints about timing of cuts

The Bank of Canada (BoC) held its benchmark interest rate steady for the fifth consecutive time in a decision that offered few hints about the timing of future rate cuts. The widely anticipated move keeps the policy interest rate at 5%, a level reached last July after one of the most aggressive monetary policy tightening campaigns in Canadian history. With the rate of inflation inching closer to the bank’s 2% target and the Canadian economy slowing, central bank officials don’t expect to raise interest rates further. At the same time, they’re not yet willing to entertain rate cuts.

Highlights:

“With inflation still close to 3% and underlying inflationary pressures persisting, the assessment of Governing Council is that we need to give higher rates more time to do their work,” BoC Governor Tiff Macklem said.
“We don’t want to keep monetary policy this restrictive longer than we have to. But nor do we want to jeopardize the progress we’ve made in bringing inflation down,” Macklem said.
In a highly unusual move, the bank left the entire last paragraph of its rate announcement unchanged from its previous statement in January, pushing back on speculation that it might use this rate decision announcement to pivot to a more dovish stance.

Fed Chair still expects rate cuts this year, but inflation progress ‘not assured’

U.S. Federal Reserve (Fed) chair Jerome Powell assured members of Congress that upcoming decisions on when and how fast to cut interest rates would be based solely on economic data. Rate cuts “really will depend on the path of the economy. Our focus is on maximum employment and price stability, and the incoming data as they affect the outlook, and those are the things we’ll be looking at,” Powell said. In prepared remarks to the House panel, Powell said rate reductions will “likely be appropriate” later this year “if the economy evolves broadly as expected.”

Highlights:

Powell cautioned that continued progress on lowering inflation “is not assured,” a fact keeping Fed officials from committing to any timetable or pace of rate reductions, with price pressures broadly seen as easing but also some concern that the disinflation process may stall.
He noted that inflation had “eased substantially” but remained reluctant to say when Fed officials might reduce the benchmark rate of interest that has been held in the 5.25% to 5.5% range, the highest in more than 20 years.
Powell noted there were risks of both cutting rates too soon and allowing inflation to reaccelerate and of keeping monetary policy too tight for too long and damaging an ongoing economic expansion.

ECB holds rates as central bankers weigh timing of cuts

The European Central Bank (ECB) held its key interest rate at a record high, signalling that policymakers need more time to assess whether a historic run of increases has tamed inflation enough for them to start cutting rates again. The ECB said it would hold its deposit rate at 4% for the fourth meeting in a row and that future rate decisions would be based on incoming data. At a news conference, ECB President Christine Lagarde signalled that officials would likely wait until June to be confident enough to start cutting rates. While inflation is heading in the right direction, “we clearly need more evidence, more data,” she said. “We will know a little more in April but much more in June.”

Highlights:

With inflation in the region nearing the bank’s 2% inflation target, the ECB is balancing the risk of cutting rates too soon, which could leave inflation stuck at an uncomfortably high level, against the danger of cutting too late, which could unnecessarily hurt an economy that has been struggling.
Despite recent falls in headline and core inflation, which excludes highly volatile food and energy prices, some economists have pointed to substantial wage increases in the eurozone and to stubborn services-sector inflation as potential signs that price pressures could be harder to defeat than anticipated.
The ECB published fresh economic forecasts showing downward revisions to inflation and growth this year. The bank expects inflation to average 2.3% this year and 2% next year, compared with December forecasts of 2.7% and 2.1% respectively. They also expect economic growth of 0.6% for the eurozone this year compared with a December forecast of 0.8%.

In the news: Cracks re-emerge in regional banking sector as policymakers weigh new capital requirements

New York Community Bank is grappling with challenges related to the acquisition of Signature Bank as well as heightened regulatory scrutiny as policymakers seek to avoid a repeat of the troubles regional banks faced in 2023. The sudden departure of longtime CEO Thomas Cangemi, the discovery of “material weakness” tied to loans, and falling commercial real estate values exacerbated by the pandemic have all contributed to the bank’s woes. A new management team is now working to reassure investors and depositors after the bank announced a $1bn USD cash infusion led by former Treasury Secretary Steven Mnuchin. This news comes as Jay Powell revealed in testimony on Wednesday that the Fed would likely be scaling back a plan to impose sweeping new capital-requirements on the biggest U.S. banks so they would be able to weather shocks like the regional bank runs that led to the collapse of Silicon Valley Bank, almost prompting a wider crisis.

Behind the headline:

New York Community Bank reported a surprise loss of $252M USD in Q4 2024 and a provision for credit losses of $552M USD largely tied to real estate. Moody’s subsequently downgraded the bank’s credit rating to “junk”.
The bank also faced increased regulatory scrutiny after it grew significantly following the acquisition of failed Signature Bank which led to a $2.4bn USD goodwill impairment charge.
Critics of the new capital requirements fear they would impair lending just as banks grapple with upheaval in commercial real estate which faces a “maturity wall” of $1.5tn USD over the next two years, while proponents argue that they are required precisely because of the situation that is occurring with New York Community Bank.

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

—

Download the rdnewsNOW mobile app on Google Play and the Apple App Store for all the latest updates on this and other stories.

by Scotia Wealth Management

Market Watch: March 8

Weekly dashboard

What's Trending