Market Watch: March 15

The multi-week equity rally largely came to an end this week as investors, hyper-vigilant towards inflation data and anything that could impact U.S. Federal Reserve (Fed) decision-making, digested the release of February’s Producer Price Index (PPI) metrics. The index – a measure of wholesaler inflation – pointed to persistent underlying price pressures that could potentially delay the start of monetary policy easing. The Fed is meeting this coming week and futures markets are pricing in a 99 per cent likelihood that rates will remain unchanged. It wasn’t only PPI data that weighed on sentiment but also a resilient job market; U.S. jobless claims came in at 209,000, below economists’ expectations of 218,500, showing continuing signs of a resilient labour market which the Fed has said they would like to see soften before cutting rates.

Highlights:

U.S. markets returned -0.09 per cent¹ for the week with major info tech names such as Apple, Microsoft, Amazon and Alphabet bearing the brunt of the losses. Rate-sensitive real estate was also negatively impacted.
Canadian markets returned 0.65 per cent ² for the week mainly due to strong gains in energy and materials as oil and copper prices moved higher. Rate-sensitive real estate was the largest detractor for the week.
European markets were -1.24 per cent³ lower for the week amid U.S. rate jitters despite upbeat corporate earnings and the expectation of a rate cut from the European Central Bank (ECB) in June, with eurozone inflation expected to be at or near target.
Emerging markets were rangebound for the week, closing -0.15 per cent⁴ lower, with constituent countries – particularly Latin American countries – subdued due to waning hopes of a U.S. rate cut.

Bond yields move higher on inflation reading ahead of Fed meeting

U.S. Treasury yields have settled just below the February highs as investors are adjusting to the expectation of fewer rate cuts for the year amid renewed inflationary pressures and resilient economic growth. Credit started the session on a firm note, underpinned by solid primary demand. New bond issuance is currently running at 36 per cent and 79 oer cent ahead of last year’s volumes for investment grade and high yield, respectively.

Highlights:

The two-year U.S. Treasury yield rose 19 basis points (bps) while the 10-year yield was down 21 bps. In Canada, the two- and 10-year yields were up 14 bps and 17 bps, respectively.
This coming week could prove volatile with the Bank of Japan (BoJ) and Reserve Bank of Australia (RBA) rate decisions scheduled on Tuesday, followed by the Fed and Bank of England (BoE) meetings on Wednesday and Thursday, respectively.
The calendar also includes the latest readings on U.S. manufacturing and services PMIs that will shed more light on economic activity.

Weekly dashboard

(Scotiabank Market Watch March 15)

Canadians’ wealth is bolstered by stock rally amid housing slump, StatCan says

Canadians are riding the recent stock market rally to bolster their wealth, more than offsetting a slump in real estate. In the fourth quarter, households saw their net worth rise $290-billion or 1.8 per cent to roughly $16.4-trillion, Statistics Canada (StatCan) said in a report. The numbers suggest that many Canadians are benefiting from asset diversification at a fraught time for personal finances, given the threats posed by higher interest rates and more onerous debt payments. Statcan cautioned that not everyone is reaping the benefits. “The accumulation of assets and liabilities is not distributed evenly across wealth quintiles as most wealth is held by relatively few households in Canada,” the report said.

Highlights:

This increase outweighed a 1.9 per cent drop in the value of residential real estate, a second consecutive quarterly decline.
Overall, Canadians were cautious about taking on debt. Financial liabilities rose by 3.4 per cent in 2023, the weakest accumulation of household debt in a calendar year since 1990.
Debt payments are eating up a large chunk of people’s take-home pay. The household debt-service was little changed at 15 per cent in the fourth quarter, similar to highs seen in 2007 and 2019. The average household is spending 15 cents of every after-tax dollar to service their debt.

U.S. inflation up again in February in latest sign that price pressures remain elevated

An underlying measure of inflation was stronger than expected last month, introducing greater uncertainty over whether and when the U.S. Federal Reserve (Fed) will lower interest rates. The U.S. Labor Department reported that its index of consumer prices rose 3.2 per cent in February from a year earlier. Economists had expected 3.1 per cent. Prices rose 0.4 per cent from the previous month, in line with expectations. Compared with a year earlier, consumer prices rose 3.2 per cent last month, faster than January’s 3.1 per cent annual pace. Core prices, which exclude food and energy items, rose 0.4 per cent from January and up 3.8 per cent from a year earlier. While that marked the smallest increase since 2021, the report dashed hopes that stronger-than-expected inflation in January was a mere blip.

Highlights:

Pricier gas pushed up overall inflation, with pump prices rising 3.8 per cent from January to February. Grocery prices, though, were unchanged last month and are up just one per cent from a year earlier. The cost of clothing, used cars, and rent also increased in February.
Despite February’s elevated figures, most economists expect inflation to continue slowly declining this year. At the same time, the uptick last month may underscore the Fed’s cautious approach toward interest rate cuts.
Prices for dental care, car repairs, and other services are still rising faster than they did before the pandemic. After raising pay for nurses and other in-demand staff, hospitals are passing their higher wage costs on to patients in the form of higher prices.

U.K. economy returns to modest growth at start of 2024

Britain’s economy returned to growth in January after entering a shallow recession in the second half of 2023. However, it is too early to know for certain if the economy is no longer in recession. Gross domestic product (GDP) shrank 0.3 per cent in the final quarter of 2023 and 0.1 per cent in the quarter before. Britain’s economy has been sluggish since its initial recovery from the pandemic, beset by a surge in the cost of energy imports from Russia’s invasion of Ukraine and, more recently, by high Bank of England (BoE) interest rates. But with inflation down from double-digit rates and forecast to return to its two per cent target soon, the squeeze on household spending is easing, and the BoE is starting to consider when to cut interest rates.

Highlights:

GDP grew 0.2 per cent month-on-month, boosted by a rebound in retailing and house-building, after a fall of 0.1 per cent in December, in line with economists’ expectations.
Office for National Statistics figures showed that construction output, which is often volatile, jumped 1.1 per cent in January, its biggest monthly rise since June and led by a 2.6 per cent rise in private-sector house-building, which had been depressed by high interest rates.
According to the BoE forecasts in its February Monetary Policy Report, real GDP could increase 0.1 per cent this quarter and maintain a similar pace over subsequent quarters.

In the news: Potential U.S. ban of TikTok looms if security concerns not addressed

The U.S. House recently passed a bipartisan bill that could ban TikTok unless its Chinese owner, ByteDance, divests its share of the company. The legislation responds to concerns that the Chinese government could compel ByteDance to surrender users’ data under a law that obliges companies to assist with intelligence gathering. The Canadian government has also ordered a national security review of the app which began in late-2023. The U.S. bill reflects escalating apprehensions over Chinese corporations’ control over platforms with extensive reach and influence not only in the U.S., but also abroad.

Behind the headline:

As of 2024, TikTok had roughly 1.6 billion monthly active users, making it the fifth most used social network. ByteDance – the world’s most valuable VC-backed startup – owns 100 per cent of TikTok, while outside investors own 60 per cent of ByteDance.
Whether a sale would or could occur is unknown. China updated its export control rules in 2020 to give it an effective say in any deal, and it has indicated it would oppose any efforts to divest. Operationally, it is also unclear whether the infrastructure could be put in place to migrate the operations to a different locale.
The other unknown is who would or even could buy TikTok given that even a small stake would knock out a lot of prospective buyers. TikTok’s U.S. operations alone are valued at over $60 billion USD, with the total value projected to be upwards of $200 billion USD.

¹S&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 - The Zukiwsky Group

Market Watch: March 15

U.K. economy returns to modest growth at start of 2024

In the news: Potential U.S. ban of TikTok looms if security concerns not addressed

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