Market Watch: April 5

After trading in a slightly downwards trajectory throughout most of the week due to rising oil prices and concerns about interest rates staying higher for longer, a Friday rally clawed back some of the losses but not enough to push major indices into the black. The rebound was largely due to a strong U.S. jobs report that beat economists’ expectations. Despite the recent strength of economic indicators, U.S. Federal Reserve (Fed) Chair Jerome Powell reiterated expectations that declining inflation will still allow rate for interest rate cuts in 2024. Investors seem torn between the desire for a strong economy which would support corporate earnings and wanting a weaker labour market that would support interest rate cuts. Meanwhile, retail trade in the Eurozone fell back in February, reducing chances of a consumer-led recovery. Germany, the largest economy in the region, recorded a significant decline, while France and Spain saw slight increases. On commodities, crude oil reached its highest level since October and is up about 21% this year amid ongoing geopolitical concerns.

Highlights:

U.S. markets returned -0.93%¹ for the week, closing out one of their worst sessions in more than a year.

Canadian markets returned 0.50%² for the week, once again buoyed by the energy and materials sectors.

European markets were -1.30%³ lower for the week as the likelihood of a consumer-driven recovery receded.

Emerging markets closed -0.74%⁴ lower amid risk-off sentiment from investors as the timing of interest rate cuts moves further out in the calendar.

Stronger-than-expected jobs growth drives rise in sovereign yields

U.S. Treasury yields climbed across the curve this week following a better-than-expected March nonfarm payrolls report. As a result, policy rate cut expectations have been pushed back further as the futures market now indicates that the first policy rate cut by the U.S. Fed will not happen until the July-September timeframe. In credit markets, U.S. investment grade spreads were mostly unchanged for the week, but high-yield spreads moved slightly higher amid heightened market volatility.

Highlights:

The 2-year U.S. Treasury yield rose 3 basis points (bps) while the 10-year yield was up 11 bps. Canadian yields moved in tandem with their U.S. counterparts, with the 2-year yield up 1 bp while the 10-year yield rose 8 bps.

U.S. nonfarm payrolls increased by 303k in March, higher than consensus estimates of 214k and February’s reading of 270k. This caused the unemployment rate to 0.1% to 3.8%.

The coming week’s economic calendar is a busy one and includes March U.S. inflation on Wednesday, followed by the producer price index read on Thursday. On the monetary policy front, the minutes from the Fed’s March meeting will be released on Wednesday, which may offer insight into the future path of policy rates.

Weekly dashboard

Canadian factory PMI edges up to 11-month high in March

Canadian manufacturing activity moved closer in March to ending a lengthy period of contraction as employment rose alongside a slower downturn in new orders, according to new data. The S&P Global Canada Manufacturing Purchasing Managers’ Index (PMI) rose to a seasonally adjusted 49.8 in March from 49.7 in February, posting its highest level since April. “Canada’s manufacturing economy crawled closer to stabilization in March, with output and new orders recording only marginal falls,” Paul Smith, economics director at S&P Global Market Intelligence, said in a statement.

Highlights:

The new orders index rose to 49.4 from 48.7 in February and the employment measure held steady at 50.7.

According to the data, firms continued to report that market demand remained subdued, with clients hesitant to commit to new work. Manufacturers subsequently remained focused on destocking as they sought to better align their production and inventory requirements.

The input prices index edged up to a four-month high of 54.2 due in part to supply chain delays. The measure of output prices was at 51.3, its lowest since June.

Powell still sees room for the Fed to cut rates this year

Stronger-than-anticipated economic activity this year hasn’t changed the Fed’s broad expectation that declining inflation will allow for interest-rate cuts this year, Chair Jerome Powell said. Powell pointed to signs that labour-market conditions are less tight than they have been in recent years, a view that has eased concerns that paychecks and prices might rise in tandem. Meanwhile, signs of firmer-than-expected inflation in January and February haven’t shaken the Fed’s stance that price growth will continue to slow down despite some bumps, Powell said at a conference in Stanford, California. “The recent data do not…materially change the overall picture, which continues to be one of solid growth, a strong but rebalancing labour market, and inflation moving down to 2% on a sometimes bumpy path,” he said.

Highlights:

Measures of underlying inflation have cooled notably since the middle of 2023. That has allowed the Fed to shift its attention away from whether to keep raising rates and toward when to lower rates from a level that some officials thought was necessary to defend against inflation becoming stubbornly elevated.

Most officials continued to see at least three cuts as appropriate this year in projections submitted at their most recent meeting last month.

Officials are trying to guard against the risk of easing too much or too soon, squandering recent gains in bringing down inflation. They also don’t want to leave rates at levels that unnecessarily slow the economy and cause a serious downturn.

Eurozone inflation cools, setting stage for rate cut

The eurozone’s annual rate of inflation fell for the third straight month in March, a surprise that makes it more likely that the European Central Bank (ECB) will cut its key interest rate soon. Consumer prices were 2.4% higher than a year earlier, easing from February’s annual inflation rate, according to figures released by the European Union’s statistics agency. ECB policymakers will meet next week but have signalled they would prefer to wait for more data on wages and new forecasts from their economists before starting to ease policy. In a March speech, ECB President Christine Lagarde said that if upcoming data releases are in line with expectations, a move in June is possible.

Highlights:

Core inflation, a measure that strips out volatile energy and food prices, also came in below economists’ expectations, reaching the lowest level in more than two years.

There were, however, signs that in labour-intensive parts of the economy, inflationary pressures have yet to ease. Eurostat said prices of services were 4.0% higher than a year earlier, unchanged from the four preceding months.

The further decline increases the likelihood that policymakers will feel confident that inflation is on track to hit the bank’s targets, allowing them to lower borrowing costs over the coming months.

In the news: EV transition slows as automakers dial back production, deliveries

As the early adopter era comes to a close, the once lofty sales expectations of electric vehicles (EVs) has begun to meet reality. While many companies had been anticipating hockey-stick like growth following Tesla’s success, the multi-decade EV transition seems like it won’t be as clean and swift as had been expected. While EV sales are still growing, they have taken a noticeable downturn; U.S. first quarter EV growth was anemic compared to the previous year while the EV share of the new-vehicle market also took a hit. In response, producers such as Ford have begun to dial-back production by delaying the start of EV production at their Oakville, Ontario plant and shifting production towards hybrid models which have seen rapid sales growth. EV adoption is still facing two major hurdles: affordability and access to charging stations. The former is due to the still ongoing shortage of microchips which has led EV producers to focus on higher margin luxury EV models, while the latter is the result of anxiety driven by the varied options and shortage of locations to charge EVs while on the go.

Behind the headline:

First quarter growth of U.S. EV sales was a tepid 2.7% compared to 47% the prior year. The EV share of total U.S. new-vehicle sales also fell to 7.1% during the first quarter, down from 7.6% at the end of 2023.

While EV prices have come down, the average selling price is around $52,300 USD, roughly 20% higher than mainstream non-luxury vehicles.

Public EV chargers also remain limited with only around 175k available in the U.S. Of these, only ~41k are so-called “fast chargers”, with the rest being “destination chargers” which are much slower. There are around 900 new chargers being opened each week according to federal data.

Hawks to Prey on Doves

This week’s risk dashboard:

Wednesday will pack a punch
BoC: the hawkish case outweighs a dovish pivot
US core CPI will help inform soft patch versus persistence
Read the full publication here.
FOMC minutes to further inform QT debate
ECB: why perfectly priced for June?
CBs: RBNZ, Peru, BoT, BoK, BSP
CPI: China, Chile, Mexico, Brazil, India, Taiwan, Norway, Sweden

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: April 5

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Hawks to Prey on Doves

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