Market Watch: April 12

Global equities traded in a downward trajectory throughout most of the week due to an uptick in U.S. inflation measures, disappointing bank earnings, and speculation that geopolitical conflicts could flare up. Setting the tone for the week was the release of higher-than-expected U.S. consumer and producer inflation measures leading to a recalibration of expected interest rate cuts for 2024. Following this, major U.S. bank shares declined following the release of first-quarter earnings as CEOs warned of the persistent inflationary pressures that are weighing on the economy and financial institutions. Looming over all the news is the potential for the escalation of conflict in the Middle East which could put further upwards on energy prices and drive up inflation.

Highlights:

U.S. markets returned -1.52%¹ for the week as surprise inflation readings and bank earnings weighed on returns.
Canadian markets returned -1.57%² for the week as the Bank of Canada (BoC) held rates steady. This comes despite yet another strong week for the energy sector as prices moved higher.
European markets were -1.13%³ lower for the week as the European Central Bank (ECB) also left interest rates unchanged while leaving the door open for cuts at the next meeting.
Emerging markets closed -1.58%⁴ lower amid a risk-off week as investor sentiment begins to tilt toward safe-haven assets.

Yields push new highs as rate cut expectations unwind

U.S. Treasury yields climbed across the curve for most of the week following the March U.S. Consumer Price Index (CPI) reading. Inflation continues to be sticky across the board, defying expectations, with a headline reading that came higher than expected. U.S. Treasury yields moved off their highs later in the week following the release of U.S. Producer Price Index (PPI) data; although headline numbers were slightly below expectations, core measures came in at or higher than projections. 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. Federal Reserve (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 31 basis points (bps) while the 10-year yield was up 28 bps. Canadian yields moved in tandem with their U.S. counterparts, with the 2-year yield up 18 bps while the 10-year yield rose 18 bps.
Corporate credit booked losses later in the week due to a rate selloff, as credit spreads remained tight following earnings from Bank of America, Goldman Sachs, and Morgan Stanley.
Floating rate notes are likely to benefit from the repricing of monetary policy expectations, with futures markets now calling for just one or two rate cuts, down from six earlier this year.

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Bank of Canada holds rate steady, says it’s more confident in inflation easing

The BoC held its policy interest rate steady for the sixth consecutive time but opened the door to rate cuts in the coming months, with Governor Tiff Macklem acknowledging that a June rate cut is possible. As widely expected, the bank’s governing council kept the overnight lending rate at 5%. At a press conference, Macklem refused to put a timeline on when the bank would start easing monetary policy. But he did say a rate cut at the next meeting in June was “within the realm of possibilities.” Both headline and core inflation fell more than expected in January and February, and a number of the bank’s indicators of future price pressures are easing.

Highlights:

“We are seeing what we need to see, but we need to see it for longer to be confident that progress toward price stability will be sustained,” Macklem said. “We need to be assured this is not just a temporary dip.”
Inflation is projected to remain close to 3% in the second quarter of 2024, partly as a result of rising oil prices. It is then expected to move below 2.5% in the second half of the year, led by slower price growth for shelter and food.
The bank revised its first quarter annualized gross domestic product (GDP) forecast to 2.8% from 0.5%. And it upgraded its 2024 GDP forecast to 1.5% from 0.8%.

Higher gas and rents keep U.S. inflation elevated, likely delaying Fed rate cuts

U.S. consumer inflation remained persistently high last month, boosted by gas, rents, auto insurance and other items, the U.S. Labor Department reported, and will likely give pause to the Federal Reserve (Fed) as it considers how often or even whether to cut interest rates this year. Prices outside the volatile food and energy categories rose 0.4% from February to March, the same accelerated pace as in the previous month. The March figures, the third straight month of inflation readings well above the Fed’s 2% target, provide concerning evidence that inflation is stuck at an elevated level after having steadily dropped in the second half of 2023.

Highlights:

Overall consumer prices rose 0.4% from February to March, the same as in the previous month. Compared with a year ago, prices rose 3.5%, up from a year-over-year figure of 3.2% in February.
Auto insurance surged 2.6% in March and is up a dramatic 22% from a year ago, reflecting in part, the rise in new-car prices over the past two years. Average auto repair costs increased 1.7% from February to March and are up a sharp 8.2% from a year earlier. And the price of gas surged 1.7% last month.
Clothing costs jumped 0.7% in March, the second straight month of sizable increases, though they have barely risen over the past year. Grocery prices, though, were unchanged last month and are just 1.2% higher than they were a year ago, providing some relief to consumers after spikes in food prices in the previous two years.

European Central Bank holds rates at record highs, signals upcoming cut

The European Central Bank (ECB) held borrowing costs at a record high but signalled it may soon cut interest rates. The ECB has kept interest rates steady since September but has long signalled that cuts were coming into view, with policymakers awaiting a few more comforting wage indicators to accompany benign inflation figures before pulling the trigger. “If the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction,” the ECB said.

Highlights:

The ECB said that incoming information has broadly confirmed its previous inflation assessment while wage growth was moderating and firms were absorbing more of the labour cost increases via their profit margins.
Nevertheless, domestic price pressures are strong and are keeping services price inflation high, the ECB said in a statement.
Supporting the case for rate cuts, consumer price inflation fell to 2.4% last month and could ease back to the ECB’s 2% target before year-end, well ahead of the bank’s own 2025 projection.

In the news: OPEC’s oil demand view unchanged, supply growth revised downwards

OPEC, the Organization of the Petroleum Exporting Countries, has recently reaffirmed its oil demand projection for the coming years. According to their analysis, global oil demand is expected to grow by 2.3 million barrels per day (bpd) in 2024 and 1.9 million bpd in 2025, unchanged from previous estimates. This substantial growth reflects the increasing energy needs of a rapidly developing world. However, OPEC’s outlook isn’t solely focused on demand; it also considers supply dynamics. The organization has revised its non-OPEC supply growth forecast downward, anticipating a more modest expansion of 1.0 million bpd from 1.1 million bpd in 2024 and 1.3 million bpd from 1.4 million bpd in 2025. This adjustment acknowledges supply constraints and geopolitical complexities that impact oil production. As the world grapples with energy transitions, the disparity between strong demand growth and weaker supply growth will play a pivotal role in shaping energy policies, investment decisions and, ultimately, energy prices.

Behind the headline:

OPEC’s latest report comes on the heels of crude futures spiking to their highest levels in over a year as escalating tensions in the Middle East and Eastern Europe drive supply concerns. West Texas Intermediate (WTI) and Brent Crude are currently trading at $85.02 USD and $90.20 USD, respectively.
The main drivers of demand growth in the coming years are expected to be China and the Middle East, while the main drivers of non-OPEC supply growth are expected to be from the U.S., Canada, Brazil, and Norway,
The forecast is in line with OPEC’s view that oil use will continue rising for the next two decades but stands in stark contrast to the International Energy Agency’s (IEA) view that predicts oil demand will peak by 2030 as the energy transition continues at pace.

·The Global Week Ahead will be available April 15, 2024.·

· 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 12

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