By Scotia Wealth Management - The Zukiwsky Group

sponsored

Market Watch: April 19, 2024

Apr 19, 2024 | 6:15 PM

This week’s highlights

• Equity markets trade lower following spike in bond yields, delayed rate cuts
• Yields push symbolic high as economic data continues to show strength
• Canada’s inflation rate ticks higher, but odds of June interest rate cut boosted
• Fed Chair Jerome Powell dials back expectations on rate cuts
• China’s first-quarter economic growth solid, but March data show demand still feeble
• In the news: U.S. floats expanding China steel tariffs to counter industrial oversupply

Week in review

Equity markets trade lower following spike in bond yields, delayed rate cuts

Global equities traded in a downward trajectory throughout the week as investors reset their expectations for rate cuts due to comments from Federal Reserve (Fed) Chair Jerome Powell who said it is likely to take “longer than expected” for inflation to return to the central bank’s 2.0% target. Adding fuel to the fire were concerns that a continued escalation of conflict in the Middle East could cause oil prices to rise further which would contribute to higher inflation. Commodity markets were volatile, with crude oil and gold both surging in early trading after Israel’s retaliatory strike on Iran. This potential risk – delayed interest rate cuts causing a spike in volatility – is something many have been cautioning of, particularly in light of the lofty valuations in sectors such as the more interest rate sensitive info tech space.

RESPONSIBILITIES OF A TRUSTEE ADDRESSED

Day 2 of LaGrange v. Red Deer Catholic: "This is not about cancel culture," says division counsel

8h ago

conducted energy weapon utilized

RCMP arrest man after confrontation inside Bower Place

11h ago

one suspect still sought

One charged after alleged armed robbery in Bower Place parking lot

11h ago

Highlights:

• U.S. markets returned -3.04%¹ for the week due to a resetting of rate cut expectations. Tech heavy indices were the most impacted as some large-cap tech names such as Nvidia saw double digit declines.
• Canadian markets returned -0.42%² for the week as as Canada’s inflation rate ticked higher. Losses were tempered somewhat by comments from the central bank regarding a possible interest rate cut at the next meeting in June.
• European markets were -2.31%³ lower mirroring their North American counterparts as the possibility of higher-for-longer rates weighed on equity markets.
• Emerging markets closed -0.96%⁴ lower as investors continue to remain risk-averse given ongoing uncertainty.

Yields push symbolic high as economic data continues to show strength

Sovereign bond yields moved higher for the week, with the 2-year yield approaching – and very briefly exceeding – the symbolic 5% level. This occurred after Fed Chair Powell signaled policymakers will likely wait longer than previously anticipated to cut policy rates following a series of surprisingly high inflation readings and strong economic indicators. As a result, government bond yields reached new year-to-date highs. Meanwhile, the index that measures Treasury market volatility rose to its highest since early January. Credit markets remained relatively soft for the week as investors remained on the sidelines following the news of escalating conflict in the Middle East.

Highlights:

• The 2-year U.S. Treasury yield rose 3 basis points (bps) while the 10-year yield was up 5 bps. The 2-year Canadian yield was down 11 bps and 10-year yield up 2 bps.
• Despite the quiet week in primary markets, this year’s volumes for both investment grade (IG) and high yield (HY) are running well ahead of last year’s for the same period, up 42% and 94%, respectively.
• According to data compiled by Bloomberg, the IG maturity calendar is relatively light this year and little changed for 2025-26, which supports credit. Financials account for about 45% of total maturities, while consumer sectors are at the top for non-financial issuers.

Weekly dashboard

Prices in USD. (Scotia Wealth Management, Bloomberg)

Canada’s inflation rate ticks higher, but odds of June interest rate cut boosted

Canada’s inflation rate ticked higher in March, but an easing of other price pressures underscored the potential for the Bank of Canada (BoC) to lower interest rates in June. The consumer price index rose 2.9% in March from a year earlier, up from 2.8% in February, Statistics Canada reported. This result matched analysts’ expectations and was partially owing to a 4.9% increase in gas prices, month over month. Elsewhere, there were encouraging signs. On a three-month annualized basis, the BoC’s preferred measures of core inflation, which strip out volatile movements in the Consumer Price Index (CPI), are running below 1.5%. “Measures of core inflation did tick down again, and that does suggest that underlying inflationary pressures are continuing to ease,” BoC Governor Tiff Macklem said. “We continue to be moving in the right direction.”

Highlights:

In the near term, gasoline could provide a headwind to bringing inflation under control. Gas prices have continued to rise in April.

Another challenge is shelter prices, which rose 6.5% in March, year-over-year. Rents jumped by 8.5%, a symptom of longstanding housing shortages across the country.

Other areas were tamer. Food purchased from stores rose at an annual rate of 1.9% in March, down from 2.4% in February. Grocery inflation peaked at more than 11% in late 2022 and early 2023.

Fed Chair Jerome Powell dials back expectations on rate cuts

U.S. Federal Reserve (Fed) Chair Jerome Powell said firm inflation during the first quarter had introduced new uncertainty over whether the central bank would be able to lower interest rates this year without signs of an economic slowdown. His remarks indicated a clear shift in the Fed’s outlook following a third consecutive month of stronger-than-anticipated inflation readings, which appears to have derailed hopes that the central bank might be able to lower interest rates pre-emptively. Officials had previously said they were looking for greater confidence that inflation was returning to its target and were optimistic another month or two of data might meet that standard.

Highlights:

“The recent data have clearly not given us greater confidence and instead indicate that it is likely to take longer than expected to achieve that confidence,” Powell said.

Powell suggested that the Fed was likely to hold interest rates at their current level, a 23-year high, for an even longer period if inflation continued to run above the central bank’s 2% goal but suggested additional interest rate increases aren’t likely if inflation is somewhat firmer than expected.

“We think policy is well positioned to handle the risks that we face,” Powell said. “Right now, given the strength of the labour market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work.”

China’s first-quarter economic growth solid, but March data show demand still feeble

China’s economy grew faster than expected in the first quarter, according to data from the National Bureau of Statistics, offering some relief to officials as they try to shore up growth in the face of protracted weakness in the property sector and mounting local government debt. However, several March indicators released alongside the gross domestic product data, including property investment, retail sales and industrial output, showed that demand at home remains frail, weighing on overall momentum.

Highlights:

The world’s second-largest economy grew 5.3% in January-March from the year earlier, comfortably above a 4.6% analysts’ forecast and up from the 5.2% expansion in the previous quarter. On a quarterly basis, growth picked up to 1.6% from 1.4% in the previous three months.

Industrial output in March grew 4.5% from a year earlier, below the 6.0% forecast and a gain of 7.0% for the January-February period.

Retail sales rose 3.1% year-on-year in March, missing the 4.6% growth forecast and slowing from a 5.5% gain in the January-February period.

In the news: U.S. floats expanding China steel tariffs

During an address to the United Steelworkers union, President Joe Biden urged the United States Trade Representative Katherine Tai to consider raising the existing 7.5% tariff on Chinese steel and aluminium to 25%. The move comes in response to concerns about the survival of the U.S. steel industry due to cheaper Chinese exports flooding global markets. This approach would mirror the former President’s trade playbook in an effort to protect domestic capacity, especially in light of China’s surging industrial overcapacity. The higher tariffs would apply to Chinese steel and aluminium imports not already subject to the existing 25% tariff in place on certain imports.

Behind the headline:

• Overcapacity concerns were most recently raised by Treasury Secretary Janet Yellen on her trip to China. While there, she said that subsidies were creating an overabundance of products which are being dumped on global markets at artificially cheaper prices, thereby stifling competition.
• China’s significant industrial subsidies are part of a recent “made in China” strategy which has seen the country invest in and heavily subsidize manufacturing in an attempt to overcome a slowdown stemming from a slump in real estate.
• International Monetary Fund (IMF) Chief Kristalina Georgieva echoed similar concerns, saying that China is at a “fork in the road” and must choose between past policies or “pro-market reforms” to spur growth.

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

Disclaimer

_{® Registered trademark of The Bank of Nova Scotia, used under licence. Scotia Wealth Management® consists of a range of financial services provided by The Bank of Nova Scotia (Scotiabank®); The Bank of Nova Scotia Trust Company (Scotiatrust®); Private Investment Counsel, a service of 1832 Asset Management L.P.; 1832 Asset Management U.S. Inc.; Scotia Wealth Insurance Services Inc.; and ScotiaMcLeod®, a division of Scotia Capital Inc. Private banking services are provided by The Bank of Nova Scotia. Estate and trust services are provided by The Bank of Nova Scotia Trust Company. Portfolio management services are provided by 1832 Asset Management L.P. and 1832 Asset Management U.S. Inc. Insurance services are provided by Scotia Wealth Insurance Services Inc. Wealth advisory and brokerage services are provided by ScotiaMcLeod, a division of Scotia Capital Inc. International investment advisory services are provided by Scotia Capital Inc. Financial planning services are provided by The Bank of Nova Scotia and ScotiaMcLeod. Scotia Capital Inc. is a member of the Canadian Investor Protection Fund and is regulated by the Canadian Investment Regulatory Organization. Scotia Wealth Insurance Services Inc. is the insurance subsidiary of Scotia Capital Inc., a member of the Scotiabank group of companies. When discussing life insurance products, ScotiaMcLeod advisors are acting as Life Insurance Agents (Financial Security Advisors in Quebec) representing Scotia Wealth Insurance Services Inc. Scotia iTRADE®(Order-Execution Only Accounts) is a division of Scotia Capital Inc. (“SCI”). Scotia Capital Inc. is a member of the Canadian Investor Protection Fund and is regulated by the Canadian Investment Regulatory Organization. Scotia iTRADE does not provide investment advice or recommendations and investors are responsible for their own investment decisions.}

_{This publication has been prepared by Scotia Capital Inc. and is intended as a general source of information only and should not be considered as personal and/or specific financial, tax, pension, legal or investment advice. We are not tax or legal advisors and we recommend that individuals consult with their qualified advisors before taking any action based upon the information contained in this publication. Opinions and projections contained in this publication are our own as of the date hereof and are subject to change without notice. While care and attention has been taken to ensure the accuracy and reliability of the material in this publication, neither Scotia Capital Inc. nor any of its affiliates make any representations or warranties, express or implied, as to the accuracy or completeness of such material and disclaim any liability resulting from any direct or consequential loss arising from any use of this publication or the information contained herein. This publication and all the information, opinions and conclusions contained herein are protected by copyright. This publication may not be reproduced in whole or in part without the prior express consent of Scotia Capital Inc.}