Market Watch: April 26

Global equities wrapped up a volatile week, marking one of the best trading periods since last November. While investors parsed developments on the economic front, including slowing U.S. GDP growth and a personal consumption expenditures (PCE) reading that was mostly in line with expectations, the real driver of weekly returns for major indices were earnings reports from megacap technology names. Alphabet jumped more than 10% after announcing a $70bn USD stock buyback and its first-ever dividend, while Microsoft was up low single digits after announcing strong third-quarter results and growth in its cloud business. The prints from both Alphabet and Microsoft were accretive to the broader megacap technology sector and helped to alleviate investors’ concerns following Meta Platforms’ disappointing forward guidance from earlier in the week.

Highlights:

U.S. markets returned 2.68%1 for the week as megacap technology earnings helped investors shake off concerns over the prospect of higher-for-longer interest rates amid slowing growth and sticky inflation.
Canadian markets returned 0.84%2, once again largely propelled by strong results in the energy and materials sectors as oil prices remain high and demand for base metals strong
European markets were 1.96%3 higher as investors responded positively to a deluge of strong earnings reports while being spared from another hot U.S. inflation reading.
Emerging markets had one of their best weeks in nine months, closing 2.14%4 higher as Asian technology stocks advanced on U.S. earnings reports that showed booming demand for artificial intelligence hardware.

Yields broadly higher following GDP reading and Fed’s preferred inflation measure

U.S. rates were broadly higher for the week following the latest U.S. GDP and PCE readings as investors seem to believe that growth and inflation are not yet in a position where the U.S. Federal Reserve (Fed) will move to cut interest rates. Growth was soft but not overly so while inflation continues to be sticky, with headline and core numbers coming in at or slightly higher than expected. Credit was firm for the week as spreads have tightened back close to 2-year lows in the last couple of trading sessions. The investment grade (IG) primary market wrapped up one of the slowest weeks for the year with just $11.6bn USD of new debt priced.

Highlights:

The 2-year U.S. Treasury yield rose 1 basis points (bp) while the 10-year yield was up 7 bps. The 2- and 10-year Canadian yields were up 10 bps and 11 bps, respectively.
According to the latest analysis from Bloomberg, IG US bonds may deliver negative returns for the year should rates continue to climb.
With credit spreads below historical averages, downside risks have built up since the beginning of the year. Widening spreads back to long-term norms would mean current year-to-date losses could grow larger by yearend, according to Bloomberg.

Weekly dashboard

Canadian retail sales slip 0.1% in February, seen flat in March

Canadian consumers continued their hesitancy to spend, with retail sales flatlining last month after a second monthly decline in a row. An advance estimate of retail receipts indicates sales were unchanged in March, Statistics Canada (StatCan) reported. This follows a 0.3% pullback in January sales and a 0.1% decline in February, suggesting a sustained period of low consumer spending. The monthly dip in February was softer than the modest 0.1% advance forecast by StatCan and economists, indicating a potential underestimation of the impact of high interest rates on Canadian household budgets.

Highlights:

Sales in February were down in five of nine retail segments tracked by the agency. Receipts at gas stations and fuel vendors were down 2.2% for the month, even as motor vehicle dealers saw a 5.1% jump in sales.
In volume terms, price-adjusted sales fell 0.3% from January, with a sharp fall in gasoline and fuel volumes. That suggests a modest headwind to industry-level gross domestic product, which StatCan had previously projected grew for a second month running with a 0.4% increase in February.
The economy is still tracking growth for the first quarter, though there are signs of pressure. Factory sales rose 0.7% in February and edged up 0.1% in volume terms from the month before, but a flash estimate of manufacturing shipments released earlier points to a 2.8% retreat in nominal sales in March.

U.S. economic growth slows to 1.6%

U.S. economic growth slowed in the first part of the year, falling short of expectations. Gross domestic product expanded at a 1.6% seasonally- and inflation-adjusted annual rate in the first quarter, the U.S. Commerce Department reported; a pullback from last year’s quick pace. The slowdown in growth was primarily due to a decrease in businesses’ inventory investments and a slowdown in spending on goods such as cars and gasoline. American consumers are still spending heavily on healthcare, insurance and other services, the Commerce Department said, indicating a shift in consumer behaviour.

Highlights:

The report comes after a string of federal data in recent weeks suggesting that the American economy will keep growing. Employers have added staff, an influx of immigrants is boosting growth and tax revenues and credit card companies have reported that customers are spending more than they did last year. All of this has translated to optimism for many businesses.
But the continuing growth has also contributed to persistent price pressures that have raised the prospect that inflation might settle closer to 3% than the U.S. Federal Reserve’s 2% goal.
There are once again signs, though, that the economy is cooling. Low-income Americans are saving far less than they did prepandemic. Mortgage rates recently bounced back above 7%, leading home sales in March to post their biggest monthly drop in more than a year. Average hourly earnings in March rose at their slowest annual pace since June 2021.

German business sentiment continues to brighten

Sentiment among German companies ticked higher for a third-straight month in April, suggesting a more consistent rebound in the outlook for businesses, despite only slow economic growth expected in the early part of this year. The closely watched Ifo business-climate index rose to 89.4 in April from 87.9 in March, data from the Ifo Institute showed, beating expectations of 88.8 from a consensus forecast of economists. The reading is the highest since May 2023. Companies were more satisfied with their current business, while their expectations also improved.

Highlights:

Business sentiment improved in all four of the sectors measured by Ifo, services, manufacturing, trade and construction. Both gauges for the current situation for businesses and expectations for the next six months improved in April.
Germany’s economic performance remains among the laggards of the eurozone. The country’s economy is expected to have grown only slightly in the first quarter of 2024, according to the Bundesbank.
However, hard data, including industrial production, has seen a renewed rise since the start of the year. Surveys have also shown a modest rebound, with the headline purchasing managers’ index suggesting growing economic activity in April, driven by the services sector.

In the news: Waning sales of EVs not enough to dissuade investment from manufacturers

Despite the decrease in EV sales as the early adopter era comes to an end, auto manufacturers continue to make big bets on the technology. With both Tesla and General Motors (GM) announcing first quarter profits this week, the trend could not have been made more clear as Tesla’s profit shrank amid waning EV sales while GM’s profits grew amid stronger internal combustion engine (ICE) vehicle sales. The picture is more nuanced than consumers shunning electric vehicles however; Tesla claims the increased focus by other manufacturers on more hybrid vehicles which includes a gasoline engine, batteries and electric motors was cannibalizing the EV market. Whatever the cause, slowing sales don’t seem to have dissuaded manufacturers from investing in EVs as the future of automobile transportation with both Honda and Toyota announcing multi-billion dollar investments to build out EV production in Canada and the U.S.

Behind the headline:

Tesla’s first quarter profits and revenue fell by 55% and 9%, respectively, from the same period in 2023 after reporting an 8.5% reduction in sales over the same period.
General Motors reported a 24% jump in profits to $3bn USD in 1Q, and is forecasting annual profits to rise from $9.8-$11.2bn USD to $11.5bn USD, primarily driven by ICE vehicle sales in North America. GM has also said they are focused on optimizing and growing their EV business to improve profitability.
Honda, which has been slow to rollout EVs, announced an $11bn USD investment to make cars and batteries in Ontario, while Toyota announced a $1.4bn USD investment in an Indiana EV facility in addition to the existing $18.6bn USD it has already invested in the U.S. amid the push towards electrification.

Too Early to Cut, Too Late to Hike

This week’s risk dashboard:

FOMC’s prior lack of a killer instinct…
…lessens its ability to fight inflation now
The Fed has other options to explore…
…before courting massive risks with added hikes
Nonfarm will be part of a suite of US job market readings
Tracking Canada’s economic rebound
Eurozone inflation may face upside risk ahead of key June meeting
Eurozone GDP will also inform the path to June

Read the full publication here

China’s PMIs are likely to signal modest growth
BanRep likely to cut again
Norges may have less confidence in an autumn cut
Will Swiss CPI embolden another SNB cut?
Is NZ wage growth still too hot for the RBNZ?
Mexico’s soft economy poised for an update
OECD to update forecasts
Global macro

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 26

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