Market Watch: May 3

Despite trading in a downward trajectory throughout much of the week as the U.S. Federal Reserve decided to keep rates steady, equity markets jumped sharply on Friday following the release of April’s nonfarm payroll report that showed both hiring and wage growth slowing. This, in turn, boosted hopes the Fed may begin to cut rates at its next meeting. While not a particularly anomalous report, its outsized impact on markets comes from emerging slack in the labour market easing concerns that the economy may be overheating and that rate hikes – as opposed to cuts – may be needed. The probability of a rate cut in September now sits around 50% according to CME Group. Returns were also boosted by strong quarterly reports from a number of large constituents including Apple which beat earnings expectations and announced a $110bn share repurchase program.

Highlights:

U.S. markets returned 0.56%1 for the week as a weaker than expected jobs report and wage growth combined with strong earnings reports buoyed equity markets.
Canadian markets returned -0.08%2 for the week as weakness in the energy sector on declining oil prices overcame strength in the materials sector as demand for base metals continues to be strong.
Despite a number of earnings misses European equities managed to return 1.66%3 for the week as markets advanced Friday on news of a softening U.S. labour market.
Emerging markets closed 0.60%4 higher as Asian technology stocks advanced on the prospect of future U.S. rate cuts even as Chinese factory activity began to slow.

Labour market slack pushes bond yields lower

U.S. Treasury yields were broadly lower across the curve on a weaker-than-expected jobs report; shorter-dated maturities which are more sensitive to imminent interest rate moves saw more volatility than their longer-dated counterparts. The U.S. economy added 175k nonfarm jobs – the smallest gain in six months – missing the forecasted 240k mark. The market is now expecting up to two rate cuts by the end of 2024. In the U.S. corporate bond market, credit spreads moved back to historical lows amid limited bond supply.

Highlights:

The 2- and 10-year year U.S. Treasury yields both fell 12 bps while the 2- and 10-year Canadian yields were down 10 bps and 13 bps, respectively.
According to Bloomberg, high yield credit spread trades at about 300bps, which aligns with the 283-295bps range implied by their two updated models.
The projections run wider, however, by the yearend, based on heightened volatility and mixed economic data for the rest of the year, calling for spreads as high as 400bps.

Weekly dashboard

Canada’s economy misses growth forecasts in February; first-quarter GDP up 2.5%

Canada’s gross domestic product (GDP) increased 0.2% in February, less than market expectations, and the economy likely expanded at a 2.5% annualized rate in the first quarter, according to Statistics Canada (StatCan) data. Analysts had forecast a 0.3% GDP growth in the month. January’s growth was downwardly revised to 0.5% from 0.6% reported initially. In a preliminary estimate for March, StatCan said GDP was likely unchanged from February as increases in utilities as well as real estate, rental and leasing were offset by decreases in manufacturing and retail trade. With the January revision and the March estimate, the 2.5% estimated growth in the first quarter would be the fastest growth rate since the first quarter of 2023.

Highlights:

GDP growth in February was driven by a second consecutive monthly rise in the services-producing industries, Statscan said. Transportation and warehousing increased 1.4% in February, the largest monthly growth rate since January 2023, the agency said.
The finance and insurance sector grew for a third consecutive month in February, adding that expectations regarding interest rate announcements led to higher-than-normal activity in the mutual fund and equity subsector in the month.
Overall, Canada’s goods-producing sector was unchanged on a month-over-month basis, while the services sector posted a 0.2% increase.

Fed acknowledges inflation setback, holds rates steady

The U.S. Fed this week emphasized that inflation has remained stubbornly high in recent months and said it doesn’t plan to cut interest rates until it has “greater confidence” that price increases are slowing sustainably to its 2% target. The Fed issued its decision in a statement after its latest meeting, at which it kept its key rate at a range between 5.25% and 5.5%, the highest in two decades and a level it reached last July. Several hotter-than-expected reports on prices and economic growth have recently undercut the Fed’s belief that inflation was steadily easing.

Highlights:

Fed chair Jerome Powell stressed that the central bank’s decision will depend on the latest economic data while also saying “My expectation is that over the course of this year, we will see inflation move back down.”
Powell indicated that the bar to cut interest rates had gone up but that the bar to hike rates was even higher. For officials to put hikes back on the table, they would need persuasive evidence that higher interest rates weren’t bringing down inflation.
Given the persistence of elevated inflation, financial markets now expect just one rate cut this year, in November, according to futures prices tracked by CME FedWatch.

China’s factory activity keeps growing but loses some steam

China’s latest batch of factory activity showed that the vast manufacturing sector has continued growing but might have lost some steam as economic headwinds persist. The country’s official manufacturing purchasing managers index (PMI) expanded for a second straight month in April, but at a slower pace, data from the National Bureau of Statistics showed. The headline reading fell to 50.4 in April from 50.8 in March but still beat the forecast of 50.2 by economists. A reading above 50 indicates an expansion in activity, while a reading below indicates contraction.

Highlights:

While the readings point to a cyclical recovery there remain plenty of risks. These include the threat of foreign trade barriers, a deeper downturn in property construction and a pullback in off-budget local government spending.
A crisis in the property sector has shown no sign of abating despite government rescue efforts. Official data showed that property investment fell 9.5% in the January-March period from a year earlier.
The official data also showed that production rose in April from March, while total new orders declined over the period. The gauge for employment also edged down, suggesting a continued lacklustre appetite to hire more workers.

In the news: Attempted Anglo American acquisition highlights increasing demand for copper

Following its failed $39bn USD all-share acquisition of mining giant Anglo American, BHP – the world’s largest mining group – is considering an improved offer. The proposal is aimed to place BHP as one of the worlds leading copper producers, accounting for ~10% of global production. With widespread applications in homes, factories, energy grids, and power generation, and the increasing need for the metal in renewable technologies and data centers, copper demand could double by 2035 according to S&P Global Forecasts. However, with the pipeline of new projects slim, combined with the capital-intensive nature and almost decade-long timeline of moving from discovery to production, the value of copper mines that are already producing has significantly increased.

Behind the headline:

Global mined and refined copper volumes continue to grow to meet demand with both figures rising 21% over the last decade to 22.0M tonnes and 25.6M tonnes, respectively.
Despite the growth in supply, demand significantly outpaces it. While copper spot prices sit below their all time highs, they are up ~16% over the last year reflecting the supply-demand imbalance.
Anglo American is particularly valuable in the copper space as it owns lucrative copper mines in Chile and Peru. Combined these two countries account for ~34% of annual production and ~30% of global reserves.

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: May 3

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