Market Watch: May 24

Global equity markets moved in unison for the week, with performance once again largely driven by data that could indicate the timing of U.S. interest rate cuts. Major indices began the week with moderate gains but turned lower on Thursday following the release of Purchasing Manager Index (PMI) data; PMIs provide insight into the direction of economic trends in manufacturing and are based on monthly surveys of supply chain managers. The strong PMI reading now has traders pricing in less than a 50% chance the Federal Reserve (Fed) will cut rates at its September meeting. Markets largely shook off interest rate worries on Friday, with most recovering losses from the prior day to close in the black.

Highlights:

U.S. markets returned 0.05%1 for the week to close at a record high with gains in Nvidia assuaging investor concerns over higher-for-longer interest rates as the economy continues to demonstrate robust growth.
Canadian markets returned 0.13%2 for the week, with slight gains in several of the larger weighted sectors such as financials and energy offsetting losses in many of the smaller weighted sectors.
European markets were down -0.75%3 for the week with modest declines in London, Paris and Frankfurt pulling the broader index lower despite improving eurozone growth.
Emerging markets closed -0.52%4 lower after U.S. data showed business activity rose at the fastest pace in two years causing investors to be more risk-averse.

Economic acceleration pushes bonds to give up recent gains

North American sovereign bond yields were broadly higher for the week following the release of stronger-than-expected provisional U.S. PMI data. This, combined with hawkish Federal Open Market Committee (FOMC) minutes, drove the weakness in bonds. Investors have lowered their expectations to just one rate cut from the Fed by the end of the year. Additionally, U.S. durable goods orders came in better than expected on Friday and in line with previous readings. A resilient economy plays into a scenario where rates would need to stay higher-for-longer. On the credit side, U.S. credit spreads appear to be approaching a resistance level that has remained largely unchanged since the beginning of the month.

Highlights:

The 2- and 10-year year U.S. Treasury yields rose 14 basis points (bps) and 10 bps, respectively, while the 2- and 10-year Canadian yields were up 2 bps and 6 bps, respectively.
The S&P Global Flash PMI Composite Output Index surged from 51.3 in April to 54.4 in May, reaching its highest level since April 2022. The 3.1-point increase, the largest in 15 months, indicates a notable acceleration in Q2 growth.
Fed officials also seem to be growing more concerned on inflation with FOMC minutes stating “participants observed that while inflation had eased over the past year, in recent months there had been a lack of further progress towards the Committee’s 2 percent objective.”

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Inflation in Canada cools to 2.7% in April, increasing odds of a summer interest rate cut

Canada’s inflation rate is cooling, and bespoke measures of consumer price growth are also on the wane, bolstering the case for the Bank of Canada (BoC) to start cutting interest rates this summer. The Consumer Price Index (CPI) rose 2.7% on an annual basis in April, Statistics Canada (StatCan) reported, down from 2.9% in March and matching analyst expectations. Not only was this the weakest annual CPI increase since early 2021, but inflation has fallen within the BoC’s target band of 1%-3% for four consecutive months. On a monthly basis, the CPI rose 0.5%, largely because gasoline prices jumped nearly 8% in April from March. But outside of a couple of problematic areas, consumer prices are broadly decelerating.

Highlights:

The BoC’s preferred measures of core inflation, which strip out volatile movements in the CPI, rose at an average annual rate of 2.75% in April, down from 3.05% in March. This was the first reading below 3% since mid-2021.
Grocery prices rose at an annual rate of 1.4% in April, down from 1.9% in March. Meat prices rose 1.8% over the past year, while fresh fruit, fish and milk saw declines. Clothing and footwear prices fell 2.6% in April, year over year, while furnishing and equipment dropped by 2.1%.
Excluding food and energy, the CPI rose by 2.7% in April, year over year, compared with 2.9% in March. On a three-month annualized basis, this measure of core inflation is running below 2%.

U.S. home sales fall again in April after high mortgage rates dampen activity

U.S. home sales fell in April for the second straight month as high mortgage rates and near-record home prices continued to stall the market during the prime selling season. Sales of previously owned homes decreased 1.9% from the prior month to a seasonally adjusted annual rate of 4.14 million, the National Association of Realtors (NAR) reported. But high mortgage rates are keeping a lid on the spring season, typically the busiest time of year in the housing market. In March, existing home sales posted their biggest monthly decline in more than a year. The low inventory of homes for sale is also thwarting buyers because high rates have prompted many homeowners to stay put. At the current sales pace, there was a 3.5-month supply of homes on the market at the end of April, below the four to six-month supply that is generally considered a market balanced between buyers and sellers.

Highlights:

The shortage has pushed prices higher. The national median existing-home price rose 5.7% in April from a year earlier to US$407,600, NAR said. That was the highest price for any April data going back to 1999.
Existing home sales were down 1.9% in April on an annual basis. These sales make up most of the housing market and were largely based on contracts signed in March and February.
Mortgage rates have fallen this month, but the average rate on the standard 30-year fixed mortgage is still above 7%, according to Freddie Mac data.

China benchmark lending rates held steady

China’s benchmark lending rates were held steady this month, according to central bank data, after Beijing announced bold moves to address property-sector malaise. Economists had expected the benchmark rates to be left untouched after the People’s Bank of China kept key policy rates, including the interest rate on the medium-term lending facility that is used to price loan prime rates, unchanged earlier this month.

Highlights:

The one-year loan prime rate was steady at 3.45%, while the five-year rate was unchanged at 3.95%.
The central bank is still likely to ease its monetary stance further as it needs more liquidity for the nation’s banks to purchase government bonds, including the issuance of ultralong special Treasury bonds that started earlier this month.
Beijing announced fresh moves to address its prolonged property-sector downturn, including having local governments buy back unsold homes, lowering down payments for would-be home buyers and removing the floor on mortgage rates that banks offer clients.

In the news: Anglo American, BHP extend talks following third rejected bid

Early in the week the Board of Anglo American received a third unsolicited takeover proposal from BHP Group which was promptly rejected. Following this third rejection, the companies agreed to extend talks by one week. The renewed bid again reiterated the request for Anglo American to de-merge its platinum and iron ore assets in South Africa, a complex plan that has been a point of concern for Anglo American. If the acquisition proceeds, it would create a mining giant with global reach and diversified operations. However, it would also face challenges related to environmental responsibility, regulatory scrutiny, and complex logistics. The focus of the new company would likely remain on commodities like iron ore, copper, and precious metals as BHP seeks to shore up its dominance given the metals’ key role in the green energy transition.

Behind the headline:

BHP’s initial all-share takeover offer valued Anglo American at £31.1bn ($38.9bn USD). Shareholders in BHP Group see the company moving closer to a $49bn USD takeover after Anglo American’s latest rejection.
The two South African assets – Anglo American Platinum Ltd. and Kumba Iron Ore Ltd. – account for a significant portion of Anglo American’s copper production.
The unsolicited takeover signals a revival of large-scale deals in the mining sector after a prolonged period of inactivity. The recent surge in copper prices has fueled interest in the space, with competitors such as Rio Tinto also expanding their presence in the base metals market but favoring development over acquisition of existing mines.

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 24

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