Market Watch: June 14

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Despite the U.S. Federal Reserve’s (Fed) holding rate steady, markets advanced on news that inflation had cooled, moving from 3.6% year-over-year (YoY) in April to 3.4% YoY in May. Markets did, however, give up some of their gains later in the week after the University of Michigan’s Consumer Sentiment Index declined in June. In Canada, markets trended lower throughout the week as the largest weighted sectors in the country – financials, energy and materials – moved lower over higher-for-longer interest rate concerns following the Fed rate announcement.

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Highlights:

• S. markets returned 1.62%1 for the week as a positive Consumer Price Index (CPI) reading put a bid under equities. A continued hold on interest rate cuts and a decline in consumer sentiment did, however, temper returns.
• Canadian markets returned -1.57%2 for the week, falling to a two-month low. Higher-for-longer U.S. interest rates weighed on Canadian financials and commodity-linked shares.
• European markets returned -2.50%3 as French and Italian markets plummeted following the results of the 2024 European Parliament elections that saw continued outflows from the region and into U.S. and emerging markets.
• Emerging markets closed -2.96%4 lower as weaker-than-expected Chinese consumer spending weighed on investor sentiment even as inflation remained low.

Fixed income advances amid improving interest rate landscape

U.S. yields continued to move lower for the week, touching their lowest levels in more than two months, following better-than-expected inflation data. The odds for a September rate cut by the Fed have moved slightly higher as well. In Canada, yields also declined for the week following the Bank of Canada’s decision last week to lower the policy rate by 25 basis points (bps). Credit spreads are wider, high yield in particular, currently sitting just off the April highs.

Highlights:

• The 2-year U.S. Treasury yield fell 3 bps while the 10-year yield fell 4 bps. In Canada, the 2- and 10-year yields were both 7 bps lower as interest rate cuts continue to buoy fixed income returns.
• Credit demand slowed this week as new issuance ran at just $6.0bn USD, well below the projected $15.0bn USD.
• According to data compiled by Bloomberg, the high yield maturity calendar is light for the rest of the year with about $40.0bn USD due for refinancing. Next year’s maturity schedule is relatively busier, with about $161.0bn USD, while 2026 sees a material increase to $347.0bn USD.

Weekly dashboard

Canada’s unemployment rate rises to 6.2%in May

Finding work has become increasingly challenging for Canadian jobseekers as a weakening economy and high interest rates push business owners to rein in hiring. Statistics Canada’s (StatCan) latest labour force survey showed the economy added 27,000 jobs last month, too modest of a gain to keep the unemployment rate from rising by a tenth of a percentage point to 6.2%. The report, which came in largely as forecasters had expected, suggests the Canadian labour market is trudging along but struggling to meet the needs of a growing number of job seekers. Economists were taken by surprise in April when employment jumped by 90,000, the largest monthly increase since January 2023. But the May employment data suggest the job market is back on trend.

Highlights:

• The report said that of those who were unemployed in April, just less than a quarter found work the next month. That’s below the pre-pandemic average of 31.5% for the same months in 2017, 2018 and 2019.
• StatCan said the involuntary part-time rate, which refers to the proportion of part-time workers who could not find full-time work or worked part-time because of weak business conditions, was 18.2% in May. That’s up from 15.4% a year prior.
• Employment was up in health care and social assistance, finance, insurance, real estate, rental and leasing, business, building and other support services, and accommodation and food services. Employment fell in construction, transportation and warehousing, and utilities.

U.S. Fed projects just one cut this year as inflation remains subdued

Fed officials pencilled in just one interest-rate cut for this year, indicating most are in no hurry to lower rates, even after a widely watched report showed inflation improved last month. The central bank also held its benchmark rate steady, in a range between 5.25% and 5.5%, a move that was widely expected. After setbacks at the start of the year, more recent inflation readings have shown improvement, Fed Chair Jerome Powell said at a news conference. “We’ve made pretty good progress on inflation,” he said. This latest report was “a step in the right direction…In order to cut rates, we’ll need to see more good data.”

Highlights:

• The latest Fed decision came hours after the U.S. Labor Department reported the consumer-price index, a measure of goods and services costs across the economy, was essentially flat from the month before and up 3.3% from one year earlier. In April, prices rose 3.4%.
• Core prices, which exclude volatile food and energy items, posted their mildest gains since 2021 and rose 0.2% from April, below economists’ expectations.
• The report showed that the slowdown in price pressures was broad-based and could help Fed policymakers restore their confidence that inflation will return to its 2% target.

China inflation stays low amid tepid consumer spending

China’s consumer prices rose mildly last month while its factory-gate prices continued to fall, suggesting persistently tepid demand as Beijing continues to try to lift lacklustre consumption. The country’s consumer-price index rose for a fourth consecutive month in May, edging up 0.3% from a year earlier, the National Bureau of Statistics reported. That matched the 0.3% expected by economists and was unchanged from April’s increase. These latest figures highlight policymakers’ difficulties in convincing consumers to open their wallets as a protracted property slump continues to weigh on Chinese households’ spending.

Highlights:

• Core consumer inflation rose 0.6% in May, down from 0.7% the prior month. Food prices dropped 2.0%, compared with a 2.7% decline in April. Prices of non-food items increased 0.8%, compared with a 0.9% rise the previous month.
• Factory-gate prices continued to fall in May but narrowed their decline from April. The producer-price index fell 1.4% from a year earlier, its 20th consecutive month of contraction.
• Beijing has been directing resources to manufacturing to offset the drag from the property sector and shift the economy away from overreliance on real estate and debt-fueled investment. This supply-side strategy risks further weighing down prices and escalating trade tensions.

In the news: U.S. sanctions prompt Moscow Exchange to halt dollar and euro trading

The Moscow Exchange, due to U.S. sanctions, has suspended trading in U.S. dollars and euros. This move comes after the Treasury Department blacklisted several Russian banks, affecting their ability to conduct Dollar- and Euro-denominated transactions. The exchange’s decision aims to mitigate risks and maintain stability in light of a deluge of sanctions following the 2022 invasion of Ukraine. The suspension of U.S. dollar and euro trading on the Moscow Exchange is unlikely to have a severe impact on the Russian economy since companies and individuals can still buy and sell these currencies through lenders. Despite the sanctions, Russia’s economy has proven to be more resilient than expected, with trade in the Chinese yuan already accounting for a majority of the Moscow Exchange’s foreign exchange dealings.

Behind the headline:

• The result of the blacklisting of several Russian banks means that the Moscow Exchange has had to halt trading for all instruments with settlements in U.S. dollars and Euros.
• The implications include increased costs for market participants due to higher commissions, wider bid-ask spreads, and unfavourable exchange rate fluctuations.
• Transactions with the dollar and euro will still be available on the over-the-counter market, and the yuan, which now accounts for more than half of foreign currency exchange, is expected to remain strong in Russia
• The annual value of bilateral trade between Moscow and Beijing reached $240bn USD in 2023. Chinese exports to Russia exceeded $111bn USD, while Chinese goods now account for 38% of Russia’s imports. Payments for these goods are often made in yuan.

This isn’t the 2016 bond market!

This week’s risk dashboard:

• Intensifying political risk
• The G7 family photo could soon face a make over
• Elections threaten Eurozone unity
• Trump’s proposals face a very different bond market
• Canada won’t be an island
• BoE to stay out of the election fray
• UK CPI lands the day before the BoE
• RBA to deliver another hawkish hold
• BCCh may sound more cautious

Read the full publication here

• PBOC likely to extend its policy hold
• BCB may hit the brakes
• Norges Bank still on hold until autumn?
• A close call at the SNB
• Rupiah weakness may drive BI to hike
• BoC’s window on Governing Council
• Global PMIs may indicate France as the growth outlier
• US retail sales might face upside risk
• US markets shut Wednesday for Juneteenth holiday
• New Zealand’s flat economy

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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