Market Watch: June 21

U.S. markets showed signs of fatigue on Friday after a week-long rally that pushed key indices to record highs. This was primarily due to Nvidia giving up most of its weekly gains after momentarily becoming the most valuable publicly traded company this week. Markets also experienced volatility on Friday due to triple witching, which references the simultaneous expiration of three types of trading contracts: stock options, stock index options and stock index futures options on the same day. In Canada, markets trended lower throughout the week as investors mulled over recent local and U.S. economic data to ascertain the potential path forward for interest rates.

Highlights:

U.S. markets rose by 0.61%1 over the week, with the benchmark index momentarily surpassing the 5,500 mark for the first time, propelled by technology stocks.
Canadian markets returned -0.32%2 for the week largely due to poor performance of base metal stocks.
European markets returned 0.14%3 as markets shrugged off the impact of last week’s European Parliament elections and as the Swiss National Bank announced a 25 basis point rate cut, the second cut of the year.
Emerging markets closed 0.95%4 higher as investors closely monitored global economic data and statements from central banks around the world.

Global yields assess data indicating a slowing economy

U.S. yields continued to hover at their two-month lows as investors parsed the range of economic data – including retail sales, housing, and unemployment claims – that pointed towards a decelerating economy, further buoying the odds for a September rate cut by the U.S. Federal Reserve. European rates also moved lower as lower-than-expected Purchasing Managers’ Index (PMI) figures hinted that the economy was losing momentum. In Canada, yields were slightly higher as Japanese Norinchukin Bank announced this week their intention to sell approx. US$63bn of U.S. and European sovereign bonds to manage losses triggered by elevated interest rates.

Highlights:

The 2-year U.S. Treasury yield rose 4 bps while the 10-year yield rose 2 bps. In Canada, the 2- and 10-year yields were both 4 bps and 2 bps higher respectively.
Credit spreads were little changed for both investment and high-yield bonds. Primary markets were quiet most of the week, and some issuers have been postponing their deals over the past few trading sessions.
As per reports from Bloomberg, risk-adjusted credit spreads, or spread-per-turn leverage (SPTL), have tightened across the U.S. high-yield corporate space mainly due to the solid demand over the past few months while leverage ratios have remained relatively stable.

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Annual pace of Canadian housing starts in May up 10% from April

Canada Mortgage and Housing Corp. (CMHC) reported the annual pace of Canadian housing starts in May climbed 10% compared with April, helped by gains in Montreal and Toronto. CMHC said the seasonally adjusted annual rate of housing starts in May amounted to 264,506 units, up from 241,111 in April. The cost of housing has been a key political issue with the federal government working to improve affordability. Ottawa has announced new tax incentives and spending in an attempt to solve the current housing crisis. The reading for housing starts in May came as the annual pace of starts in Montreal more than doubled with an increase of 104% and Toronto gained 47%, both boosted by multi-unit starts. The pace of starts in Vancouver for May fell 32% compared with April.

Highlights:

CMHC said the overall annual pace of urban housing starts in Canada was 246,111 units, up 11% from 221,376 in April. The annual pace of multi-unit urban starts increased 13% to 203,141, while single-detached urban starts rose 2% to 42,970.
The seasonally adjusted annual rate of rural starts was estimated at 18,395.
The six-month moving average of the monthly seasonally adjusted annual rate was up 3.8% at 247,830 units in May compared with 238,859 units in April.

U.S. retail sales miss expectations in May as lower prices for gasoline, motor vehicles weigh

U.S. retail sales increased less than expected in May as lower prices for gasoline and motor vehicles weighed on receipts at service stations and auto dealerships. Retail sales rose 0.1% last month after a downwardly revised 0.2% drop in April, the U.S. Commerce Department’s Census Bureau reported. Retail sales were previously reported to have been unchanged in April. Economists had forecast retail sales to gain 0.3% in May. The trend in sales growth has been slowing as higher prices and interest rates force households to prioritize essentials and cut back on discretionary spending.

Highlights:

Banks have also tightened access to credit as borrowers struggle to keep up with loan payments. Though the labour market remains on a solid footing, it is becoming difficult for people who lose their jobs to quickly find new work and wage increases are moderating.
Retail sales, excluding automobiles, gasoline, building materials and food services, rose 0.4% last month after a downwardly revised 0.5% drop in April. These so-called retail sales were previously reported to have declined 0.3% in April.
Core retail sales correspond most closely with the consumer spending component of gross domestic product. Consumer spending increased at a 2.0% annualized rate in the first quarter, helping to restrain the U.S. economy to a 1.3% growth pace.

Bank of England holds off on rate cut despite easing inflation

The Bank of England (BoE) kept its main interest rate unchanged at a 16-year high of 5.25% ahead of a July 4 election. The BoE’s Monetary Policy Committee voted 7-2 to keep rates on hold, in line with economists’ expectations. Deputy Governor Dave Ramsden and external MPC member Swati Dhingra remained the only policymakers to support a cut to 5%. BoE Governor Andrew Bailey said in a statement accompanying the decision that the latest data showing inflation back at its 2% target was “good news” but that it was too soon to cut rates. “We need to be sure that inflation will stay low, and that’s why we’ve decided to hold rates at 5.25% for now,” he said.

Highlights:

The BoE expects inflation to rise above target as the effect of past energy price falls drops out of annual inflation data and repeated its May forecast for inflation to be around 2.5% in the second half of 2024.
The BoE said indicators of inflation persistence, chiefly wage growth and services inflation, had moderated since its May meeting but remained high.
They viewed the higher-than-expected reading as reflecting a nearly 10% rise in Britain’s minimum wage and annual indexed rises in prices that reflected past inflation, factors they did not expect to have as big an upward effect on future inflation.

In the news: Boeing’s horrible, no good, very bad year

This week, Boeing’s CEO, Dave Calhoun, who is slated to step down at the end of the year, testified before the Senate Homeland Security Committee’s Permanent Subcommittee on Investigations. During the hearing, he addressed manufacturing problems, allegations of “nonconforming” parts in 737 Max jets, and reports that the company retaliated against whistle-blowers who raised safety and quality concerns. Meanwhile, the FAA has launched an investigation into the use of possible counterfeit titanium by a company that supplies Boeing’s fuselages and Airbus’ wing components. Additionally, a Southwest Airlines Boeing 737 Max experienced a rare “Dutch roll” incident during the flight that caused substantial damage to the plane and prompted a separate investigation by the National Transportation Safety Board and the FAA. These revelations come at a moment of intense scrutiny for Boeing and the broader aviation industry, which is grappling with a string of mishaps and safety concerns that have surfaced over the past several years.

Behind the headline:

In 2019, Boeing faced significant challenges when the 737 Max fleet was grounded due to a series of high-profile crashes. These incidents had a pronounced impact on the company’s stock price, which has declined by over 60% since then.
The titanium used in the Boeing and Airbus components was purchased from a little-known Chinese company and sold using allegedly fake documentation. Following an investigation, it was found to have small holes due to corrosion.
A “Dutch roll” is a side-to-side oscillation that creates a figure-8 effect and can lead to a dangerous feedback loop if unaddressed. It is unclear how this occurred as most modern airplanes have equipment to dampen the effect.
In January, a 737 Max 9 jet experienced a door panel blowout during flight, and in April, Boeing disclosed a separate incident involving potentially falsified inspection records related to 787 Dreamliner wings, necessitating reinspection of some planes still in production.

Teeing Up July’s Markets

Political risk is just getting started
US Presidential debate could further inform polling
Final polling before France’s first round election
The last full week of UK election campaigning
Iran’s faux election
US core PCE could be very soft
Canadian CPI may inform BoC July pricing…
…with basket changes and housing’s rising effect
Tracking Canadian GDP, and why it’s better under the hood

Read the full publication here

BoC’s Macklem to speak about, well, everything!
Key US Treasury auctions return
Eurozone CPI: One of two before July’s ECB
Banxico expected to hold in the peso’s election aftermath
BanRep expected to deliver another large cut despite COP softening
Riksbank expected to stick to its script
BSP: Still thinking about August?
Turkey’s central bank likely to hold at a dizzying height
CPI: Australia, Tokyo, Malaysia, Singapore
Other 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: June 21

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