Market Watch: July 5, 2024

Jobs, jobs, jobs. Oh, and did we mention jobs? Both Canada and the U.S. showed an uptick in unemployment this week following the release of June’s employment data indicating that higher interest rates may finally be having the intended effect of creating slack in the labour market. This, in turn, has increased odds that either the Bank of Canada (BoC) or the U.S. Federal Reserve (Fed) will cut rates at their next meetings. In Europe, London markets gained following the outcome of the UK general election which saw the Labour party win a majority, while in France markets also gained with the election going to a runoff on Sunday and polls showing the National Rally becoming the largest party but falling short of an absolute majority.

Highlights:

After being closed Thursday for July 4^th, U.S. markets returned 1.57%¹ for for the week to close at an all-time high as investors anticipate that an uptick in unemployment could spur the Fed to cut rates at its September meeting.
Canadian markets returned 0.71%² for the week led by strong gains in the materials sector as most others were slightly positive to flat.
European markets, partly fueled by prospects of U.S. rate cuts, returned 2.19%³ for the week as investors seemed largely unperturbed by the outcome of the UK general election and a Sunday runoff in France.
Emerging markets closed 1.79%⁴ higher as investors moved to a risk-on footing in light of a potential easing of U.S. monetary policy.

Bond yields mixed as investors bet on two Fed rate cuts following June jobs data

U.S. and Canadian bond yields moved lower Friday following better-than-expected nonfarm payroll data but were mixed for the week. Relative to the previous read, which was revised down, it was a slight decline. The benchmark 10-year yield is trading in the middle of the two-month range as higher-for-longer U.S. monetary policy is still in play. There was no material impact on Fed policy expectations with the market now pricing in one to two rate cuts by year-end. Credit spreads stabilized this week at the higher end of the 3-month range in terms of investment grade and high yield. The recent weakness in credit was broad and may continue into July.

Highlights:

The 2-year U.S. Treasury yield was 1 bps lower while the 10-year yield rose 7 bps. In Canada, the 2- and 10-year yields were 3 bps and 13 bps higher, respectively.
Spreads widened last month across all sectors and tenors. Five-year terms increased the most on average, led by energy and banking, while 10-year maturities remained relatively stable, with capital goods and technology widening the least.
There are several Fed speakers scheduled next week, including Chair Powell. Notably, the latest U.S. Consumer Price Index (CPI) and Producer Price Index (PPI) are due Thursday and Friday, respectively.

Weekly dashboard

Canadian unemployment rate continues to climb

Canada’s unemployment rate rose to a 29-month high of 6.4%, highlighting that people might be losing jobs as the labour market struggles to absorb a rapidly swelling population. The jobs report, which also showed that youth unemployment reached almost a decade high barring the pandemic years, prompted money markets to increase bets of a rate cut by the Bank of Canada (BoC) this month to around 56% from 40% a day earlier. Canada lost a net 1,400 jobs in June, Statistics Canada said, against analysts’ predictions of 22,500 job gains, in further indications of weakness in economic condition.

Highlights:

Despite increasing unemployment, wage growth has been a sore point in the BoC’s efforts to tame inflation and it ticked up again in June.
The average hourly wage growth of permanent employees accelerated to an annual rate of 5.6% from 5.2% in May. The pay growth rate, closely tracked by the BoC because of its effect on inflation, was the fastest since 5.7% in December.
Employment in the goods sector increased by a net 12,600 jobs, mostly in agriculture, while the services sector lost a net 14,100 jobs, led by transportation and warehousing and Information, culture and recreation.

U.S. jobs report shows unemployment ticked up to 4.1%

The U.S. Labor Department reported that the U.S. added a solid 206,000 jobs last month, slightly beating expectations and continuing a remarkably strong run. But the unemployment rate ticked up to 4.1%, a sign of slack in a labour market that has already shown some hints of gradually slowing down. The jobs report seems to have affirmed investors’ view that the economy is slowing, but not in a drastic way that would prompt more aggressive rate cuts. The June report marked the first time since 2021 that the unemployment rate clocked in above 4%.

Highlights:

For the U.S. Federal Reserve, the report provides further evidence that the labour market appears to have come into better balance. A hot labour market makes it more difficult to lower rates.
There were other indications as well that the job market is continuing to cool. Average hourly earnings were up 3.9% in June from a year earlier, marking their smallest gain since 2021. The counts for both April and May were revised lower by a combined 111,000 jobs.
The labour force participation rate, the share of working-age people who were employed or seeking work, ticked up to 62.6%, an indication that more people entered the labour market.

Eurozone manufacturing sector faces accelerated downturn in June

Eurozone manufacturing health, as measured by the HCOB Manufacturing Purchasing Managers’ Index (PMI) and compiled by S&P Global, declined for the fourth time in five months in June. The PMI fell from May’s 14-month high of 47.3 to 45.8, indicating a solid and accelerated deterioration in the sector. This renewed decline means the PMI remains significantly below its survey average of 51.6. After nearly stabilizing in May, the final month of the second quarter saw factory production across the euro area fall solidly and at the fastest pace in 2024 so far. June’s contraction in output came amid a sharper deterioration in demand conditions, as evidenced by the respective index for new orders falling further below the 50 no-change mark. Eurozone goods producers also reported weaker sales to clients externally, with the latest survey data signalling a 28th consecutive monthly drop in new export orders.

Highlights:

Greece retained its position at the top of the manufacturing PMI rankings, despite its index falling to a six-month low. Slower rates of improvement were likewise recorded for both Spain and the Netherlands.
Germany’s manufacturing sector was once again the eurozone’s worst-performing, as has been the case in every month since February.
Despite the broader deterioration in business conditions, business confidence was unchanged from May’s 27-month high. This meant that firms were optimistic about the forthcoming year, with the level of positive sentiment above its long-term average.

In the news: Volkswagen, Rivian agree to technology joint venture

Volkswagen AG (VW) has announced an initial investment of $1 billion USD in Rivian Automotive, Inc. as part of its “Strategy 2024,” which focuses on the electrification of its portfolio. The two companies also intend to establish a joint venture focused on next-generation electrical/electronic architecture (E/E architecture) for electric vehicles. If successful, the joint venture would allow VW access to Rivian’s E/E architecture technology and give Rivian access to VW’s managerial expertise. It will also help Rivian increase production – they recently had to pause construction of a $5bn USD factory in Georgia – and shore up investor support in the company, which has never turned a quarterly profit. The deal comes at a particularly opportune time for Rivian as it seeks to bridge the financing gap amid the slowdown in EV sales. The total investments from Volkswagen in Rivian could reach $5 billion USD by 2026.

Behind the headline:

Under this agreement, Volkswagen will grant Rivian a convertible note worth $1 billion USD, which will convert into a direct shareholding upon regulatory approvals.
To alleviate investor concerns about the starkly different work cultures that can often plague deals of this nature, VW’s software chief Wassym Bensaid said the leadership team has agreed to embrace Rivian’s agility-centric culture and that “very clear rules and responsibilities” have been set out for the joint venture.
If the tests of VW vehicles with Rivian technology work with complete functionality, consumers could soon see the full suite of VW vehicles, including Audi, Lamborghini, Porsche and Bugatti, utilizing Rivian E/E architecture.

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 - The Zukiwsky Group

Market Watch: July 5, 2024

Week in review

U.S., Canadian markets steadily advance amid short trading week

Bond yields mixed as investors bet on two Fed rate cuts following June jobs data

Weekly dashboard

Canadian unemployment rate continues to climb

U.S. jobs report shows unemployment ticked up to 4.1%

Eurozone manufacturing sector faces accelerated downturn in June

In the news: Volkswagen, Rivian agree to technology joint venture

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