Market Watch: July 19

Megacap technology stocks – which have been the main drivers of year-to-date performance – were the loss leaders for the week, causing major indices to post their worst session since April. This decline is occurring amid a market rotation, where investors reduce holdings in this year’s top-performing stocks in favor of underperforming ones. The underlying rationale for this shift is the expectation that the 2024 market rally will broaden beyond large-cap companies as the prospects of a soft-landing seem more likely and we move into a period of policy normalization. A faulty update on Friday from IT firm Crowdstrike caused a number of Windows based computers to crash which ultimately led to a cascade of failures around the world that impacted trading, travel, and a number of other services. This had the effect of compounding losses in the megacap technology space.

Highlights:

U.S. markets were -1.95%1 lower for for the week as megacap names pulled the broader index lower.
Canadian markets returned 0.08%2 for the week as losses in the materials sector was offset by modest gains from a number of smaller sectors within the index.
European markets returned -2.34%3 with all sectors in the red. Travel and leisure stocks were among the week’s biggest detractors as airlines, hotels and other companies struggled with IT issues.
Emerging markets closed -2.73%4 lower as chip stocks took it on the chin amid reports the U.S. may impose further restrictions on sales to China. In addition, China’s Third Plenum offered few catalysts to convince investors to overlook ongoing issues in the real estate sector.

Bond yields move lower despite late week bump

U.S. Treasury yields declined for the week despite moving higher on Friday as investors digested comments from Federal Reserve (Fed) officials that indicated little appetite for a rate cut at the upcoming meeting. Traders are increasingly betting on a September rate cut despite the labour market showing further signs of slowing; U.S. initial unemployment claims released on Thursday came in higher than economists had forecasted. Markets are now pricing in less than 5 per cent odds of a July rate cut and 95 per cent odds of a September rate cut. On the credit side, spreads remained firm despite elevated primary sales. Investment grade (IG) new issuance was $38bn USD, well above projections. The coming week’s macroeconomic calendar is busy, with data on U.S. home sales, the Bank of Canada’s monetary policy decision, and S&P Global Purchasing Managers’ Index data for the major economies..

Highlights:

The 2-year U.S. Treasury yield was 4 basis points (bps) lower while the 10-year yield fell 2 bps. In Canada, the 2- and 10-year yields were 15 bps and 6 bps lower, respectively.
Fed Governor Christopher Waller emphasized data monitoring before any decision, while other officials echoed similar sentiments.
“I believe current data are consistent with achieving a soft landing, and I will be looking for data over the next couple months to buttress this view,” Waller said in his speech. “So, while I don’t believe we have reached our final destination, I do believe we are getting closer to the time when a cut in the policy rate is warranted.”

Weekly dashboard

Canada’s inflation rate eased more than expected in June to 2.7%

Canada’s inflation rate fell more than expected in June, boosting the likelihood that the Bank of Canada will deliver a repeat performance and cut interest rates again next week. Statistics Canada reported that the Consumer Price Index (CPI) rose 2.7% in June from a year earlier, down from 2.9% in May. Financial analysts were expecting the inflation rate to ease slightly to 2.8%. Unadjusted for seasonality, consumer prices fell 0.1% on a month-to-month basis, the first decline in six months.

Highlights:

So far this year, inflation has mostly been weaker than expected and lagged the Bank of Canada’s projections. The annual inflation rate has resided within the central bank’s target range of 1% to 3% for six consecutive months.
Elsewhere, the data points to a sluggish economy struggling to cope with higher interest rates. The unemployment rate has risen to 6.4% from a historic low of 4.8% two years ago, and households are pulling back on discretionary purchases.
The timeline for additional rate cuts is uncertain as the central bank said it is taking a data-dependent approach to its decisions. However, given the recent subdued numbers, economists and investors are leaning heavily toward a second consecutive rate cut on July 24.

U.S. retail sales report showcases consumer, economic resilience

U.S. retail sales were unchanged in June as a drop in receipts at auto dealerships was offset by broad strength elsewhere, a display of consumer resilience that bolstered economic growth prospects for the second quarter. The better-than-expected report from the U.S. Commerce Department also showed that sales in May were higher than initially estimated. It did not change expectations that the U.S. Federal Reserve could start cutting interest rates in September amid cooling inflation and helped to assuage fears of a sharp slowdown in the economy. The unchanged reading in retail sales last month followed an upwardly revised 0.3% gain in May.

Highlights:

Economists had forecast retail sales, which are mostly goods and are not adjusted for inflation, would fall 0.3% after a previously reported 0.1% gain in May.
Retail sales increased 2.3% year-over-year basis in June. Momentum has, however, slowed from the 7.7% gain logged in January 2023. After a period of high inflation, households are trading down and seeking cheaper alternatives, as evident in earnings reports from major retailers and manufacturers.
Online store sales jumped 1.9%, adding to a 1.1% increase in May. Sales at gasoline stations dropped 3.0%, reflecting lower pump prices, while building material and garden equipment store sales increased 1.4%; food services and drinking places gained 0.3%, furniture store sales rose 0.6%, electronics and appliance outlets advanced 0.4%, while clothing retailers increased 0.6%.

European Central Bank keeps rates steady

The European Central Bank (ECB) held interest rates steady but kept the door open to further reductions this year as investors await a first rate cut by the U.S. Federal Reserve (Fed) since 2020. The ECB lowered its key interest rate by a quarter point last month to 3.75%, widening a policy gap with the Fed, which held interest rates steady in a range between 5.25% and 5.5% for a seventh consecutive meeting. Investors are currently betting that both central banks will likely cut rates by a quarter-point in September and probably once more before year-end. Central banks are expected to embark on rate-cutting cycles as economic policy uncertainty rises worldwide.

Highlights:

ECB President Christine Lagarde said the bank wasn’t on a preset path to lower interest rates and warned that domestic inflationary pressures remained high in the eurozone. “What we do in September is wide open,” Lagarde said, adding that policymakers would closely study incoming economic data.
While inflation in the eurozone has declined significantly, prices remain sticky in some parts of the economy, especially in the large services sector. Rapid wage growth has kept price pressures alive in a sector where labour represents a large share of costs.
ECB officials have signalled they will take a wait-and-see approach and observe how rate cuts are affecting the economy before lowering borrowing costs further.

In the news: Energy firms realize record profits despite renewables push

Despite global efforts to promote renewable energy and electric cars, North American oil producers are currently experiencing record profits. This unexpected surge in profitability is driven by high oil prices and an increasing demand for oil. Investors, however, find themselves in a dilemma: on one hand, they recognize the urgency of transitioning to cleaner energy sources. On the other hand, oil stocks remain lucrative, providing attractive returns. Balancing environmental responsibility with financial gains is a delicate tightrope. The tension between environmental concerns and financial gains remains a central challenge in the energy sector.

Behind the headline:

The cost of oil is off recent lows due to geopolitical tensions, supply constraints, and increased demand. These elevated prices directly benefit oil companies, leading to substantial revenue and earnings growth.
Despite climate change concerns, the world still heavily relies on oil for transportation, industrial processes, and petrochemicals. Developing countries, in particular, continue to consume more oil as their economies expand.
While renewables gain traction, the transition away from fossil fuels is gradual. Infrastructure, policy changes, and technological advancements are necessary for a sustainable shift.

The Coal Miners Central Bank

This week’s risk dashboard:

BoC expected to cut again despite rising inflation risk
Why the BoC won’t change QT
Canada’s front-end is cheap to the US
US Q2 GDP to inform the slowing debate
US PCE inflation may be very soft…

Read the full publication here

…and this time it might stick
PMIs: EZ, UK, US, Japan, Australia
Russian central bank expected to hike
Turkey’s central bank likely to extend pause
US earnings season intensifies

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: July 19

Week in review

Bond yields move lower despite late week bump

Weekly dashboard

Canada’s inflation rate eased more than expected in June to 2.7%

U.S. retail sales report showcases consumer, economic resilience

European Central Bank keeps rates steady

In the news: Energy firms realize record profits despite renewables push

The Coal Miners Central Bank

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