Market Watch: Aug. 30, 2024

Equity markets were choppy throughout the week, driven by key economic data and corporate earnings. On Monday, U.S. equity futures dipped as investors awaited Nvidia’s earnings and crucial economic reports. Tuesday saw further declines in with Nvidia’s earnings release gaining significant attention. By Wednesday, U.S. equity futures rose, buoyed by initial unemployment data pointing to a resilient labour market. This positive momentum continued into Thursday, as inflation data bolstered expectations for multiple rate cuts by the Federal Reserve. European markets mirrored this trend, with modest gains on Monday, resilience on Tuesday, and record highs by Wednesday and Friday driven by robust earnings reports and personal consumption expenditure (PCE) data. Overall, the week highlighted the market’s sensitivity to economic indicators and corporate performance, particularly Nvidia’s earnings and inflation data.

Highlights:

U.S. markets were 0.27%¹ higher supported by lower than expected initial jobless claims, upwardly revised GDP forecasts, lower inflation data along with Nvidia’s earnings results.

Canadian markets advanced 0.33%² for the week, driven by largely by strong performance in the more rate sensitive financials and real estate sectors ahead of the upcoming Bank of Canada interest rate decision on September 4 where they are expected to cut another 25 basis points (bps)

European markets returned 0.49%³ for the week, supported by strong corporate performance and positive economic indicators including lower euro-area inflation.

Emerging markets closed 0.30%⁴ higher as accelerating growth and expectations of higher corporate earnings and global monetary policy normalization buoyed indices.

Bond yields mixed amid economic data and corporate activity

This week, bond markets saw nominal yields give back some gains following Powell’s Jackson Hole speech. Yields fluctuated, with a small steepening trend midweek. U.S. Core PCE and GDP revisions influenced yields, while Canadian bank earnings and potential primary issuances added activity. Credit spreads remained firm, supported by equity market strength. By Thursday, front-end yields rose slightly in both Canada and the U.S., with market activity slowing ahead of the Labour Day weekend. The Bank of Canada is expected to cut rates next week, and potential real estate spinoffs from telecom companies like Telus and BCE could impact spreads. Overall, the bond market reflected cautious optimism amidst economic data releases and corporate activities.

Highlights:

The 2-year U.S. Treasury yield was 11 basis points (bps) lower, while the 10-year yield was 1 bp higher. In Canada, the 2- and 10-year yields were 2 bps and 6 bps lower, respectively. Bond yields and prices move inversely to one another.

Yields fluctuated throughout the week, influenced by U.S. Core PCE and GDP revisions, with a small steepening trend midweek.

Credit spreads remained firm, supported by equity market strength and potential real estate spinoffs from telecom companies like Telus and BCE.

Weekly dashboard

(Scotia Wealth Management)

Canada’s Q2 growth surpasses forecasts amid spending surge

Canada’s economy grew by 2.1% annualized in the second quarter of 2024, surpassing the Bank of Canada’s (BoC) forecast of 1.5% and the median estimate of 1.8%. This growth, the fastest since the first quarter of 2023, was primarily driven by an 11% surge in government spending and a 3.5% increase in total investment excluding inventories. However, per capita GDP declined for the fifth consecutive quarter, and household spending growth softened to 0.6% annualized. Preliminary data for July indicates flat growth, with declines in several sectors offset by gains in finance, insurance, and retail. The underlying details of the GDP report suggest weaker economic conditions than the headline figures imply, making the Bank of Canada’s third-quarter growth forecast of 2.8% nearly unattainable. This situation strengthens the case for continued interest rate reductions.

Highlights:

Canada’s economy grew by 2.1% annualized in the second quarter of 2024, surpassing the Bank of Canada’s forecast of 1.5% and the median estimate of 1.8%, marking the fastest growth since the first quarter of 2023.
Government spending surged by 11% in the second quarter of 2024, significantly contributing to the overall economic growth and highlighting the role of fiscal policy in driving the economy.
Total investment, excluding inventories, increased by 3.5% in the second quarter of 2024, indicating robust business activity and confidence, despite other economic challenges.

Fed’s preferred inflation gauge stays on cooling trend

U.S. July inflation data showed price growth remains on the path back to the U.S. Federal Reserve’s (Fed) target of 2%, adding to the case for cuts to interest rates next month. Both the overall Personal Consumption Expenditures (PCE) price index and the core reading, which excludes food and energy prices, rose 0.2% in July. The soft price growth continues a recent stretch of cooler inflation readings and falls in line with what Fed officials were hoping to see before easing their restrictive monetary policy stance.

Highlights:

The year-on-year measures still show overall inflation running at about 2.5%, with the core rate at 2.6%. However, the three-month annualized rates for last month’s PCE and core PCE dropped to 0.9% and 1.7%, respectively, putting inflation squarely on a path back to the Fed’s target.
July’s further cooling of inflation could give the Fed some leeway to be more aggressive with rate cuts at coming meetings, but that is likely to be seriously considered only if the labour market shows a steep deterioration.
The Federal Open Market Committee is scheduled to meet on September 17-18. The only other significant data point before that is the August consumer price index, which will be released in September.

Weak German consumer confidence adds to economic woes

German consumer sentiment has weakened once again as a one-off boost from the European soccer championship in the country faded, compounding concerns that Europe’s largest economy will fail to mount a sustained recovery this year. The forward-looking consumer-climate index for Germany, published by research group GfK and the Nuremberg Institute for Market Decisions, forecasts confidence to fall 3.4 points to minus 22.0 points in September. That snapped back from the improvement seen in August. Falling consumer confidence comes after German businesses reported slumping sentiment in the closely watched Ifo survey published earlier. Purchasing managers’ survey data last week also saw August activity decline, with the manufacturing sector continuing to endure particularly tough times.

Highlights:

The GfK/NIM survey said consumers’ income expectations for the next 12 months fell significantly, dragging the overall indicator down. The last time expectations fell more sharply within a month was September 2022, when inflation was almost 8%.

News about weakening job security is also making consumers more pessimistic, meaning a fast recovery in consumer sentiment seems unlikely.

Consumer views of the future of the economy also worsened, and the gauge of willingness to buy also fell slightly, according to the survey.

In the news: Analysts trim crude price forecasts amid ample supply, anemic demand
Despite efforts by major producers like Saudi Arabia and Russia to maintain production cuts throughout the year, the market has shown signs of softening. This is largely due to a more subdued outlook for global demand – particularly from China and Europe – leading to rising inventory levels. Additionally, geopolitical tensions have not escalated to levels that would significantly disrupt supply. As a result, the U.S. benchmark oil price is expected to average $78.82 USD a barrel in 2024, down from the prior month’s estimated average of $79.22 USD.
Behind the headline:

OPEC+ is considering unwinding some of its oil production cuts in the third quarter of 2024, aiming to gradually increase supply amidst fluctuating global demand and economic uncertainties.

Analysts expect global oil demand to increase by 1.0 to 1.3 million barrels per day (mbpd) in 2024, a slight adjustment from the previous forecast of 1 to 1.5 mbpd growth.

Despite ongoing conflicts in the Middle East and Eastern Europe, analysts have noted that the risk premium on oil has decreased, as there has been no significant impact on oil flows.

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: Aug. 30, 2024

Markets fluctuate on earnings and economic data but close higher for the week

Canada’s Q2 growth surpasses forecasts amid spending surge

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