Market Watch: October 18

The week began with U.S. retail sales exceeding expectations, signaling robust consumer spending and boosting sentiment about the state of the economy. However, this also had the effect of decreasing the likelihood of future interest rate cuts which tempered returns. In Canada, lower-than-expected inflation data heightened expectations for a rate cut by the Bank of Canada, adding to the positive market momentum. Midweek, the European Central Bank’s (ECB) rate cut and dovish outlook, coupled with moderating U.K. inflation, supported European equities. Ultimately though a number of high profile earnings misses led the index to close lower for the week. Meanwhile, China’s GDP growth, although slightly below the previous quarter, surpassed market forecasts, but ongoing concerns about the property market tempered investor optimism. Geopolitical developments, such as easing fears of oil supply disruptions, also played a role, leading crude prices to decline for yet another week.

Highlights:

U.S. markets, tempered by lower rate cut expectations, closed 0.87 per cent¹ higher for the week. Stronger-than-expected retail sales, resilient consumer spending, a pullback in jobless claims, and positive earnings reports, particularly from chip stocks like Taiwan Semiconductor, kept the index in positive territory.
Canadian markets rose 1.33 per cent² for the week. A fall in oil prices tempered returns, but the increased likelihood of interest rate cuts caused rate sensitive sectors such as financials and utilities to outperform.
European markets returned -0.34 per cent³ for the week despite the ECB cutting rates and a moderation in UK inflation as mixed corporate earnings impacted sectors like technology and manufacturing.
Emerging markets closed -0.23 per cent⁴ higher for the week as China’s positive GDP growth, expanding industrial production, and commitment to further stimulus measures was not enough to overcome ongoing concerns about the property sector.

U.S., Canadian rate cut forecasts continue to diverge

In the U.S., stronger-than-expected retail sales data pushed Treasury yields higher, reflecting resilient consumer spending and reducing the likelihood of aggressive rate cuts by the Federal Reserve. North of the border, Canadian sovereign yields moved lower as inflation data came in below expectations, reinforcing the case for yet another rate cut by the Bank of Canada. Midweek, the European Central Bank’s rate cut and dovish outlook led to a decline in short-term government bond yields and a weaker euro. Credit spreads tightened amid solid demand for corporate debt, with significant issuance from major banks.

Highlights:

The 2- and 10-year U.S. Treasury yields were 1 basis point (bp) and 3 bps higher, respectively. In Canada, the 2- and 10-year yields were 17 bps and 7 bps lower, respectively.
Investment grade (IG) new issuance is expected to moderate over the coming week to about $20bn USD following this week’s bank dominated sales of $25bn USD.
On the macro front, we have Bank of Canada rate decision and Fed’s Beige Book set to be released on Wednesday, along with the latest U.S. Purchasing Manager Index (PMI) data on Thursday followed by U.S. durable goods on Friday.

Weekly dashboard

Canada’s inflation rate falls to 1.6 per cent in September

Canada’s inflation rate dropped below 2 per cent in September for the first time in more than three years. The Consumer Price Index (CPI) rose at an annual rate of 1.6% in September, down from a 2 per cent pace in August, Statistics Canada (StatCan) reported. Financial analysts had been expecting a slowdown to 1.8 per cent. On a monthly basis, consumer prices fell 0.4 per cent. This marked the lowest inflation rate since February 2021. On a three-month annualized basis, the Bank of Canada’s core measures of inflation, which strip out volatile movements in the CPI, slowed to 2.1 per cent in September from 2.3 per cent in August.

Highlights:

The soft results were heavily influenced by gasoline prices, which fell 7.1 per cent in September from August. Excluding gas, the CPI rose by an annual rate of 2.2 per cent, matching the increase in August.
Housing costs rose by an annual 5 per cent in September, down from 5.3 per cent in August. Rents rose 8.2 per cent, quite elevated by historical standards, but down from 8.9 per cent in August.
Grocery prices rose 2.4 per cent in September, year-over-year, matching the increase in August. Clothing and footwear prices have dropped 4.4 per cent over the past year.

Strong discretionary spending lifts U.S. retail sales in September

U.S. retail sales increased solidly in September, likely as lower gasoline prices gave consumers more money to spend at restaurants and bars, supporting the view that the economy maintained a strong growth pace in the third quarter. The slightly stronger-than-expected rise in sales reported by the U.S. Commerce Department also reflected sharp increases in receipts at clothing store outlets as well as miscellaneous store retailers. Consumers boosted online purchases and spent more at health and personal care stores. Spending and the overall economy are being underpinned by solid income growth, ample savings as well as strong household balance sheets. Though labour market momentum has slowed, layoffs remain historically low, supporting wage gains.

Highlights:

Retail sales rose 0.4 per cent last month after an unrevised 0.1 per cent gain in August. Retail sales advanced 1.7 per cent on a year-on-year basis in September.
Sales at clothing stores rebounded 1.5 per cent after falling 0.8 per cent in the prior month. Receipts at miscellaneous store retailers surged 4.0 per cent, while online sales climbed 0.4 per cent.
Grocery store sales vaulted 1.0 per cent and receipts at general merchandise stores rose 0.5 per cent. Building material and garden equipment store sales gained 0.2 per cent. Consumers also spent more at sporting goods, hobby, musical instrument and bookstores.

ECB cuts interest rates as eurozone economy stumbles

The ECB cut interest rates for the third time this year, saying inflation in the eurozone was increasingly under control while the outlook for the wider economy was worsening. The first back-to-back rate cut in 13 years marks a shift in focus for the eurozone’s central bank from bringing down inflation to protecting economic growth, which has lagged far behind that of the United States for two years straight. “We believe the disinflationary process is well on track, and all the information we received in the last five weeks were heading in the same direction – lower,” ECB President Christine Lagarde told a news conference after an ECB statement which also noted “recent downside surprises” on economic activity.

Highlights:

Those data are likely to have tilted the balance within the ECB in favour of a rate cut, with business activity and sentiment surveys, as well as the inflation reading for September, all coming in slightly lower than expected.
Asked about the prospect of higher tariffs on European goods if Donald Trump wins next month’s U.S. presidential election, Lagarde said any trade obstacles were a “downside” for Europe.
The quarter-point cut lowers the rate that the ECB pays on banks’ deposits to 3.25 per cent. Money markets are almost fully pricing in three further reductions through next March.

In the news: Boeing seeks new financing and cuts jobs to stabilize finances

Boeing is actively seeking new financing and implementing significant job cuts as part of a broader strategy to stabilize its financial position amid ongoing challenges. The aerospace giant plans to raise up to US$25 billion through a combination of stock and debt offerings, aiming to protect its investment-grade credit rating and address cash flow issues exacerbated by a prolonged strike. Concurrently, Boeing announced it would cut approximately 17,000 jobs, or 10 per cent of its workforce, to reduce costs and streamline operations. These measures are driven by the need to mitigate the financial impact of production delays, regulatory scrutiny, and declining customer confidence following recent safety incidents. While these steps are crucial for Boeing’s short-term survival, they also signal a period of significant restructuring that could reshape the company’s future operations and market position.

Behind the headline:

Boeing aims to raise up to US$25 billion through stock and debt offerings to maintain its investment-grade credit rating and address cash flow issues exacerbated by a prolonged strike.
The company plans to cut approximately 17,000 jobs, representing 10 per cent of its workforce, as part of cost-reduction measures to streamline operations and improve financial stability.
These actions are driven by the need to mitigate the financial impact of production delays, regulatory scrutiny, and declining customer confidence following recent safety incidents.

¹S&P 500 Index CAD
²S&P/TSX Composite Index CAD
³Bloomberg Developed Markets ex N. America Large & Mid Cap Price Return Index CAD
⁴Bloomberg EM Large & Mid Cap Price Return Index CAD

by Scotia Wealth Management

Market Watch: October 18

Week in review

Weekly dashboard

Canada’s inflation rate falls to 1.6 per cent in September

Strong discretionary spending lifts U.S. retail sales in September

ECB cuts interest rates as eurozone economy stumbles

In the news: Boeing seeks new financing and cuts jobs to stabilize finances

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