By Scotia Wealth Management - The Zukiwsky Group

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Market Watch: June 14, 2019

Jun 14, 2019 | 3:15 PM

Big Picture

Mexico Tariffs Suspended, Fed to Focus On Low Inflation U.S. markets got off to a good start this Monday, buoyed by relief over the White House’s decision to drop a threat to hit Mexico with tariffs on billions of dollars of goods. U.S. Treasury yields and shares of manufacturing and tech companies rose after President Trump “indefinitely suspended” the tariffs, which were set to take effect Monday.

In China, the yuan on Monday slipped to its weakest level in 2019 after the country’s imports fell the most in nearly three years and as talks to end the China-U.S. trade war remain deadlocked. However, Chinese stocks did get a boost Tuesday from fresh stimulus measures. Chinese shares rallied over news that Beijing would be speeding up financing of major infrastructure projects through special bond issues. The Shanghai Composite Index rose 2.6%, its strongest single-day gain in nearly a month. Meanwhile, Hong Kong’s Hang Seng Index declined sharply mid-week, as protests turned violent over a bill there to allow extradition to China.

In the U.S., inflation expectations are continuing to fall, in what is likely to be a troubling development for the Fed as it considers lowering its short-term rate target. The expectation that the Fed will need to lower rates is driven by weak inflation, along with worries the Trump administration’s various trade battles could pose serious risks to growth. U.S. inflation slowed in May, as the consumer-price index rose just 1.8% from a year earlier, despite a strong jobs market and wage gains. Fed officials are set to meet next week, beginning Tuesday.

Finally, it’s been an up-and-down week for the TSX, which was weighed down on Wednesday by the energy sector, as oil futures fell 4% over rising crude inventories. However, Canada’s main stock index finished slightly higher Thursday, buoyed by energy shares, as markets reacted to news of two suspected attacks on oil tankers near the Strait of Hormuz.

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Markets

N.A. Markets Relatively Calm Before Next Week’s Fed Meeting

For the four days covered in this report, the Dow added 123 points to close at 26,107, the S&P 500 gained 19 points to settle at 2,892, while the tech-heavy Nasdaq climbed 95 points to close at 7,837. In Canada, the TSX inched 8 points higher to end at 16,239.

Equities/Strategy

Strategy

Softening economic data in the U.S. bolsters case for U.S. Federal Reserve rate cut. Calls for the U.S. Federal Reserve (Fed) to cut interest rates are ringing loudly these days amid persistently soft inflation data, modestly deteriorating labour market statistics, and an economy embroiled in a trade feud with China. The market-implied odds of a July cut increased after this week’s inflation reading. Fed funds target rate futures now indicate almost 25bps of easing in the next two months. The effects of the prolonged trade spat with China are starting to affect the United States. Corporate investment outlooks are less certain, economists are less confident in their growth expectations, and consumers face increased prices for core goods. Higher prices can depress consumption and may lead to lower corporate investment as companies grow concerned about future demand. Reassuringly, U.S. consumers have maintained spending levels amid rising wages and tight labour markets. Because of this, we do not expect a recession in 2019, but we do expect growth to decelerate and financial markets to remain volatile. In the very near-term, growth concerns should be placated by fiscal and monetary stimulus efforts in other parts of the world. A Fed rate cut would likely extend the current economic cycle and help reset market expectations for growth and inflation, though we believe the bar for a rate cut has been set quite high. In particular, we think economic fundamentals would need to deteriorate significantly in order for the Fed to act.

(Bill Curry)

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