Market Watch: December 10

As expected, the Bank of Canada on Wednesday kept its overnight rate unchanged at 0.25 per cent and repeated its expectations to raise rates in the second or third quarter of 2022. U.S. markets posted slight gains Wednesday, while the TSX fell 85 points, after two solid days in the green.

On Thursday, the U.S. Labor Department reported that weekly jobless claims dropped to 184,000, the lowest level in more than five decades. Despite the strong numbers, U.S. markets were mixed, with S&P 500 and Nasdaq posting modest losses, while the Dow was flat. In Canada, the TSX lost 152 points, weighed down by the energy and materials sectors.

Finally, China’s largest property developer, China Evergrande Group, failed to make key bond payments this week, setting the stage for what could be one of the country’s largest-ever debt restructurings.

Markets Regain Lost Ground

For the four trading days covered in this report, the Dow climbed 1,175 points to close at 35,755, the S&P 500 rose 129 points to settle at 4,667, while the tech-heavy Nasdaq added 432 points to close at 15,517. In Canada, the TSX gained 292 points to end at 20,925.

Strategy

U.S. CPI reaches highest level since 1982, though details suggest price pressures may have peaked

Consumer prices in the U.S. rose 6.8 per cent in November, on a year-over-year basis, marking the highest rate in the last 40 years, but with energy prices falling sharply in recent weeks, we think last month may have marked the peak.

Core inflation matched expectations at 4.9 per cent year-over-year, while the monthly series rose 0.8 per cent and 0.5 per cent, for headline and core, respectively. Energy prices increased by 3.1 per cent from a month ago, driven by a 6.1 per cent month-over-month advance for gasoline prices. However, recent crude oil weakness and the decline in the natural gas spot price suggests the energy category could weigh on headline results next month, and potentially be a drag on figures early next year as well.

Food prices increased by 0.7 per cent on the month, with broad-based increases in both food at home and away from home, as higher labour costs likely worked their way into higher menu prices at restaurants. Notably, air fares increased by 4.7 per cent in November and hotel room rates went up by 2.9 per cent, but new Omicron-related containment measures and higher domestic case levels could result in these gains being reversed in the months ahead. Rents and owners’ equivalent rent both increased by 0.4 per cent in November.

Overall, we think headline inflation has peaked but the trend lower could be slow over the first half of next year. Month-over-month changes in CPI have gone down when cases are rising, and vice versa, which could lead to continued noise in the series with new variants, winter weather, and relatively low vaccination rates in the U.S.

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Market Watch: December 10

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