Market Watch: May 31

Global equity markets trended in a downwards trajectory throughout much of the week but made a strong comeback later in the day on Friday. The late-week turnaround was enough to push U.S. markets into the black but left its Canadian and international counterparts in the red. The narrative for the week was largely driven by the release of U.S. Personal Consumption Expenditure (PCE) which came in slightly below, but for all intents and purposes in line with, expectations. The lack of progress on inflation combined with a still resilient economy and labour market continues to prove volatile for investors as they try to divine when the Federal Reserve (Fed) will begin cutting interest rates.

Highlights:

U.S. markets returned 0.21%1 for the week with investors taking profits following several weeks of gains despite the Fed’s preferred measure of inflation coming in slightly below expectations.
Canadian markets returned -0.15%2 for the week, led lower by losses in the financials and industrials sectors amid weaker-than-expected first quarter GDP growth.
European markets fell -0.13%3 for the week following the release of preliminary May inflation figures that slightly exceeded expectations. Despite this, the market is still putting 98% odds on a rate cut at the European Central Bank’s June 6th
Emerging markets closed -0.64%4 lower driven by U.S. rate uncertainty and weak consumer spending out of China.

Sovereign bond yields move higher following U.S. PCE reading

Sovereign bond yields held steady throughout the week but turned higher on Friday following the latest PCE numbers. U.S. inflation proved sticky throughout April with core readings coming in just a touch below expectations before rounding, with all but one measure remaining unchanged from the previous month. Notably, the latest GDP measures in Canada were weaker than expected, falling short of projections and lower than previous readings. This, combined with inflation falling within the Bank of Canada’s target range, is leading markets to expect the central bank will cut rates at its June 5th meeting. The Fed is expected to be on hold throughout the summer. On the Credit front June, like May, is expected to be a positive month for investment grade (IG) corporate bonds as it has been over the last three decades, averaging 0.5% return, according to data compiled by Bloomberg.

Highlights:

The 2-year U.S. Treasury yield fell 1 basis point (bp) while the 10-year yield rose 7 bps. In Canada, the 2- and 10-year yields were up 5 bps and 8 bps, respectively.
June may see a decrease in IG primary supply, historically at $95bn USD compared to May’s $135bn USD. This potential decrease may help maintain credit spreads close to historical tights, subject to continuing solid demand.
The coming week is laden with major macro releases including U.S. labour data and PMIs, and monetary policy decisions from the Bank of Canada and the European Central Bank.

Weekly dashboard

Canadian economy misses first-quarter growth forecast; April GDP likely up 0.3%

The Canadian economy expanded at an annualized rate of 1.7% in the first quarter, missing forecasts and real gross domestic product (GDP) likely rose 0.3% on a monthly basis in April, Statistics Canada (StatCan) data showed. The quarterly growth rate was slower than the 2.2% pace forecast by analysts, as well as the Bank of Canada’s (BoC’s) 2.8% forecast. Fourth-quarter GDP growth was revised to an annualized rate of 0.1% from 1.0% reported initially, StatCan said. The GDP report shows that Canada’s economy did not rebound from a soft patch last year as strongly as data initially suggested, and may convince the central bank to start lowering borrowing costs.

Highlights:

On a per capita basis, household final consumption expenditures edged up 0.1% in the first quarter, after three quarters of declines. Per capita spending on services increased 0.5%, while per capita spending on goods declined for the 10th consecutive quarter.
On the month, GDP growth was flat in March from February, matching forecasts. While both goods-producing and services-producing industries stayed essentially unchanged, the construction subsector recorded a 1.1% rise in March, the largest monthly growth rate since January 2022.
In an advance estimate for April, StatCan said GDP likely rose 0.3% as increases in manufacturing, mining, quarrying, oil and gas extraction and wholesale trade were partially offset by decreases in utilities.

U.S. economic growth revised lower for first quarter

The U.S. Commerce Department reported that the economy grew more slowly in the first quarter than previously estimated after downward revisions to consumer spending. Gross domestic product (GDP), the broadest measure of economic activity, grew at a 1.3% annualized rate from January through March, down from the advance estimate of 1.6% and notably slower than the 3.4% pace in the final three months of 2023. The downgrade of first-quarter growth followed recent softness in readings of retail sales and equipment spending.

Highlights:

A measure of inflation during the first quarter was revised down to 3.3% from 3.4%, the stiffest quarterly price-pressure growth in a year.
The downward revision to GDP brings the first-quarter’s growth rate to the lowest since the second quarter of 2022, when the economy contracted, and leaves output below the 1.8% rate that officials at the U.S.Federal Reserve see as its longer-run, noninflationary potential.
According to the U.S. Commerce Department, the soft start to the year is not expected to have persisted into the current second quarter.

IMF raises China economic growth forecasts

China’s economic outlook seems brighter after a strong first-quarter performance and recent policy stimulus, the International Monetary Fund (IMF) said as it raised growth forecasts for the country. The IMF said it now projects 2024 gross domestic product (GDP) growth at 5%, up from its prior forecast of 4.6% made in April. That puts the organization’s estimate in line with the official China GDP growth target of around 5%. The organization also raised China’s growth forecast for next year by 0.4% to 4.5%. The upgrades come as sentiment toward the world’s second-largest economy has tentatively picked up following the surprisingly strong first-quarter performance.

Highlights:

Looking ahead, the IMF sees China’s economy slowing to 3.3% by 2029, dragged by an aging population and slower productivity growth.
The IMF expects core inflation to rise but remain low as output continues below potential. It projects core inflation will average 1% in 2024. Against that backdrop, it sees scope for further monetary policy easing.
China’s top policymakers have recently rolled out more aggressive measures to help revive the property sector, centred on clearing excess housing inventory. The moves have so far boosted market sentiment, but doubts about the efficacy of the measures persist.

In the news: Major energy companies forge strategic alliances through consolidation

ConocoPhillips has agreed to acquire Marathon Oil for $22.5bn USD in an all-stock deal, aiming to bolster reserves and create economies of scale. The transaction, including $5.4bn of Marathon’s debt, is expected to close in Q4 2024. Meanwhile, Chevron has received shareholder approval for its $53bn USD merger with Hess, further strengthening its position in the industry. These acquisitions reflect the ongoing trend of consolidation in the energy sector and signal a shift in the energy landscape with companies positioning themselves for long-term growth and efficiency.

Behind the headline:

ConocoPhillips aims to add high-quality, low-cost supply inventory to its leading U.S. unconventional position by acquiring Marathon Oil. The deal is expected to be completed by the end of the year and will value Marathon Oil at just over $30 USD/share.
Chevron’s acquisition of Hess will bring an additional $13.07bn USD in sales, increasing its total sales to $220.82bn USD and will give Chevron access to the Stabroek Block in Guayana. The deal is still yet to be approved by regulators.
Historically, large mergers in the oil and gas sector have been responsible for driving shareholder value by maximizing synergies beyond general and administrative (G&A) expenses through cost optimization, streamlining of operations, and strategically aligning portfolios.

Can Macklem Keep his Word?

This week’s risk dashboard:

Will the BoC cut or hold? The cases for both & expectations
ECB expected to begin easing—but should it?
Will Canada’s jobs boom continue?
Temps are swamping the Canadian summer job market

Read the full publication here.

US payrolls may be looking a tad Canadian
Mexico’s election primer
RBI expected to hold
OPEC+ meeting probably won’t rock the boat
Global macro

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: May 31

Week in review

Weekly dashboard

Can Macklem Keep his Word?

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