Market Watch: June 7

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While the performance of both U.S. and Canadian markets was varied for the week, both countrys’ major indices were relatively muted given the backdrop of macro events that typically spur an outsized response. In the U.S., strong labour market data which has pushed out the expectation for interest rate cuts and caused a spike in bond yields was tempered by returns from major info tech names such as Nvidia, Microsoft, Apple, Google, Meta and Amazon. In Canada, investors had a relatively anemic response to the first interest rate cut as the more interest rate sensitive sectors of the economy were positive while declining energy and materials prices pulled the broader index into the red. Notably, Canadian financials were lower for the week which also detracted from overall returns. Abroad, European equities benefitted from the first European Central Bank (ECB) rate cut while emerging markets posted a gain amid growth in Chinese manufacturing activity which helped to dispel concerns over the country’s recent economic challenges.

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Highlights:

• U.S. markets returned 1.38%¹ for the week as investor sentiment remained positive amid strong returns from major info tech names despite the decreasing likelihood for interest rate relief amid a resilient economic backdrop.
• Canadian markets returned -0.80%² for the week as losses in the financial, energy, material sectors overcame modest gains in a number of interest rate sensitive sectors such as real estate, info tech and consumer discretionary.
• European markets rose 0.69%³ for the week led by interest rate sensitive sectors following the first European rate cut.
• Emerging markets closed 0.91%⁴ higher for the week. Elections in Mexico and South Afria weighed on equity markets in these locales however strong manufacturing activity from China managed to keep the broader index in the black.

U.S., Canadian bond yields move in unison despite diverging interest rate forecasts

U.S. Treasury yields took a sharp turn lower alongside their Canadian counterparts despite better-than-expected U.S. labour market data. Benchmark 10-year yields fell for the week, adding to gains from the last two trading sessions. We may see weakness in interest rates going into the Federal Open Market Committee (FOMC) meeting next week. Canadian bond yields were also lower for the week following the Bank of Canada’s (BoC) 0.25% interest rate cut amid disinflation trends, subdued GDP growth and a tightening labour market.

Highlights:

• The 2-year U.S. Treasury yield fell 20 basis point (bp) while the 10-year yield fell 26 bps. In Canada, the 2- and 10-year yields were down 33 bps and 31 bps, respectively, as interest rate cuts buoyed returns.
• The possibility of U.S. interest rates staying higher for longer is a primary concern after the nonfarm payroll report and has weighed on both fixed income and equity returns.
• Credit spreads remained firm amid little scheduled activity in the primary market.

Weekly dashboard

BoC cuts key interest rate for the first time in four years to 4.75%

The BoC cut its benchmark interest rate by a quarter-percentage-point, lowering borrowing costs for households and businesses, for the first time in four years and marking a turning point for the Canadian economy after the biggest inflation and interest-rate shock in decades. The central bank’s governing council lowered the policy rate to 4.75% from 5%, a two-decade high reached last summer after 10 rapid-fire rate hikes. The BoC was the first G7 central bank to start easing monetary policy.

Highlights:

• The highly anticipated move won’t do much by itself to reduce monthly payments on mortgages, car loans or lines of credit, but it kickstarts a monetary policy easing cycle that should see interest rates fall further in the coming quarters.
• The process of reducing inflation has gone more smoothly than many economists expected. The Canadian economy has not fallen into a recession, and mortgage delinquencies have remained low.
• BoC Governor Tiff Macklem cautioned that the bank may move slowly to bring down interest rates. “We don’t want monetary policy to be more restrictive than it needs to be to get inflation back to target. But if we lower our policy interest rate too quickly, we could jeopardize the progress we’ve made. Further progress in bringing down inflation is likely to be uneven, and risks remain,” he said.

U.S. hiring defied expectations in May, with 272,000 new jobs

The U.S. economy created far more jobs than expected in May and annual wage growth reaccelerated, underscoring the labour market’s resilience and reducing the likelihood the U.S. Federal Reserve (Fed) will be able to start rate cuts in September. The U.S. Labor Department’s closely watched employment report also showed the unemployment rate ticked up to 4.0% from 3.9% in April, reaching a symbolic threshold below which the jobless rate had previously held for 27 straight months. The unexpectedly strong report made plain that while the labour market has softened around the edges in recent months, its still-solid performance is set to keep the Fed on the sidelines and taking its time in deciding when to begin lowering borrowing costs.

Highlights:

• According to the report, nonfarm payrolls increased by 272,000 jobs last month. Revisions showed 15,000 fewer jobs created in March and April combined than previously reported. Economists had forecast payrolls advancing by 185,000.
• The healthcare sector added 68,000 jobs; government payrolls increased by 43,000 positions. Employment in the leisure and hospitality sector rose by 42,000 jobs, while professional and business services hired 32,000 workers.
• Wages increased 4.1% in the 12 months through May, following an upwardly revised 4.0% annual rise the prior month. Wage growth in a 3.0%-3.5% range is seen as consistent with the Fed’s 2% inflation target.

ECB cuts interest rates for first time since 2019

The ECB lowered interest rates by a quarter point, beginning to reverse a historic series of rate increases and widening a policy gap with the U.S. Federal Reserve (Fed), which isn’t expected to follow suit for months. The ECB said it would reduce its key interest rate to 3.75% from 4%, its first rate cut in almost five years. Future interest-rate decisions will be based on incoming economic data, the bank said in a statement. The ECB’s rate-setting committee “is not pre-committing to a particular rate path,” the bank said.

Highlights:

• The cut potentially puts the ECB and the Fed on different tracks and widens an existing gap in borrowing costs between the U.S. and Europe. While this could boost Europe’s growth in the short term, the gap could also complicate the work of policymakers, especially in Europe.
• Underlying inflation in the eurozone, stripping out volatile food and energy prices, ticked higher to 2.9% last month from 2.7% in April. In the U.S., core inflation declined to 3.6% in April.
• In its policy statement, the ECB said that while inflation has come down, wage growth remains elevated, and inflation is likely to stay above its 2% target “well into next year.” Inflation forecasts for this year and next were revised higher.

In the news: Nvidia market cap briefly crosses $3tn mark, buoys broader index

Nvidia Corp. has crossed the $3tn USD market capitalization milestone to become the world’s second-most valuable company, second only to Apple Inc. which also passed the same symbolic threshold this week. Nvidia’s rapid ascent began in the latter part of 2022 when its graphics processing units (GPU) fuelled a boom in artificial intelligence. Over the past year, Nvidia’s share price has more than doubled, with most of those gains having taken place since the start of this calendar year. Nvidia has not only been the best performer among S&P 500 and Nasdaq constituents this year, it has single-handedly contributed more than any other company to both of the major indices indices. However, as Nvidia continues to grow with a seemingly impenetrable moat, the race for the top spot has intensified; Intel and Advanced Micro Devices (AMD), whose market valuation is about one-tenth that of Nvidia, announced new generations of specialized processors this week at Computex, the world’s largest computing conference in Taipei.

Behind the headline:

• Nvidia, which has an estimated 80% market share in the AI chip market, reported over 400% year-over-year increase in its GPU sales, further comforting investors with its pace and scale of growth.
• Nvidia’s 151.0% year-to-date (YTD) return has contributed ~3.7% to the S&P500’s YTD return of 12.7%. Other major tech names such as Microsoft, Meta and Amazon have each contributed between 0.5%-0.8% to overall returns.
• At Computex, AMD unveiled a series of AI focused chips designed specifically for next-generation laptops. In collaboration with Microsoft, these chips will power laptops that are integrated with Microsoft’s AI chatbot, Copilot.

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