Market Watch: June 28

U.S. markets were flat for the week after building up in advance of May’s Personal Consumption Expenditure (PCE) release on Friday, only to give up any gains due to a higher-than-expected core reading. North of the border, Canadian markets were positive as both the financial and energy sectors – the largest weightings within the index – closed firmly in the black. More broadly, markets wrapped a productive first half to the year. Not withstanding bouts of volatility as investors readjusted to interest rate expectations and the prospect of higher-for-longer rates, a resilient global economy, relatively strong corporate earnings, and an AI-fueled technology sector kept a bid under global equities.

Highlights:

U.S. markets closed -0.05%¹ lower for the week as a higher-than-expected core PCE reading weighed on the broader index even as a number of major tech names – excluding Microsoft and Nvidia – advanced for the week.
Despite an uptick in inflation that could see the Bank of Canada (BoC) hold interest rates steady at its next meeting, Canadian markets returned 1.61%² for the week as the financial and energy sectors advanced.
European markets returned an anemic 0.33%³ for the week as European markets slipped in the final trading session of June as French shares fell to their lowest level in five months as political uncertainty keeps investors on edge.

Emerging markets closed -0.22%⁴ lower for the week despite encouraging political news out of South Africa and Mexico’s central bank signaled that policy will remain restrictive.

Bond yields flat despite constructive PCE reading

U.S. rates moved higher Friday but were essentially flat for the week following the latest Personal Consumption Expenditures (PCE) inflation report. U.S. inflation decelerated in May across the board, matching consensus expectations. Notably, the core PCE month-over-month (MoM) read for April was revised higher, which makes the case for the Federal Reserve (Fed) to remain on hold until there is sufficient evidence that inflation is firmly on a downward trajectory. Market expectations about the Fed’s monetary policy haven’t changed following the report, with investors still pricing in one or two policy rate cuts by year end. Credit spreads continue to trade at elevated levels relative to the past three months. High yield primary volume has dropped this month, making June the slowest month for the year, thus far.

Highlights:

The 2-year U.S. Treasury yield was 3 bps lower while the 10-year yield rose 3 bps. In Canada, the 2- and 10-year yields were 12 bps and 13 bps higher, respectively.
The coming week is short for bond markets with both Canadian and U.S. markets closed Monday, but is likely to be active with major macro releases due.
Investors will digest the ADP employment change, U.S. Purchasing Manager Index readings and Federal Open Market Committee meeting minutes on Wednesday and the U.S. Nonfarm payroll change report on Friday. Additionally, Fed Chair Powell and European Central Bank President Lagarde are scheduled to speak on Tuesday.

Weekly dashboard

(Scotia Wealth Management)

Canada’s inflation rate accelerated to 2.9% in May

A surprise spike in Canadian inflation last month throws up a possible hurdle for the Bank of Canada (BoC) to offer up back-to-back rate cuts and is a fresh reminder of the price pressures consumers still face. The consumer-price index (CPI), a measure of goods and services prices across the economy, rose 2.9% in May from a year earlier, Statistics Canada reported, faster than the 2.6% advance economists had forecast and after inflation eased to 2.7% in April. While it marks a fifth straight month that the index has been inside the 1% to 3% window the BoC targets, the quickening pace of inflation casts doubts on what many economists have expected would be a second round of rate relief late next month.

Highlights:

Gains in core prices, excluding volatile food and energy, matched the headline CPI pace for the month and annually, while key indicators of underlying inflation preferred by the central bank also picked up. On a monthly basis, headline inflation rose 0.6% in May.
Mortgage interest costs and rent remained the biggest drivers of consumer price growth. Prices for services rose 4.6% in May after a 4.2% boost the prior month, while prices for goods grew 1.0% for a second straight month.
Consumers also paid more for travel tours and flights, while prices for food bought at stores increased for the first time since last June, though only modestly. Grocery prices remain elevated and have increased 22.5% compared with May 2020.

U.S. economic growth for last quarter revised up to a 1.4% annual rate

The U.S. economy expanded at a 1.4% annual pace from January through March, the slowest quarterly growth since spring 2022, the U.S. Commerce Department reported. This revised figure was a slight upgrade from its previous estimate. The Commerce Department had previously estimated that the gross domestic product (GDP), the economy’s total output of goods and services, advanced at a 1.3% rate last quarter. The first quarter’s GDP growth marked a sharp pullback from a strong 3.4% pace during the final three months of 2023. Also noted in the report was that consumer spending grew just 1.5%, down from an initial estimate of 2% in a sign that high interest rates may be taking a toll on the economy.

Highlights:

The report showed that the first quarter slowdown was caused mainly by two factors: a surge in imports and a drop in business inventories. These factors can fluctuate from quarter to quarter and don’t necessarily reflect the underlying health of the economy.
Imports shaved 0.82% off first-quarter growth, while lower inventories subtracted 0.42%.
Most economists believe growth has picked up in the current quarter. They estimate an annual growth rate of around 2% for April through June, fueled by continued spending by America’s consumers.

German business sentiment weakens with economic, political clouds ahead

Sentiment at German companies has become more pessimistic on weakening expectations for business conditions ahead, amid growing economic and political uncertainty, according to a monthly survey. The Ifo Institute’s business climate index fell to 88.6 in June from 89.3 in May. That was against economists’ expectations that the index would rise to 89.6. The Ifo data comes after weakening sentiment in purchasing managers’ surveys published last week, dragged by worsening sentiment in the manufacturing sector.

Highlights:

The decline was driven by pessimistic expectations for the next six months, though assessments of the current situation remained unchanged, the Ifo said. Sentiment for manufacturing and trade sectors fell, while services and construction ticked up.
Some of the faltering business sentiment was due to rising risks to economic growth, spurred by increased support for populist parties at home and abroad, as the European elections at the beginning of the month showed.
However, the Ifo Institute also upgraded its forecast for economic growth in Germany to 0.4%, from 0.2% under a previous March forecast, with private consumption set for a modest revival in Europe’s largest economy.

In the news: Global shipping rate surge could lead to higher costs and inflation

The global shipping industry is grappling with soaring ocean freight rates, and concerns are mounting that prices for a standard 40ft shipping container could approach or even surpass the highs seen during COVID. The issues this time are, unlikle during the height of the COVID pandemic, varied and global, meaning there is no one single cause or solution; conflict around the Red Sea, low water levels in the Panama Canal, and dockworker and longshore worker strikes in the U.S., Germany and now possibly Canada are all causing disruptions. Supply chain inflation is once again becoming a major topic among logistics companies involved in global trade and could cause global inflation to once again rise and push back the timeline for monetary policy easing.

Behind the Headline:

According to Drewry Shipping Consultants’ World Container Index, the price for a 40ft container now sits at $5,318 USD, up 256% year-over-year (YoY).
While the current rate is 49% lower than the pandemic high of $10,377 USD reached in September 2021, it is 275% higher than the average pre-pandemic rate of $1,420 USD in 2019.

Ranking the Presidents

This week’s risk dashboard:

Ranking the Presidents on the economy and markets
EGBs may be on edge after French election
U.K. election expected to return Labour to power
U.S. nonfarm payrolls still resilient?
ECB’s Sintra often drives euro volatility
Canada’s job market and the BoC’s exaggerated narrative
Canadian, U.S. holidays
The last Eurozone core CPI print before the ECB’s July decision
Global inflation readings dominate the rest

Read the full publication here.

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

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by Scotia Wealth Management

Market Watch: June 28

Week in review

Highlights:

Weekly dashboard

Ranking the Presidents

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