Market Watch: August 23

Global equities moved higher Friday after Federal Reserve Chair Jerome Powell hinted at future interest rate cuts during his speech at Jackson Hole, Wyoming. Although Powell did not specify the timing or magnitude of the cuts, he emphasized the need for policy adjustments based on incoming data and evolving economic conditions. Technology and small cap stocks surged, driven by hopes of a more favorable, lower-rate environment. Powell’s remarks boosted market sentiment, reflecting traders’ positive reaction to potential monetary easing.

Highlights

U.S. markets were 1.47 per cent¹ higher for the week with the more rate sensitive sectors being the largest beneficiaries of possible rate cuts as the U.S. labour market continued to show some slack.
Canadian markets advanced 1.05 per cent² for the week, trading sideways throughout much of it as a tug-of-war between positive (declining inflation) and negative (rail strike) news played out. The main index gapped higher Friday following comments from Jerome Powell, closing in positive territory.
European markets returned 2.96 per cent³ for the week, achieving their longest winning streak since March, driven by investor optimism on potential interest rate cuts. Positive sentiment and economic data from the bloc’s largest economies – Germany and France – also helped propel markets higher.
Emerging markets, similar to their developed market counterparts, closed 3.05 per cent⁴ higher for the week as a risk-on sentiment pervaded global equity markets.

Bonds rally following Powell comments at Jackson Hole

This week’s key focus was on U.S. FOMC Chairman Jerome Powell’s comments at the Jackson Hole Symposium, and he did not disappoint. From a fixed income standpoint, Powell effectively confirmed that the “time has come for policy to adjust,” that the Committee does not “seek or welcome further cooling in labour market conditions,” and that his “confidence has grown that inflation is on a sustainable path back to 2 per cent”. U.S. rates initially rallied 7-8 bps with the curve steepening lead by the front-end, while Canadian rates also rallied 4-5 bps. Credit spreads have taken their cue from the equity markets and have tightened. The consideration for the market now will be the size, pace, and timing of incoming U.S. rate cuts.

Highlights

The 2-year U.S. Treasury yield was 9 basis points (bps) lower, while the 10-year yield was 6 bps lower. In Canada, the 2- and 10-year yields were 2 bps and 1 bp lower, respectively. Bond yields and prices move inversely to one another.
At the time of this writing, a September policy rate cut in the U.S. is now fully embedded into expectations, with an outsized chance of a half-point move.
As alluded to by Chair Powell, the magnitude will be contingent on incoming data, particularly on the labour market. August employment reports will be released on September 6 for both the U.S. and Canada.

Weekly dashboard

Canada’s inflation rate drops to slowest pace in three years

In July, the Consumer Price Index (CPI) increased by 2.5 per cent year-over-year, marking the slowest growth since March 2021 and a decrease from June 2024’s 2.7 per cent rise. This broad-based deceleration in headline inflation was driven by lower prices for travel tours, passenger vehicles, and electricity. On a monthly basis, the CPI rose by 0.4 per cent in July, following a 0.1 per cent decline in June. Gasoline prices, which increased by 2.4 per cent month-over-month in July, contributed to the upward pressure on the monthly CPI figure. Seasonally adjusted, the CPI saw a 0.3 per cent rise in July.

Highlights

Travel tour prices, which fell 2.8 per cent year-over-year after a 7.4 per cent increase in June, were the main factor in the CPI’s deceleration. This decline was primarily due to a base-year effect, as travel tour prices had surged 15.5 per cent month-over-month in July 2023, the first summer without COVID-19 restrictions.
Passenger vehicle prices dropped 1.4 per cent year-over-year, after a 0.4 per cent decline in June. This slowdown was due to slower price growth for new vehicles as inventory levels improved compared to July 2023. Meanwhile, used vehicle prices fell by 5.7 per cent.
Gasoline prices increased more rapidly year-over-year in July (+1.9 per cent) compared to June (+0.4 per cent). The most significant acceleration occurred in the Prairie provinces, partly due to reduced supply from a refinery shutdown in the Midwestern United States.

U.S. nonfarm payrolls revised lower

The U.S. Labor Department’s preliminary annual benchmark revisions revealed that nonfarm payroll growth was overestimated by 818,000 jobs from April 2023 to March 2024, reducing the total job growth to 2.08 million, nearly 30 per cent less than initially reported. This revision, the largest since 2009, suggests a weaker labor market than previously thought, potentially influencing the Federal Reserve’s interest rate decisions. The most significant downward revisions were in professional and business services, leisure and hospitality, and manufacturing sectors, while some sectors like private education and health services saw upward revisions.

Highlights

Professional and business services saw the largest downward revision, with job growth reduced by 358,000.
Leisure and hospitality, and manufacturing sectors also faced significant downward revisions, with reductions of 150,000 and 115,000 jobs, respectively.
Upward revisions were noted in private education and health services, which saw an increase of 87,000 jobs.

China maintains key loan rates amid signs of economic recovery.

The People’s Bank of China (PBOC) has maintained its key lending rates, with the one-year loan prime rate (LPR) at 3.35 per cent and the five-year LPR at 3.85 per cent, following last month’s cuts to record lows. The one-year LPR is a benchmark for business and household loans, while the five-year LPR is used for mortgages. Chinese officials use these rates to regulate business growth and consumer spending. This was a widely anticipated hold, as two consecutive rate cuts were deemed premature, especially after the bank’s recent actions to temper a frenzied rally in China’s bond markets.

Highlights

In July, the PBOC unexpectedly lowered two benchmark rates by 10 basis points and similarly reduced the seven-day repo rate, demonstrating ongoing efforts to stabilize and stimulate the economy..
China’s government bond yields dropped to a record low after the unexpected rate cuts in July, driven in part by speculative trading activities.
Despite challenges such as a property market slump and weak consumer spending, recent data shows signs of stabilization, with industrial production (+5.1 per cent) and retail sales (+2.7 per cent) improving.

In the news: First-of-its-kind Canadian rail strike affects key supply chains

The simultaneous strike at Canada’s two largest railways, Canadian National Railway and Canadian Pacific Kansas City, has led to a halt in operations for nearly 80 per cent of the national network. Following months of tense labour negotiations on key issues such as relocation, rest periods, workers were locked out just after midnight on Thursday. This is the first time the two railways have been idle at the same time. The strike has immediately disrupted North American supply chains, which handle approximately $740M USD in trade daily, potentially costing the Canadian economy up to $250M USD per day, according to Moody’s estimates.

Behind the headline

Sectors reliant on rail transport such as agriculture, automotive, and energy faced disruptions as alternatives like trucking may not be able to handle the diverted freight, putting essential commodities at risk of bottlenecks in both domestic and international markets.
Several passenger rail routes in Toronto, Vancouver, and Montreal were disrupted due to commuter trains’ reliance on Canadian Pacific Kansas City tracks and their dispatchers.
Due to the high integration of the U.S. and Canadian economies, businesses in the U.S. are set to be impacted, with rail transport accounting for 14 per cent of the $382 billion USD in bilateral trade during the first half of 2024.

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: August 23

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