Market Watch: September 13

During the week, equity markets were influenced by a mix of economic data and central bank actions – both experienced and expected. In the U.S., small-business optimism fell, reflecting concerns over inflation and material costs, while sticky consumer and producer inflation data suggested persistent month-over-month (MoM) pricing pressures despite easing year-over-year (YoY). The Federal Reserve’s (Fed) anticipated interest rate cut added to market speculation. European markets were stable, but the European Central Bank’s (ECB) rate cut and declining eurozone industrial production raised concerns about economic recovery. In China, mixed trade data highlighted potential buffers against domestic slowdown but also risks to GDP targets. Currency movements saw the Japanese yen strengthen and the dollar soften, while commodities like crude oil and gold closed moderately higher for the week.

Highlights:

U.S. markets closed 4.06%1 higher for the week, dipping Wednesday following the release of Consumer Price Index (CPI) and Producer Price Index (PPI) data that showed an unexpected uptick in core inflation. Markets rallied late week however as investors repositioned ahead of the coming week’s Fed rate decision.
Canadian markets rose 3.58%2 for the week with returns largely driven by the materials sector which was up almost double digits as investors bought the dip following the previous week’s retreat on weak economic data.
European markets returned 1.32%3 for the week, influenced by the ECB’s 25 basis point (bps) cut to 3.50%. Declining eurozone industrial production (-0.3% MoM) has also raised fresh concerns about growth in the region.
Emerging markets closed 1.45%4 higher for the week Chinese trade data for August showed strong export growth but weak imports, highlighting potential buffers against domestic slowdown while flagging risks to achieving GDP targets.

Fixed income steady amid inflation data and central bank moves

During the week, sovereign bond and credit markets experienced notable movements driven by economic data and central bank actions. U.S. rates remained relatively stable, trading just above two-year lows, with slight increases following sticky CPI and PPI inflation readings. High yield bonds rallied for four consecutive sessions, with yields hitting their lowest since June 2022, primarily due to declining rates. Credit spreads were firm, although rating agencies S&P and Moody’s showed divergent views, with S&P turning negative and Moody’s moving to neutral.

Highlights:

The 2- and 10-year U.S. Treasury yields were 10 bps and 5 bps lower, respectively. In Canada the 2- and 10-year yields were 14 bps and 6 bps lower, respectively. Bond yields and prices move inversely to one another.
Investment grade new issuance was robust, totaling $100bn USD over six trading days..
Markets reflected a mix of stability and cautious optimism amid ongoing economic growth uncertainty and the anticipation of further monetary policy normalization.

Weekly dashboard

BoC says global trade disruptions could hinder inflation fight

Governor Tiff Macklem said global trade disruptions could make it harder for the Bank of Canada (BoC) to consistently meet its 2% inflation target. The BoC will have to balance the risks of controlling higher prices with ensuring economic growth. Inflation in Canada has been consistently falling this year, but Macklem said that as globalization slows, the cost of global goods might not decline to the same degree, which could put more upward pressure on inflation. “Trade disruptions may also increase the variability of inflation,” he said. “Trade disruptions may mean larger deviations of inflation from the 2% target.” This means the bank is focusing on risk management to balance inflation and growth and investing to better understand global supply chains, he said.

Highlights:

Supply shocks such as the one during the pandemic have created a difficult trade-off for central banks, as monetary policy cannot simultaneously stabilize growth and inflation.
“We’re updating our models to use scenarios when periods of uncertainty make central forecasts less reliable,” said Macklem, adding that the bank was using more micro-data to track and understand the consequences of trade and industrial policy.
He said Canada needs to be ready for the trade disruptions that seem inevitable amid a changing trade landscape. While the BoC does not set trade policy, it needs to understand shifts in global trade because they affect Canadians and drive costs and inflation.

U.S. headline inflation extends cooling streak, core rises

Inflation eased in August to new three-year lows, teeing up the U.S. Federal Reserve (Fed) to begin gradually reducing interest rates at a meeting next week. The consumer-price index climbed 2.5 per cent from a year earlier, according to the U.S. Labor Department, decreasing from 2.9 per cent in July and extending its cooling streak to five months. Core inflation, a measure that excludes volatile food and energy costs, held roughly steady at 3.2 per cent. Economists had expected overall prices to have risen 2.6 per cent from a year ago, as well as a 3.2 per cent increase in core prices.

Highlights:

Price increases for housing continued to keep core prices elevated.
Cost increases for food slowed in August, while used vehicles and energy were cheaper than a month earlier.
An intensifying selloff in oil markets in recent weeks suggests prices at the pump will continue to decline in the coming weeks, a key reversal in pressures that have coloured Americans’ views of the U.S. economy.

ECB cuts interest rates for second time in three months

The European Central Bank (ECB) lowered interest rates by a quarter point, its second cut in three months, offering a boost to the eurozone’s faltering economy and widening a policy gap with the U.S. Federal Reserve (Fed), which is expected to start cutting rates next week. The ECB said it would reduce its key interest rate to 3.5 per cent from 3.75 per cent. Future interest-rate decisions will be based on incoming economic data, the bank said in a statement. Major central banks, including the Fed, are shifting their focus from fighting inflation to supporting growth as inflation falls steadily toward 2 per cent and economic momentum falters.

Highlights:

According to recent data and surveys, Europe’s long-anticipated economic recovery has proved elusive. Germany, Europe’s largest economy and manufacturing powerhouse, is flirting with recession as industrial output falls steadily.
Robust wage growth is supporting household spending in Europe and worrying central bankers, who are trying to gauge where inflation might land after successive economic shocks.
Underlying inflation, stripping out volatile food and energy prices, remains uncomfortably high for policymakers, at 2.8% last month in the eurozone.

In the news: Fed dials back proposed banking regulations

This week, the Fed announced a significant softening of its proposed new rules for banks, following extensive lobbying from Wall Street. Initially, the Fed had planned to implement stringent capital requirements, but the revised proposal now includes a more modest 9 per cent increase in capital for large banks. This decision, unveiled by Fed Vice Chair for Supervision Michael Barr, aims to balance financial stability with the operational concerns of major financial institutions. The changes reflect a compromise between regulatory rigor and the banking sector’s pushback against what they deemed to be overly burdensome regulations. This move is seen as a victory for big banks, which argued that the original rules would have stifled economic growth and innovation. The revised rules will be resubmitted for further review and implementation.

Behind the headline:

Under the original rules, large banks would have been required to increase their common equity tier 1 (CET1) capital by approximately 19 per cent, reflecting a significant boost in capital to cover potential risks.
Banks would have also had to include unrealized gains and losses from certain securities in their capital ratios, but the revised rule now limits this requirement to global systemically important banks (G-SIBs).
Bank chiefs and lobbyists formed a coalition with community and racial advocate groups claiming the standards would hinder low-income borrowers from obtaining mortgages and financial services.

Monepalooza won’t be just aboud the Fed!

This week’s risk dashboard:

A massive wave of global central bank decisions
FOMC: Initial pace and forward guidance are both uncertain
The cases for 25 or 50
PBOC may join the Fed and ease policy
BoJ unlikely to alter policy this week
Bank of England likely to hold, ramp up QT
Canadian CPI one of two updates before next BoC
Canadian political risk escalates this week

Read the full publication here.

A heavy week for BoC-speak
Norges Bank to hold, refresh forward guidance
Brazil’s possible hike is the worst nightmare of global central bankers
Bank Indonesia inching toward easing?
SARB to commence easing cycle
CBCT to hold again
Turkey’s central bank to hang tight at eye watering levels
Global macro indicators

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: September 13

Week in review

Weekly dashboard

Monepalooza won’t be just aboud the Fed!

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