Market Watch: November 1

In the U.S., a weaker-than-expected jobs report and GDP growth contrasted with strong consumer spending, rising personal incomes, and Personal Consumption Expenditures (PCE) – the Federal Reserve’s (Fed) preferred inflation gauge – coming in only slightly above the 2.0% target. Despite some weaknesses, the mostly positive data suggested that the Fed might hold rates steady at its next meeting, which weighed heavily on megacap info tech names and other rate sensitive sectors such as utilities and real estate. In Canada, modest GDP growth fell short of expectations, partly due to disruptions from wildfires and labour strikes. In Europe, better-than-expected GDP growth in the eurozone alleviated recession fears, although underlying economic momentum remained modest. The Bank of Japan maintained its policy stance, emphasizing the influence of U.S. economic conditions on its decisions. Market sentiment was further shaped by corporate earnings reports, fiscal policy announcements in the U.K., and fluctuating commodity prices, including a modest rebound in crude oil.

Highlights

U.S. markets closed -1.35%¹ lower for the week as rate sensitive sectors including info tech, utilities and real estate pulled back after data indicated the Fed may not have sufficient justification to cut rates at its next meeting.
Canadian markets fell -0.80%² for the week, largely due to continued weakness in the energy and materials sectors.
European markets returning -1.00%³ for the week, following their North American peers lower, after mixed economic data and corporate earnings reports dampened sentiment.
Emerging markets closed -1.10%⁴ lower for the week, driven by weaker-than-expected economic data from China including a soft GDP reading and fluctuations in commodity prices.

Bond market continues to see volatility amid fluctuating interest rate forecasts

U.S. rates climbed towards mid-summer highs, driven by resilient economic indicators and potential inflationary pressures, which could shorten the Fed’s easing cycle. Credit spreads diverged, with high yield outperforming investment grade, reflecting sector-specific dynamics. The Bank of Japan’s steady policy stance and the eurozone’s better-than-expected GDP growth also influenced global bond markets. Additionally, U.S. nonfarm payrolls data, impacted by weather-related distortions, suggested a cautious approach to future rate cuts. Elevated U.S. Treasury supply and upcoming macroeconomic events, including the U.S. presidential election and Federal Open Market Committee (FOMC) meeting, added to market volatility and investor sentiment.

Highlights

The 2- and 10-year U.S. Treasury yields were 9 basis point (bp) and 7 bps higher, respectively. In Canada, the 2- and 10-year yields were flat and and 2 bps lower, respectively.
Credit spreads have been diverging with high yield (HY) debt outperforming investment grade (IG) in the last couple of weeks. A similar dynamic unfolded in July when speculative grade was bid for a while before widening and catching up to IG bonds, a likely outcome this time around..
Despite tighter credit premiums, high yield (HY) debt experienced its first monthly loss since April due to a selloff in rates, according to data compiled by Bloomberg.

Weekly dashboard

Canada’s economy stalled in August, likely grew 0.3% in September

According to Statistics Canada (StatCan), Canada’s gross domestic product (GDP) was unchanged in August before likely expanding 0.3% in September, indicating the economy might have missed the central bank’s growth forecast for the third quarter. Economic growth has slowed in Canada under the impact of high borrowing costs. The Bank of Canada has said it wants the economy to strengthen and has cut interest rates four times in a row to spur growth as inflation returned to the bank’s 1%-3% control range this year.

Highlights

The biggest drag on the economy in August was a 1.2% contraction in manufacturing. Retooling and maintenance activities at multiple auto plants contributed to the decline.
Canada’s goods-producing industries, which include the manufacturing sector, fell to its lowest level since December 2021.
In a preliminary estimate for September, StatCan said GDP was likely up 0.3%, helped by increases in finance and insurance, construction and retail trade sectors.

U.S. economic growth extends solid streak

The U.S. economy continued its recent streak of strong growth in the third quarter, as consumers picked up their spending, and exports and government spending rose. GDP rose at a 2.8% annual rate in the third quarter, adjusted for seasonality and inflation, the U.S. Commerce Department reported. The report points to an economy that’s still humming, with strong consumer spending supported by a robust labour market and business investment that remains relatively solid.

Highlights

The quarter was lower than the 3.1% growth rate economists had expected and marked a slight pullback from a 3% rate in the second quarter.
Consumer spending rose 3.7% in the third quarter, accelerating from 2.8% in the second quarter.
Non-residential fixed investment (business spending on software, research and development, equipment and structures) rose 3.3%, slowing slightly from the second quarter.

Eurozone expands faster than expected, raising hopes of soft landing

The eurozone’s economy grew more rapidly than expected in the three months to the end of September, boosting hopes that the bloc is set for a soft landing from the surge in inflation that followed Russia’s invasion of Ukraine. The pickup in growth will ease worries that a long period of high interest rates has stalled the area’s recovery and reassure policymakers that rapid cuts to its key interest rate aren’t urgently needed.

Highlights

GDP in the 20-nation area grew 0.4% in the third quarter, accelerating from 0.2% in the April-June period.
Germany showed unexpected growth, while France got a boost from the Olympic Games. Italy was the only major euro economy to report a weaker-than-expected performance.
The eurozone economy grew at an annualized rate of 1.5%, its strongest performance in two years.

In the news: Energy needs of AI could drive resurgence in nuclear power

The surging energy demands of large tech companies and AI are driving a renewed interest in nuclear power as a clean energy source. Companies like Microsoft, Google, and Amazon are investing in nuclear energy to power their data centers, which are essential for AI operations. This shift is exemplified by Microsoft’s deal to purchase power from the Three Mile Island plant and Google’s agreement with Kairos Power for small modular reactors. These investments highlight nuclear power’s potential to provide reliable, carbon-free electricity, crucial for meeting the tech industry’s growing energy needs while supporting environmental goals.

Behind the headline:

Microsoft and Google combined consume approximately 24 terawatt-hours (TWh) of electricity annually, surpassing the energy consumption of over 100 countries.
Google has signed a deal with Kairos Power to purchase 500 megawatts of power from seven small modular reactors (SMRs), with the first reactor expected online by 2030.
The power needs of data centers, largely driven by AI, are expected to triple by 2030, increasing from 3-4% of total U.S. power demand today to 11-12%.

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

by Scotia Wealth Management

Market Watch: November 1

Week in review

Weekly dashboard

Canada’s economy stalled in August, likely grew 0.3% in September

U.S. economic growth extends solid streak

Eurozone expands faster than expected, raising hopes of soft landing

In the news: Energy needs of AI could drive resurgence in nuclear power

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