By Scotia Wealth Management - The Zukiwsky Group

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Market Watch: Dec. 16, 2024

Dec 16, 2024 | 2:55 PM

This week’s highlights

• Equity markets falter despite constructive backdrop
• Rate cuts, rate cuts, and possibly more rate cuts
• Bank of Canada cuts rate by half-point
• U.S. inflation ticked up to 2.7% in November
• ECB cuts rates by quarter point in attempt to boost slowing growth

Week in review

Equity markets falter despite constructive backdrop

The Bank of Canada’s 50 basis points (bps) rate cut highlighted concerns over economic growth and inflation dynamics, while U.S. Consumer Price Index (CPI) and Producer Price Index (PPI) inflation data aligned with expectations, reinforcing the likelihood of a 25 bps rate cut by the Fed. In Europe, the European Central Bank’s (ECB) rate cut and updated projections reflected ongoing economic challenges. China’s economic data showed slowing credit expansion, prompting discussions on proactive fiscal and monetary policies. Additionally, geopolitical developments, such as potential U.S. tariffs on Canadian goods and changes in China’s currency policy, added to market uncertainty.

Looking back

Year in Review: Red Deer County Mayor Jim Wood proud of community growth

2h ago

2024 reflection

Year in Review: Olds Mayor Judy Dahl thanks community following challenging year

20h ago

Bower Ponds

Newcomer learn to skate event returns January 2

22h ago

Highlights:

• U.S. markets returned -0.61%¹ for the week despite CPI and PPI inflation data aligning with expectations. Geopolitical developments including potential tariffs and counter-tariffs weighed on sentiment, while a decline in major semiconductor names including Nvidia pulled the index lower.
• Canadian markets declined -1.53%² for the week, influenced by the Bank of Canada’s 50 bps rate cut, concerns over economic growth and inflation dynamics, and the potential impact of U.S. tariffs on Canadian goods, which increased uncertainty and clouded the economic outlook.
• European markets returned -1.52%³ for the week following the ECB rate cut, updated projections reflecting ongoing economic challenges, political uncertainty in France and Germany, and weak manufacturing prospects exacerbated by protectionism risks.
• Emerging markets closed -1.27%⁴ lower amid China’s slowing credit expansion, discussions on proactive fiscal and monetary policies, potential U.S. tariffs on Chinese goods and changes in China’s currency policy, which added to market uncertainty.

Rate cuts, rate cuts, and possibly more rate cuts

The Bank of Canada’s 50 bps rate cut to 3.25% and the U.S. CPI and PPI inflation data, which aligned with expectations, reinforced the likelihood of a rate cut by the Fed. U.S. Treasury yields moved lower following the inflation data, with short-term rates declining in response to the Fed’s policy easing path, while longer-term rates remained stable. Credit spreads were little changed, settling close to historically low levels. Additionally, China’s slowing credit expansion and discussions on proactive fiscal and monetary policies added to market dynamics.

Highlights:

• The 2- and 10-year U.S. Treasury yields were 5 and 15 bps higher respectively. In Canada, the 2-year yield was 5 bps lower while the 10-year yield rose 6 bps.
• Primary markets are likely to close early this coming week and call it a year as new sales volumes have reached the monthly estimates for investment grade (IG) with decent activity also on the high yield side.
• According to data compiled by Bloomberg, the IG spread-per-turn-leverage (SPTL) remains at some of the tightest levels over the past two decades at 31bps. Though it has improved somewhat since March this year, leverage continues to be elevated by historical standards while credit premiums are trading close to record lows.

Weekly dashboard

Bank of Canada cuts rate by half-point

The Bank of Canada (BoC) cut interest rates by half a percentage point and signalled that it may slow down the pace of rate cuts going forward amid rising economic uncertainty. As widely expected, the bank’s governing council lowered the policy rate to 3.25% from 3.75%. This was the fifth consecutive rate cut since June and the second oversized move in a row.

Highlights:

• BoC Governor Tiff Macklem justified the oversized move by pointing to tepid economic growth and a weakening labour market in recent months.
• The bank highlighted several risks on the horizon. Chief among these is a slowdown in population growth following Ottawa’s new immigration targets, which the bank said will likely lead to weaker gross domestic product growth next year.
• It also pointed to the potential of U.S. tariffs on Canadian goods, which Macklem called “a major new uncertainty.”

U.S. inflation ticked up to 2.7% in November

U.S. inflation picked up in November, a sign that the path to bringing down price pressures remains bumpy. The consumer price index (CPI) rose 2.7% from a year earlier, the U.S. Labor Department reported, after climbing 2.6% in October. Core prices, which exclude volatile food and energy items, rose 3.3% over the previous 12 months.

Highlights:

• The CPI index rose 0.3% from the prior month, the strongest month-over-month increase since April. The increase was driven by persistent inflationary pressures in the cost of food, vehicles and medical care.
• Food prices increased 0.4% after rising 0.2% in October. Grocery store food prices surged 0.5%, with the cost of eggs soaring 8.2% amid an avian flu outbreak.
• In the 12 months through November, the so-called core CPI gained 3.3%, matching the advance in October. Over the past three months, the core CPI averaged a 3.7% annualized rate.

ECB cuts rates by quarter point in attempt to boost slowing growth

The European Central Bank (ECB) lowered interest rates by a quarter point, aiming to stabilize an economy rocked by debt worries in France and highly exposed to the trade tariffs threatened by U.S. President-elect Donald Trump. The ECB reduced its key interest rate to 3% from 3.25%, widening a gap in benchmark borrowing costs with the U.S. Federal Reserve. It was the third cut in as many meetings.

Highlights:

• Europe’s economy has slowed, and business confidence indicators have weakened further, and headline inflation rose for a second straight month to 2.3% in November.
• Germany, Europe’s biggest economy, has barely grown since before the pandemic. In France, the second-largest eurozone economy, the government collapsed over a disagreement over how to lower the country’s massive budget deficits.
• The ECB said it would continue to determine interest rates meeting by meeting based on incoming economic data, wanting to wait and see before committing to further cuts.