Market Watch: Jan. 13, 2024

U.S. equity markets started the week on a positive note, driven by renewed confidence in AI infrastructure demand and a marginally weaker U.S. dollar. However, by mid-week, markets turned lower as news that President-elect Trump may declare a national economic emergency to justify his tariff plans caused tech stocks to decline and bond yields to rise. In Canada, Prime Minister Trudeau’s resignation added to market volatility, while strong employment data provided some support. European markets were initially buoyed by gains in the Stoxx Europe 600 but faced persistent inflation concerns and higher U.K. yields. In China, economic data highlighted ongoing challenges in manufacturing and weak domestic demand. The release of a strong U.S. jobs report on Friday further pressured markets downward, as it reduced the likelihood of future interest rate cuts.

Highlights:

U.S. markets returned -0.67%¹ for the week after proposed tariff plans and a strong jobs report that reduced the likelihood of future rate cuts overcame renewed confidence in AI infrastructure demand.
Canadian markets declined -1.13%² for the week with volatility spiking following Prime Minister Trudeau’s resignation, strong employment data decreasing the likelihood of further interest rate cuts, and investors digesting the increasing possibility of broad based U.S. tariffs on Canadian imports.
European markets returned -0.47%³ for the week as higher energy prices and wage growth reinforced inflation concerns. Higher U.K. Gilt yields and a muted reaction to eurozone inflation data also shaped investor sentiment.
Emerging markets closed 0.29%⁴ higher as ongoing challenges in Chinese manufacturing, weak domestic demand, and economic data highlighted the now long-simmering downturn.

Bond yields moved higher throughout the week on fears of inflationary tariffs and strong Canada, U.S. jobs reports

Fixed income markets experienced a volatile week, starting with U.S. rates trading just below a 7-month high due to a larger Treasury supply calendar. By mid-week, bond yields rose as President-elect Trump considered declaring a national economic emergency to justify his tariff plans, causing market uncertainty. In Europe, U.K. 10-year yields reached their highest level since 2008, driven by persistent inflation and higher U.S. rates. Canadian rates were influenced by strong employment data, which reduced the likelihood of future rate cuts. In China, weak domestic demand and ongoing challenges in manufacturing kept pressure on yields. By the end of the week, the release of a strong U.S. jobs report further pushed yields higher, as it diminished expectations for future interest rate cuts, leading to a flattening of the sovereign curve in both the U.S. and Canada.

Highlights:

The 2- and 10-year U.S. Treasury yields were 2 and 13 bps higher, respectively. In Canada, the 2-year yield was 2 bps higher while the 10-year yield rose 13 bps. Bond yields and prices move inversely to one another.
In both Canada and the US, after today’s jobs report, the sovereign curve is flattening with the front end of the curve pricing in a lower probability of rate cuts in 2025.
A resilient U.S. economy, combined with sticky inflation and elevated Treasury supply, is conducive to elevated rates, with index swaps pricing in that the Fed will be on hold until September following Friday’s jobs report.

Weekly dashboard

Canadian exports rise in November, trade surplus with U.S. increases

Canada posted its ninth-consecutive trade deficit in November, but its trade surplus with the United States grew that month. Canada’s total merchandise trade exports increased 2.2% in November, while imports increased 1.8%, narrowing the country’s trade deficit with the rest of the world to $323 million from a downwardly revised $544 million the month before, Statistics Canada reported.

Highlights:

The long-standing goods trade surplus with the United States increased to $8.2 billion from $6.6 billion in October, with exports to the U.S. up 6.8% month-to-month and imports up 4.1%.
Canada’s exports to the U.S. have been helped in recent months by a depreciation in the Canadian dollar against the U.S. dollar, which makes Canadian products more appealing to American buyers.
The increase in overall Canadian exports was broad-based in November, with metals and non-metallic ores up 10.5%, industrial machinery and parts up 3.8% and aircraft and transportation equipment up 6.7%. Energy exports rose 2.2%, with a 4.8% jump in crude oil exports on stronger prices.

U.S. hiring blew past expectations with 256,000 jobs added in December

The U.S. labour market seems to have found its footing, a relief to households and businesses but a growing cause for concern in financial markets. The U.S. economy added 256,000 jobs in December, and the unemployment rate edged down to 4.1%, the U.S. Labor Department reported. Last month’s gain in nonfarm payrolls was the biggest since March and well above the 155,000 jobs that economists had expected. The unemployment rate was also better than the expected 4.2%.

Highlights:

The jobs report was the latest sign that the U.S. labour market has recovered from its midyear stumble and might even be gaining steam.
It could prevent an interest-rate cut at the U.S. Federal Reserve’s (Fed) next meeting, which is January 28-29. It could also reduce the chances of a cut at the Fed’s subsequent meeting in March.
For all of 2024, roughly 75% of hiring took place in just three sectors: healthcare and social assistance, leisure and hospitality, and government. But in December, a broader swath of the services sector added jobs, including retail, professional and business services, information and finance.

Eurozone inflation rose to 2.4% in December

Statistics agency Eurostat reported that annual inflation in the eurozone rose for a third straight month to reach 2.4% in December. The preliminary reading was in line with economists’ forecasts and marked an increase from a revised 2.2% in November. Core inflation held at 2.7% for a fourth straight month, also meeting economists’ expectations, while services inflation nudged up to 4% from 3.9%.

Highlights:

Headline inflation was widely expected to accelerate after hitting a low of 1.7% in September, as base effects from lower energy prices fade.
The full extent of increases in the reading, along with persistence in services and core inflation, will be closely watched by the European Central Bank, which markets currently expect to cut interest rates from 3% to 2% across several trims this year.
The pace of price rises in the eurozone’s largest economy, Germany, hit a higher-than-expected 2.8% in December, according to figures published separately this week. Inflation in France, meanwhile, came in at 1.8%, below analysts’ expectations of 1.9%.

^{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}

by Scotia Wealth Management - The Zukiwsky Group

Market Watch: Jan. 13, 2024

Week in review

Inflationary policy proposals, resilient labour market push equity markets lower

Bond yields moved higher throughout the week on fears of inflationary tariffs and strong Canada, U.S. jobs reports

Weekly dashboard

Canadian exports rise in November, trade surplus with U.S. increases

U.S. hiring blew past expectations with 256,000 jobs added in December

Eurozone inflation rose to 2.4% in December

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