Market Updates

source: ARG analysis, Bloomberg and MSCI

What happened last week?

Equity trading volumes were lower as the New York Stock Exchange was closed at 1 pm on Friday after closing all day on Thursday. During this shortened session this week the major U.S. indexes gained around 1% while the TSX fell slightly, about one-third of a percent, or 72 points. Gold jumped up 2%, oil fell for the fifth consecutive week as bonds increased.

Canada’s Consumer Price Index (CPI), rose 3.1% on a year-over-year basis for October, down from 3.8% in September. Gasoline prices fell by 7.8% in October and were the primary driver of lower overall inflation for Canadian households. It appears that the Bank of Canada will continue to pause interest rate increases, and a reduction in rates is likely months away.   StatsCan release    Watch CBC     BoC Governor’s speech

Finance Minister Chrystia Freeland delivered the government’s latest economic statement. Along with programs to support housing, the government is predicting slow economic growth, increasing unemployment, and dramatically higher costs to service the national debt. Both the size of the debt, largely the result of healthcare and economic support during the pandemic, and interest increases to curtail inflation are the culprits.  CBC – Fall Update    CBC – Freeland’s Update    Watch CBC

Lastly, CRA announced that the Tax-Free Savings Account (TFSA) contribution limit for 2024 had risen to $7,000, and the lifetime limit for those born before 1991 will be $95,000 as of next year. Coordinating contributions to, and withdrawals from, registered accounts to reduce overall taxes during your working life and in retirement is the goal. TFSA limit for 2024    Fraser & Partners Industry Update

What’s ahead for this week and beyond?

In Canada, following last week’s release of consumer inflation data, the next important pillar of economic health, Gross Domestic Product (GDP), is scheduled for Thursday afternoon. One day later, StatsCan will announce the latest employment report, which is another important indicator reflecting economic health.

In the U.S., building permits, new home sales, monthly home price index, preliminary GDP for consumer spending, sales, deflator, and corporate profits are scheduled. The most significant report will be the Personal Consumption and Expenditure (PCE) price index, the Federal Reserve’s primary inflation measure.

Globally, the European Union will release many economic indicators, including consumer inflation and selling price expectations, consumer confidence, business climate, and economic and industrial sentiment.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

Our grid, above, shows mostly green for the past week of trading. Major North American equity indexes jumped up, led by the TSX at more than 2½ percent. The laggard was the Dow which still rose almost 2% for the week. The Canadian dollar and gold both moved upward as the price of oil and bond yields fell.

Equities reacted most directly to positive inflation news, which supports more dovish monetary policy announcements scheduled by the Bank of Canada and Federal Reserve, on December 6^th and 13^th, respectively:

• S. consumer inflation was little changed in October after increasing 0.4% in September. Over the past twelve months, the all-items Consumer Price Index (CPI) increased 3.2%, down from September’s year-over-year inflation of 3.7%. The rise in the price of shelter was offset by the decline in the price of gasoline. The Federal Reserve’s pause on interest rate increases appears to be well-reasoned at this time. U.S. equity indexes rose 1½ to 2½ percent and the TSX jumped 1.6% on the day that the CPI was released. BLS release  CNBC article  CNBC 2
• StatsCan released Canadian inflation data for industrial products and raw materials prices. The Industrial Product Price Index (IPPI) fell 1.0% in October and is 2.7% lower on a year-over-year basis. Raw Materials declined by 2.5% last month, and 0.8% since October 2022. The drop suggests that existing monetary policy is achieving some of its desired effects. StatsCan IPP release

Lastly, the U.S. Congress was able to pass new spending legislation, signed by President Biden, that avoided a government closure. This round had been driven by a 45-day stop-gap bill approved at the end of September. The current bill buys more time but also splits some of the spending, which may drive additional political gameplay when it expires early next year.  AP article  CNN article

What’s ahead for this week and beyond?

In Canada, Consumer Price Index (CPI) data for October and retail sales for September will be the highlights of the week’s economic releases.  The new housing price index and the federal government’s budget balance are scheduled to be reported.

In the U.S., the Thanksgiving holiday will shorten and lighten the coming week as markets will be closed on Thursday, and traditionally light trading volumes are expected for Friday. Existing home sales, and durable goods orders will be released during the quieter than usual week.

Globally, consumer confidence across the Eurozone, along with producer prices and Gross Domestic Product for Germany, and the U.K.’s house price index, and consumer confidence will be announced.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

The TSX was the lone North American index to lose ground (less than 1%) as the U.S. majors moved ahead, and the global All-Country World Index (ACWI) almost broke even. The year-to-date and one-year returns for the S&P 500, and particularly the NASDAQ, are impressive. The S&P 500’s results have been more than doubled by the NASDAQ, which has gained nearly 32% this year. Both the TSX and Dow are far behind. The Canadian government’s 10-year bond rose last week to approach 4% again.

Oil fell for the third consecutive week, the price dropping by 12% over this period. Gold had its first end-of-week drop since the war between Hamas and Israel began. Since closing at $1,845 on October 6^th, one day before the initial attacks of October 7^th, gold has risen more than 12%.

Geopolitical events have influenced markets in the absence of major economic releases in North America and elsewhere. It was a relatively slow week for economic news in North America. Inflation, employment, and Gross Domestic Product reports that will indicate national economic health for Canada and the U.S. will arrive shortly. The coming week will provide greater stimuli from economic data and corporate performance.

“For the third quarter, the S&P 500 is reporting (year-over-year) earnings growth of 4.1%. However, for the fourth quarter, analysts are now projecting (year-over-year) earnings growth of only 3.2%.” Additionally, analysts are predicting earnings growth of 6.7% and 10.5% for the first two quarters of 2024. The earnings reports for the major Canadian banks, which are widely held directly and indirectly by almost all domestic investors, are scheduled for the last days of November.
https://insight.factset.com/analysts-expect-sp-500-earnings-growth-to-improve-in-1st-half-of-2024

What’s ahead for this week and beyond?

In Canada, following the observances on Saturday and a banking holiday for Remembrance Day on Monday, manufacturing sales, wholesale trade, raw materials prices, and producer prices are scheduled to be reported.

In the U.S., imports, exports, trade balance, real weekly earnings, retail sales, and business inventories will be announced. The Consumer Price Index (CPI) and the Producer Price Index (PPI) are scheduled for release.

Globally, retail sales, industrial output, outstanding loans, and money supply in China, Gross Domestic Product data, industrial production, and HICP in the Eurozone will be reported. As recession fears in the U.K. rise, an employment report, retail sales, CPI, and PPI will be released.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

On Wednesday the U.S. Federal Reserve held the federal funds rate within a range of 5¼ to 5½ percent. Chair Jerome Powell emphasized that “the process of getting inflation sustainably down to 2% has a long way to go.” No promises of rate reductions were offered, however, North American stocks rose after several weeks of poor performance.  Fed release CNBC equities and Fed

The Canadian economy added 18,000 jobs last month, and unemployment rose to 5.7%, the fourth consecutive monthly increase.  The construction sector added 23,000 jobs and the information, culture, and recreation sector added 21,000 jobs, while the retail trade and manufacturing sectors lost 22,000 and 19,000 jobs, respectively. Year-over-year average hourly wages rose 4.8% in October. After adding 64,000 jobs in September and 40,000 in August, October’s performance represents a slowing of the Canadian economy.  StatsCan release

The Bureau of Labor Statistics reported that nonfarm payroll had risen by 150,000 in October. That figure fell below expectations and the monthly average of 260,000 in 2023. The unemployment rate rose 0.1% to 3.9%. Each of the major worker categories saw little change in unemployment rates, as 6.5 million Americans were unemployed.  BLS release   CNBC and jobs and outlook

The Bank of England (BoE) left their interest rates unchanged as the likelihood of a recession in that country is predicted as a 50/50 possibility. The BoE signaled that the interest rates will remain elevated as inflation remains stubbornly high in the United Kingdom. Like the Bank of Canada and the Federal Reserve, the BoE has a target of 2% for inflation. Unlike Canada and the U.S. inflation has not responded as quickly or as fully to increased interest rates.  BoE and rates

The slowing of jobs growth in North America suggests that existing monetary policy manoeuvres are causing the desired effects of slowing the economy without falling into recession.

What’s ahead for this week and beyond?

In Canada, building permits, imports, exports, and trade balance will be reported. Western University’s Ivey School of Business will release its Purchasing Managers Index.

In the U.S., consumer credit, and wholesale sales will be reported in a week with few important economic indicators. News concerning geopolitical events and relations could influence markets.

Globally, China will announce its imports, exports, trade balance, and Consumer and Producer Price Indexes. The Eurozone will release its Producer Price Index (PPI), and retail sales.

source: ARG analysis, Bloomberg and MSCI

What happened in October?

The 10^th month of 2023 provided significant uncertainty and volatility.

(source: Bloomberg https://www.bloomberg.com/marketsand ARG Inc. analysis)

Many events contributed to the down-up-down-up-and-down-and-up month for investors:

1. September 30^th / October 1^st

Just as the month was beginning a stop-gap measure that extended spending for an additional 45 days was passed to avoid a U.S. government shutdown.   CNBC and “shutdown”  CNN and “shutdown”

2. October 6^th

“Total nonfarm payroll employment rose by 336,000 in September, and the unemployment rate was unchanged at 3.8 percent”, according to the U.S. Bureau of Labor Statistics.  BLS release

3. October 11^th and 12^th

On two consecutive days, U.S. producer and consumer inflation data were released. The Producer Price Index (PPI) increased 0.5% in September, down slightly from 0.7% in August. Year-over-year prices advanced 2.2%, which is the largest increase since April. Consumer prices rose 0.4% in September, down from 0.6% in August. Over the last 12 months, the Consumer Price Index (CPI) has risen 3.7%, which is the same reading as in August.   BLS PPI release   BLS CPI release

4. October 17^th

Canada’s CPI was lower than expected. On a year-over-year basis, consumer prices rose 3.8% in September, slightly lower than the 4.0% gain measured in August. The slowing of price increases was led by travel services, durable goods, and groceries. Gasoline rose 7.5% on an annualized basis, compared to August’s 0.8% increase. Excluding gasoline, the CPI rose 3.7% in September.  CBC and CPI   StatsCan CPI release

5. October 18^th to 23^rd

The U.S. corporate earnings season began less than impressively. The number and magnitude of positive earnings surprises are slightly below the 10-year averages. This is not the corporate profitability that markets wanted.  Factset and Q3 earnings

6. October 25^th

The Bank of Canada made a monetary policy announcement that kept the policy interest rate unchanged. The press release states, “Inflation has been easing in most economies, as supply bottlenecks resolve, and weaker demand relieves price pressures. However, with underlying inflation persisting, central banks remain vigilant.” This may provide insight into the Federal Reserve’s next announcement.  BoC Press Release     CBC and BoC

7. October 26^th

U.S. GDP grew faster than expected during the third quarter. The annualized pace is 4.9%. The expanding economy, and inflation over target, may be the rationale for the Federal Reserve to tighten monetary policy by raising interest rates, but traders see that as unlikely. CNBC and GDP  BEA release

8. October 27^th

On Friday the Bureau of Economic Analysis released the Personal Consumption and Expenditures (PCE) price index. In September, the most recent reporting period, personal income rose 0.3%, and the PCE price index rose 0.4%. Core PCE (excluding volatile food and energy) increased 3.7% on a year-over-year basis. Core PCE peaked at 5.6% in early 2022, and has fallen steadily, but remains well above the Fed’s target of 2%. The PCE is the Federal Reserve’s primary inflation indicator, the Personal Consumption and Expenditures (PCE) index will be reported a few days ahead of the next U.S. interest rate announcement.  BEA and PCE CNBC and PCE

9. October 31^st

According to StatsCan, “Real Gross Domestic Product (GDP) was essentially unchanged for a second consecutive month in August as factors such as higher interest rates, inflation, forest fires and drought conditions continued to weigh on the economy.”  StatsCan release

What’s ahead for November and beyond in 2023?

On November 1^st, the Federal Reserve announced that it was holding interest rates unchanged. The Federal Funds rate will remain in the range of 5¼ to 5½%. Fed Chair, Jerome Powell, said that rate reductions have not been considered or discussed for the next interest-rate meeting in December.  CNBC and Fed release   Fed release and press conference

source: ARG analysis, Bloomberg and MSCI

What happened last week?

For the fifth time in the last six weeks, North American equity indexes lost value. Since markets closed on September 15^th, the TSX has lost more than 9% of its value after falling nearly 1,900 points, the American indexes are down 6½ to 7½ percent. The All-Country World Index (ACWI), comprised of about 3,000 constituents from 23 developed and 24 emerging markets, has also fallen 7½ percent reflecting the global extent of the downturn for equities. Generally, the economic situation is better than the geopolitical events over this period of time. Nonetheless, negativity is winning against equities in the short term.

The Bank of Canada made a monetary policy announcement that kept the overnight rate unchanged at 5%, with the bank rate at 5¼% and the deposit rate at 5%. According to the press release, “The global economy is slowing, and growth is forecast to moderate further as past increases in policy rates and the recent surge in global bond yields weigh on demand” and “Inflation has been easing in most economies, as supply bottlenecks resolve, and weaker demand relieves price pressures. However, with underlying inflation persisting, central banks remain vigilant.” Also, the quarterly Monetary Policy Report was released, which included concerns of continued inflation above goal, and geopolitical risks that could drive global inflation higher with increased energy prices and further supply chain disruptions.  BoC Press Release   BoC MPR   CBC and BoC

On Friday the Bureau of Economic Analysis released the Personal Consumption and Expenditures (PCE) price index, the Federal Reserve’s primary inflation indicator. In September, the most recent reporting period, the personal income rose 0.3%, and the PCE price index rose 0.4%. This reporting occurred a few days ahead of the U.S. interest rate announcement scheduled for November 1^st. The PCE report will be closely monitored and may predict the Fed’s next announcement. The consensus is that the Fed, like the Bank of Canada, will leave interest rates unchanged for now.  BEA and PCE CNBC and PCE

What’s ahead for this week and beyond?

In Canada, Gross Domestic Product for August and an employment report for October are scheduled for release.

In the U.S., housing will be well represented with the Case-Shiller index, mortgage market, construction spending, and refinance indexes scheduled for release. Government and non-farm payrolls will also be released. On Wednesday the Consumer Price Index will be released.  Also, on Wednesday, the Federal Reserve will deliver an interest rate decision.

Globally, the Eurozone will report business climate, consumer confidence, economic, industrial sentiment, and employment. The Bank of England has an interest rate announcement planned for Thursday. Any escalation or spread of actions in the Middle East will lead to uncertainty and volatility.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

Equities and safer havens moved in opposite directions last week. The major North American indexes fell 1.6 to 3.2 percent last week as the 10-year Government of Canada bond yield ended the week over 4%, and 10-year U.S treasuries (not shown above) nearly breached 5%. Gold rose again, for the second consecutive week, now up $149.20 or 8.1% since the Hamas-Israel War began.  US Treasuries  Treasury Yields

Canada’s Price Index (CPI) was released on Tuesday, and it was lower than expected. On a year-over-year basis, consumer prices rose 3.8% in September, slightly lower than the 4.0% gain measured in August. The slowing of price increases was led by travel services, durable goods, and groceries. Gasoline rose 7.5% on an annualized basis, compared to August’s 0.8% increase.  CBC and CPI   StatsCan CPI release

China reported that its Gross Domestic Product (GDP) for the third quarter is 4.9% above last year, beating analyst expectations of 4.4%. Year-to-date 2023 is 5.2% ahead of 2022. The strengthening of the second-largest economy will assist global growth.   CNN and China’s GDP

On Thursday, the Federal Reserve Chair, Jerome Powell, delivered a speech at the Economic Club of New York where he said, “Inflation is still too high, and a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal.” Traders immediately removed the likelihood of a November rate increase, but it will take 1½ weeks for the confirmation to arrive from Powell.   Powell Speech  CNBC and Powell’s Speech

The largest contributor to falling values for U.S. equities may be the outlook for the third quarter earnings season, which appears to be lackluster. Only about one-fifth of the S&P 500 have reported earnings so far, and the majority have beaten estimates, but downward revisions to EPS could make Q3 the fourth consecutive quarter of year-over-year earnings declines for the S&P 500. FactSet Insight

What’s ahead for this week and beyond?

In Canada, the Bank of Canada will release an interest rate decision on Wednesday, which will be influenced by the latest inflation, employment, and Federal Reserve news.

In the U.S., the mortgage market index, building permits, new home sales, and durable goods data will be announced. The Federal Reserve’s primary inflation indicator, the Personal Consumption and Expenditures (PCE) index will be reported, which is almost a week ahead of the next U.S. interest rate announcement. The PCE report will be closely monitored and may predict the Fed’s next announcement.

Globally, consumer confidence and the European Central Bank’s refinancing rate will be reported in the Eurozone, while Japan releases its latest consumer inflation and foreign investment data.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

Despite mixed economic outcomes and an extreme and deadly escalation between Israel and Hamas, and not to dismiss the human tragedy, equity markets performed positively for the week. It was a quiet week for Canadian economic news, the influential news came from the U.S. and the Middle East:

• S. Consumer Price Index (CPI) rose 0.4% in September, after increasing 0.6% in August. Over the last year, the all-items index increased 3.7% before seasonal adjustment. Over half of the monthly increase was contributed by shelter, and gasoline was also a major contributor. Grocery prices rose 0.1% over the month. BLS CPI release
• S. Producer Price Index (PPI) increased 0.5% in September, after rising 0.7% in August and 0.6% in July. Year-over-year producer prices rose 2.2%, the largest increase since moving up 2.3% for the 12 months ended in April. BLS PPI release
• The price of gold rose for the first time in four weeks after the attack by Hamas in Israel. Safe haven investments, like gold, drove the price upward. ET and gold
• Oil prices also rose nearly 6% last week. If a regional conflict arises involving Iran, which has supplied arms and funding to Hamas, Bloomberg estimates that oil prices could soar to $150, and trigger a global recession. Yahoo and equity headwinds

The current U.S. CPI is still far above the Federal Reserve’s goal of 2%, but the odds of an interest rate increase on November 1^st fell to 9% midweek, down from 27% the previous Friday. The odds of a Fed rate increase in mid-December have dropped from 42% to 28%.

As the end of the week neared, and the likelihood of an Israeli invasion of Gaza rose, equity turned downward. Although the chances of an equity downturn based on a Fed rate increase may have fallen, the VIX volatility index closed the week at 19.32, up significantly from Wednesday’s close of 16.09.
IBD rate hike odds  VIX quotes  Investopedia VIX

What’s ahead for this week and beyond?

In Canada, manufacturing sales and wholesale trade for August, and September’s Consumer Price Index (CPI), Producer Price Index (PPI), and Raw Materials Price Index (RMPI) are scheduled for release.

In the U.S., retail sales, capacity utilization, manufacturing output, industrial production, business inventories, building permits, housing starts, and net capital flows are scheduled for release.

Globally, China will report its Gross Domestic Product (GDP), industrial output, urban investment, house prices, and retail sales. The Eurozone will release its overall consumer inflation in the form of the Harmonized Index of Consumer Prices (HICP). Diplomacy will be under pressure to deliver a détente quickly in the Middle East to address the complicated situation in Israel and Gaza.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

Regardless of one’s feelings for or against Kevin McCarthy and the stop-gap funding measure he brokered to avoid a U.S. government shutdown; the turmoil created by his ouster has caused short-term damage to markets. Each major North American index lost more ground than last week on a percentage basis, and the NASDAQ converted last week’s gain into a loss. The TSX and Dow moved into negative territory on a year-to-date basis, and the price of crude is lower than it was one year ago.

The ongoing “speaker saga” was interrupted on Friday morning by the release of objective economic news. The U.S. economy added 336,000 jobs in September according to the Bureau of Labor Statistics release. The unemployment rate held steady at 3.8% after gains in leisure and hospitality, government, health care, professional, scientific, technical services, and social assistance. “The job market has continued to defy expectations of a significant slowdown” according to CNBC.  The robustness of job creation could place pressure on the Federal Reserve to raise rates further or maintain them at their current levels for longer than originally anticipated. Upcoming U.S. inflation data will heavily influence the Fed’s next interest rate announcement.  CNN, jobs, and the Fed

Here at home, and also on Friday, Canada’s latest jobs report arrived through a StatsCan release that showed “employment rose by 64,000 in September, following an increase of 40,000 in August”, a total of more than 100,000 since July.  Like the U.S., the unemployment rate was unchanged but sits higher at 5.5% for the third consecutive month. The increases occurred for core-aged (25 to 54 years) women and men, while youth (15 to 24) and people aged 55 and older saw little change. Much of the gain was concentrated in part-time employment, which rose 48,000.

The strong jobs market suggests that previous interest rate increases have not effectively slowed economic growth or consumer demand. More interest rate actions may be required. Reuters  Financial Post

What’s ahead for this week and beyond?

In Canada, Monday’s observance of the Thanksgiving holiday will cause a slow news week for Canadian announcements. On October 25^th, the Bank of Canada will make an interest rate announcement.

In the U.S., until it occurs the election of the next Speaker of the House will consume much of the news attention. Economically, the Producer Price Index (PPI) and the Consumer Price Index (CPI) will be the most objective and important reports prior to the Fed’s interest rate announcement on November 1^st.

Globally, China will release its outstanding loan growth and new loans, which is an important indicator tracking their ongoing domestic, economic woes. Japan will report machine orders, corporate goods prices, and bank lending providing a measure of understanding of their economic health.

source: ARG analysis, Bloomberg and MSCI

What happened in September?

It was a difficult month for most investors as equities, the Canadian dollar, and gold all lost value. The rising price of oil may have reduced the losses for the TSX, but on a broad-based basis, a loss of more than 3½% for the month did not deliver the desired results.

(source: Bloomberg https://www.bloomberg.com/marketsand ARG Inc. analysis)

August had, essentially, five weeks of trading last month, but September was a shorter month with a holiday in both Canada and the U.S. and the timing of weekends seemed significantly shorter.  However, the return to business following the end of summer produced several developments for investors.

1. September 1^st

The month began with the release of the U.S. employment report that showed 187,000 nonfarm payroll jobs had been added in August, and the unemployment rate rose to 3.8%. Employment trended upward in health care, leisure and hospitality, social assistance, and construction, and declined in transportation and warehousing.  BLS release

2. September 6^th

At its latest interest rate decision, “The bank of Canada (today) held its target for the overnight rate at 5%, with the Bank Rate at 5 ¼% and the deposit rate at 5%. The Bank is also continuing its policy of Quantitative Tightening.” Considerations included the moderating of inflation in advanced economies, while remaining above goal, slowing global growth, led by China, and robust consumer spending in the U.S.  Bank of Canada announcement

3. September 13^th

U.S. CPI rose 0.6% in August, after rising only 0.2% in July. “Over the last 12 months, the all-items index increased 3.7 percent before seasonal adjustment” according to the Bureau of Labor Statistics. Core inflation, which excludes food and energy, rose more than expected at 0.3% for the month.   CNBC and August inflation  BLS release   CNN and August inflation

4. September 14^th

The European Central Bank (ECB) increased its three key lending rates by 25 basis points. North American and European equity indexes jumped up on the news, and the Europeans leaped higher on a percentage basis. ECB Monetary Policy Decisions

5. September 15^th

The United Auto Workers (UAW) began a strike against the Big 3 U.S. car manufacturers for the first time walking out at all of them simultaneously. At the end of the month, the UAW expanded its strike action further as the rhetoric from both sides continued.  APNews and UAW strike

6. September 20^th

At the latest monetary policy announcement from the Federal Reserve, Chair Powell stated, “Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have slowed in recent months but remain strong, and the unemployment rate has remained low. Inflation remains elevated.” Consequently, the federal funds rate was maintained at a range of 5¼ to 5½ percent.     Federal Reserve announcement and press conference

7. September 29^th

Released on Friday was the U.S. Federal Reserve’s primary inflation indicator, Personal Consumption and Expenditures Price Index.  In August prices rose by 0.4% (down from 0.9% in June) in aggregate, excluding more volatile food and energy, the index rose by 0.1%. This was the smallest monthly increase since November. The core PCE level is down from 4.3% in July and is at its lowest level in nearly two years. These levels were slightly below expectations, and the year-over-year annual increase for core PCE was 3.9%, which matched the forecasts.

The continuing improvements in the battle against inflation suggest that the Federal Reserve is nearing the end of its rate increases.  BEA’s PCE release   CNBC and PCE

8. September 30^th

The trading week had ended before a deal was reached in the House of Representatives on Saturday evening. It is a stop-gap measure, that extends spending for an additional 45 days after it is expedited and approved in the Senate and signed by President Biden just prior to Sunday’s 12:01 am deadline.   CNBC and “shutdown”  CNN and “shutdown”

What’s ahead for October and beyond in 2023?

After avoiding a U.S. government shutdown, two important interest rate announcements from the Bank of Canada and the Federal Reserve will occur on October 25^th and November 1^st, respectively. The threat of a U.S. government shutdown in mid-November may be repeated unless a full spending bill is passed.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

Markets continued to suffer from uncertainty about whether a government spending bill would be successfully negotiated in the U.S. Congress. Equities broadly lost ground for the third week out of the last four. The trading week had ended before a deal was reached in the House of Representatives on Saturday evening. It is a stop-gap measure, that extends spending for an additional 45 days after it is expedited and approved in the Senate and signed by President Biden just prior to Sunday’s 12:01 am deadline. It is not a longer-term spending bill, and the uncertainty and threat of a shutdown may be repeated in mid-November.   CNBC and “shutdown”  CNN and “shutdown”

Canadian retail sales figures showed that July’s spending reached $66.1 Billion, a 0.3% gain, which was slightly below StatsCan’s forecast. Despite the BC port strikes 7 of 9 industries reported higher sales than in June. This data and more suggest that the Bank of Canada could leave interest rates unchanged at their next announcement in October, and perhaps for the year’s balance. Retail sales and interest rates

Real Gross Domestic Product (GDP) was essentially unchanged in July, following a 0.2% decline in June.  Overall, 9 of 20 industrial sectors posted increases.  The largest negative decline was for the manufacturing sector, which contracted by 1.5%.  It was the second consecutive monthly decline for manufacturing.  Sectors impacted by wildfires, mining and quarrying, accommodation, and food services grew in July after declines in June.  StatsCan GDP release

Also released on Friday was the U.S. Federal Reserve’s primary inflation indicator, Personal Consumption and Expenditures Price Index.  In August prices rose by 0.4% (down from 0.9% in June) in aggregate, excluding more volatile food and energy, the index rose by 0.1%.  These levels were slightly below expectations, and the year-over-year annual increase for core PCE was 3.9%, which matched the forecasts.   BEA’s PCE release   CNBC and PCE

What’s ahead for this week and beyond?

In Canada, imports, exports and trade balance, and the Ivey Purchasing Managers Index are scheduled earlier in the week. On Friday the employment report will be released.

In the U.S., construction spending, durable goods orders, factory orders, mortgage market index, and ADP’s national employment report are scheduled to be reported. Also on Friday, the U.S. non-farm payroll report and unemployment will be released.

Globally, the Eurozone will report its unemployment rate, producer prices, and retail sales. Japan will release its household spending, and Great Britain will announce its nationwide house price index.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

Most of the influence on equities was associated with actions, or more appropriately inactions, in the U.S. The Federal Reserve’s interest rate announcement on Wednesday and the ongoing threat of a government shutdown provided additional uncertainty that contributed to equities losing value. Canadian consumer inflation also provided some home-grown negativity.

On Tuesday, StatsCan released the latest Canadian inflation showing that “the Consumer Price Index (CPI) rose 4.0% year-over-year in August, up from the 3.3% increase in July.” Energy, rent, and mortgage interest contributed to the rising inflation rate. Price growth moderated for groceries but remained far above goal at 6.9% on an annualized basis.  StatsCan and CPI

The American federal funds rate was held steady again by the Fed’s Federal Open Market Committee; the group that sets U.S. monetary policy. Since March 2022 interest rates have been raised 11 times from its effective lower boundary in a range between 0 and 0.25% to a range of 5.25% to 5.50%. Based on the remarks from Fed Chair, Jerome Powell, rate increases appear to be paused, but rates could remain higher for longer.  Further increases are not expected, but desired reductions will be delayed. Markets had expected no change in the rate, which left uncertainty over future announcements as the primary point of speculation. Equities fell on news and remarks at the press conference with the S&P 500 and NASDAQ dropping 1% and 1 ½%, respectively.  FOMC Fed Funds Rate  CNBC and Fed Rate Decision

Political intrigue in the U.S. Congress continued to escalate its influence on capital markets as the possibility of an October 1^st government shutdown loomed. The economic impact would be substantial, with the travel industry alone losing an estimated $140 million per day.   CNBC and shutdown

What’s ahead for this week and beyond?

In Canada, the most important indicator scheduled for release is the monthly, quarterly, and annualized GDP as of July. The federal government’s budget and budget balance are also scheduled.

In the U.S., building permits, new and pending home sales, Case-Shiller home index, consumer confidence, and durable goods orders are planned. The Federal Reserve’s primary inflation indicator, Personal Consumption, and Expenditures, is scheduled for release on Thursday and will provide an explanation of last week’s interest rate decision. Thursday will also deliver Gross Domestic Product data.

Globally, Great Britain will release its GDP performance. The Eurozone will report economic, services, and industrial sentiment, business climate, selling price expectations, and consumer confidence, which are important, forward-looking indicators.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

It was a strong week for investors concentrated in Canadian equities. The TSX rose over 2½%, which far outdistanced the Dow’s modest gain and small losses incurred by the S&P 500 and NASDAQ. Additionally, the Canadian dollar gained almost 1% in value compared to its U.S. counterpart, adding to the lustre of the results.

The price of oil added nearly 4% for the week. The TSX has been positively correlated to the price of commodities, including oil, which may account for last week’s strong performance by the TSX.  Correlation – TSX and Oil

On Wednesday, the Bureau of Labor Statistics released the latest U.S. consumer price information. The Consumer Price Index rose by 0.6% during the month of August, tripling the 0.2% monthly increase for July. The year-over-year rate also increased, “Over the last 12 months, the all-items index increased 3.7% before seasonal adjustment.” Although the top-line inflation rate is rising, much of this is attributed to rising gasoline prices. Friday’s closing price of oil is the highest week’s end close since November 2022. Removing gas and food, two volatile components, from the calculations, has “core inflation” continuing to moderate. It is at its lowest level since March 2021.  CNBC and August CPI   BLS CPI release   CNN and August CPI

Another inflation indicator, the U.S. Producer Price Index, was also released last week by the Bureau of Labor Statistics. Price increases rose for companies in August, and rose faster than in July, like the behaviour of the CPI.  BLS PPI release

Consensus has not been reached on whether the Federal Reserve will raise rates further, but most agree that rates should begin falling in early 2024.  Interest rates and inflation

What’s ahead for this week and beyond?

In Canada, a robust week for economic releases is scheduled with housing starts, new housing price index, Consumer Price Index (CPI), Producer Price Index (PPI), and raw materials price index being planned.

In the U.S., building permits, housing starts, existing home sales, mortgage market index, and National Association of Home Builders Housing Market Index will be released. The Federal Reserve will make an interest rate decision on Wednesday afternoon.

Globally, the Eurozone will report Harmonized Index of Consumer Prices (HICP) and consumer confidence, Japan and the United Kingdom will release their CPI and PPI, reflecting inflation for the third and sixth largest economies, respectively.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

Despite Goldman’s lowered fears of an inflation-induced recession stock markets acted cautiously to global news early in the week. The G20 Summit that included leader absences occurred while North American equity indexes fell 1 to 2%.

In news much closer to home, the Bank of Canada’s interest rate decision on Wednesday kept interest rates unchanged. After raising rates from effectively zero in March of 2022 to five percent inflation has been brought under some control. Additionally, July’s jobs report showed Canada’s unemployment rate rose to 5.5% as 6,000 jobs were lost. Gross Domestic Product fell during the second quarter of 2023.  CBC and interest rate announcement   Bank of Canada interest rate announcement

On Friday StatsCan reported that employment rose by 40,000 (0.2%) in August. Economists had predicted an increase of 20,000. In 2023, employment has risen by 174,000, yielding a monthly average increase of 21,750 per month.

Total employment is 20,260,000 representing an employment rate of 61.9%, which fell by 0.1% as the population increased by 103,000 last month. The unemployment rate of 5.5%, which is unchanged from July. Employment rose for core-aged men and women aged 25 to 54 by 33,000 and 21,000, respectively. Female youth employment increased by 32,000, male youth fell by 29,000, and women aged 55 and older fell by 27,000.

Professional, scientific services, technical services, and construction increased employment while educational services and manufacturing declined.  StatsCan release    CBC and jobs

What’s ahead for this week and beyond?

In Canada, after last week’s Bank of Canada interest rate decision, was a relatively quiet week for announcements. On September 19^th, the next release of consumer inflation data is scheduled, which may provide some insight into the Bank of Canada’s actions relative to the resilient employment situation.

In the U.S., the mortgage market index, mortgage refinance index, Consumer Price Index (CPI), and Producer Price Index (PPI) for August will be reported.

Globally, Japan releases its corporate goods price index and business survey, China’s new loans, outstanding loan growth, retail sales, and house prices (growing in importance as their economy slows) are scheduled, and Great Britain’s goods trade balance, construction, industrial and manufacturing output will be reported. The Eurozone’s industrial production will be reported on Thursday.

source: ARG analysis, Bloomberg and MSCI

What happened in August?

The Dow’s 1-year returns at 10% have more than doubled TSX, which sits below 5%. The S&P 500 and NASDAQ have done well at 17% and 34%, respectively, in 2023, and 14% and 19% year-over-year.

(source: Bloomberg https://www.bloomberg.com/marketsand ARG Inc. analysis)

Like last month, August ended strongly, with a final week that delivered gains of 1½ to 3½ percent for the major indexes.  However, the third week’s performance could not be reversed before September began.

1. August 1^st

Fitch Ratings downgraded the quality of U.S. sovereign debt from “AAA” to “AA+” reflecting “the expected fiscal deterioration over the next three years, a high and growing general government (GG) debt burden, and the erosion of governance relative to . . . peers . . . that has manifested in repeated debt limit standoffs and last-minute resolutions.” The government debt issue is driven by weaker federal government revenue, new spending initiatives, and higher interest rates as the general government deficit is predicted to rise to 6.9% of Gross Domestic Product in 2025 as the GG debt-to-GDP ratio is forecasted to rise to 118.4% by 2025.
CBC and Fitch  Press Release from Fitch

2. August 4^th

U.S. Employment situation summary and the Canadian Labour Force Survey were both released. Markets treated this data with wariness since the American job market continued its resiliency concern that interest rates would remain at current levels grew. In the U.S., non-farm payroll employment rose by 187,000 jobs in July, and the unemployment rate was unchanged at 3.5% as 5.8 million Americans are unemployed. Employment in Canada was static in July with 6,000 fewer jobs, which represents a change of less than one-tenth of one percent. The unemployment rate rose 0.1% to 5.5%, the third consecutive monthly increase.
StatsCan July Jobs    BLS July Jobs    NYTimes Jobs

3. August 14^th and 16^th

Economic indicators from China, the world’s second-largest economy with significant international trade, began to turn downward. China’s economic recovery and growth are slowing. The economic integration by Canada and the U.S. differs in magnitude and by the overall trade balance, and “bad news from China” has affected different stocks and sectors differently in North America. Canada’s closer ties caused a steeper decline than American indexes, but overall, both sides of the border have been impacted.
China Trading Partners   China’s economic woes

The Federal Reserve released its meeting minutes on the 16^th from the July interest rate decision. The participants noted that “recent indicators suggest the economic activity has been expanding at a moderate pace. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated.” The committee voted unanimously to keep rates steady, while “prepared to adjust the stance of monetary policy as appropriate.” Fed Minutes

4. August 25^th

On August 25^th, Fed Chair, Jerome Powell, spoke about “Inflation and the Path Forward.” According to Powell inflation is still running too high and further interest rate increases may be required. Over the past year, “restrictive monetary policy has tightened financial conditions, supporting the expectation of below-trend growth.” Despite these comments equity markets moved higher on the last day of the week, especially the Dow.
Read Powell’s speech   Watch Powell’s speech   CNBC summary

5. August 31^st

The month concluded on a high note when Atlanta Federal Reserve Bank President Raphael Bostic indicated that “policy is appropriately restrictive” during a speech in Cape Town, South Africa. Although he did not indicate that it was time to ease monetary policy, he stated patience is needed to allow the current restrictive policy to influence the economy and not inflict unnecessary economic pain.” The Fed is expected to leave rates unchanged at its next meeting. CNBC and Bostic

What’s ahead for September and beyond in 2023?

The Bank of Canada and Federal Reserve have interest rate announcements scheduled for September 6^th and 20^th, respectively. Seven weeks will have passed since each of these central banks released interest rate decisions. Each country will have released two rounds of consumer inflation and employment reports by their September announcement dates.

The deliberations at the Bank of Canada show that concern over raising rates too quickly is top of mind for members of the rate-setting committee.  https://www.cbc.ca/news/business/bank-of-canada-deliberations-1.6919589

source: ARG analysis, Bloomberg and MSCI

What happened last week?

Before the Labour Day holiday weekend, the last week of the summer was almost all green.  Each major equity index, the Canadian dollar, gold, and oil moved upward, not subtly.  Our dollar may have just edged ahead of its American cousin, but the performance achieved by the rest of the gainers in our grid was impressive.

Canada’s Gross Domestic Product for June and the second quarter showed that the size of the economy was unchanged after growing by 0.6% in the first quarter. In May GDP increased 0.2% but fell 0.2% in June as 12 of 20 sectors produced decreases.  StatsCan monthly GDP  StatsCan YoY GDP

The Federal Reserve’s primary inflation indicator, Personal Consumption and Expenditures (PCE) was released on Thursday by the Bureau of Economic Analysis showing that year-over-year inflation rose from 3% last month to 3.3% in July.   NYTimes and PCE   BEA PCE

On Friday the U.S. Bureau of Labor Statistics announced that 187,000 jobs had been added in August, and the unemployment rate had risen to 3.8%. “Employment continued to trend up in health care, leisure and hospitality, social assistance, and construction. Employment in transportation and warehousing declined.”   BLS Jobs

These important indicators are trending positively for investors. The slowing jobs market and the lowered level of inflation (despite its small rise and level above the 2% goal) indicate that previous monetary policy moves by the Fed have lowered demand, slowed the economy, and have not plunged the U.S. economy into recession. The Canadian economy seems to be further along the path as our economy shrank in June, and that effect will be judged by the Bank of Canada next week.

What’s ahead for this week and beyond?

In Canada, imports, exports and trade balance, labour productivity, and capacity utilization are scheduled after Monday’s Labour Day holiday. The two most important announcements will be Wednesday’s Bank of Canada interest rate decision and Friday’s employment report.

In the U.S., after Labor Day durable goods orders, factory orders, and several Purchasing Managers Indexes (PMIs) will be released.  Following last week’s PCE inflation measure, August’s Consumer Price Index (CPI) will be released at the end of the week.

Globally, Japan’s household spending, revised GDP, and foreign reserves, China’s imports, exports, and trade balance will be released along with the Eurozone’s Producer Price Index, retail sales, GDP, and employment report.

source: ARG analysis, Bloomberg and MSCI

What happened last week?   

It was a mild, wait-and-see week for the two broad-based indexes (TSX and S&P 500) in our grid, as the U.S. Federal Reserve held its annual symposium in Jackson Hole, Wyoming.  On Friday, Chair, Jerome Powell, spoke about the Fed’s economic outlook and prospective view of monetary policy.   According to Powell inflation is still running too high and further interest rate increases may be required.  Despite these specifics equity markets moved higher on the last day of the week, especially the Dow.  Both inflation and employment will be reported prior to the next interest rate announcements by the Fed and the Bank of Canada in September. Federal Reserve Powell Speech You Tube Powell Speech  CNBC Powell and Inflation  

The earnings season for Canadian banks began with RBC and TD reporting quarterly results.  Since most Canadian investors hold positions in the major banks directly or through mutual or exchange-traded funds, the corporate results for members of the financial services sector are an important bellwether for the value of their holdings.   

The effects of higher interest rates are beginning to affect profitability.  Last quarter RBC boosted its profits by almost $300 million over the same quarter last year to $3.9 Billion, based on revenues that rose 20% to $14.4 Billion.  TD missed analyst expectations with earnings down 8% year-over-year for the quarter to $3 Billion as expenses and loan loss provisions rose.  CBC – RBC Jobs  BNN Bloomberg – Canadian Banks  CMP – TD Earnings  

What’s ahead for this week and beyond? 

In Canada, the current account and economic output, expressed as monthly, quarterly, and year-over-year Gross Domestic Product are the two most meaningful economic announcements on the schedule.  The remainder of the big Canadian banks will report their most recent quarterly results. 

In the U.S., “shelter” which was the predominant contributor to the most recent inflation data will continue in the news with monthly home prices, the Case-Shiller home price index, Also, consumer confidence, the ADP national employment report and purchasing managers indexes will be released.  The Federal Reserve’s primary inflation indicator, Personal Consumption and Expenditures (PCE) will be released on Thursday, and could provide volatility, if capital markets react with surprise. 

Globally, Japan will also release its consumer confidence and industrial output data.  The Eurozone will report economic, services and industrial sentiment, business climate, consumer inflation expectations, consumer confidence, and employment. 

source: ARG analysis, Bloomberg and MSCI

What happened last week?

The latest economic woes in China affected markets globally last week, equity indexes in our grid, above, lost 2 to 3% last week. August-to-date equities have lost about 3 to 5%. China’s economic recovery and growth are slowing. The economic integration by Canada and the U.S. differs in magnitude and by the overall trade balance, and “bad news from China” has affected different stocks and sectors differently in North America. Canada’s closer ties caused a steeper decline than American indexes, but overall, both sides of the border have been impacted.

According to a Reuters survey, Gross Domestic Product grew 6.3% in the last quarter measured on a year-over-year basis, which is 1% below expectations. The annualized growth expectation was not reached because the most recent quarter ending in June grew by only 0.8%, down significantly from the first quarter’s 2.2% growth over the same period in 2022.  The Guardian and China’s GDP

The Canadian Consumer Price Index (CPI) rose 3.3% year-over-year, following a 2.8% increase in June. On a monthly basis, consumer prices rose 0.6% in July compared to 0.1% in June. These increases echoed U.S. CPI that was released last week showing an uptick in July (3.2%) compared to June (3.0%) for the annualized and monthly inflation rates. Like the U.S. where inflation had been falling for over one year, 90% of the year-over-year inflation in July was attributed to shelter, and Canadian consumer prices were led by a 31% rise in mortgage interest costs. StatsCan CPI release  CBC and inflation

Bond yields are also rising, attracting investment away from equities, further placing stock values under additional pressure. More will be known about where equities and bonds are heading when the next inflation and employment figures are released in advance of the next central bank interest rate announcements scheduled for September.  CNN and bond yields

What’s ahead for this week and beyond?

The new housing price index and retail sales in Canada are the two economic indicators of note on the calendar.

In the U.S., “shelter” which was the predominant contributor to the most recent inflation data will dominate the news for investors with existing and new home sales, mortgage refinance index, building permits, and housing starts set to be reported.

Globally, no major European or Asian economic releases are scheduled as the summer season continues.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

Canadian markets were closed on Monday for the observance of the penultimate summer holiday. Markets will next be closed on both sides of the border for Labour Day on September 4^th, which signifies the end of the summer and is just three weeks away.

U.S. Consumer Price Index (CPI) rose 0.2% in July, the same as in June, and 3.2% on a year-over-year basis, which is slightly higher than June’s 3.0% annualized inflation. Over 90% of the monthly all-items increase is attributed to the continued rise in the price of shelter. Shelter rose 7.7% in July and comprises almost 35% of the U.S. CPI, the largest category for the more than 80,000 price quotes collected monthly. Vehicle insurance, food at home (i.e., groceries) and away from home, and energy all contributed to rising consumer prices in July. BLS release CNN and inflation

Equity markets reacted favourably when inflation data was released. All four major indexes jumped up on the news before finishing the day in positive territory after falling slightly from their peaks on Thursday. By the end of the week, the inflation release was not nearly as newsworthy as previous announcements that might directly affect monetary policy. Another employment and inflation will be released before the next announcements by the Bank of Canada and the Federal Reserve in September.

China, the world’s second-largest economy after the United States, saw its trade numbers for July fall. For the third consecutive month, Chinese exports have fallen. Both foreign and domestic demand for its products along with a real estate crisis and the war in Ukraine have contributed. Exports have dropped by 14.5% compared with July 2022. Mexico and Canada have surpassed China as the top trading partners of the U.S. as political intrigue brings supply chains closer to home to reduce risk. NYTimes and China

What’s ahead for this week and beyond?

In Canada, inflation data will dominate with consumer, producer, and raw materials price indexes scheduled for release, along with manufacturing sales, and wholesale trade figures.

In the U.S., import and export price indexes, the National Association of Home Builders (NAHB) housing market index, building permits, housing starts, industrial production, capacity utilization, manufacturing output, and retail sales will be announced.

Globally, Japan will release its latest GDP, capacity utilization, imports, exports and trade balance, and its CPI. Also, scheduled for announcement are China’s retail sales and industrial output, Eurozone’s industrial production, GDP flash estimate, and Great Britain’s consumer and producer inflation, which has been much higher than the U.S., Canada, and most other nations at about 8%.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

American equity indexes lost about ½ percent on Friday, while Canada’s TSX rose by the same amount as the news centered on jobs at the week’s end. The cooling labour market suggests that the demand-dragging interest rate increases by the Bank of Canada and the Federal Reserve have lowered job creation. Friday’s reports could be a concrete step to pausing, and eventually lowering, interest rate changes. However, the jobs news did not salvage the week for equity investors, which it likely would have if U.S. creditworthiness had also not been in the news.

Employment in Canada was static in July with 6,000 fewer jobs, which represents a change of less than one-tenth of one percent. The unemployment rate rose 0.1% to 5.5%, the third consecutive monthly increase. To date in 2023 the monthly gain in jobs is 22,000 on average. On a year-over-year basis, average hourly wages rose 5.0% in July, which lags inflation over the past 2 years.   StatsCan July Jobs

In the U.S., non-farm payroll employment rose by 187,000 jobs in July, and the unemployment rate was unchanged at 3.5% as 5.8 million Americans are unemployed. Employment rose in health care, social assistance, financials, and wholesale trade. Labour force participation, those employed or seeking employment continues at the 62.6% level for the fifth month in a row.    BLS July Jobs        NYTimes Jobs

The news that has affected markets most was the credit downgrade issued by Fitch, one of the big three ratings agencies with Moody’s and Standard & Poor’s. U.S. creditworthiness was lowered by Fitch Ratings to AA+ from AAA. In 2011 when S&P downgraded U.S. government debt for the first time the S&P 500 fell more than 10% during the first week, and the TSX dropped 3.4% in one day on the unprecedented move. Thankfully, the current reaction was more muted than twelve years ago.    Bloomberg Stocks

What’s ahead for this week and beyond?

In Canada, the week has been shortened by a much-appreciated summer holiday (uniquely named in each province and territory) on Monday. Canadian imports, exports, and trade balance will be announced on Tuesday.

In the U.S., consumer credit, international trade, wholesale sales, and inventories are scheduled for release. The Consumer Price Index (CPI) will be reported on Thursday, which, coupled with last week’s non-farm payroll report, could predict future Federal Reserve monetary actions.

Globally, China, which has been in a quiet period for economic announcements, will release its imports, exports, trade balance, and consumer and producer price indexes.  Germany will report its industrial output and CPI.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

Canada’s TSX nearly broke even for the week, while American and Global (i.e., ACWI) gained 1 – 2%. Almost all the positive gain for the week was achieved on Friday. The TSX rose two-thirds of a percent (0.66%) to nearly eliminate its losses, and the other indexes had neither gained nor lost ground by the end of trading on Thursday, which allowed Friday’s positive results to represent the entire week.

This “net neutrality” preceded and followed the Federal Reserve’s raising the federal funds rate, its benchmark, by ¼% (25 basis points) on Wednesday. This announcement met market expectations, and Chair Jerome Powell’s remarks at the press conference echoed the wait-and-see stance the Fed will take over the next eight weeks. Before the next interest rate announcement inflation and employment will be reported twice, and Powell stated several times that the Fed will not indicate its next moves until its next announcement on September 20^th. Fed press conf and announcement   NYTimes and Fed

The European Central Bank (ECB) raised its key interest rates by 25 basis points. Returning inflation to the target 2% level is the universally stated objective, and the ECB shares this goal.  ECB rate announcement.

Canadian economic growth was strong for the last reported month, May, as Gross Domestic Product (GDP) rose by 0.3%. More than half the industrial sectors grew, but oil and gas production and residential construction fell.  The former was reduced by the effects of Alberta wildfires and increasing interest rates from the Bank of Canada. Based on preliminary data for June, the Canadian economy could shrink, and be lower than anticipated should negative months appear.  StatsCan release   CBC and GDP

The news was positive despite some less-than-stellar domestic economic performance, which yielded a week with measured gains in the U.S. and only a very slight loss at home on the TSX.

What’s ahead for this week and beyond?

In Canada, the monthly employment report will arrive at the end of the week along with the Ivey Purchasing Managers Index (PMI). The earnings season for Canadian public companies begins to pick up momentum over the next three weeks.

In the U.S., PMIs from Markit and ISM will show corporate optimism for manufacturing and services. ADP will release its employment report. Factory and durable goods orders will be reported. The non-farm payroll report for July will be released on Friday.

Globally, Eurozone employment will be reported on Tuesday, and retail sales and Producer and Consumer Price indexes on Thursday. The Bank of England will also release its latest interest rates on Thursday. Japan will report its employment, construction orders, housing starts, and consumer confidence.

source: ARG analysis, Bloomberg and MSCI

What happened in July?

North American equity indexes added another 2 to 4 percent to their year-to-date advances in response to positive news on inflation, jobs, and monetary policy. Gold, oil, and Canadian government bonds also increased as the Canadian dollar nearly broke even after losing just five one-hundredths of a cent by month’s end.

(source: Bloomberg https://www.bloomberg.com/marketsand ARG Inc. analysis)

Like last month, July ended strongly. June achieved an exceptional day of gains for equity indexes on the 30^th, while July earned positive returns over the last two-thirds of the month.

1. July 5^th

The month began slowly with markets closed for the official observance on July 3^rd of Canada Day and Independence Day on July 4^th. Following the two holidays the Federal Reserve released the meeting minutes from its previous Federal Open Market Committee that included interest rate deliberations and opinions of its committee members. The belief that the federal funds rate must be raised to 5.6% (up from their March 2023 projection of 5.1%), and their unanimous decision to raise rates at their mid-June meeting, sent equity markets lower. FOMC Meeting Minutes   Summary of Econ Projections

2. July 7^th

Continued strength in employment for June held markets steady. The increase of 60,000 and 209,000 additional jobs in Canada and the U.S., respectively, represented a situation where “good news” might be “bad news”. A robust labour market that is able to fuel consumer demand and inflation might require more severe monetary policy from the Bank of Canada and the Federal Reserve. Markets were wary and held their ground and did not rise on this news that might otherwise be interpreted positively. StatsCan June Jobs BLS U.S. June Jobs

3. July 12th

The U.S. Bureau of Labor Statistics reported that the Consumer Price Index had risen 0.2% in June, and the all-items index had risen 3.0% over the last 12 months. Shelter continued as the largest contributor to price increases, along with groceries and food away from home. Energy prices fell, especially gasoline, heating oil, and natural gas, while electricity prices rose.

The Bank of Canada increased its benchmark interest rate by ¼ percent (25 basis points to 5%. The small increase was aligned with expectations and was driven by easing inflation and lower energy prices and a decline in goods price inflation. “However, robust demand and tight labour markets are causing persistent inflationary pressures in services” according to the Bank’s press release and in its Monetary Policy Report.

The lowering of inflation and tempered policy by the Bank of Canada were viewed positively and markets turned upward in response.

4. June 18^th

Actual good news was announced by StatsCan as consumer inflation rose on a year-over-year basis by 2.8%, which was down from the previous month’s annual inflation of 3.4%. The devil is in the details since much of the decline could be attributed to falling gasoline prices in June. “Excluding gasoline, headline inflation would have been 4.0% in June, following a 4.4% increase in May. Canadians continued to see elevated grocery prices (+9.1%) and mortgage interest costs (+30.1%)” based on StatsCan analysis.   StatsCan CPI Release

5. July 26^th

The Federal Reserve increased its interest rates, again by 25 basis points (¼ percent). There may have been some hope that a pause in rate increases might be permitted by slowing inflation, but once the news was received it was digested well, and markets rose again.  Fed Press Conf

6. July 28^th

The Fed’s primary inflation indicator, the Personal Consumption Expenditures price index showed an increase of 3.0% over the past year and 0.2% for June, which is a very positive indicator. PCE Release

What’s ahead for August and beyond in 2023?

The continuous flow of news of the battle against inflation and interest rates is wearying. Although the conditions persist to ensure that monetary policy will be closely followed, the next Bank of Canada and Federal Reserve announcements will occur on September 7^th and 20^th, respectively. A brief reprieve from the bombardment of speculation and news from central banks could be quiet to markets and the balance of summer.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

The positive momentum that began two weeks ago continued upward last week.  The tech-heavy NASDAQ retreated slightly, but the remaining North American equity indexes delivered strong gains over the last five trading sessions.  Oil, gold, and bonds delivered gains last week, too.

For Canadian equities encouraging inflation news was helpful.  On Tuesday, StatsCan released the year-over-year Consumer Price Index (CPI) that has fallen to 2.8%, its lowest level since March 2021, and down from May’s 3.4%. During the month of June, the all-items index rose 0.1% compared to 0.4% for May.  Prices fell for gasoline and telecommunications, 21.6% and 14.7%, respectively, to lower the overall rate of inflation.  However, food and mortgage costs continue to rise.  Grocery prices have risen 9.1% in the past year and 20% over the past two years.  After the Bank of Canada has raised interest rates ten times, mortgage interest costs have jumped 30% in the past year.  StatsCan release CBC and inflation

The quarterly earnings reporting has been underway for about 2 weeks, and the news has been generally positive.  As of Friday, 18% of the S&P 500 have reported their earnings and three-quarters have beaten Earnings Per Share (EPS) estimates by an average of 6.4%.  The proportion of firms beating estimates and the size of the surprise is at the 10-year average for the S&P 500.  Factset S&P 500

In Canada, the earnings situation and its revised estimates are far less positive.  The EPS estimates have been lowered 4.8% for Q2 that ended on June 30^th.  Four of eleven sectors are projected to report year-over-year earnings growth, led by the Information Technology and Financials sectors.  Overall, earnings growth is expected to turn positive by Q4, which may be reflected in recent values.  Factset TSX

The climate created by lowering inflation and pressure to raise interest rates is influencing markets.  This will be tested or confirmed at the Federal Reserve’s next interest rate announcement.

What’s ahead for this week and beyond?

In Canada, the federal budget balance will be reported.  Monthly Gross Domestic Product is scheduled for Friday, which will reveal the effectiveness of Bank of Canada monetary actions.

In the U.S., the monthly home price index, mortgage market index, mortgage refinance index, building permits, new home sales, durable goods, Gross Domestic Product (advance), consumer confidence and Personal Consumption and Expenditures are all scheduled for release.

Globally, Eurozone consumer inflation expectation, economic sentiment, selling price expectations and business climate will be reported.  Japan will release consumer inflation data as a bellwether for the Asia-Pacific region’s battle against price increases.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

It was nearly an all-green week for investors.  North American equity indexes were buoyed 2-3% by interest rate and inflation news. The Canadian dollar, gold and oil also rose with bonds the only retreating indicator in our grid, above.

Most of the momentum was built by anticipating midweek releases. Wednesday was not a slow news day for investors in this country, or elsewhere. The Bank of Canada raised its benchmark interest rate, the overnight rate, ¼% (25 basis points) to 5%. Despite overall inflation beginning to slow, the Bank stated, “robust demand and tight labour markets are causing persistent inflationary pressures in services.”  Although significant progress has been made by lowering inflation from its peak of more than 8%, strong demand continues to fuel price increases. The Bank is also continuing its policy of Quantitative Tightening to reduce demand by reducing liquidity in debt markets. BoC Monetary Policy Report

Also, on Wednesday the Bureau of Labor Statistics announced that the U.S. Consumer Price Index rose 3.0% over the past year. This is the smallest year-over-year rate of inflation in nearly two years.  As of April, and May year-over-year inflation was 4.9% and 4.0%, respectively. Prices rose 0.2% in June, with shelter accounting for over 70% of that increase. Overall food-at-home was unchanged as meat, poultry fish and eggs decreased by 0.4% in June. The slowing inflation numbers are lending credence to the anticipation that the Federal Reserve will extend its pause on interest rate increases. BLS CPI release

Over the past year Canadian and American equity indexes have risen 10-25%. Recent increases reflect that central banks may be concluding their rate hike cycles, and a “soft landing”  is probable as inflation slows and economic growth and employment continue their resiliency. CNBC and soft landing   NYT soft landing

What’s ahead for this week and beyond?

In Canada, several important indicators including retail sales, wholesale trade, producer and raw materials price indexes, consumer price index, new housing price index, building permits, and housing starts are scheduled for the coming week.

In the U.S., many similar announcements will occur with retail sales, manufacturing output, capacity utilization, business inventories, National Association of Home Builders market index, building permits and housing starts on the calendar.

Globally, Japan will release its capacity utilization, imports, exports and trade balance, U.K. will report its consumer, raw materials, and producer price indexes. The European Central Bank is scheduled to deliver its next monetary policy statement and interest rate announcement on July 27^th.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

Despite a week shortened by national holidays, many significant economic developments occurred. Jobs reports and Federal Reserve deliberations dominated economic news and heavily influenced markets.

Midweek ADP released its June employment report showing 497,000 new U.S. jobs for June. Companies with less than 250 employees accounted for nearly all of the job gains in leisure and hospitality, trade, construction, education, healthcare, transportation, utilities, natural resources, and mining. ADP report

The U.S. Federal Reserve released minutes from its Federal Open Market Committee’s latest interest rate meeting. Although the decision to pause rate increases was unanimous, most members believe that additional rate increases will be warranted, and a pause allows “time to assess the economy’s progress toward the Committee’s goals of maximum employment and price stability.”  CNBC on FOMC   Fed minutes

The arrival of official jobs announcements on Friday were two more influential economic releases. StatsCan reported 60,000 new Canadian jobs in June and unemployment rose 0.2% to 5.4%. In the U.S., non-farm payroll increased by 209,000 according to the Bureau for Labor Statistics (BLS), significantly less than ADP’s report. More importantly, job creation in June is well below the average for the first six months of 2023. The U.S. unemployment rate was unchanged at 3.6%. The difference between the two countries was a slight rise in the labour participation rate in Canada, yet both countries saw similar increases in year-over-year wages to 4.2% and 4.4%, respectively, for Canada and the U.S.

This could be a case where “good news” is “bad news” as the Federal Reserve and Bank of Canada decide their next monetary policy moves. The strength of the economy evidenced by positive jobs data suggests that prior interest rate increases have not slowed demand and the economy sufficiently to lower inflation closer to the 2% target. On Friday, following the jobs reports the North American indexes fell ¾% to 1½% before reversing much of those losses by week’s end.  StatsCan release    BLS release   CNBC analysis of jobs release

What’s ahead for this week and beyond?

In Canada, building permits, housing starts, new home sales, and manufacturing sales will be released. On Wednesday the Bank of Canada will announce an interest rate decision.

In the U.S., after last week’s employment news inflation will be featured as the Consumer Price Index (CPI) and Producer Price Index (PPI) will be released prior to the Federal Reserve’s interest rate announcement on July 26^th.  Also, wholesale sales and inventories, and consumer credit are scheduled.

Globally, the Eurozone will release its PPI, retail sales, and industrial production.  China will announce imports, exports, and trade balance.  Japan will report its capacity utilization and industrial revenue.

source: ARG analysis, Bloomberg and MSCI

What happened?

Equities rose at a substantially higher rate in June than in the previous five months of the year. For example, the TSX is ahead 4% in 2023 with ¾’s of that gain occurring last month. The Dow rose 4½% last month and is now nearly 4% in the black for the year.

The first half of the year saw equities performing well, especially during the second quarter and in June. The NASDAQ was the clear winner among North American indexes after posting a jump of nearly 32% this year. The S&P 500 managed to gain almost exactly half the NASDAQ’s increase by posting an increase of 15.9% over 6 months, which is also impressive. The 30 major corporate constituents of the Dow rose 3.8% collectively and were edged out by the nearly 4% rise of the TSX.

Bloomberg https://www.bloomberg.com/marketsand ARG Inc. analysis)

The rise in equities can be attributed to the resiliency of two major economic indicators, economic growth, and employment, despite persistent inflation above target levels and almost uninterrupted interest rate increases by central banks.

What happened in June?

(source: Bloomberg https://www.bloomberg.com/marketsand ARG Inc. analysis)

June ended very strongly with an exceptional day of gains for equity indexes on the 30^th.  Before the last day, several significant economic events spurred markets forward, and not always upward. Typically, many of the influences affecting Canadian and American markets emanate from the U.S., and June was no exception.

1. June 2^nd – The month began with good news as the U.S. jobs market continued its strong growth when nonfarm payroll increased by 339,000 in May, which is more than March and April’s employment increases of 217,000 and 294,000, respectively. The average monthly gain in employment over the past 12 months has been 341,000, showing that job growth has returned to more robust levels. Unemployment rose 0.3% to 3.7% despite gains in services, construction, healthcare, transportation, government, and warehousing.
2. June 6^th – The Organization for Economic Cooperation and Development (OECD) reported April consumer inflation at 7.4% for its 38 member countries. Inflation had been 7.7% in March as 27 countries reported a decline, but inflation exceeded 10% in 10 countries and surpassed 20% in Hungary and Turkey. Also, the OECD projects global growth at 2.7% this year, and 2.9% in 2024, which is below the 3.4% average growth seen in the seven years before the pandemic.June 9^th – Canadian “overall employment was little changed in May, as employment fell by 77,000 for youth aged 15 to 24 and it increased by 63,000 among people aged 25 to 64” according to the latest data from StatsCan. Despite the small gain in total employment, growth has moderated suggesting that this economic indicator is heading toward neutral or negative territory.

3. June 13^th – The Bureau of Labor Statistics released S. inflation data for May showing consumer price increases of 0.1% in May and year-over-year of 4.0%. Prices had risen 0.4% in April, and May’s annualized inflation rate was the lowest since March 2021.June 14^th – The Federal Reserve made its latest interest rate decision, holding rates steady, and markets reacted mostly favourably. The pause in interest rate increases is expected to be temporary according to the information released with the announcement since the 2% inflation target has not been reached. Simultaneous to the interest rate announcement was the release of the Fed’s Summary of Economic Projections, which contains the dot-plot, which collects the individual opinions of Federal Open Market Committee (FOMC) members for upcoming interest rates.  Currently, FOMC members project that interest rates will rise into 2024 before falling slightly, and lower rates in the 3 to 3½% range will arrive in 2025.

4. June 21^st – Jerome Powell during his testimony to the House Financial Services Committee stated, “The process of getting inflation down to 2% has a long way to go.” Powell’s support for additional rate increases has markets tempering their enthusiasm for the Fed’s pause earlier in the month.
5. June 30^th – The Bureau of Economic Analysis reported the Personal Consumption and Expenditures price index rose by 0.1% in May after rising 0.4% in April. The PCE is the Federal Reserve’s primary inflation indicator, and raising rates high enough to slow spending, but maintain modest growth is the goal. Markets signified that the Fed is closer to that target than believed just a few days earlier after Powell announced in Madrid that he expects slower rate increases.

On balance, each of these major influences, and many more, have delivered positive effects on equities, where most retirement investors are concentrated. Each of the announcements (above) has arrived with some negative elements but has almost universally caused a rise in values.

What’s ahead for July and beyond in 2023?

The battle against inflation will continue to be waged as the resiliency of the major and global economies continues. Demand has been strong and only recently shown signs of abating. The next interest rate decisions from the Bank of Canada, Federal Reserve, and European Central Bank (July 12^th, 26^th and 27^th, respectively) will account for past decisions and the relative strength of economies.

Subsequent interest rate decisions are not scheduled until mid-September, which will require a heavy reliance on each central bank’s projections for growth, employment, and inflation to carry through to the autumn.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

Friday was a very positive day for most retail investors, especially those concentrated on North American equities. The S&P 500 jumped 1¼% on the last day of the week, and nearly 2½% for the week. The U.S. indexes performed spectacularly, too, but not to the level of Canadian stocks did for the week. The TSX rose 3.8% last week. Admittedly, the TSX still remains far behind the S&P 500 over the past year and in 2023. The S&P 500 has had one of its first halves of any year after gaining almost 16%.

The clear leader for equities indexes after the first half of the year is the NASDAQ which has bested even its own 1-year returns, 32% to 25%, respectively. These returns have not been without volatility, and that trend may continue, emphasizing the need for both short-term and long-term time horizons when planning investments and savings.

During the last two major public communications, Jerome Powell, Federal Reserve Chair, has stated positions and circumstances that are widely seen as positive for the U.S. and global economies, and by extension U.S. equities. After 11 consecutive interest rate increases, the Fed left them unchanged at the last announcement. Recently in Madrid, Powell said, “We did take one meeting where we didn’t move [interest rates], so that’s in a way a moderation of the pace,” he explained. “So, I would expect something like that to continue, assuming the economy evolves about as expected.”

That sentiment was bolstered by spending news from the Bureau of Economic Analysis that showed that the Personal Consumption and Expenditures price index rose by 0.1% in May after rising 0.4% in April. The PCE is the Federal Reserve’s primary inflation indicator, and raising rates high enough to slow spending, but maintain modest growth is the goal. Powell’s remarks  Personal income and spending

What’s ahead for this week and beyond?

In the U.S., Tuesday will celebrate Independence Day, and a relatively light week for the number of economic announcements will occur. Purchasing Managers Indexes (PMIs), durable goods orders, factory orders, mortgage market. On Friday the Non-Farm Payroll report will be delivered.

In Canada, the major economic announcements will be imports, exports and trade balance, and the employment report, which will arrive on Friday.

Globally, the Eurozone’s Producer Price Index (PPI) and retail sales will be announced. Europe’s largest economy, Germany, will report its industrial output, and imports, export, and trade balance. Japan will release household spending and foreign reserves.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

In non-financial news, Canada’s population has topped 40 million people according to a StatsCan release!  An increasing population provides an expanding domestic market and access to a growing workforce for companies to contribute to overall economic output, which is broadly positive news for investors concentrated in Canadian securities. According to the World Bank, Canada is the 38^th largest by population, and the 9^th largest by GDP showing the productivity of our firms, labour and economy.

Despite this news markets performed poorly last week. The major equity indexes, domestically and continentally, lost ground. The TSX almost erased its 2023 positive gains by dropping nearly 3%, while U.S. equities dropped about 1½% collectively.

A positively correlated indicator for economic health is retail sales. In April, Canadian retail sales grew 1.1%, and excluding gasoline stations, fuel vendors, vehicles, and parts the increase was 1.5%. Core retail sales have increased in each of the past five months. StatsCan release

Despite the retail positivity, greater influences prevail. The expectation that the Federal Reserve will raise rates again to temper demand in the resilient U.S. economy has slowed and reversed gains in American and global equity markets. https://www.nytimes.com/2023/06/23/business/stock-market-fed.html

In the U.K., the Bank of England raised interest rates for the 13^th consecutive time and to the highest level since 2008 at 5%. The Bank was responding to inflation data for May, which showed prices had risen 8.7% over the previous year. U.K inflation is about double the rate in Canada and the U.S. Watch BoE Governor  Bank of England rates and inflation

What’s ahead for this week and beyond?

In Canada, the Consumer Price Index for May, which could foreshadow interest rate adjustments from the Bank of Canada, and imports, exports and trade balance will be reported.

In the U.S., durable goods orders, building permits, new home sales, consumer confidence, and monthly home price index. The Federal Reserve’s most important inflation indicator, Personal Consumption Expenditures (PCE) will be reported on along with Gross Domestic Product for the first quarter.

Globally, the Eurozone will announce the latest business climate, industrial and economic sentiment, and consumer confidence data. No major announcements are scheduled from China or Japan, the second and third largest economies.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

Markets moved ahead broadly last week, as North American and global equities positively interpreted two significant and related announcements on inflation and interest rates.

On Tuesday, the U.S. Bureau of Labor Statistics reported consumer inflation for May. The Consumer Price Index (CPI) rose 0.1% during the month after increasing by 0.4% in April. The year-over-year inflation rate dropped significantly to 4.0% after sitting at 4.9% at the end of April. The annual rate of inflation fell for the 11^th consecutive month. https://www.bls.gov/news.release/cpi.nr0.htm

On Wednesday the Federal Reserve released its latest monetary policy. For the first time in the last 11 interest rate announcements rates were unchanged. Since inflation remains well above the 2% target, nearly all of the Fed Governors believe that additional rate hikes will be necessary, suggesting that the pause on June 14^th is only temporary. The Bank of Canada had increased rates at 8 consecutive meetings, then paused in March and April, and then raised rates by ¼% on June 7^th. Domestic and international inflation and monetary policy guided the Canadian central bank’s return to rate increases. Inflation and interest rates elsewhere are less influential for the Federal Reserve. Fed release  BoC release  NYTimes & Fed

Additionally, on Friday the Eurozone released year-over-year inflation information for May with the Consumer Price Index at 6.1%, down from 7% in April. https://tradingeconomics.com/euro-area/inflation-cpi

This news positively affected American equities most with NASDAQ and S&P500 gaining 3¼ and 2½ percent, respectively. The Dow topped a 1% gain for the week, while the TSX rose less than ½%. The lowering of inflation and pausing of rate hikes, even if only temporary, supports the notion that recession may be avoided, and greater economic growth could soon be possible.

What’s ahead for this week and beyond?

In Canada, producer and raw materials prices and inflation, new housing price index, retail sales, federal government budget balance, and the Bank of Canada’s deliberations from its interest rate decision of June 7^th will be released.

In the U.S., after a busy week last week with an inflation and interest rate announcement, indicators will focus on housing with building permits, housing starts, existing home sales scheduled for release.

Globally, consumer and producer inflation data will be released for the U.K. just prior to a Bank of England interest rate announcement. The European Central Bank will conduct a General Council Meeting. Japan will report its industrial production and capacity utilization and release monetary policy meeting minutes from the Bank of Japan.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

Canada’s TSX was the only major North American equity index that lost value last week. It fell about 1% behind the performance of its U.S. peers, whom each made modest gains below ½%.

On Wednesday morning the Bank of Canada raised its policy interest rate by 25 basis points (¼ percent). The target for the overnight rate rose to 4¾%, the Bank rate to 5%, and the deposit rate to 4¾%. In the press release, The Bank stated,

“Globally, consumer price inflation is coming down, largely reflecting lower energy prices compared to a year ago, but underlying inflation remains stubbornly high.  While economic growth around the world is softening in the face of higher interest rates, major central banks are signaling that interest rates may have to rise further to restore price stability.”

Next week the Federal Reserve, the U.S. central bank, has a monetary policy update scheduled for Wednesday, June 14^th. The action this week from Canada is anticipating an increase from the Fed, and our increase is intended to address the recent uptick in our inflation rate and protect the Canadian dollar’s value. Additionally, the European Central Bank will make its next interest rate decision on June 15^th.

Continued increases in interest rates to control inflation could raise the spectre of recession when consumer demand inevitably reacts to the higher cost of borrowing. A slower economy will reduce the ability of many corporates to generate profits at optimal levels and could tarnish share values.

https://www.bankofcanada.ca/2023/06/fad-press-release-2023-06-07/  https://www.cbc.ca/news/business/bank-of-canada-rate-decision-1.6868206

What’s ahead for this week and beyond?

In Canada, after last week’s somewhat surprising rate increase by the Bank of Canada a light week for economic releases with housing starts manufacturing and wholesale sales, and investment inflows scheduled.

In the U.S., a much heavier week for announcements is planned with retail sales, import/export inflation, consumer inflation, producer inflation, industrial production, capacity utilization, and business inventories on the calendar. The upcoming interest rate announcement from the Federal Reserve will be the most influential release of the week and, likely, the month.

Globally, inflation numbers will be released in the Eurozone, specifically Italian and French consumer and import/export inflation, and overall EU industrial production.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

U.S. markets were closed on Monday for Memorial Day, but that did not stop equities from receiving a much-needed boost as May concluded and June began. The surprising laggard among North American equity indexes was the NASDAQ which gained only 1% on Friday, while the others rose 1½ to 2%. Both the TSX and the S&P 500 had been down for the week until Friday’s rally. So far this year and over the past year the NASDAQ has delivered the highest returns of the major indexes. Optimism linked to advances in Artificial Intelligence (AI) has driven gains on the NASDAQ and in the technology sectors of other indexes.

In addition to the tech wave, avoiding a default on U.S. government debt was the leading reason for widespread growth in share values last week. A deal had been agreed between House Leader McCarthy and President Biden prior to Monday’s Memorial Day. Despite deep criticism from both Democrats and Republicans, it received bi-partisan approval in the House and the Senate and was then signed into law. A 2-year extension on the debt ceiling was achieved in exchange for spending and tax reductions.  https://www.nytimes.com/2023/05/29/us/politics/debt-ceiling-agreement.html

Secondly, on Friday morning, the latest U.S. jobs data was announced. Employment grew by 339,000 in May, and the unemployment rate rose 0.3% to 3.7% as the number of unemployed persons grew by 440,000 to 6.1 million.  https://www.bls.gov/news.release/empsit.nr0.htm

The ongoing growth in jobs in Canada and the U.S. has confounded the Bank of Canada and the Federal Reserve. Increasing interest rates to lower demand is less effective when job growth is robust. Jobs growth makes a recession less likely but could lead to additional interest rate increases to slow inflation.

What’s ahead for this week and beyond?

In Canada, the most significant news will likely arrive from the Bank of Canada when it announces its latest interest rates on Wednesday morning. A pause in rate hikes has been in place, and the mid-week release will demonstrate whether The Bank believes that it has struck the right balance between slowing demand-fueled inflation, and not slowing the economy into recession. Friday’s employment numbers will also provide insight into the health of the Canadian economy.

In the U.S., durable goods, factory orders, mortgage market index, wholesale sales, and inventories will be released. On June 14^th the Federal Reserve is scheduled to release its next interest rate announcement, and it will be heavily anticipated and closely watched since its influence on markets could be very strong.

Globally, the Eurozone will report its retail sales, imports, exports and trade balance and employment, unemployment, and wages. China will report consumer inflation and employment data.

source: ARG analysis, Bloomberg and MSCI

What happened in May?

Last month saw divergence among major North American equity indexes with two increasing and two decreasing in value. The NASDAQ gained more than Canada’s TSX lost, plus 6% against minus 5%. The S&P 500 and the Dow delivered performance with a gap of nearly 4%, plus ¼% versus minus 3½%, respectively. The risk of a negative economic shock from the U.S. debt ceiling situation played against increasing optimism for technology stocks concentrated in the NASDAQ with the growth of Artificial Intelligence (A.I.).

(source: Bloomberg https://www.bloomberg.com/marketsand ARG Inc. analysis)

The month of May concluded with the passage of the debt ceiling bill in the U.S. House of Representatives that will keep the government operating and allow the U.S. Treasury to meet its obligations when it is passed by the Senate and signed into law by President Biden. Prior to the deal that was negotiated by President Biden and House Speaker McCarthy several other influential events occurred.

1. May 3^rd – U.S. Federal Reserve increased its federal funds rate by 25 basis points. Predictions that the Fed would not raise rates were proved wrong, but the meeting minutes of the Federal Open Market Committee indicated that the decision was not unanimous. Equities dipped temporarily on recession fears. https://www.federalreserve.gov/monetarypolicy/fomcpresconf20230503.htm
2. May 5^th – Equities recovered quickly from the Fed’s rate increase when Canadian and U.S. jobs data was released. Employment rose by 41,000 and 253,000 in April respectively, and unemployment remained unchanged in both countries at 5.0% and 3.4%. The strength of the jobs market showed that a recession was not immediately on the horizon. https://www150.statcan.gc.ca/n1/daily-quotidien/230505/dq230505a-eng.htm?HPA=1&indid=3587-2&indgeo=0 https://www.bls.gov/news.release/empsit.nr0.htm
3. May 10^th – Inflation has not responded to interest rate increases as much as needed, but has not grown much worse, and had markets holding steady. Inflation news was neutral, and it was not apparent if the U.S. central bank, the Federal Reserve, would stop interest rate rises.
   a. U.S. consumer inflation rose 0.4% in April and 4.9% on a year-over-year basis. Shelter was the largest contributor to the monthly increase, followed by vehicle and gasoline prices. https://www.bls.gov/news.release/cpi.nr0.htm
   b. May 16^th – Canadian inflation rose more in April at 0.7% for the month and 4.4% for the year. https://www150.statcan.gc.ca/n1/daily-quotidien/230516/dq230516a-eng.htm?HPA=1&indid=3665-1&indgeo=0
4. S. debt ceiling arguments and negotiations continued throughout the month and became increasingly concerning for markets during the second half as the deadline to avert a crisis was approaching. Over the last weekend of May, a deal was agreed by Biden and McCarthy. Over the next three days of May the legislation, The Fiscal Responsibility Act, was debated and passed in the House. It is being fast-tracked through the Senate. The goal is to enact this new law before the deadline of June 5^th set by Treasury Secretary Yellen when U.S. government debt obligations would go unmet. https://www.cnbc.com/2023/06/01/debt-ceiling-bill-updates.html

During the first half-day of trading since the House passed the debt bill equity indexes rose ½ to 1% indicating that an important hurdle had been cleared.

What’s ahead for June and beyond in 2023?

Now that the U.S. debt ceiling crisis seems to have been avoided, pending passage in the U.S. Senate markets will return to their usual priorities, inflation, interest rates, economic growth, and the linkages between them.

Inflation has stopped growing but is remaining much higher than the 2% annual rate targeted by Canadian and American central banks. Further interest rate increases aimed at lowering demand, particularly consumer demand and consumer spending, increase the threat of a recession. Traditionally a recession was defined as two or more quarters of negative economic growth. The updated definition of recession is “a significant, widespread, and prolonged downturn in economic activity.”

The goal for Fed Chair, Jerome Powell, and Bank of Canada Governor, Tiff Macklem, is to raise rates just high enough to curb inflation and not induce a recession. The next two opportunities to adjust interest rates are June 7^th in Canada and June 14^th in the U.S. Whether the interest rate pause continues in Canada or begins in the U.S. will provide insight to the path of the economy, and markets, in the near term.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

The TSX and major U.S. corporates (i.e., Dow Jones Industrial Average) lost ground last week. Whereas the S&P500 technology stocks and the tech-heavy NASDAQ performed well. The 2½% gained last week, the 24% year-to-date, and 10½% over the past 12 months have placed the NASDAQ far into the lead compared to its North American rival indexes. Tech stocks are being valued as both a defensive strategy during uncertain times and as growth opportunities based on innovation for areas like artificial intelligence.   EJ sector analysis

All the tech optimism is continuing to be overshadowed by the debt ceiling unpredictability. The deadline of early June, when the U.S. government will run out of cash and be unable to meet its debt obligations is quickly approaching. It appears that a 2-year deal has been tentatively reached between President Biden and House Leader McCarthy. Once the 150-page deal is finalized it will have to pass through the U.S. Senate and House of Representatives and receive Biden’s signature before it becomes law. The reaction for equities is still uncertain since the U.S. Treasury will need to replenish its cash reserves, which could pull capital away from stocks and temporarily, at least, place downward pressure on share prices.  CNN and debt ceiling   CNBC and debt ceiling

Additionally, the Federal Reserve released its meeting minutes from the most recent interest rate decision on May 3^rd, showing officials were divided on whether further interest rate increases were required.  Their next opportunity to adjust rates to respond to inflation, employment, and economic growth is scheduled for June 14^th. The Bank of Canada will announce its interest rate plans on June 7^th. The next three weeks with debt legislation and central bank action will be extremely important for investors.

What’s ahead for this week and beyond?

In Canada, the first quarter Current Account, Gross Domestic Product for March, and year-to-date and manufacturing Purchasing Managers Indexes (PMI) will be released.

In the U.S., American markets are closed for Memorial Day on Monday. Starting on Tuesday the Conference Board will release consumer confidence information, and ADP will release its payroll report ahead of the U.S. Department of Labor’s weekly unemployment claims and the Bureau of Labour Statistics monthly jobs report.

Globally, Japan will release its jobs data, and its industrial production, consumer confidence, and retail sales, while China will report several PMIs. The Eurozone will announce business climate, consumer confidence, services and industrial sentiment, and inflation expectations. The European Central Bank will release its Financial Stability Review.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

It was a strong session for investors in U.S. equities, and the TSX was the only index that lost value. The NASDAQ bested the other major equity indexes for the fourth consecutive week. The gain of more than 3% in one week for the NASDAQ was nearly double the performance of the S&P 500, and well beyond the respectable, yet small, increase of the Dow.

On Tuesday the latest consumer inflation data was released by StatsCan. In April the Consumer Price Index (CPI) rose 4.4% on a year-over-year basis, just slightly above the same figure for March, which was 4.3%. On a monthly basis, prices increased by 0.7% in April, above March’s one-month inflation of 0.5%. Gasoline, groceries, rent, and mortgage interest were the largest contributors. The uptick in the year-over-year rate has begun to raise doubts about whether the Bank of Canada can continue its rate pause.  StatsCan CPI release    G&M inflation and rates

The debt ceiling negotiations continue in the U.S. without resolution. President Biden has warned, “I can’t guarantee that they (Republicans) will not force a default by doing something outrageous”. Republicans would like significant reductions in government expenditures in exchange for an increase in the borrowing limit. Growing sentiment is that neither side will be able to escape blame should a default occur. The deadline to avoid a cash shortfall is approaching quickly, and President Biden and House Leader McCarthy had an in-person meeting scheduled for 5:30 pm on Monday. Honouring its debts by avoiding default is necessary for the American, North American, and global economies.  https://www.cnn.com/2023/05/21/politics/debt-ceiling-talks-biden-mccarthy/index.html     https://www.nytimes.com/2023/05/19/us/politics/debt-ceiling-economy.html

What’s ahead for this week and beyond?

After Monday’s celebration of Victoria Day in Canada, when markets were closed, another light week for economic announcements will occur with wholesale and manufacturing sales, the federal government’s budget balance, and the raw materials price index scheduled for release.

In the U.S., building permits, pending home sales, new home sales, durable goods orders, Gross Domestic Product, and April’s Personal Consumption Expenditures (PCE) will be reported before Memorial Day is observed on May 29^th. Also, the meeting minutes from the Federal Reserve’s latest interest rate announcement on May 3^rd will be published.

Globally, Eurozone consumer confidence, manufacturing and services Purchasing Managers Indexes, and a European Central Bank (ECB) meeting are scheduled. The Bank of Japan will release its inflation indicator and the Bank of China will announce its prime rate.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

It was a very light week for economic announcements In Canada, so the news that affected markets most emanated from the U.S. and elsewhere. Most of the releases concerned inflation.

On Wednesday the Bureau of Labor Statistics released the latest Consumer Price Index (CPI) data showing that household purchases rose by 4.9% on a year-over-year basis and by 0.4% in April after rising 0.1% in March. The most recent monthly price increases were led by shelter, used vehicles, and gasoline. Overall, the energy index rose 0.6% for the month, and food prices in the aggregate were unchanged, thankfully. This was the tenth consecutive month that year-over-year inflation fell, and the smallest 12-month price increase in two years.  BLS CPI release

The U.S. Producer Price Index (PPI) rose 0.2% in April after falling 0.4% in March and was unchanged in February. On an annualized basis producer prices rose 2.3% for the twelve months ending in April. Over the past year, producer prices have fallen each month from a high of 11.2% in April 2022.  BLS PPI release

China’s consumer prices rose 0.1% in April, after rising 0.7% in March, and its year-over-year inflation rate is 1%. China’s PPI fell 3.6% compared to April 2022. China’s inflation for consumers and producers is significantly lower than the United States, which has seen 10 consecutive interest rate increases and brought U.S. CPI down to 4.9%. The Federal Reserve has raised rates to lower demand, and the lack of demand seems to be the cause of China’s low inflation. It appears that U.S. inflation and the demand that drives it is heading in the correct direction, but uncertainty regarding the “debt ceiling” has begun to weigh heavily on equity markets.

What’s ahead for this week and beyond?

In Canada, new housing price index, housing starts, manufacturing, wholesale, and retail sales will be reported. After last week’s U.S. report April and year-over-year CPI for Canada will be released.

In the U.S., a variety of indicators for April showing the health of the economy will be reported, including retail sales, capacity utilization, industrial and manufacturing production, business, and retail inventories, building permits, housing starts, and existing home sales.

Globally, the Eurozone will announce its first quarter Gross Domestic Product (GDP) and trade balance and its consumer inflation for April and year-over-year. China is scheduled to release its industrial production, retail sales, and the unemployment rate for April. Capacity utilization and industrial production, imports, exports, and trade balance, and CPI will be reported by Japan.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

North American equity indexes lost value from Monday to Thursday before rallying on Friday when the TSX rose 1½% and the NASDAQ jumped 2¼% with the S&P 500 and Dow improving by about 1¾% on the final day of the week. The losses had been about 2-3% prior to Friday’s rally.

Friday also brought the latest Canadian employment data from StatsCan. Employment rose by 41,000 in April, all in part-time work. The unemployment rate has remained unchanged since December 2022 and is 5.0%. The slowing of full-time employment growth is a result of prior monetary actions undertaken by the Bank of Canada to temper demand.
StatsCan release

Linked to employment and current rounds of interest rate increases, the U.S. is lagging behind Canada. On Wednesday the U.S. Federal Reserve raised interest rates by ¼ percent (25 basis points) to a range of 5% to 5¼% for the federal funds rate. In the press conference that followed the interest rate announcement, Fed Chair, Jerome Powell, indicated that the timing of a rate cut was not known and that the current conditions do not favour a reversal of the current path. The U.S. labor market has cooled and the possibility of a “soft landing” is still possible since large increases in unemployment have not appeared as it had in prior recessions.
Fed release   CNBC and Fed decision

On Thursday the European Central Bank (ECB) raised its benchmark interest rates by the same amount, 25 basis points. Price stability (controlling inflation) is the primary goal of the ECB’s interest rate policy, just as it is for the Bank of Canada and the Federal Reserve. All three institutions have a 2% target inflation rate as their goal. ECB release

The next opportunity for the ECB, Bank of Canada, and Fed to adjust their monetary policy is scheduled for June 5^th, June 7^th, and June 14^th, respectively. Several weeks will elapse before the opportunity for monetary policy from these three bodies to further align arrives.

What’s ahead for this week and beyond?

In Canada, a very light week for economic announcements brings March’s building permits on Wednesday, and not much else of note.

In the U.S., wholesale inventories and sales, monthly and year-over-year Consumer Price Index (CPI), Producer Price Index (PPI), and Import and Export Price Indexes will describe the inflation situation for Americans and American firms.

Globally, China will release its CPI and PPI, and imports, exports, and trade balance. In Europe, France and Germany will reveal their consumer inflation.

source: ARG analysis, Bloomberg and MSCI

What happened in April?

Last month demonstrated the resiliency of equity markets. After a quick rise to begin the month, North American indexes suffered a hiccup. The indexes then repeated this same pattern twice before the month ended successfully for most. The NASDAQ finished the month where it began, but the TSX, S&P500, and Dow each increased by 2.7%, 1.5%, and 2.5%, respectively.

(source: Bloomberg https://www.bloomberg.com/marketsand ARG Inc. analysis)

April 2023 may be remembered more for its turmoil than the results posted by month-end:

1. Early in the month, Federal Reserve Bank of Cleveland President Loretta Mester indicated that the federal funds rate had more upward movement needed to quell inflation. The spectre of rising rates leading to a recession continued to threaten equity markets at the beginning of the month.  Watch Fed President Mester here
2. At 8:30 am Eastern on April 12^th the U.S. Bureau of Labor Statistics released consumer inflation data for March. Prices last month rose 0.1%, while the year-over-year rate was measured at 5.0%. The annualized rate remains stubbornly above the Federal Reserve’s target of 2% annual price increases. Markets showed that heightened inflation could lead to additional monetary policy moves to slow demand, including more interest rate rises, are possible. The belief that rates will rise again is not universally held at the Fed, and the differences of opinion are also contributing to market confusion.
   1. About two hours later, the Bank of Canada (BoC) released its interest rate announcement, also, on April 12^th. For the second consecutive time, the Bank did not change its policy interest rate, holding the target for the overnight rate at 4½%. BoC projections have Canadian consumer inflation falling to about 3% in the middle of 2023 “because of lower energy prices, improved supply chains, and restrictive monetary policy”, which is already in place. BLS release Bloomberg and Fed rate increases   BoC release
3. April 25^th did not start well for equities as all indexes dropped close to 1% in the first hour of trading. By the end of the month, those short-term losses had been reversed. Two key economic indicators were released last week in the U.S., Gross Domestic Product (GDP) and Personal Consumption Expenditures (PCE) price index. Total economic output, GDP, grew at an annualized rate of 1.1% for the first quarter of 2023, which is below most estimates. GDP grew at a rate of 2.6% in the final quarter of 2022, and 2.1% for all of 2022. PCE, which is the Federal Reserve’s preferred indicator for inflation rose 4.2% in March, down from February’s 5.1%. The current period exceeded estimates of 3.7%. These two items resulted in a strong uptick for equities by the end of the week. It appears that the economy is slowing, and inflation is softening (not as much as projected or desired), which alleviates some pressure on the Federal Reserve to continue raising interest rates. CNBC GDP & PCE   BEA PCE release

What’s ahead for May and beyond in 2023?

Not much has changed in the past year since inflation began to grow dramatically and central banks began raising rates to lower demand. The path of inflation and efforts to control it will continue to have the largest impact on investors.

The next significant event for markets will likely be the Federal Reserve’s interest rate announcement on May 3^rd. The prediction that the Fed will deliver a “one and done” (one more interest rate increase before pausing and/or lowering rates) continues to be supported. The delivery of recent economic news for GDP and PCE supports this policy.

The Bank of Canada has paused rate increases for its last two announcements, and the Fed is likely to pursue this strategy relatively soon. Wednesday will be an important day for equity investors.

The European Central Bank (ECB) also has an interest rate announcement scheduled for next week. The implication from the ECB is not as important for most Canadian investors, but actions in Europe will be interpreted for North American firms and their investors.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

The rally for equities during the second half of last week erased early losses. U.S. equities fared better than Canada’s TSX, which lost ¼ percent.

The Bank of Canada released a Summary of Governing Council Deliberations leading to its monetary policy announcement of April 12^th. The major factors contributing to the decision to hold rates steady are the international economy, domestic economic developments, and the inflation outlook. The summary provides insight into both the process of the Bank’s analysis and the depth. It also highlights that these decisions cannot be based solely on the situation in Canada, and the U.S. is a major influence.

Two key economic indicators were released last week in the U.S., Gross Domestic Product (GDP) and Personal Consumption Expenditures (PCE) price index. Total economic output, GDP, grew at an annualized rate of 1.1% for the first quarter of 2023, which is below most estimates. GDP grew at a rate of 2.6% in the final quarter of 2022, and 2.1% for all of 2022.

PCE, which is the Federal Reserve’s preferred indicator for inflation rose 4.2% in March, down from February’s 5.1%. The current period exceeded estimates of 3.7%.

These two items resulted in a strong uptick for equities by the end of the week. It appears that the economy is slowing, and inflation is softening (not as much as projected or desired), which alleviates some pressure on the Federal Reserve to continue raising interest rates. CNBC GDP & PCE   BEA PCE release

What’s ahead for this week and beyond?

In Canada, March’s imports, exports, and trade balance, and a number of Purchasing Managers Indexes for April will be reported. On Friday the jobs report for April will be released, which will show employment, unemployment, and wages for the most recent period.

In the U.S., construction spending, durable goods production, factory orders, trade balance, and an extensive array of Purchasing Managers Indexes are scheduled. The most important announcement for the week will occur on Wednesday afternoon when the Federal Reserve releases its monetary policy announcement.

Globally, many markets will be closed on Monday for Labour Day (also known as May Day). Eurozone consumer inflation and several individual nations’ inflation numbers will be released on Tuesday. Employment data for the Eurozone will also be announced, which will be followed by a European Central Bank interest rate announcement.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

Canada’s TSX was the only major North American index to gain ground last week. Its rise of ½% may be modest compared to some week’s gains and losses, but it outpaced its continental rivals, and all other indicators in our grid, above.

On Tuesday StatsCan released consumer inflation numbers that showed prices have risen 4.3% in the March-to-March timeframe. One month earlier the year-over-year inflation rate was 5.2%. Much of the decline in this March’s annualized inflation rate can be attributed to the steep monthly price increases experienced in March 2022, which were 1.4%. In March 2023 consumer prices rose 0.5%. Last month food prices rose 8.9%, shelter increased by 5.4%, health, and personal care rose 6.5%, and gasoline fell by 13.8%.   StatsCan’s CPI release

On Thursday Tiff Macklem and Carolyn Rogers, Bank of Canada Governor, and Senior Deputy Governor, respectively, testified in Ottawa. The central bankers indicated that rate cuts are not expected in 2023, and a slowdown, not a recession, is expected in Canada. Some concern was expressed that further increases in government spending could contribute to inflation as the public service strike continues, and 150,000 federal workers seek higher wages. The robust job market could continue to fuel inflation, which could also delay interest rate cuts or lead to rate increases. The Bank of Canada’s overall view is that inflation will come under control and the economy will experience a soft landing. Several months will need to pass before we know whether this prediction has become a reality.  CBC’s take on BoC testimony

What’s ahead for this week and beyond?

In Canada, February’s Gross Domestic Product data, and March’s new housing price index, wholesale sales, and manufacturing sales are scheduled for release. Also, the Bank of Canada will release its summary of deliberations from the last interest rate decision.

In the U.S., the house price index, new home sales, mortgage market index, and pending home sales will provide insight into the housing market for March. Consumer confidence, durable goods orders, along with Q1 Gross Domestic Product and Personal Consumption Expenditure (PCE) price index, the Federal Reserve’s preferred inflation measure, will also be reported.

Globally, Japan will release a number of economic indicators including its Consumer Price Index, industrial production, retail sales, and unemployment. In the Eurozone, German and French consumer confidence and spending, consumer inflation, and Gross Domestic Product numbers will be released.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

Markets moved higher last week, with the exception of gold. North American equity indexes all rose with the TSX leading with a nearly 2% increase. The Canadian dollar also added another 1% in value, as oil and Canadian bond rates also improved.

The Bank of Canada released its interest rate decision on Wednesday morning and decided that no adjustments were needed at this time, holding the benchmark interest rate steady at 4½%. The plan to pause interest rates had been announced and enacted at the last interest rate announcement back on March 8th. The continuation of ‘the pause’ was predicated on demand slowing, inflation tempering, wage rises moderating, and Gross Domestic Product growth easing, which would demonstrate that domestic and international monetary action was affecting appropriate change.

Evidence that consumer inflation was slowing was delivered from the U.S. on Wednesday morning with news that the Consumer Price Index (CPI) had settled back to a year-over-year rate of 5.0% for March after a modest 0.1% increase during that month. On Thursday the U.S. Producer Price Index (PPI) continued the trend by declining to 2.7% per year and by 0.5% in March.  CPI    PPI

Positive results in the fight against inflation suggest that future interest rate increases from the Federal Reserve may be smaller.  CNN, US inflation and the Fed

What’s ahead for this week and beyond?

In Canada, the Consumer Price Index report for March will be released on Tuesday, followed by the Industrial Producer and Raw Materials Price Indexes on Wednesday. Retail sales and housing starts are two more important indicators on the calendar.

In the U.S., a relatively light week for announcements includes building permits, housing starts, existing home sales, the National Association of Home Builders housing market index, and manufacturing and services Purchasing Managers Indexes.

Globally, inflation news continues as the Eurozone is scheduled to release its CPI (along with Italy’s and Germany’s PPI) and consumer confidence. China will report its GDP and industrial production for the first quarter.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

The week concluded with the closure of North American exchanges for Good Friday observances. While markets were closed the latest U.S. employment numbers were released by the Bureau of Labor Statistics. The unemployment rate remained unchanged as 236,000 jobs were added, which is close to estimates, but well below the 326,000 jobs added in February. It is also the lowest monthly gain in jobs since December 2020. Leisure and hospitality, government and professional, business services, and healthcare sectors contributed most of the gains.  CNBC and jobs

Prior to the jobs announcement the major indexes delivered mixed results with the TSX and Dow advancing by ½%, the NASDAQ losing 1% and the S&P 500 essentially breaking even during four days of trading. Since the beginning of 2023, these indexes are all in positive territory with NASDAQ leading the pack at nearly 17%, trailed by the S&P 500 at 7%, the TSX at 3½%, and the Dow with a slight gain. The technology-heavy NASDAQ also leads in 1-year losses at minus 14%. The other indexes also need to gain significantly to erase losses suffered over the past year after losing 8%, 9%, and 4% for the TSX, S&P500, and Dow, respectively.

The near-term prospects for equities will hinge on inflation, associated interest rate and monetary policy action, and the fear of a recession from the slowing economic activity.

What’s ahead for this week and beyond?

In Canada, an interest rate decision, monetary policy report, and rate statement from the Bank of Canada are scheduled for Wednesday morning. Tiff Macklem, Bank of Canada Governor, has previously indicated that the central bank plans to pause interest rate increases.

In the U.S., wholesale inventories and trade sales, mortgage market indexes, and fuel inventories (heating oil, gasoline, crude oil) precede inflation reports. On Wednesday the Consumer Price Index (CPI) will be released, Thursday brings the Producer Price Index and Friday includes the Import and Export Price Indexes.

Globally, the International Monetary Fund (IMF) will conduct a series of meetings. Retail sales and industrial production will be released for the Eurozone. China will report its consumer inflation and Japan will release its producer inflation next week, providing a glimpse of price increases and, perhaps, upcoming monetary policy in Asia.

source: ARG analysis, Bloomberg and MSCI

What happened in March?

Last month was difficult to endure for investors concentrated in North American equities, especially those with significant holdings in financial services, which includes most Canadians. By the end of March, the TSX finished almost where it began the month, and the U.S. equities indexes rose 2 to 6½ percent.

Rates of interest and inflation continued their influential roles, but the failure of two U.S. banks, concern over many more institutions, and a government-led acquisition of Credit Suisse by UBS consumed most of the attention as markets rose, dropped swiftly, and then steadily regained (or improved) their position.

(source: Bloomberg https://www.bloomberg.com/marketsand ARG Inc. analysis)

March 2023 will be remembered more for its turmoil than the results posted by month-end:

1. On March 7^th, Federal Reserve Chair, Jerome Powell, testified in Washington where he reiterated the central bank’s commitment to reduce inflation to the target of 2%. Coupled with the strength of the U.S. economy, “which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.” Despite the other good news for the economy (employment, GDP), continuing to increase interest rates can lower the value of equities as the fear or likelihood of recession increases.
   Watch Powell video
2. Much attention has been paid to the effect on consumers from rising interest rates, but financial institutions can be exposed, too. As short-term rates rise, and banks are forced to pay current rates on deposits, their long-term investments at lower rates of return can cause a narrowing of margins. A confidence crisis and bank run resulted, and regulators in California shut down Silicon Valley Bank on March 10^th. This led to additional scrutiny and wider worries for bank solvency and was amplified when the FDIC shuttered Signature Bank on March 12^th. The confidence crisis in banking triggered a decline in equity indexes.  SVB Fallout Spreads
3. Equity markets began a tentative recovery after the U.S. Treasury Department, Federal Reserve, and Federal Deposit Insurance Corporation added increased protections for depositors and introduced a new borrowing facility to allow banks to meet short-term cash needs. Joint release
   1. The effects of increasing interest rates were not limited to the United States. The nascent recovery was imperilled when Credit Suisse was exposed and rescued by UBS under very generous conditions. The deal was brokered by the Swiss government to protect depositors, some investors, and the Swiss banking reputation. The reputation of Swiss bank security and discretion could be damaged further as Switzerland’s Attorney General has launched a criminal investigation into the takeover. Swiss investigation CS/UBS
4. As the failures, takeovers, and concerns for banks continued so did the analysis and reflection. The growing sentiment is that many of the most at-risk banks had problems with managing traditional assets, not complicated derivatives, and were largely exposed to interest-rate risk. As government institutions stepped in to protect depositors and reassure investors share prices have begun to respond favourably. CNBC and bank contagion

What’s ahead for April and beyond in 2023?

Although the risk and issues for banks seem to be easing, the health of the financial sector will likely play a significant role in markets. As Jerome Powell stated during his press conference following the interest rate decision on March 22^nd, it is expected that lenders will raise requirements, which will limit access to capital in the marketplace. This will allow banks to either hold cash for liquidity or increase income through higher rates.

Central banks will continue to monitor overall economic growth (Gross Domestic Product), employment, as well as inflation. Inflation growth has ebbed and has begun to decline, if only slightly, yet remains far from the shared target of 2%. The next scheduled interest rate decisions from the Bank of Canada, Federal Reserve, and European Central Bank are April 12, May 3, and May 4, respectively.

BoC monetary policy                  Fed monetary policy                  ECB monetary policy

source: ARG analysis, Bloomberg and MSCI

What happened last week?

The end of the week, March 31^st, coincided with the end of the first quarter of 2023. For equity investors, the final few days of trading reversed much of the recent losses that began with two bank failures in the United States. Each North American index gained more than 3% last week, and they all sit in positive territory for 2023. Unfortunately, each of them is below their levels of one year ago by four to fourteen percent.

The NASDAQ has jumped nearly 17% this quarter and this year as technology firms are seeing their reductions in staffing and other cost-cutting measures reflected positively in their share prices. The broader indexes, like the TSX and S&P 500, have been weighed down by the Financials sector in each.

One of the contributors to last week’s increases for equities was the release of February’s U.S. Personal Consumption Expenditures (PCE) price index on Friday. Core PCE increased 4.6% on a year-over-year basis, a slight deceleration from the level in January. In February the PCE rose 0.3% from its level in January. These increases were below expectations, leading to increases across equities.

The broad opinion is that inflation is trending downward, “giving the Federal Reserve some leeway to cut rates by the end of the year if the economy falls into recession” according to Jeffrey Roach, Chief Economist at LPL Financial. It also appears that some stability has returned to the U.S. banking sector, which has indexes rising.  https://www.cnbc.com/2023/03/31/fed-inflation-gauge-february-2023-.html     https://www.bea.gov/news/2023/personal-income-and-outlays-february-2023

Additional positive news for the Canadian economy arrived with the release of January’s Gross Domestic Product (GDP) numbers which saw a monthly growth of 0.5%, which could be a foreshadowing that a domestic recession can be avoided. https://www.cbc.ca/news/business/economy-GDP-canada-january-1.6797180

What’s ahead for this week and beyond?

The Bank of Canada’s Business Outlook Survey will be released in Canada. Also, imports, exports and trade balance, and the latest jobs data, including employment change, unemployment rate, and labour participation rate are scheduled prior to the Good Friday holiday.

In the U.S., a number of indicators will be reported: durable goods, factory orders, construction spending, imports, exports, trade balance, mortgage index and refinance rate, and energy stockpiles and inventories. On Good Friday when markets are closed Nonfarm Payroll report will be issued.

Globally, imports, exports, and trade balances are expected from Germany, France and Italy, and Purchasing Managers Indexes for products and services for the Eurozone and U.K.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

North American equity indexes delivered positive, overall returns last week, and the S&P 500 and NASDAQ achieved this feat for the second consecutive week. Financial firms, primarily banks, continue to lead the news cycle with Credit Suisse, Deutsch Bank, and others revealing vulnerabilities. The TSX Financials sector is down about 11% since its most recent peak in mid-February.

Rising interest rates and insufficient oversight have led to the failures of Silicon Valley Bank and Signature Bank. The more recent news at far larger institutions that includes the takeover of Credit Suisse by UBS and concerns for Deutsche Bank could have a greater impact domestically and internationally. With rates rising for the past year, a few banks had the cash demands of paying higher short-term rates collide with the long-term, low interest their investments are earning. Thankfully the Canadian financial services sector is much more heavily regulated than American and European institutions.

The crisis for some banks has affected the U.S. Federal Reserve’s ability to fight inflation. Typically, a central bank will slow demand in the economy by reducing liquidity in the system by raising rates and reducing bond holdings. On Wednesday the Federal Reserve increased its benchmark, federal funds, rate by ¼ point, which is a smaller increase than forecast just a few weeks ago.
Fed’s inflaltion and bank crisis       CBC explainer Canadian banks       Fed press conf, release and SEP

On Tuesday StatsCan released the Consumer Price Index (CPI) for February which showed an increase of 5.2% on a year-over-year basis. A month earlier, January’s annualized inflation was 5.9%.  Although the inflation rate has fallen from its peak and continues lower, it is due to steep monthly price increases one year ago that have adjusted the baseline upward. Groceries prices continue to drive overall inflation after posting a rise of 10.6% since February 2022.

What’s ahead for this week and beyond?

In Canada, after last week’s consumer inflation release another significant economic release, January’s Gross Domestic Product, measuring the economy’s overall health will be reported.

In the U.S., the House Price Index, pending home sales, goods trade balance, retail inventories, real consumer spending, personal income, and spending will be released. Fourth quarter GDP, GDP Price Index and GDP Sales, and the Fed’s primary inflation indicator, the Personal Consumption Expenditures (PCE) price index, are scheduled toward the end of the week.

Globally, following the takeover of Credit Suisse by UBS, European news continues as Germany, France, and Italy release their Consumer Price Index for their individual countries, and the entire Eurozone also reports aggregate CPI.  Eurozone business climate, inflation expectations, and employment are also due.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

Friday’s St. Patrick’s Day celebration coincided with the ending of about ten days of market turmoil. The widely varying opinions of the significance for investors of recent events had the North American indexes reflecting the same lack of clarity. The NASDAQ and the Dow gained 4½ and 1½%, respectively, for the week while the TSX dropped by 2% and the Dow essentially broke even.

A number of important economic indicators were released, but fears over the failures of two U.S. banks, and difficulties for two more, First Republic and Credit Suisse, drove the news cycle early last week.

• The failures of Silicon Valley Bank and Signature Bank were the first since 2020, and the 512^th and 513^th since 2008. Elsewhere, First Republic received a capital injection of $30 Billion from other banks. On Sunday, UBS announced a $3.2 Billion purchase of Credit Suisse.
• The European Central Bank (ECB) “decided to increase the three key ECB interest rates by 50 basis points, in line with its determination to ensure the timely return of inflation to the 2% medium=term target.”
• The FebruaryS. Consumer Price Index (CPI) as released on Tuesday at 0.4% for the month and 6.0% year-over-year.

Recent financial industry events that require stability measures may hamper the Fed’s ability to address inflation. The implications for the Federal Reserve’s interest rate announcement on Wednesday are being considered in light of the late Sunday sale of Credit Suisse.
List of failed banks     ECB     CNBC UBS and CS      Bureau of Labor Stats and CPI

What’s ahead for this week and beyond?

In Canada, the consumer inflation data and new housing price index for February will be released on Tuesday morning prior to market-open.

In the U.S., several housing indicators are scheduled for release including existing and new home sales, building permits, mortgage applications, mortgage market, and refinance indexes. The most compelling release will be Wednesday’s interest rate decision from the Federal Reserve.

Globally, consumer confidence and the trade balance for the Eurozone will be announced along with manufacturing and services Purchasing Managers Indexes for the region. In Asia, an interest rate announcement is due from the Peoples Bank of China, and Japan’s CPI is scheduled for release. On Friday it was announced that China’s leader Xi Jinping will visit Vladimir Putin in Russia, just as an arrest warrant for Putin was issued by the International Criminal Court.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

Concern for the continued rise of inflation and additional interest rate increases in the U.S. weighed on markets last week. Domestically, the Bank of Canada held its target for the overnight rate steady at 4½% on Wednesday. This is the first time interest rates have been steady since January 2022, following eight consecutive rate increases.

The slowing of the Canadian jobs market, a top indicator of economic growth, enabled the Bank of Canada’s position to pause rate increases. The Canadian economy added 22,000 jobs in February, an increase of 0.1% for the month. Total employment has risen to 20,054,000, and the unemployment rate was unchanged at 5.0%. Wages have risen 5.4% on a year-over-year basis in February, which is increase from January’s annualized wage gain of 4.5%.

Unfortunately, the impact of the Bank of Canada’s decision was overwhelmed by the Federal Reserve. Fed Chair, Jerome Powell, testified to Congress last week, and said, “if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes” and “the latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated”. A strong or strengthening economy means that previous interest rate increases have not yet caused the desired effect of slowing demand in the economy, which will in turn, slow inflation. The sentiment that more interest rate increases will cause a deeper recession grew last week.

StatsCan Feb jobs        BoC interest rate decision        CNBC and Powell Testimony       Powell Opening Statement       Watch Powell Testimony

What’s ahead for this week and beyond?

In Canada, January sales data for manufacturing, wholesale, and new vehicles will be reported. Industrial and raw materials price indexes will be released, which will foreshadow future consumer inflation numbers.

In the U.S., the Consumer Price Index (CPI) for February will be released on Tuesday prior to the opening of markets. The next day, the Producer Price Index (PPI) will be announced. Volatility is expected to increase before and after these two important indicators are released. Other important releases scheduled include building permits, housing starts, import and export price indexes, industrial production, retail sales, and business inventories.

Globally, the European Central Bank (ECB) will announce an interest rate decision on Thursday and conduct a press conference. The next day, Friday, consumer inflation for the Eurozone will be released. China, the world’s second-largest economy, will report its retail sales and industrial production.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

Once February gave back about half of January’s positive start to the year for stocks, the beginning of this month delivered strong results. The North American equity indexes rose 1¾ to 2½ percent after March began. The Canadian dollar strengthened marginally, and both gold and oil rose.

Previous monetary policy tightening had provided some respite from consumer inflation, but the effectiveness of higher interest rates has recently appeared dubious. The spectre of interest rate increases weighed on markets last month.

After peaking last summer headline inflation, the Consumer Price Index (CPI), had begun to fall slightly, but then its decline stalled. Consumer prices in Spain, France, and Germany, Europe’s largest economy, rose in February. U.S. prices rose 0.5% in January compared to December. Canadian year-over-year inflation dropped slightly, but only because January 2023 price increases paled compared to January 2022.

During the next three weeks, the latest inflation rates will have influenced interest rate announcements at the Bank of Canada (March 8^th), European Central Bank (March 16^th), and the Federal Reserve (March 22^nd). Both the European Central Bank and Federal Reserve have indicated that additional interest rate increases are necessary. The Bank of Canada is hinting at a more cautious approach.

Until the upcoming rate announcements occur and the economic indicators on which they are based, like inflation, employment, and wages, are known increased levels of volatility for equities will be the short-term result.

U.S. inflation              BNN and Fed             Canada inflation                    Eurozone inflation

What’s ahead for this week and beyond?

In Canada, the most important announcements will be the Bank of Canada’s interest rate decision on Wednesday and the latest employment data on Friday.

In the U.S., durable goods and factory orders, wholesale trade, mortgage market, and mortgage refinance indexes, imports, exports and trade balance, average hourly earnings and the non-farm payroll report will be released.  Also, Fed Chair, Jerome Powell, will testify before Congress.

Globally, the import, export, and trade balance reports continue with China. The Bank of Japan will announce its latest monetary policy and interest rate decision after consumer and producer inflation is released. Eurozone retail sales and Gross Domestic Product are scheduled, and several European Central Bank leaders, including President Lagarde, will deliver speeches during the week.

source: ARG analysis, Bloomberg and MSCI

What happened in February?

With the exception of a few peaks, last month delivered mostly negative results for investors concentrated in equities. Canada’s TSX and the U.S. S&P 500 fell by almost the exact percentages of 2.63% and 2.61%, respectively, in February. The Dow dropped an additional point and a half finishing the month 4.19% below January’s close. In a relatively benign result, the NASDAQ leaked a little more than 1% of its overall value. The All-Country World Index (ACWI), which is comprised of 23 Developed Markets and 24 Emerging Markets, and 2,882 constituents, lost 3% of its value last month.

The Canadian dollar continued its slide against the American counterpart, and the commodities, gold, and oil, followed downward. Bond yields, represented by the Bank of Canada 10-year note, rose again.

(source: Bloomberg https://www.bloomberg.com/marketsand ARG Inc. analysis)

Each time equity values made significant gains those higher levels created a peak when negative news caused indexes to retreat immediately afterward:

1. The Federal Reserve raised its benchmark “federal funds” rate by 25 basis points to a range of 4½ to 4¾ percent. The optimism for slowing interest rate increases was short-lived when the announcement did not support a gentle path for rates. The U.S. Non-farm Payroll Report showed that employment rose 517,000 in January with widespread gains and the unemployment rate was unchanged at 3.4%, and steady since early last year. The strong jobs market suggests that interest rates have not sufficiently slowed the economy and further action from the Federal Reserve is required.
2. The jobs market weighed-down markets again when Fed Chair, Jerome Powell, stated, “The reality is if we continue to get strong labor market reports or higher inflation reports, it might be the case that we have to raise rates more”. Regarding the reduction of inflation with a recession, he said, “There’s been an expectation that it’ll go away quickly and painlessly. I don’t think that’s at all guaranteed.” These statements reiterated existing policy, but their stark frankness confirmed the Fed’s prioritization of inflation reduction over recession avoidance.
3. Consumer inflation reversed its recent path by increasing in January more than it had in December, and year-over-year prices increased by 6.4% according to the Bureau of Labor Statistics press release.
   1. On February 16^th, Bank of Canada Deputy Governor, Paul Beaudry, reconfirmed the importance and commitment to the 2% inflation target. Despite the pain inflicted by higher interest rates, stable and predictable prices facilitate better spending and investing decisions.

The remainder of February was negatively influenced by Canadian inflation running at 5.9%, and increasing Gross Domestic Product for the U.S. fourth quarter.  Both situations support a more hawkish monetary policy.

What’s ahead for March and beyond in 2023?

The key influence on markets will continue to be the performance of the world’s largest economy, the United States, and its effect on American and global monetary policy. The European Union and the European Central Bank (ECB) will also exert some influence, too.

The ECB and the U.S. Federal Reserve will announce their latest monetary policy statements, which include interest rate decisions, on March 16^th and 22^nd, respectively. The Bank of Canada will precede both of those organizations with an announcement on March 8^th.

Watching the results of monetary policy announcements, rate forecasts prior to announcements, and missed expectations will provide insight into market moves.

Currently, the guidance from the ECB and Federal Reserve continues to indicate rate rises for the next round and beyond, if necessary. The Bank of Canada’s pause in rate hikes is in jeopardy based on recent commentary. Inflation continues to run far above its target, and the interest rate increases to date may have tempered inflation’s climb but have not brought price increases back into the target range of 2%.

Barring any unexpected economic shocks, like an escalation by Russia, monetary policy driven by inflation will continue its control of markets.

BoC monetary policy                  Fed monetary policy                  ECB monetary policy

source: ARG analysis, Bloomberg and MSCI

What happened last week?

Following the holiday observances in Canada and the U.S. on Monday, it was an eventful week for most investors. Equities continued to lose value on predictions of increased tightening by central banks.

The year-over-year rate of Canadian consumer inflation lowered to 5.9% in January, a decline from 6.3% in December. In January the cost of mortgage interest, gasoline, and food rose, while cellular services and passenger vehicles fell. During the month of January 2023, prices rose 0.5% compared with an increase of 0.9% in January 2022.  StatsCan January CPI

Another important measure of inflation, the U.S. Personal Consumption Expenditures (PCE), which is a measure of consumer spending, rose 5.4% on a year-over-year basis as of the end of January. This is a slight increase from December’s annualized increase of 5.3% and ends three consecutive months of decline for this measure that began in October. On a monthly basis, prices were up 0.6% in January, which is higher than December’s increase of 0.2%.

After the PCE was released North American equity indexes opened below Thursday’s close. Only the TSX was able to climb back into positive territory for the day. Friday’s reversal allowed the TSX to limit its losses for the week to approximately half the percentages of the American indexes. The Dow completed its fourth consecutive week of losses, and the S&P 500 delivered its poorest result of 2023.

The decline in equity values is related to the prediction that the Federal Reserve, and perhaps the Bank of Canada, will continue its hawkish monetary policy stance and increase interest rates aggressively. The PCE data shows that consumer spending is strong, along with employment and wages, and unemployment is at historic lows. These factors will require more time and higher rates to slow the economy sufficiently to lower inflation. The higher rates will also slow corporate results and the value of their shares.  BEA PCE data  BEA PCE  CNN on PCE and Fed

What’s ahead for this week and beyond?

In Canada, the fourth-quarter Gross Domestic Product (GDP) will be reported along with building permits, labour productivity, and Purchasing Managers Indexes (PMIs) for manufacturing.

In the U.S., durable goods orders, goods trade balance, retail, and wholesale inventories, pending home sales, house price index, mortgage market index, and construction spending will all be released.

Globally, in the Eurozone consumer confidence and inflation expectation, and the Consumer Price Index (CPI) and Producer Price Index (PPI) will be reported. Japan will release its core CPI, retail sales, construction orders, and housing starts.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

The major North American indexes peaked on Wednesday and then delivered two days of negative returns to close the week before Monday’s holiday observances. The most important economic news affecting capital markets was focused on U.S. consumer and producer inflation, and the implications for the next round of Federal Reserve monetary actions scheduled for March 22^nd.

The Consumer Price Index (CPI) rose 0.5% in January after rising 0.1% in December. The year-over-year inflation rate is 6.4%. Over half of the monthly rise was contributed by the price of shelter, food, gasoline, and natural gas. The Producer Price Index  (PPI) increased by 0.7% in January, which follows a decline of 0.2% in December. For the 12 months ending January 31^st, the PPI has risen 6.0%.

With inflation in the United States well above the 2% target, and a strong jobs market at-home that added 150,000 jobs in January, investors are concerned that the Bank of Canada’s interest rate increase pause and the Federal Reserve’s rate increase slow-down may be in jeopardy. The latest Fed governors’ communications strongly suggest that further rate increases may be larger than recently projected to fight inflation. The Bank of Canada had taken a wait-and-see approach and indicated that rate increases were paused. However, this approach included the Federal Reserve slowing its rate increases.

The equities markets have not been reflecting this shift and indexes have gained 2 to 12 percent in 2023.  Investors may have benefited from this year’s bump, but its longevity is questioned.

BLS CPI   BLS PPI    FP Boc and Inflation     Bloomberg and Fed    Financial Express

What’s ahead for this week and beyond?

In Canada, Monday’s holiday in its many forms has markets closed. Starting on Tuesday with the release of the latest consumer inflation data, retail sales, new housing price index, manufacturing and wholesale sales and the federal government’s budget balance will be reported.

In the U.S., markets will close for President’s Day, which was originally celebrated as Washington’s Birthday. Existing home sales, mortgage market index, and consumer and personal spending will be announced. The Department of Commerce will release the Personal Consumption and Expenditure (PCE) price index, the key inflation indicator for the Federal Reserve.

Globally, the Eurozone will release its regional Consumer Price Index (CPI), which incorporates inflation across all economies in their organization. Germany, the largest European economy, will release its Gross Domestic Product (GDP) for Q4. Japan will also release its consumer inflation data.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

Although equity markets lost ground last week, it has been an excellent start to the year with North American indexes gaining between two and twelve percent in six weeks. The economic conditions that have begun the year have provided the situation for value increases.

Inflation has begun to respond to interest rate actions from the Bank of Canada and the U.S. Federal Reserve. Inflation is much higher than the target of 2%, but it has fallen to about 6½%, which is down from the peaks of 8 or 9% experienced last summer. The slowing of interest rate increases, and predictions of further moderation of monetary action, are providing positive momentum for equities.

The labour market has remained remarkably resilient. In January 150,000 and 517,000 jobs were added in Canada and the U.S., respectively. The Canadian unemployment rate has held steady at 5.0%, and just 3.4% in the U.S., which are historically low levels for both countries.

The strong employment numbers and wage gains that have provided fuel to inflation have also allowed corporate earnings to maintain their trajectory until recently. Earnings per share (EPS) are expected to be down about 5% for the fourth quarter of 2022 in the U.S. and about 7% in Canada. The S&P 500 is tracking to report its first year-over-year decline in earnings since Q3 2022, and the TSX is predicted to deliver a slight 1.3% annual earnings gain.

EPS predictions for the first quarter of 2023 are not buoyant. The tighter monetary policy is affecting corporate performance in the currently reported quarter, and the timelier economic news (inflation and employment) is showing improvements and strength. The markets are facing more difficult and more optimistic news simultaneously, and increased volatility is the immediate result.

StatsCan inflation   StatsCan employment   BLS employment BLS   inflation FactSet   S&P500   FactSet TSX. Reuters volatility

What’s ahead for this week and beyond?

In Canada, housing starts, manufacturing sales, and wholesale sales for January are scheduled for release.  The raw materials and industrial price indexes will be reported on Friday.

In the U.S., January’s consumer and producer inflation will be announced, providing some context for Federal Reserve actions.  Retail sales and inventories, capacity utilization, industrial production, manufacturing production, business inventories, building permits, and housing starts will be reported in a very busy week for U.S. economic announcements.

Globally, the Eurozone will report fourth-quarter employment, Gross Domestic Product, trade balance, and industrial production data.  The U.K. will release consumer and producer price indexes.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

The stock indexes performed well again last week. The NASDAQ moved upward for the fifth consecutive week, the S&P 500 gained 1½%, and the TSX rose almost the same amount as the Dow lost. According to FACTSET half the S&P 500 companies have reported their most recent quarterly earnings, and 70% have exceeded earnings expectations, which is below the 5-year average or 77%, but still strong enough to provide optimism for equities.

Major news came from the U.S. Federal Reserve on February 1^st. “The Fed” echoed the previous sentiment from the Bank of Canada by raising its benchmark interest rate, the federal funds rate, by 25 basis points (¼ percent) to a range of 4.5% to 4.75%. Over the same period, the Bank of Canada has raised its policy interest rate by the same amount. This was the smallest increase since March 2022, when the Fed began increasing interest rates to combat inflation. Between then and now, the Fed has delivered increases of 50 basis points twice, and 75 basis points four times.

The return to a smaller rate hike suggests that inflation has begun to respond, and the end of rate increases is approaching. The difference in wording in the accompanying press release, that “the Committee would be prepared to adjust the stance of monetary policy” versus December’s “the Committee anticipates that ongoing increases in the target range will be appropriate” supports the smaller rate increase.  https://www.federalreserve.gov/monetarypolicy/openmarket.htm    https://www.federalreserve.gov/monetarypolicy/fomcpresconf20230201.htm

Earlier in the week Canadian Gross Domestic Product (GDP) numbers were released by StatsCan that showed our economy edged up 0.1% in November. Gains by services industries were mostly offset by a decline in goods production. The early results for December show that GDP was unchanged.

The softening economy has economists and market analysts believing that central banks will soon curtail their monetary actions, lessening the likelihood of a recession. Equity markets across North America are responding positively, and as always good news must be interpreted carefully as explained by NPR.

What’s ahead for this week and beyond?

In Canada, December’s imports, exports, and trade balance will be released on Tuesday, and employment data (full and part-time employment, participation, and unemployment) will be reported on Friday.

In the U.S., a quieter week delivers trade balance, consumer credit, wholesale trade, and the federal government’s budget balance.

Globally, in the Eurozone, retail sales, construction data, and German industrial production are the most important anticipated reports. In Asia, China’s latest CPI and Japan’s household spending are scheduled.

source: ARG analysis, Bloomberg and MSCI

What happened in January?

Last month proved to be a much more tensionless month than most for investors of almost every type. The major equities indexes, where most hold the majority of the assets to fund future retirement, all gained dramatically. The Dow, which only advanced by 2¾% over the course of January was the laggard. The relatively broad-based TSX and S&P 500 moved ahead seven and six percent, respectively, and the tech-heavy NASDAQ jumped over 10%.

(source: Bloomberg https://www.bloomberg.com/marketsand ARG Inc. analysis)

Reducing the anxiety for investors was the consistent and repeated daily increases. Only a few days during January failed to deliver positive gains, and each of those was associated with legislative and economic events emanating from the United States:

• January began with the U.S. House of Representatives unable to elect a Republican Speaker of the House. The negotiations and debate continued for several days and were more prolonged than any Speaker’s election in more than a century and a half. Eventually, Kevin McCarthy prevailed, and then the speculation that he had ceded too much power to achieve the position began in earnest.
  • Debate regarding the Republican’s ability to move the economy forward by cutting taxes also commenced as McCarthy’s tenuous leadership began.
• Just after mid-month, equities faltered as the U.S. debt ceiling reached its limit. The Department of the Treasury began utilizing extraordinary measures to keep the federal government operating. These included suspending new investment in retirement and healthcare funding for the Civil Service Retirement and Disability Fund and the U.S. Postal Service Retiree Health Benefits Fund, sales of State and Local government treasury securities, and reinvestments in the Exchange Stabilization Fund.
  • Collectively, the Treasury’s actions provide about five months for the somewhat divided Republicans, who, technically, control the house, and the unified Democrats who stand in opposition.
• The penultimate day of January was negatively affected by the upcoming Federal Reserve interest rate announcement on Wednesday, February 1^st. In comments during and since the last monetary policy release, the Fed has steadfastly maintained its commitment to controlling demand-driven inflation. The markets have wavered between accepting economic “good news” for Gross Domestic Product and jobs at face value and interpreting “good news” as fuel to inflation, which will increase the Fed’s resolve.
  • Rates are widely expected to increase, and the accompanying commentary will be heavily parsed to understand intentions for additional rate rises. CNBC and rates

The distractions of Speaker elections, legislative control, and debt ceiling attainment did little to disrupt a very positive month to begin the year for equity investors.

What’s ahead for February and beyond in 2023?

The continued reliance on monetary policy as a bellwether for markets and investors monitoring their portfolios is fatiguing. Unfortunately, this situation will continue until inflation is under control and approaching the target inflation rate of 2%. The Bank of Canada and the Federal Reserve expect inflation to fall enough to stabilize and ease rates in 2023 and early 2024.

The policy interest rates in Canada and the U.S. are expected to settle in the range between 4½ and 5½% to achieve the restrictive economic conditions necessary to arrest price increases.

The Federal Reserve took another step toward controlling inflation on February 1^st by raising the federal funds rate by 25 basis points to a range of 4.5% to 4.75%.

Once achieved, rates will be lowered to the estimated neutral rate of interest, where full employment has been achieved and inflation is constant. This represents a situation where interest rates are neither restrictive nor expansionary, and have been estimated at about 2.5% for both Canada and the U.S.

Federal Reserve   Bank of Canada   Brookings Institute  WaPo and Neutral Rates

source: ARG analysis, Bloomberg and MSCI

What happened last week?

The Bank of Canada released its latest monetary policy on Wednesday morning, raising the policy interest rate by 25 basis points to 4.50%. Since March 2022 Canada’s central bank has increased this rate from its effective lower boundary of 0.25% by 4.25%.

Some criteria underlying the interest rate decision include Canadian and American consumer and producer inflation, the jobs market (job creation, total employment, labour force participation and unemployment), and global economic conditions. The Bank expects domestic inflation to fall back to about 3% this year and near 2% in 2024 as energy prices continue to fall and restrictive monetary policy continues to reduce demand, which will eventually slow the demand for workers. The easing of restrictions in China promotes additional economic growth there, and the Bank of Canada projects that the global economy will grow by 2% this year and 2½% in 2023. They project our economy to grow by 1% in 2023 and 2% next year.

Although Canada is the world’s 9^th largest economy according to the World Bank (between Italy and South Korea based on GDP), it is less than 10% of the size of the U.S. economy, and as such domestic monetary decisions require close scrutiny of the American and global situation.

The next scheduled monetary policy release by the U.S. Federal Reserve is February 1, and indications from their leadership of additional rate increases must be included in our central bank’s reasoning.

Bank of Canada release, press conference and Monetary Policy Report

What’s ahead for this week and beyond?

In Canada, November’s GDP data will be announced. An improvement from its 0.1% decline in October is expected, but the interest rate increases imposed by the Bank of Canada since March are anticipated as a significant deterrent to economic growth.

In the U.S., the Federal Reserve’s Federal Open Market Committee (FOMC) will release a monetary policy update on Wednesday afternoon. The size of an interest rate increase has been one of the most popular points of debate for business and economic news. January’s non-farm payroll report portrays the health of the jobs market, which is the companion to inflation as the Federal Reserve’s twin mandates.

Globally, German GDP, trade balance, import price index, Producer Price Index (PPI), retail sales, and Consumer Price Index (CPI), French PPI, and Italian CPI will be reported. The CPI and PPI for the entire Eurozone will be reported in aggregate as the European Central Bank ponders additional rate increases.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

The annual World Economic Forum in Davos, Switzerland concluded on Friday after 2,500 leaders assembled to discuss “Cooperation in a Fragmented World”. The wide-ranging topics provide some of the latest thinking on global issues, and dozens of recorded sessions are available for viewing here.

Closer to home, North American equity markets continued to react to the news that economies here are slowing, but now the reaction has turned negative. Initially, the inflation, jobs, and Gross Domestic Product (GDP) numbers in Canada and the U.S. indicated that central banks would likely slow or suspend interest rate increases.

The addition of the U.S. federal government hitting its debt ceiling, falling retail sales, and industrial production has caused closer scrutiny, revealing that a recession in the second half of 2023 is more feared.

On Friday, equities rebounded with all major Canadian and American indexes rising. The up-and-down days of the week produced uneven results for the week for the indexes. The TSX and NASDAQ gained the amount that the S&P 500 lost, about two-thirds of a percent. The Dow, comprised of the 30 largest industrials, lost nearly 3% for the week, even after rising 1% on Friday.

https://www.cnn.com/2023/01/19/investing/dow-stock-market-today-economy/index.html

What’s ahead for this week and beyond?

In Canada, the Bank of Canada will release its latest monetary policy and interest rate announcement on Wednesday at 10 am Eastern. Moderating domestic and U.S. inflation data, along with employment and GDP, will heavily influence decisions on rates and liquidity.

In the U.S., the week will start slowly for economic announcements, but gain momentum as fourth quarter GDP, trade balance, real consumer spending, and Personal Consumption Expenditures (PCE) are released. Personal income and spending, and the PCE price index for December are scheduled for Friday.

Globally, celebrations of China’s new year on January 22^nd have slowed economic activity and raised the concern of further outbreaks of Covid following the extensive amount of travel associated with the holiday. Japan will release its latest CPI, which may provide some insight into the Bank of Japan’s surprise interest rate decision last week.

source: ARG analysis, Bloomberg and MSCI

What happened last week?

Thursday’s release of U.S. consumer inflation data continued the run of positive performance for equities so far in 2023. The Consumer Price Index (CPI) declined by 0.1% in December and compared to December 2021 prices have risen 6.5% on a year-over-year basis. Inflation had peaked in June at 9.1% and had been at 7.1% in November. Core CPI, which excludes food and energy from the basket of consumer goods and services, rose 0.3% in December and 5.7% over the last year.

“The index for gasoline was by far the largest contributor to the monthly all items decrease, more than offsetting increases in shelter indexes” according to the Bureau of Labor Statistics.

The overall rate of consumer price increases suggests that past monetary policy moves have begun to affect inflation. Both the Bank of Canada and the Federal Reserve have raised their policy interest rates by 4% since March of 2022.

It is not the slowing of inflation, but the belief that the Federal Reserve and other central banks will slow and eventually reverse interest rate increases that has markets moving upward for equities and downward for bonds. Once monetary policy eases demand will rise, employment will increase, and the economy will grow at levels to support corporate profitability.

Canadian consumer inflation data for December will be released next week, which will provide some guidance for the Bank of Canada. CPI was 6.9% in October and 6.8% in November on a year-over-year basis. The next scheduled interest rate announcement for the Bank of Canada is January 25^th and will include the quarterly Monetary Policy Report.

Bloomberg Fed rates and inflation   CNBC inflation  BLS CPI release  StatsCan  BoC release

What’s ahead for this week and beyond?

In Canada, manufacturing sales, wholesale sales, retail sales, and housing starts will be released. The most important report will announce consumer and producer inflation for December.

In the U.S., markets will be closed on Monday for the observance of Martin Luther King, Jr Day. Producer inflation, retail sales, mortgage market index, industrial and manufacturing production, building permits, housing starts, and existing home sales will be reported.

Globally, consumer inflation releases continue with Germany and Italy contributing their country data, as well as the entire Eurozone report. On Friday the European Central Bank Chair, Christine Lagarde will speak. China will release its fourth quarter Gross Domestic Product, industrial production, retail sales, and unemployment rate. The Bank of Japan has an interest rate decision scheduled for Tuesday.

(source: ARG analysis, Bloomberg and MSCI)

What happened last week?

Friday provided a welcome uptick in North American equity indexes after jobs data was released. Both the Canadian and American economies continued to generate jobs even after monetary policy moves that have been enacted on both sides of the border. The jobs market demonstrated continued resiliency and provided encouragement on the “interest rate increase vs recession” debate.

“Employment rose by 104,000 in December, and the unemployment rate declined by 0.1 percentage points to 5.05%, just above the record low of 4.9% reached in June and July” according to the Statistics Canada release on Friday. Employment levels increased in six provinces and held steady in two territories.    https://www150.statcan.gc.ca/n1/daily-quotidien/230106/dq230106a-eng.htm?HPA=1

Total nonfarm payrolls rose by 223,000 and the unemployment rate edged down to 3.5% during December in the United States. Job gains were achieved in the leisure and hospitality, health care, construction, and social assistance sectors.  https://www.bls.gov/news.release/empsit.nr0.htm

The U.S. jobs growth in December was the lowest monthly number in 2022, and the average hourly earnings number is softening, showing that Federal Reserve action is working. Both suggest that the Federal Reserve’s interest rate increases and tightening of capital markets are beginning to achieve the desired effects of slowing demand that drives economic growth.

More interest rate increases are expected from the Federal Reserve, while the Bank of Canada has said that future increases require additional analysis. Markets responded positively to the jobs data based on monetary policy effectiveness.  CNBC Payrolls and Fed  BoC release Fed release

What’s ahead for this week and beyond?

In Canada, November’s building permits, signifying strengths or weaknesses in the construction sector and the housing market will be announced. Bank of Canada Governor, Tiff Macklem, will participate in a panel discussion on the risk of climate change.

In the U.S., Federal Reserve Chair, Jerome Powell, will speak at the Sveriges Riksbank International Symposium in Stockholm on Tuesday. On Thursday, December and year-over-year consumer inflation data will be released.

Globally, the European Central Bank will release its latest economic bulletin. Great Britain will report its Gross Domestic Product report for December, the fourth quarter, and year-over-year. Italian retail sales, French imports and exports, and German GDP will also be announced. Both China and Japan will release CPI and Producer Price Index (PPI) data for December.

(source: ARG analysis, Bloomberg and MSCI)

What happened in 2022?  

Overall, last year was a trying time for almost every Canadian investor. Several factors contributed to the turmoil and difficulty that affected every asset class and investor at some point during the last twelve months. Although a single, isolated event rarely occurs politically, economically, socially, or medically several instances in 2022 can be viewed as turning points, especially for the major North American equity indexes.

When markets changed directions last year the frequent causes were economic announcements or the anticipation of these announcements on inflation, employment, economic output, monetary policy, recession, and geopolitical issues. Each of these factors, and many others, play into investor sentiment for the future, and influence or drive broad market moves.

In addition to the beginning and end points of 2022 (#’s 1 and 10, below), the equity markets reversed their direction 8 significant times (#’s 2 through 9). The observed changes can be attributed to the linkages between inflation, interest rates, jobs, and economic output in the U.S.

(source: Bloomberg https://www.bloomberg.com/marketsand ARG Inc. analysis)

1. The S&P 500, Dow, and NASDAQ, peaked on the first trading day of the year, January 4^th, and dropped by 19%, 9%, and 33%, respectively, by the end of the year. The TSX, helped by its concentration on commodities, delayed its peak until late March and early April and still fell by nearly 9% in 2022.
   https://www.bloomberg.com/markets
2. Russia invaded Ukraine on February 24^th, providing a foundation for the economic and humanitarian tragedy felt throughout the year. January 1, 2023, marked the 312^th day of the war.
   The Guardian’s daily war summary
3. The primary inflation indicator for the U.S. Federal Reserve, the Personal Consumption Expenditures (PCE) price index for February was released at the end of March. Consumer prices were rising at an annual rate of 6.4%, a level not seen in more than 40 years.
   https://tradingeconomics.com/united-states/pce-price-index
4. April’s Consumer Price Index (CPI) edged downward providing a lift to equity markets as the year-over-year inflation rate fell to 8.3% from 8.5% in March. Prices rose 0.3% in April.
   BLS CPI
5. The anticipation for the Fed’s interest rate announcement on June 15^th was negative, and when May’s rising inflation, 8.6% year-over-year, was announced the markets began pricing in a large increase to the federal funds rate, which eventually was 75 basis points.
   BLS May inflation   Federal Reserve announcement
6. The release of U.S. employment data provided some respite from the fears of recession as the American economy continued to generate jobs at a robust pace. 372,000 jobs were created in June 2022 and the unemployment rate remained unchanged at 3.6%.
   BLS employment situation
7. The minutes of the Federal Reserve’s Federal Open Market Committee were released. The meeting notes indicated that members of the committee believe that interest rates must be much higher than originally projected to reduce inflation to acceptable levels.
   FOMC Minutes from June meeting
8. Again, consumer inflation exceeded expectations and remains well above the Fed’s target of 2%, suggesting that rates will be increased substantially again, potentially triggering a recession. The CPI for September, released on October 13^th, sat at 8.2% on a year-over-year basis. Prices rose 0.4% in September compared with an increase of 0.1% in August.
   BLS September inflation
9. The Federal Reserve’s FOMC raises benchmark interest rates again by 50 basis points.
   Federal Reserve press release
10. After two consecutive years of annual gains during a pandemic the major indices lost value in 2022.

What’s ahead for January and beyond in 2023?

In the near, medium, and longer-term the effects of central bank monetary policy on inflation, employment, and prospects of further action will guide equity markets. The terminology that everyone will become more acquainted with in 2023 will include “restrictive monetary policy”, “filtering through”, “soft landing” and “recession”.

The purpose of increasing interest rates is to slow demand for goods and services because financed purchases have become more expensive than regular purchases. Businesses and consumers reduce their overall consumption due to higher prices, and reduced demand removes upward price pressures. If the reduction of consumption is substantial and prolonged a recession occurs.

The predictions from both the Bank of Canada and the U.S. Federal Reserve are that interest rate increases will slow, if not cease. Once inflation responds to monetary policy action, it is anticipated that those monetary measures (interest rates and Quantitative Tightening) will be maintained until further adjustments become necessary.

Once the trajectory of interest rates is better understood, the nature of markets will be clearer.

(source: ARG analysis, Bloomberg and MSCI)

What happened last week?  

It was a short week for Canadian traders with markets shuttered on Monday and Tuesday for the observance of Christmas Day and Boxing Day. U.S. markets do not observe Boxing Day.

Despite the lower trading volumes typical for this period, the equity markets continued their recent path with additional losses. The North American indexes lost only small amounts during the most recent week but have lost substantial value over the past year. The TSX and Dow declined by nearly 9% for the year. The S&P 500 and NASDAQ lost nearly 20% and 34%, respectively over the last year.

Since the last Weekly Market Update two important indicators were released in Canada.

• November’s consumer inflation data was reported on December 21^st. The year-over-year rate in November was 6.8%, following October’s 6.9% annual increase. Gasoline prices fell 3.6% in November and are up by 13.7% over the past year. Grocery prices have risen 11.0% year-over-year, and prices for housing have risen 7.2% over the same period as mortgage rates and rents rose.  StatsCan CPI
• On December 23^rd Gross Domestic Product (GDP) numbers showed the Canadian economy had grown 0.1% in October, down from September’s 0.2%. Service industries (arts, entertainment, recreation, accommodation, food services, transportation, warehousing, and the public sector) expanded, while mining, oil, gas, and manufacturing declined. StatsCan GDP

The “third estimate” of U.S. third quarter GDP was announced on December 22^nd and showed that the economy expanded at an annualized rate of 3.2% during Q3 after declining 0.6% in Q2.  BEA Q3 GDP

The progress of monetary policy against inflation and on economic output (i.e., GDP) will guide markets well into 2023.  GDP and Inflation

What’s ahead for this week and beyond?

In Canada, the latest employment numbers for December will be released on Friday.  The numbers’ strength (or weakness) may foreshadow Bank of Canada monetary policy decisions.

In the U.S., December’s jobs information, labour force participation, and the unemployment rate will be reported by the Bureau of Labor Statistics on Friday.

Globally, consumer inflation data will be announced for Germany in particular and the entire Eurozone more generally. Like other jurisdictions, inflation numbers will influence central bank policy.

(source: ARG analysis, Bloomberg and MSCI)

What happened last week?  

For two consecutive weeks, monetary policy announcements influenced North American equity markets. On December 7^th the Bank of Canada increased its overnight rate by ½% (50 basis points), and on December 14^th the U.S. Federal Reserve increased its benchmark rate, the federal funds rate, by the same amount. Admittedly, the size of the American economy and the power that the Federal Reserve wields makes their monetary moves more substantial than Canadian policy. Interestingly, the central banks of both countries have increased interest rates in their last seven consecutive opportunities. Also, both institutions have raised their rates by 4¼% since March 2022.

At least one important difference has emerged. The Bank of Canada has said that future interest rate increases may not be necessary, while the Federal Reserve is anticipating additional increases to control inflation which is well above both of their targets of 2%. The Bank of Canada stated, “. . . Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target”, while the Fed said, “The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.” BoC statement Fed Statement

On December 15^th, the European Central Bank (ECB) raised its rates with an identical 50 basis point increase. The ECB’s equivalent to the Canadian overnight and the American federal funds rate is the deposit facility rate which is now 2.0%, less than half the comparable rates in North America.    ECB statement

The major concern for markets is the fear of a recession caused by rising rates that slow economic growth sufficiently to shrink inflation. Equity markets dropped immediately following the Fed’s announcement and accompanying commentary, and on the following day, more than 90% of S&P 500 stocks dropped as the overall index fell more than 1%.  Bloomberg article

What’s ahead for this week and beyond?

In Canada, after a slow week for economic announcements last week, three important indicators are scheduled for release: October’s retail sales and Gross Domestic Product, and November’s Consumer Price Index.

In the U.S., November’s building permits, new home sales, existing home sales and durable goods orders, December’s consumer confidence, and third quarter’s GDP data will be released.

Globally, no major economic announcements are planned. In one of the most exciting World Cup final games ever that ended in a 3-3 tie after extra time, Argentina defeated France in penalty kicks.

(source: ARG analysis, Bloomberg and MSCI)

What happened last week?  

For many, the most significant change affecting daily life was the drop in the price of crude oil. It will help lower inflation and improve the perception of inflation through the gas pump. The price of oil is below its 2022 start and within pennies of its price from one year ago.

However, the major domestic economic news was the action taken by the Bank of Canada on Wednesday morning. The “overnight rate” was raised by 0.5% (50 basis points). It was the seventh consecutive increase, dating back to early March. During the last 9 months, the rate has risen from its effective, lower boundary of 0.25% to 4.25%.

During the announcement, Tiff Macklem, Governor of the Bank of Canada indicated that a pause in rate hikes was a possibility when he said, “But we recognize that we have raised interest rates rapidly and that their effects are working their way through the economy. In other words, we are moving from how much to raise interest rates to whether to raise interest rates.”  The widely held belief is that interest rates will reduce demand to match supply and reducing and eliminating rate hikes at the appropriate times will allow inflation to be mitigated without pushing the economy into a recession.

Bank of Canada release            FP reporting on BoC speech    CBC rate hike analysis

More inflation news emerged last week with the U.S. Producer Price Index (PPI) release. The PPI measures inflation at the wholesale level. Producer prices rose 0.3% in November and 7.4% for the 12 months ending in November. In October, the 12-month PPI increase was 8.1%. The PPI began 2022 at over 10% and had exceeded 11% for four months (March to June) before moving downward during late summer and autumn to its current level.                https://www.bls.gov/news.release/ppi.nr0.htm

Inflation news will be in sharp focus again next week as U.S. consumer prices and a Federal Reserve monetary policy announcement are scheduled.

What’s ahead for this week and beyond?

In Canada, no major economic announcements are scheduled.

In the U.S., consumer inflation data will be released on Tuesday, which may indicate the Federal Reserve’s monetary policy actions scheduled for this coming Wednesday.

Globally, the European Central Bank will release its interest rate decision on Thursday, and the Eurozone will publicly announce consumer inflation on Friday. The FIFA World Cup continues with the semi-finals of Croatia v Argentina and France v Morocco on Tuesday and Wednesday, respectively. The Finals are on Sunday, December 18^th.

(source: ARG analysis, Bloomberg and MSCI)

What happened last week?  

Gross Domestic Product and jobs data heavily influenced markets and the inferences drawn from those releases on upcoming interest rate announcements provided an additional batch of fodder for analysts.

The Canadian economy expanded slightly during the third quarter, rising 0.7%. It was the fifth consecutive quarter of rising GDP. Oil and gas production grew 1.8% in September when a new record for crude bitumen production was set. Agricultural production rose 0.7% for the month, which is the twelfth consecutive month of increased output.  StatsCan release

During July, August, and September 2022 the U.S. economy grew in real GDP terms at an annualized rate of 2.9%, compared with a decline of 0.6% in the second quarter. Leading the growth were increases in exports, consumer spending, and government (local, state, and federal) spending. BEA release

“Employment was little changed (+10,000) in November, and the unemployment rate declined by 0.1 percentage points to 5.1%” according to another StatsCan release.

Total non-farm payroll employment rose by 263,000 last month in the U.S. The unemployment rate was unchanged at 3.7% as the participation rate held steady.  BLS release

GDP and jobs data show the resilience of the Canadian and, especially, the American economy as monetary policy has been tightened in 2022. The next interest rate announcements by the Bank of Canada and Federal Reserve on December 7^th and 14^th, respectively, are subject to speculation. The speech on Wednesday from Fed Chair, Jerome Powell, and the immediate market bump demonstrates the influence of monetary policy on equity values. Powell speech analysis  Watch Powell’s speech

What’s ahead for this week and beyond?

In Canada, October’s imports, exports, and trade balance, building permits, and industrial utilization will be announced. On Wednesday at 10 am Eastern, the Bank of Canada will make an interest rate decision.

In the U.S., several economic indicators are scheduled including factory and durable goods orders, imports, exports, and trade balance, Producer Price Index (PPI), core PPI, gasoline, crude oil, and heating oil inventories.

Globally, Eurozone GDP, retail sales and employment for Q3, China’s Consumer Price Index, PPI and trade balance, Japan’s GDP, and household spending will be reported. The World Cup continues without North American nations after Mexico and Canada failed to emerge from group play and the U.S. lost to the Netherlands on Saturday in the round of 16.

(source: ARG analysis, Bloomberg and MSCI)

What happened in November?  

Overall, the results for investors were largely positive last month. The major Canadian and American equity indexes rose 4.4 to 5.7%, and the global All Country World Index (ACWI) jumped 7.6%. The Canadian dollar gained more than a cent as many snowbirds prepare for their annual winter migration for warmer weather in the United States. The price of oil fell, which will assist consumers (and snowbirds who will be driving 2,000 kilometres or more to reach their winter havens). Gold’s lustre as a safe haven continued, and although bond yields were down slightly for the month, they doubled in 2022.

Three notable events were primary triggers for broad moves in North American equity markets last month. For November, and due to the tight linkage of the Canadian economy to the American economy, the major events that raised and lowered the TSX and the U.S. indexes were from south of our border.

(source: Bloomberg https://www.bloomberg.com/marketsand ARG Inc. analysis)

1. November 2^nd – Federal Reserve interest rate decision

The question was not whether an increase would occur, but the size and implications for future increases were the focus of speculation. Chair, Jerome Powell, announced a 75-basis point (¾%) interest rate increase to extend the monetary policy battle against inflation.
Federal Reserve release   CNBC article

2. November 10^th – U.S. Consumer Price Index released

U.S. consumer inflation generated a rebound from recent losses. Price increases were below expectations at 0.4% for October and 7.7% on a year-over-year basis. The monthly increase repeated September’s level while annual inflation fell to its lowest level since January, and 1½% below June’s recent peak.

Investors believe that the Federal Reserve’s interest rate hikes have begun to slow inflation. Consequently, the further belief is that smaller interest rate increases will be required in the future. Markets reacted with optimism when North American equity indexes posted their best trading day since 2020 by jumping 3½ to 7½% on Thursday.
BLS CPI release    CNBC CPI analysis     CNN rate/CPI reporting

3. November 30^th – Federal Reserve Chair, Jerome Powell, speaks

Equity markets have been seeking indications that future interest rate increases could be lowered, and eventually slowed and then reversed. After several years of pro-business and pro-expansion interest rates, the recent rate rises have weighed heavily on domestic and global stock prices.

The indication from Chair Powell caused U.S. indexes to jump 3-4% on the last day of the month. Canada’s TSX followed the positive example set by the American indexes by moving up nearly 1%.
Transcript of Powell Speech    NYTimes analysis

Other factors have influence over markets (Covid resurgence in China and elsewhere, geopolitical issues like Russia’s war against Ukraine, supply chain disruptions from both Covid and hostilities, etc.), but the primary drivers have been the rate of inflation and the reaction of central banks to it.

What’s ahead for December and beyond?

The Federal Reserve’s next opportunity to raise interest rates will occur on December 14^th, which is one week after the Bank of Canada’s next scheduled announcement. Both actions will affect North American investors, with Canadian equities feeling the effects of both central banks’ actions, while American stocks will be most affected by their domestic monetary policy.

On December 2^nd Canadian and U.S. jobs data for November will be released, and the expected softening of labour markets in both countries supports the slowing of interest rate increases. Canadian jobs are expected to be 5,000, down from 108,000 in the prior month, and U.S. jobs are predicted at 200,000, down from 261,000. During the first seven months of 2022, about 450,000 jobs were created each month.  Bloomberg Economic Calendar

The course of the pandemic and economic recovery that initiated much of the job growth in the first half of 2022 will continue to influence economic conditions. Powell also indicated in his speech the belief that a lag occurs before actions take effect and “it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down”. Many indicators are beginning to suggest the time for moderating is approaching.

(source: ARG analysis, Bloomberg and MSCI)

What happened last week?  

The U.S. Thanksgiving holiday that closed American markets on Thursday and Friday afternoon made last week “light” based on trading volumes. The S&P 500 averaged 510 million shares per day for the first three days of trading versus an average of 671 million shares per day for the previous week’s Monday to Wednesday, a 24% decline.  S&P500 on Bloomberg

During this quieter-than-usual time, equities in Canada and the U.S. performed well last week as the major indices rose 1-2%. Since their closing levels of September 30^th, the indexes have risen as follows, TSX – 10.5%, S&P500 -12.3%, Dow 19.6%, and NASDAQ 6.2%. The overall increase during the past two months has been inconsistently achieved with several days of sharp peaks and narrow valleys. The sharper days of gain and loss are in contrast to the volatility index, VIX, which has fallen from 31.8 to 20.5 over the same period and is at its lowest level since August.

The lower levels of volatility are in anticipation that central banks will begin raising interest rates more slowly. The release of the Federal Reserve’s meeting minutes showed that this sentiment is building with the Fed’s Federal Open Market Committee, which sets monetary policy. The realized prediction calmed markets, despite indications that more interest rate increases are anticipated  FOMC Minutes  Reuters article Russell article

What’s ahead for this week and beyond?

In Canada, Gross Domestic Product (GDP) for September and the third quarter will be released. Employment data for November will be reported on Friday.

In the U.S., after Thanksgiving’s relatively quiet week the announcements increase to include pending home sales, house price index, mortgage applications, mortgage market index, GDP, GDP price index, consumer and personal spending, wholesale, and retail inventories. The week concludes with government, manufacturing, and non-farm payrolls.

Globally, the FIFA World Cup continues to distract many countries from economic developments like OPEC’s production meeting, Eurozone’s consumer confidence, business climate and inflation expectation, and Consumer Price and Producer Price Indexes. China’s rapidly growing covid cases and response may foreshadow future releases from the second-largest economy.

(source: ARG analysis, Bloomberg and MSCI)

What happened last week?

Interest rates, inflation, and recession concerns continued to influence markets, and the mixed news and its implications had equities falling for the week, albeit only slightly. For the second consecutive week, a key U.S. inflation indicator has fallen. The Producer Price Index (PPI), which measures inflation at the wholesale level, had its year-over-year rate at 8.0% for October. The annualized rate of producer inflation has dropped from over 10% earlier this year and a peak in March 2022 at 11.2%. On November 10^th the latest Consumer Price Index (CPI), also for October, was reported. The annual inflation rate dropped to 7.7% from September’s 8.5%.     BLS PPI release    BLS CPI release

Domestically, Canadian consumer inflation for October equalled September’s annual rate at 6.9%. Gasoline and housing cost increases were offset by slowing increases in groceries (fruit, vegetables, and meat).  Gasoline rose 9.2% in October after falling 7.2% in September. Overall, monthly price increases in October were 0.7%. Although Canada’s CPI did not fall, it also did not increase. StatsCan release

The Organization for Economic Development and Cooperation (OECD) will soon release its inflation and growth analysis. Since their last projections in September, the outlook has worsened. Inflation rose, notwithstanding some recent, minor successes, European economies have contracted, a resurgence of Covid with strong restrictions in China, and growing predictions of U.S. economic contraction next year. The predictions of inflation-fighting rate increases, their effectiveness, and effect on GDP will guide markets into 2023 and beyond  Bloomberg on Recession Danger   CNN PPI

What’s ahead for this week and beyond?

In Canada, retail, wholesale, and manufacturing sales for September will be reported on Tuesday along with the new housing price index. The Federal budget balance will be released on Friday.

In the U.S., the mortgage market index, building permits, housing starts, and new home sales are scheduled for release. Markets will close on Thursday and early on Friday for Thanksgiving.

Globally, Germany, the leading European economy, will announce its Gross Domestic Product, the European Central Bank will conduct a non-monetary policy meeting, and the Eurozone’s consumer confidence will be released. Japan, the third largest economy, will report its consumer inflation.

(source: ARG analysis, Bloomberg and MSCI)

What happened last week?

Inflation was, again, on everyone’s watchlist. U.S. consumer inflation was released midweek and generated a rebound from recent losses. Price increases were below expectations at 0.4% for October and 7.7% on a year-over-year basis. The monthly increase repeated September’s level while annual inflation fell to its lowest level since January, and 1½% below June’s recent peak.

The major contributors to inflation remain housing, food, and gasoline. Inflation exists across a broad array of goods and services, and the drop in the annual inflation in October has not significantly reduced the overall inflation rate relative to the long-run average target set by the Federal Reserve of 2%.

Investors believe that the Federal Reserve’s interest rate hikes have begun to slow inflation. Consequently, the further belief is that smaller interest rate increases will be required in the future. Markets reacted with optimism when North American equity indexes posted their best trading day since 2020 by jumping 3½ to 7½% on Thursday.

Caution should still be exercised with inflation still running very high and the jobs market still strong. With little ‘slack’ created in the jobs market it will be difficult for inflation to fall back toward target levels that will eliminate the need for monetary policy action.

BLS CPI release     CNBC CPI analysis    CNN interest rate / CPI reporting

What’s ahead for this week and beyond?

In Canada, the week begins with a speech by Bank of Canada Governor, Tiff Mackle. The economic indicators scheduled include manufacturing and wholesale sales, housing starts and CPI for October.

In the U.S., it will be the Producer Price Index (PPI) and import and export price indices that are released to measure American inflation. Retail sales, capacity utilization, industrial and manufacturing production, business, gasoline, crude oil inventories, building permits, housing starts, and existing home sales will also be announced in a busy week for economic reporting.

Globally, the Eurozone will release its trade balance, industrial production, Q3 employment and Gross Domestic Product and CPI for the region as well as France and Italy, individually. China will announce retail sales, house prices, and industrial production. Japan will report its GDP, capacity utilization, industrial production, trade balance and consumer inflation.

(source: ARG analysis, Bloomberg and MSCI)

What happened last week?

On Wednesday afternoon the Federal Reserve delivered its interest rate decision. The question was not whether an increase would occur, but the size of it and the implications for future increases was the focus of speculation. Chair, Jerome Powell, announced a 75-basis point (¾%) rise to increase the monetary policy battle against inflation. Federal Reserve release   CNBC article

The first four days brought losses to North American equity indices, and Friday’s lift of 1% for each index prevented the week five days of losses. Friday’s reversal was initiated by employment news announced before markets opened.  https://www.bloomberg.com/markets/stocks

In the U.S., 261,000 new jobs were created in October mostly in health care, services and manufacturing. Labour force participation remained unchanged while the unemployment rate rose 0.2% to 3.7%. In Canada, employment rose by 106,000 in October, recouping job losses that occurred between May and September. The construction, manufacturing and accommodation and food services added jobs, while wholesale and retail trade lost jobs. Unemployment was unchanged at 5.2%.

The strong employment numbers on both sides of the border are worrying to central bankers, and continue to add certainty to more rate hikes, which is increasing fears of recession. Although, equities moved higher on Friday the overall direction was downward based on the reality and prediction of rate increases, and plentiful jobs. BLS release   StatsCan release    WSJ article

What’s ahead for this week and beyond?

In Canada, a week with no significant economic announcements concludes with Remembrance Day observances on Friday.

In the U.S., several Governors from the Federal Reserve will be delivering speeches that could provide additional insight to the recent interest rate increase. The Consumer Price Index (CPI) and Core CPI for October will be released. The U.S. federal government will announce the Budget Balance, and crude oil, gasoline, heating oil and natural gas inventories.

Globally, Germany’s industrial production and CPI for October, France’s imports, exports and trade balance, and the Eurozone’s retail sales for September will be announced. China’s trade balance, CPI and PPI are scheduled for release.