Market update

Another turbulent week for global markets with changing policy rates being the primary driver for the volatility this week.

The US Fed confirmed market expectations by raising interest rates by 0.50% on Wednesday. This is the first time they have hiked rates by 50 bps in decades.

Markets reacted to this news positively on Wednesday due to the expectation that rates would rise by 0.75%. Thursday reversed this trend with the NASDAQ coming off almost 5% for the day.

European stocks broadly came off as well on the back of Wall Street’s sell-off Thursday, though energy stocks remained resilient gaining 0.70% on Friday.

Initial relief over the Federal Reserve’s ruling out of more aggressive hikes seemingly gave way once again to fears that a sharp hiking cycle in order to rein in red-hot inflation could harm economic growth.

Gold rallied on the back half of the week as stocks slid and interest rates rose.

Weekly change: TSX: -0.6% ; DOW: -0.2%; S&P 500: -0.2%; NASDAQ: -1.5%; GOLD: -0.8%

 

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Global Economic Update

US Purchasing Managers’ Index (PMI), a leading economic indicator, fell to 55.4 in April from 57.1 in March; missing the consensus of 57.6. It was the lowest reading since July 2020.

Eurozone PMI fell to a 15-month low of 55.5 vs. 56.5 in the previous month.

Ivey PMI Index (Canada) showed a similar trend in our domestic economy as the rate fell from a record high of 74.2 in March to 66.3 in April; this is still higher than 60.6 from April 2021.

Data released over the weekend showed a contraction in Chinese factory activity in April as Covid lockdowns hit industrial production.

Canada’s economy recorded a surge in trade with the rest of the world in March, as rising prices for commodities coupled with strong domestic demand and a smoother global supply chain, drove both imports and exports. BNN Bloomberg

The data suggest that some of the bottlenecks plaguing the trade sector eased in March, at least temporarily. The surge in imports also suggests strong demand in Canada for goods – a sign of a healthy economy.

Canada’s ample potash deposits are drawing “high levels” of interest around the world since sanctions upended global fertilizer markets due to disrupted supplies of the key fertilizer from Belarus and Russia. BNN Bloomberg

US trade deficit widened to a record high of $109.8 billion USD in March, worse than the consensus expectation for a deficit of $107 billion USD.

With policy rates across many developed economies all moving in the same direction, coupled with the above economic data, it is reasonable to suggest we have seen the peak of economic growth globally.

 

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Do low rates beget low peak rates? Written by Avery Shenfeld Link to article

“Only when the tide goes out do you discover who’s been swimming naked.” – Warren Buffet

Bank of England delivered an unprecedented fourth hike in a row, while the Fed’s 50 basis point step was the first of that scale in decades.

However, markets were taken aback this past week as both the Fed, and the Bank of England indicated that rates may not rise as much as markets have expected.

Typically in a period of successive rate hike cycles, investors have higher rate expectations than what gets rolled out by central banks and ultimately what has been priced in. This is usually due to structural changes in the economy and a slower growth trend that weakens capital spending.

What if rate hikes take that one step too far? Equity and asset valuations are showing some signs of fragility, and sub-investment grade debt markets (below BBB), while functioning, are repricing. Both could be hit with further downside.

 

U.S. job openings, resignations hit record highs in March

American employers added back nearly half a million jobs and are now just 1.5 million jobs below peak employment.

The separate household survey showed that the U.S. added nearly 750,000 jobs in March, and the unemployment rate fell from 3.8% to 3.6%, nearing a 50-year low.

For the first week of April, jobless claims came in at 166,000, which is the lowest level since 1968. In 1968, the job market was less than half its current size.

The JOLTS survey shows that employers are looking to add 11.7 million new workers. But how are they going find 11.7 million new workers when the economy is within 1.5 million jobs of being at full employment? Employers will likely have to entice workers with higher wages.

Average hourly earnings rose by 5.6% in the rolling year ending March 2022, the fastest rate in decades, and may grow even more quickly as employers compete over scarce workers.

Reuters

 

Global Insights

Toronto home sales plunge 41% in April as higher rates take hold -“Based on the trends observed in the April housing market, it certainly appears that the Bank of Canada is achieving its goal of slowing consumer spending as it fights high inflation,” said Kevin Crigger, president of TRREB, in a release Wednesday.
BNN Bloomberg

 

A battery startup founded by a former Tesla (TSLA.O) engineer announced on Tuesday plans for US-based mass production of next-generation materials aimed at cutting costs, boosting driving ranges and reducing the industry's reliance on China.

Reuters

 

A study by analysts at Royal Bank of Canada (RBC) found that one-fifth of the global container ship fleet was currently stuck in congestion at various major ports:

1. Major ports in China, U.S. and Europe facing long delays
2. Shipping fuel cost up 66% in refueling hub Singapore over last year
3. Russia-Ukraine war risks pushing up ship insurance costs

Reuters

 

China's central bank on Wednesday pledged monetary policy support to ensure ample liquidity, help businesses badly hit by the latest COVID-19 outbreak in the country and support a recovery in consumption.

Reuters