MARKET UPDATE – February 26^th - March 8^th, 2024

In a Nutshell: Markets continued a positive trend despite some less than favourable inflation data, while the U.S. Fed kept interest rates steady and stuck to its projections for at least three rate cuts this year.

 

U.S. Labour Markets

News for labour markets continued to be mixed, but a notable increase in the unemployment rate (hitting a two year high) could possibly mark an inflection point in what has been an incredibly resilient labour market.

U.S. job growth accelerated in February, likely masking a softening in underlying labour market conditions as the unemployment rate increased to a two-year high of 3.9%.  The jump in the unemployment rate after holding at 3.7% for three straight months reflected a further decline in household employment.

U.S. Initial jobless claims fell slightly by 2,000 to 210,000 vs. the 215,000 expected, showing a low level of layoffs in the economy.

 

 

U.S. Economy

Investors responded positively to the U.S. Federal Reserve holding rates steady and maintaining their outlook of cutting rates 3 times this year.  However a second straight month of higher than expected inflation does create some uncertainty over whether or not they can follow through.

Federal Reserve officials have indicated they still expect to cut interest rates by three-quarters of a percentage point this year, sending U.S. equity markets to record highs.  The market reaction on Wednesday came after the Federal Open Market Committee voted unanimously to leave rates unchanged at a 23-year high of 5.25% to 5.50%.

A second straight month of stronger-than-expected inflation has effectively shut the door on the possibility of a Federal Reserve interest-rate cut before June, with some traders and analysts betting central bankers may need to wait even longer.

The U.S. Consumer Price Index (CPI) increased 0.4% in February and 3.2% from a year ago vs. the 3.1% forecast.  Gasoline and shelter prices drove the February consumer price index up 3.2% versus a year earlier; an acceleration from January's 3.1% increase.

 

Canadian Economy

Canadian equity markets had a positive two weeks as Q1 data is starting to reveal that Canada may also be able to navigate the high interest rate environment with a soft landing.  Markets responded well to weaker than expected inflation data and other retail sales data coming in above expectations.

Surprisingly, Canada's inflation rate cooled in February to its slowest pace since June, and closely-watched core inflation measures eased to more than two-year lows.  Annual headline inflation cooled to 2.8% last month, beating analyst expectations for a 3.1% rise, and below 2.9% increase in January.  On the month, the consumer price index rose 0.3%, less than a forecast 0.6% rise.

Canada's retail sales contracted a little less than expected in January, weighed down by lower goods prices and sales of motor vehicle and parts.  Retail sales dropped by 0.3% in January after a 0.9% jump in December that was spurred by holiday season sales.  Results came in above analyst consensus expectations.

Canada Mortgage and Housing Corp. says the annual pace of housing starts in February climbed 14% compared with January.  When looking at year-over-year figures, February's actual housing starts were 10 per cent higher in Toronto and 82 per cent higher in Vancouver because of higher multi-unit starts.

 

 

Eurozone and U.K. Economy

Some positive news across the Eurozone and U.K. as recent inflation data provides a pathways to rate cuts.  Eurozone business activity has also continued to pick up, with Germany beginning it’s road to recovery.

British inflation slowed in February, keeping the Bank of England on track to start cutting interest rates in the months ahead.  Consumer prices rose by 3.4% in annual terms after a 4.0% increase in January, the weakest rate of inflation since September 2021.

German inflation eased in February to 2.7%, the federal statistics office stated last week.  German consumer prices, harmonised to compare with other European Union countries, had risen by 3.1% year-on-year in January.

Euro zone business activity was almost in growth territory in March, however the recovery was uneven with a strong rebound in services activity offsetting a more severe downturn in manufacturing.  HCOB's preliminary composite PMI rose to 49.9 this month from February's 49.2, ahead of expectations but marking its tenth month below the 50-level separating growth from contraction.

Germany's economic downturn eased slightly in March as business activity in the country’s service sector came close to stabilizing. The HCOB German Flash Composite PMI rose to 47.4 in March from 46.3 in February. That was in contrast to of 47.0. March was the ninth month in a row with a reading below the 50 mark, which points to a contraction in business activity.

 

 

 

Japanese Economy

Japan saw some significant inroads to economic growth with exports rising significantly on the month and, GDP revisions having them avoid a recession in Q4 last year.  The expansion caused the Bank of Japan to hike rates for the first time in 17 years.

Bank of Japan hiked interest rates for the first time in 17 years, and also ended its yield curve control programs.  The move marked a historic shift away from nearly a decade of ultra-dovish monetary policy.

Japan’s manufacturing sector shrank less than expected in March, while the services sector grew at a faster pace, indicating some resilience in the economy as it faces an end to years of monetary stimulus.  Japan Manufacturing PMI read 48.2 so far in March, compared to expectations for a reading of 47.5.  The figure improved from the 47.2 seen in February.

Japan’s exports grew more than expected in February, spurring a bigger-than-expected drop in the country’s trade deficit as demand in China and the U.S. remained robust.  Exports grew 7.8% year-on-year in February, more than expectations for a rise of 5.3% but slower than the 11.9% jump seen in January.

 

Reuters Market Updates http://www.reuters.com

Bloomberg Market Updates - https://www.bnnbloomberg.ca/markets

 

 

Market Data	S&P/TSX	S&P 500	DOW	NASDAQ	STOXX EU	WTI	GOLD
This Week	0.5%	-0.1%	0.0%	-0.7%	0.3%	3.9%	-1.1%
Last Week	0.6%	2.3%	2.0%	2.9%	0.5%	-0.2%	0.3%

Market data taken from https://www.marketwatch.com/

 

 

 

Inflation - Not Going Quietly Into the Night by Craig Basinger, Chief Market Strategist, Purpose Investments Inc. Link to Article

The recent U.S. Consumer Prices Index (CPI) data showed a slight increase in both headline and core month-over-month changes, leading to a rise in year-over-year figures.  This uptick in inflation was mainly due to a lack of price deflation in goods, which had been falling for the past six months.  The market reacted differently to this information, with bond yields moving higher.  However, there are concerns about base effects on future inflation readings, potentially leading to a resurgence of inflation reminiscent of the 1970s.

 

 

Will Inflation Rhyme?

 

Despite recent increases in goods pricing, the overall trajectory of inflation is expected to remain downward over the next year.  Services inflation, which makes up a significant portion of the U.S. CPI, tends to be more stable but moves slowly.  Factors such as cooling rents and wages are expected to help inflation continue to cool as 2024 progresses, with some countertrend moves along the way.

 

Early Movers vs. Lagged Movers: Lagging Inflation measures starting to come around…

 

It is the view of Craig Basinger and Purpose Investments that this recent uptick in inflation will prove to be a short-term counter trend and along with the rise in yields.  However, the article notes that the Fed and other central banks still very much walk a tightrope in their rate cutting policies.

 

 

 

 

Focused on the Fed Brian S. Wesbury – Chief Economist  Link to Article

The Federal Reserve meeting caused speculation among investors and analysts about potential rate cuts and economic projections.  However, an exclusive focus on Fed policy shifts is unhealthy if it replaces an emphasis on innovation, entrepreneurial risk-taking, and corporate profits as key drivers of stock market valuations.

Recent reports show inflation rates continuing to exceed the Fed's 2.0% target, with the “Super Core” measure of inflation, which includes services only (no goods) but also excludes food, energy, and housing rents, rose 0.8% in January and 0.5% in February (tracking for an 8.2% rate of inflation for 2024).

There are also signs of economic slowdown are emerging, with “Core” sales (which exclude volatile categories such as autos, building materials, and gas stations) being revised down in previous months.  First Trust see this as a crucial measure for estimating GDP.

Despite concerns, the Fed is unlikely to adjust its inflation target in the near future.  Investors are advised to pay attention to the Fed's actions but not to fixate on them, as the productive capacity of the American people ultimately drives economic outcomes.

 

Saved by Zero by William Smead, Smead Capital Management Link to Article

The U.S. Federal Government has set a net zero carbon goal by 2050.  Significant investments have been made in green initiatives that have been funded through borrowed money.  Despite this investment and government subsidy, investor sentiment has ultimately shifted away from these ventures.

 

The fossil fuel industry has meanwhile faced challenges due to environmental criticisms and regulations, leading to consolidation among major companies like Exxon Mobil, Chevron, and ConocoPhillips acquiring some notable mid-cap companies in the U.S. to secure oil and gas reserves and extend the companies' lifespan.  The need for fossil fuels to meet global energy demands has been little impacted despite an increasing focus on cleaner alternatives.

 

 

There is a risk of increased oil and gas prices (indeed the price of energy overall) due to “industry shaming”, the lack of additional capital expenditure by the worlds large cap energy companies, and the growing demand for electricity driven by Artificial Intelligence and electric vehicle adoption.

 

NOTABLE NEWS

Justin Trudeau’s government will end up tapping the bond market for around $250 billion in debt next year, one of the country’s biggest lenders says.

Canadian Imperial Bank of Commerce says a combination of refinancing needs, the budget balance and non-budget items totals $265 billion, but the Finance Department has pre-funded just $13 billion.  This reduces CIBC’s bond issuance estimate for the 2024-25 fiscal year to about a quarter-trillion dollars.

Bloomberg

 

If you only look at the headlines about the monthly payroll report, the job market has looked surprisingly strong in recent months.  However, when you look a little closer, the picture isn’t as rosy.  After the fact revisions in prior month numbers are a significant example of this.  Payrolls in December and January were revised down by a total of 167,000 (the largest monthly downgrade for any non-shutdown months since late 2008), meaning February was just 108,000 above the original January level. 

Link

 

What goes around comes around – due to a recent resurgence in popularity, vinyl records have returned to the U.K. CPI basket of goods after a 32-year hiatus.

Link

 

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Aurie Wicks, CA, CPA, CFP       Tyler Quinn, CIM, FCSI           Bram Houghton, CFA, CFP

Wealth Advisor                             Sr. Investment Advisor,             Investment Advisor

(403) 835 - 4785                          Portfolio Manager                     (403) 690 - 9376                                 

aurie.wicks@cibc.com              (403) 299 - 7356                       bram.houghton@cibc.com

                                                    tyler.quinn@cibc.com

 

 

Wicks Quinn Houghton Group are Investment Advisors with CIBC Wood Gundy in Calgary, Alberta, Canada. The views of Wicks Quinn Houghton Group do not necessarily reflect those of CIBC World Markets Inc.

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