MARKET UPDATE – MAY 20^th – may 31^st, 2024

In a Nutshell: Another choppy two weeks for markets as concerns over U.S. interest rate policy continues.  Consumption data was positive for inflation watchers, while the stock market continued to closely monitor corporate earnings.

U.S. Labour Markets

A mixed two weeks for U.S. labour Markets with new unemployment claims ticking higher this week after strengthening the week before.  We continue to see no trend in the relative strength of the labour market.

The number of Americans filing new claims for unemployment benefits ticked higher last week after falling the week before, but underlying strength in the labour market still shows signs of resilience and should continue to support the economy.

 

U.S. Economy

The U.S. economy showed signs of slowing with a weaker than expected Gross Domestic Product (GDP) growth rate, though consumer confidence and business activity remains strong.  Personal Consumption Expenditures (PCE) showed inflation as steady month-over-month.

The U.S. economy grew more slowly in the first quarter than previously estimated after downward revisions to consumer spending. GDP grew at an 1.3% annualized rate from January through March, down from the advance estimate of 1.6% and notably slower than the 3.4% pace in the final three months of 2023.

Sentiment around inflation was boosted this week Personal Consumption Expenditures (PCE), the Fed's preferred gauge of inflation, came in 2.7% in April, unchanged from March and thus showing no signs of accelerating.

U.S. consumer confidence unexpectedly improved in May after deteriorating for three straight months.  Optimism about the labor market and worries about inflation and higher interest rates over the next year were prevalent, though consumers were upbeat about the stock market and had planned to buy major household appliances in the next 6 months.

U.S. business activity accelerated to the highest level in just over two years in May, but manufacturers reported a surge in prices for a range of inputs, suggesting that goods inflation could pick up in the months ahead.  U.S. Composite PMI Output Index, jumped to 54.4 this month, which was the highest level since April 2022 and followed a final reading of 51.3 in April.

 

 

 

Canadian Economy

The Bank of Canada (BoC) will have likely seen all the data they need to cut rates as early as June this year with Consumer Price Index (CPI)  continuing a cooling trend.

CPI fell to 2.7% in April from 2.9% in March on a Year-over-Year, marking the softest rate since March 2021.  Food prices slowed amid lower grocery prices while transportation prices rose due to higher gasoline prices.  Core CPI slowed to 1.6%, down from a 2.0% gain in March. Canada's Producer Price Index however increased by 1.4% Year-over-Year in April, compared to the -0.5% estimate.

Canada's retail sales contracted for a third consecutive month, missing expectations, underscoring the softness in economic growth and impact of high interest rates on consumer spending.  Retail sales in March dropped by 0.2% as consumers curtailed purchases of furniture, home furnishings, electronics and appliances.  For the quarter that ended March 31, sales were down 0.2%.

 

Eurozone and U.K. Economy

The U.K. and Europe are likely to have seen all the data required to begin cutting rates as well, though Britiains CPI didn’t fall as much as had hoped.  This leaves some uncertainty over the Bank of England’s actions.

Eurozone business activity has expanded at its fastest pace in a year this month, supported by buoyant demand for services, while manufacturing showed signs of approaching a recovery.  Preliminary Purchasing Managers Index (PMI) climbed to 52.3 this month from April's 51.7, beating expectations of 52.0 and the third consecutive month of an expansionary reading above 50.

Inflation in Britain eased less than expected and a key core measure of prices barely dropped, prompting investors to pull bets on a Bank of England rate cut next month.  The CPI rose by 2.3% in the 12 months to April, down sharply from March's 3.2% increase and its lowest since July 2021, though analysts and the BoE had forecast a bigger drop to 2.1%.

German inflation rose slightly more than forecast to 2.8% in May, although this was expected and shouldn’t impact European Central Bank policymakers ahead of their interest rate decision next week. This exceeded the expected of 2.7%, after increasing 2.4% in April.  Economists are paying close attention to the data from Germany - Europe's biggest economy - ahead of the release of inflation figures from the wider Eurozone on Friday.

 

Energy

Oil recovered this week as another attack on a ship in the Red Sea added to heightened geopolitical tensions in the Middle East ahead of an OPEC+ meeting.  Oil has risen this year due to tensions across the Middle East and output cuts by the OPEC and its allies.  Still, gains have been muted given the potential risks of wider war in the Middle East and prices have softened since early April because of abundant supply outside OPEC+.

The European Commission's expected move to hike tariffs on Chinese electric vehicles (following the U.S. decision to increase tariffs to 100%) is set to kick off a round of talks that Chinese executives hope will soften the blow for the world's biggest EV industry.  The provisional tariffs, expected to be announced in June represents billions of dollars in new costs for Chinese electric car makers.

Solar stocks rallied this week after reports said China, the largest maker of panels and other solar-power products, was preparing measures against a price war. 

 

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	-0.6%	0.0%	-2.3%	1.4%	-0.6%	-2.9%	-3.4%
Last Week	-0.4%	-0.5%	-1.0%	-1.1%	-0.2%	-0.6%	0.6%

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

 

CIBC Economics – Canadian CPI (April): All clear on the inflation front by Andrew Grantham  Link to Article

This week’s CPI data should have provided all the information the Bank of Canada (BoC) needs to begin cutting dates.  While headline inflation aligned with consensus most core measures showed the softening that they have been looking for.

While gasoline prices rose, food prices actually fell by 0.2% and headline inflation was at 2.7% down from 2.9% the previous month.  Food prices have a significant impact on the core measure that the BoC preferably looks at.  Non-core measures, such as telephone services and internet services continued to place the most downward pressure on that headline inflation number.

Implications: Policymakers were looking for the encouraging signs to start the year to continue, which doesn’t leave any material reason to not cut rates and CIBC Economics believes that rate hikes could very well begin in June of this year. As such the Canadian dollar weakened on the inflation print.

 

Bursting the myth: Understanding market bubbles by Pierre Dongo-Soria, Russell Investments Link to Article

It's important for investors to distinguish between market bubbles and regular market cycles.  Market cycles are driven by fundamental economic factors and are an inherent aspect of market dynamics, whereas a market bubble is marked by unsustainable price increases unsupported by underlying fundamentals and when bubbles burst, prices crash, causing significant and often permanent losses for investors.

Market-related symptoms

The S&P has seen outsized market returns to start the year but as have Japan and Europe, many reaching all time highs.  While they may look expensive from a Price/Earnings valuation perspective, the U.S. market has been in this territory for some time with prices being driven primary by earnings growth, and 78% of companies in the S&P this year reporting Earnings per share above expectations.

 

Psychological symptoms

Narratives are powerful drivers of human behaviour.  Sentiment indicators include the Volatility Index (VIX) which is presently sitting in a neutral range, as well as hot button words in the media painting a far different picture from 2022, with words like “Higher Rates” and “Recession” being replaced with “Earnings” and “All-Time Highs”.  Articles can also be scored based on positive and negative words within the article which also point to this paradigm shift.

Sentiment score in financial news

 

Russell Investments current analysis of the U.S. equity market suggests that while there may be pockets of overvaluation, the overall market does not exhibit the characteristics of a bubble.

 

 

MacroMemo - May 28 - June 10, 2024 by Eric Lascelles Link to Article

Easing inflation

While inflation showed some concerning signs earlier this year, April inflation data and other recent signals appear to have broken this persistent trend.  While Services inflation is still too hot, it has finally showed signs of cooling.  The breadth of inflation has also narrowed with less components of the basket significantly contributing to the overall number.

 

 

Service inflation is starting to ease

 

U.S. consumer worries

Some conflicting data regarding to the overall health of the U.S. consumer, with consumer loan delinquencies rising, credit card balances slowing, savings rates being eroded (to pre-2005 lows) and rising household net worth.

Further to that, while it remains tighter for many with higher rates, debt servicing as a percentage of income is still in line with the pre-pandemic norm.

U.S. household debt servicing costs in line with pre-pandemic norm

 

Looking through the data, the best predictor of consumer spending isn’t interest rates or inflation or confidence, but household income.  That, in turn, is informed by job creation and wage growth.  Job creation remains healthy and wage growth, while slowing, is still strong.

 

NOTABLE NEWS

Toyota Motor showcased next-generation engines on Tuesday that can be used in cars as varied as hybrids and those running on biofuel, as it targets tougher emissions standards, but also doubles down on its strategy of selling more than just EVs.  Subaru and Mazda Motor also displayed in-development engines with significantly reduced volume and height versus current engines.

"With these engines, each of the three companies will aim to optimize integration with motors, batteries, and other electric drive units," they said in a joint statement.

Reuters

Madrid's Prado Museum unveiled a painting by Italian baroque master Caravaggio on Monday that will go on public display for the first time this week after what the museum has described as one of the greatest discoveries in the history of art.

"Ecce Homo" (Behold the Man) had been lost since the 19th century before re-emerging three years ago, when the painting, initially attributed to an unknown Spanish painter, was about to go under the hammer at auction in Spain for a fraction of its value.

Reuters

 

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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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