MARKET UPDATE – June 3^rd – June 14^th, 2024

In a Nutshell: The U.S. stock market continued to charge forward into fresh all-time highs as cooling inflation continues to support the Technology sector, despite some volatility to end this week as markets digested a hawkish Federal Reserve meeting.

U.S. Labour Markets

U.S. labour markets still showing mixed signals with private payrolls dropping by more than expected, and jobless claims rising last week to the highest number in 10 months. Despite this the U.S. economy created far more jobs than expected in May exceeding expectations by almost 50%, with wage growth accelerating and lay offs / quit rates remaining unchanged.

 

U.S. Economy

The U.S. Fed kept rates unchanged this week, indicating that they were looking at inflation as well as a variety of other data, such a employment and economic growth when considering their interest rate policy. The Fed also indicated rate cuts may not start until as late as December 2024. Producer Price Index (PPI) in the U.S. fell in May from the previous month, well below expectations, which is a good indicator that inflation will continue to cool.

 

U.S. Inflation and interest rates

 

Canadian Economy

Canada became the first G7 country to cut interest rates by 0.25% to 4.75%, which was in line with market expectations. The BoC's preferred measure of inflation moved below 3% and Canada GDP growth for the first quarter was lower than the BoC's expectation. Canada’s employment rate also climbed to 6.2% as opportunities became harder to find for prospective jobseekers. The Canadian economy added 27,000 jobs last month – too modest of a gain to keep the unemployment rate from rising.

 

Eurozone and U.K. Economy

The ECB cut rates for the first time in five years on Thursday, lowering its record-high deposit rate by 25 basis points to 3.75%. The ECB raised its inflation forecasts and stressed that any further rate reduction would depend on incoming data. It reaffirmed that borrowing costs needed to remain high enough to keep a lid on prices. Britain’s economic growth also weakened in April, likely due to wet weather, though it has expanded over the last 3 months at the fastest rate in 2 years indicating the start of their recovery from a slight recession to end 2023.

 

Energy

Oil prices stumbled last week as OPEC+ signaled it will begin tapering off its production cuts this year just as demand worries intensified following weak data from major oil consumer China. It did recover in large part this week based on forecasts for relatively strong growth in global oil demand for the remainder of the year, and solid U.S. fuel demand this summer.

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	-1.2%	1.3%	0.3%	2.4%	1.8%	-1.9%	-0.9%
Last Week	-1.7%	1.6%	-0.5%	3.2%	-2.1%	3.9%	1.0%

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

 

 

 

CIBC Economics – Quick Take: Bank of Canada decision by Andrew Grantham

The Bank of Canada cut it's overnight rate by 25bp to 4.75% as expected, and in reality with core inflation decelerating and growth remaining tepid there wasn't a good excuse to not begin the process of moving rates lower. The statement pointed to "continued evidence" that core inflation is easing, which meant that policy no longer needed to be as restrictive as it has been.

It noted that the breadth of inflationary pressures were "near their historic average", and that policymakers' confidence that inflation was coming back down to target had increased with the recent data. The opening statement for the press conference noted that it would be "reasonable" to expect further rate cuts if inflation continues to ease, although it also reminded investors that decisions would be taken "one meeting at a time".

Financial markets had mostly priced in today's cut to the overnight rate beforehand, but long rates and the Canadian dollar still moved lower on the news as a perceived dovish tone suggests the likelihood of a greater number of follow up moves. We continue to forecast a further 25 bps reduction at the next meeting in July, and a total of 4 cuts (3 more after today's) by the end of the year.

 

Macro Memo June 11 - June 24 by Eric Lascelles Link to Article

Easing cycle Continues

The Bank of Canada opted to take advantage of receptive market pricing to push through its first rate cut. RBC Economics had long favoured July as the logical starting point on the presumption that the Bank would wish to properly signal the coming cut in advance, but soft GDP data to start the year may have been the tipping point.

 

Two questions arise as the rate cutting cycle begins in Canada:

1) How far might the Bank of Canada get ahead of the U.S. Federal Reserve (Fed) in rate cuts?

While there’s no limit, rate cuts can have a dual effect in smaller economies where the cut itself contributes to economic changes and a currency response potentially providing an additional boost to growth and inflation.

While generally similar to the U.S. in rate policy, Canada has deviated as much as 2.5 percentage points in the past, though as much as a percentage point differential like between 2011 – 2014 may be more likely in this instance.

Monetary policy in Canada and U.S sometimes deviates moderately

 

2) Might Canada’s home prices suddenly explode higher now that the cork has been popped on rate cuts?

A recent report indicated that a significant portion of potential homebuyers were waiting for better financing conditions before entering the market. However, a single 25 bps rate cut may not have a substantial impact on affordability, especially if it was already expected and factored into bond yields, which is what banks base their rate adjustments upon.

While the real estate industry isn’t expecting drastic shifts in buyer behavior, rate cut is seen as a leading indicator for potential future cuts, which could influence market dynamics. There may be renewed interest in the housing market, but predicts that home prices may remain relatively stable. Overall, there is increased uncertainty surrounding the situation as it continues to unfold.

 

U.S. data evolves

The U.S. labour market continues to send mixed signals, adding 272,000 jobs in May, though the household survey, which is a far more volatile survey, indicated a loss of 408,000 jobs. Job openings also continue to edge lower and initial jobless claims are inching higher (with a significant rise last week), though they are still historically low.

 

U.S. jobless claims remain low

 

 

Falling U.S. temporary employment would normally have induced a recession already

 

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