Central bankers: Assemble!

Investors looking at global central bank activity might think they’re in the midst of a Marvel movie franchise. For years they’ve witnessed a group of predominantly male leaders wielding their superpowers to fight a common adversary—whether it’s a global pandemic, inflationary pressures or high interest rates. In 2020, they had to combine their strengths to safeguard the financial system from the devastating impacts of the pandemic. Two years later they joined forces once more to dwell inflationary pressures, which were partly a consequence of their earlier actions. Now it appears the team is ready for their newest installment: saving the planet from recession. After central banks from US, European Union, England and Canada all lowered interest rates in the past few weeks, an unexpected ally joined the team as the People’s Bank of China (PBOC) announced a series of measures aimed at jumpstarting its battered economy.

Economic data

Let’s hope these concerted actions don’t lead to the remake of a 1970’s classic: “return of the second-wave inflation” as some of the data this week suggests the economy remains resilient in spite of high interest rates. The third revision to US second quarter gross domestic product (GDP) came in above expectations at 3%. Details of the report show very decent growth, with personal consumption standing strong at 2.8% and gross private investment at 8.3%. The latter number reflects efforts made to improve manufacturing capacity at home and a push for environmentally friendly projects. Muddying the water though was the personal income and spending numbers, both of which came in below expectations at 0.2%. This shows higher interest rates are taking some steam out of consumers. The Personal Consumption Expenditures Price Index (PCE) dipped to an annual rate of 2.2%, well in the target range of the US Federal Reserve (Fed).

News out of Canada was positive. The payroll employment number from SEPH showed that close to 33,000 jobs were created in July, most of them in public administration, education and health. The report also showed that average weekly earnings are growing at 4.5% on a yearly basis. While this is good news for workers, high wage growth can feed the inflation cycle and will be closely watched by the Bank of Canada (BoC). Lastly, the July GDP print beat estimates with a 0.2% increase for July, taking the Year-over-Year (Y/Y) growth number to 1.5%. While those numbers are nothing to brag about, they show an economy that is still able to move along through strong headwinds.

Bond market reaction: Embracing the soft landing

The backup in yields we witnessed after the Fed rate announcement last week was not reversed this week. The 10-year Canadian bond finished up 3 basis points (bps) at 2.98% as markets continue to embrace the soft landing narrative. With central banks prioritizing growth and governments having trillions of dollars in debt to finance, we’re witnessing a phenomenon not seen in a long time: a term premium. The yield curve moved further into positive territory, meaning investors are now demanding higher yields to purchase longer-dated securities. Corporate bonds continue their gradual tightening as positive economic news persist and new issues are met with robust demand.??????????????????????????????

Stock market reaction: Rallying

Fireworks in markets outside North America, especially Asia, following several stimulus announcements in China. Across the indices in China and Hong Kong, equities rallied between 17% and 20% since mid-September. Remember that when China sneezes, the world catches a cold. However, this time we’re seeing the opposite effect. Investors saw several European companies with exposure to the region rally in sympathy. Most prominent was the rebound in luxury goods, a sector that derived the majority of its growth over the past decade from Asia. Given weakening consumer sentiment and more conservative spending, growth rates have moderated recently, especially post-pandemic. Stocks in this industry saw a relief-rally following recent announcements. On another note, the materials sector continues to outperform as gold breached $2600/oz and anticipation of increased consumption helped other commodities and base metals. Mining giants including BHP and Glencore were up 12% this week.

What to watch in markets next week

The first week of October comes with the latest non-farm payroll number. This will be closely watched as the market will use it to gauge if the Fed will need to further cut interest rates in 50 bps increments. We’ll also get both manufacturing and services ISM numbers. It will be a short week in Canada with markets closed on Monday to commemorate the National Day for Truth and Reconciliation.?

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Authors: Adam Ditkofsky, Pablo Martinez, Sandor Polgar, Steven Lampert, Craig Jerusalim, Rahul Bhambhani and Diana Li

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