Choose your own adventure

There were some fairly important policy rate events outside of North America this week, which clearly showed how central banks across the globe are beginning to diverge in their paths to address their own unique growth and inflation profiles. First and as expected, the Bank of England left its overnight rate unchanged, acknowledging easing inflationary pressures while continuing to guide market expectations to potentially start rate cuts in June. Second, the Bank of Japan announced the end of its negative rates regime and abandoned its yield curve control policy, bringing its short-term interest rate to 0%-0.1% from -0.1%. While Japan was the last in the world to exit negative rates, it cautioned against aggressive rate hikes. It anticipates accommodative financial conditions will likely be maintained unless trend inflation accelerates ahead of expectations. Third, the Swiss National Bank surprised markets by cutting its policy rate by 0.25%, based on expectations for inflation to be below 1.5% through 2026. This represents the first reduction by one of the world’s 10 most traded currencies since the end of the pandemic.?

Closer to home, and as expected, the US Federal Reserve (the Fed) left the target range for the federal funds rate unchanged at 5.25%-5.50%. At the same time the Fed revised its 2024 gross domestic product (GDP) estimate from 1.4% to 2.1% and core inflation from 2.4% to 2.6%. Still, Chairman Powell reaffirmed expectations for three rate cuts this year, which sent bond yields lower and equity markets higher. Ahead of the announcement, markets were concerned that Powell would take a more hawkish stance at this meeting, possibly reducing the number of expected rate cuts for this year, especially since recent inflationary data has been coming in modestly higher than expected. Still, there were some signs of these concerns in the release with the dot plot (representing policy rate expectations for each voting member of the FOMC) moving higher for both medium and long-term projections. Chairman Powell also indicated that slowing the pace of quantitative tightening would come into view “fairly soon”. But for now, it remains unchanged at the pace of $95 billion per month. Since the meeting, futures markets moved to be more consistent with Fed expectations with the first rate cut now expected in June or July.?

Economic data

We also saw Canadian Consumer Price Index (CPI) data for February this week, which came in well below expectations at 2.8% Year-over-Year (Y/Y)—this represents the second consecutive month below 3%. Core metrics also improved with median core CPI falling by 0.2% to 3.1% and services (excluding shelter) now pacing at 1.6% Y/Y. Still, the Bank of Canada (BoC) previously signalled it wants to see further evidence of eroding inflation before taking any action and starting to cut rates—this data further supports the case to start cutting rates this June. Lastly,? Deputy Governor Toni Gravelle noted in a speech on Thursday that the BoC is only expecting to end quantitative tightening in 2025, signaling confidence in its ability to continue to shrink the balance sheet while potentially cutting rates simultaneously.????

Bond market reaction: Moved lower this week

Bond yields moved lower on the week in reaction to the Fed reaffirming its guidance for three rate cuts in 2024. In Canada, the move was also in reaction to lower-than-expected inflation in the first two months of the year, bringing the past six-month pace to 0.4% on an annualized basis. The yield curve, defined as the difference in yield between 2-year and 30-year Government of Canada bonds, also steepened this week with the decline in shorter term bond yields being more pronounced than longer bonds. Still, both the US and Canadian yield curves remain deeply inverted.?

Both investment grade and high yield bond spreads were tighter as risk assets continued to benefit from the Fed’s dovish stance and declining inflation. However, two widely held names, Bell Canada and Inter Pipeline, saw their rating outlooks changed to negative, which took spreads modestly wider. New issues, while light in Canada, continued to be well received with deals coming to market with little to no concession.

Stock market reaction: Global equities were up

Global equity markets were up this week with the TSX making all-time highs following the Fed’s comments about rate cut expectations this year. By sector, Industrials, Energy and Technology led the way in Canada, and Telecommunications dragged on index returns. Couche-Tard, one of Canada’s darling stocks, reported earnings this week that posted a rare miss versus expectations. The company is one of the largest gas station operators in North America and often provides useful insight into consumer consumption patterns and behaviours. Management noted weakness in consumer spending in the US—especially centered around the low-income consumer.

Apple also diverged from the market this week, loosing more than US$115 billion in market value in one day, following an announcement by the Justice Department that it is suing the company for violating antitrust regulations. This comes after the European Union already fined Apple US$2 billion for unrelated antitrust behaviour. The company plans to fight back and defend itself, but this is a development investors are watching closely.

What to watch in markets next week

Next week marks the end of the first quarter. In Canada, we’ll see the CFIB Business Barometer, the January SEPH report and GDP. In the US, we’ll get new home sales, durable goods orders and consumer confidence. The Weekly Roundup is taking a week off next week due to Good Friday, but will be back the first Friday in April.

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

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