Holding pattern

Following last week’s weaker than anticipated payroll report, markets have been in somewhat of a holding pattern, trying to anticipate exactly what the next move by global central banks will be —and whether we’ll in fact start seeing rate cuts this summer. While the US Federal Reserve (Fed) appears to be on hold for now, at least until September, Fed Chairman Powell did announce plans to slow the speed of the central bank’s balance sheet drawdown (quantitative tightening) starting in June from US$95 billion to US$60 billion.? While Powell noted that this does not change the Fed’s overall plans to continue reducing its balance sheet, it does signal to the market that restrictive policies are starting to ease.

Across the pond on Thursday, the Bank of England (BoE)left its key rate unchanged as expected at 5.25%. However, it did indicate it was on course to start cutting rates over the coming months alongside its European peers—possibly as early as June. Unlike in the US, inflation in the UK has fallen steadily over recent months, with the BoE anticipating it will likely draw near its 2% target in April 2025.

Closer to home, questions remain in terms of what exactly the Bank of Canada (BoC) will do at its next meeting in June. The futures market is currently pricing in a 50% probability of a rate cut at that meeting and a 100% probability for July. Governor Macklem’s recent comments thus far have been modestly hawkish, although in a recent interview he did note there is room for some divergence from the US policy stance. Ultimately, the data we see over the next few weeks of May will be critical.??

Economic data

While light, there were a few interesting economic data points this week worth highlighting. First, in the US we saw consumer credit data for March. It increased by US$6.3 billion, far below expectations of US$15 billion and represents the smallest gain so far this year. A big part of this came from revolving debt (includes credit card debt), which fell drastically to an increase of just US$152 million. This is the first time since August 2021 that the advance was less than US$3 billion. Second, wholesale trade sales also turned negative in March, despite positive expectations. This caused the inventory/sales ratio to rise modestly to 1.35x. The durable goods inventory/sales ratio also moved higher to 1.82x, its highest level since November 2023. This should continue to support stable or even further easing of goods inflation. Lastly, in the US we saw the Manheim used vehicle price index, fall by 2.3% in April. ?This represents a 14% decline Year-over-Year (Y/Y) and is its biggest Month-over-Month (M/M) decline this year. All of these data points are supportive for bonds in the US.?

In Canada, the employment report for April blew past expectations, with more than 90,000 jobs being added. While the unemployment rate was unchanged M/M at 6.1% (due to an increase in the labour force and the participation rate) hourly wages for permanent employees came in higher than expected at 4.8% Y/Y. Overall, this report challenges the BoC’s case for cutting rates in June.? However, it is necessary to highlight that unemployment still moved higher in many parts of the country including Ontario, Quebec, Alberta, Manitoba and Saskatchewan.??

Bond market reaction: In line with last week

Both US and Canadian bond yields were pretty much in line with last week, with US and Canadian 10-year bonds yielding approximately 4.5% and 3.7%, respectively. We did see shorter dated bond yields move modestly higher in Canada following the strong employment report for April. However, the market remains uncertain if we will indeed see a rate cut in June or July. Corporate credit spreads were unchanged with demand for investment grade bonds and high yield bonds remaining robust.? Earlier in the week we saw high yield spreads move below 300 basis points (bps), which is close to the lows we’ve seen over the past 10 years. Still, new issues continue to be well absorbed with new bonds coming with little to no primary market concessions.

Stock market reaction: Marching towards all-time highs

Global equity markets continue their upward march towards all-time highs as earnings season continues. However, companies reporting slight misses vs. investor expectations continue to get punished. In Canada, Shopify reported satisfactory results, but investors were quick to sell after the company guided to higher investments over the next few quarters. While Shopify is one of the market leaders in e-commerce, second only to Amazon, its gross merchandise value represents ~15% of the overall US e-commerce market. Shopify also stands to benefit from other adjacent services it offers including payments where penetration rates have further upside. In other news, Japanese entertainment conglomerate, Sony, is rumoured to be bidding for two companies simultaneously: US media company Paramount and a Japanese e-comics provider. Despite partnering with private equity on the potential buyout of Paramount, estimated price tags are close to US$26 billion, which raises question marks on financing and balance sheet capacity. Will Sony be the new parent for classic movies like The Godfather? Stay tuned.

What to watch in markets next week

Next week in the US, we’ll see CPI, PPI, retail sales, business inventories, housing starts, building materials, import/export prices indices, capacity utilization and the leading index. In Canada, we’ll see wholesale sales, housing sales, manufacturing sales, existing home sales, and international securities transactions.?

CIBC Asset Management is committed to providing market insights and research to help you find the right investment solutions. If you'd like to discuss this market and economic update in more detail or have questions about your investments, please get in touch with your advisor or CIBC representative anytime.

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

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