The rule of three

Economic data

A common device of great storytellers is the rule of three, a pattern recognition technique used to capture an audience’s attention or convey a message. Think “life, liberty, and the pursuit of happiness” or simply “location, location, location”. Central bankers aren’t necessarily known for their storytelling prowess, but perhaps the Bank of Canada was treated to its own rule of three this week when looking at inflation – namely, “3% headline CPI, 3% median CPI, and 3% trim CPI”. Admittedly that’s not very catchy, but nonetheless it’s still notable to see 3?handles on each of the Bank’s three main inflation figures for May. On the surface that looks like progress, and indeed the report offered some encouraging points. However, the Bank would be wise to dig a little deeper. While the +3.4% year over year headline CPI is the lowest since June 2021, much of the decline can be attributed to lower gasoline prices, which reached their peak last May. Another area we’re watching closely is services inflation, which has proven stickier and remained elevated at +0.5% month over month. In fact, the more granular “core services excluding shelter” measure, a favourite of economists, is still running at +4.9% on a 3-month annualized basis. Overall, it was a mixed report that did little to change market expectations of one additional rate hike to come. This morning’s April GDP number, which was unchanged month over month, also did little to alter those market expectations since the Federal worker strike alone cut 0.1% off the headline CPI while the May flash estimate (+0.4%) showed a re-acceleration of growth.

The Fed was also on notice this week with a string of stronger data points. First, US new home sales came in well ahead of estimates at +12.2% month over month, defying notions of a housing market slowdown. The Conference Board Consumer Confidence survey also surprised, reaching its highest level since early 2022, a sign of improved sentiment. And finally, Q1 GDP saw a significant upward revision from +1.4% to +2.0%, largely driven by stronger than expected personal consumption, especially related to services. The good news on the latter is that personal spending is showing signs of cooling as figures for May came in below expectations earlier today. But all told, the Fed may also have more work to do.

On a more personal note, we would like to highlight that our colleague Patrick O’Toole, one of our team’s senior fixed income portfolio managers, is retiring this week. Patrick started this weekly letter more than 10 years ago as an internal newsletter to provide teams across CIBC with key market information to support our clients with their investment needs. His passion and market insights have been well recognized amongst his peers across Canada, and it’s through these efforts that our Weekly Roundup has grown into the successful publication that it is today. We would like to thank Patrick for all his guidance, insight and most importantly friendship over all these years. Lastly, we would like to congratulate him on his retirement, and wish him well as he moves into the next exciting chapter of his life. Enjoy retirement Pat, you deserve it!

Bond market reaction

Canadian and US yields diverged this week, as Canada notably outperformed on the back of the strong US data and hawkish comments out of Fed Chair Powell’s appearance at the European Central Bank Forum in Portugal. Corporate issuance was quieter following a heavy calendar last week, and though new issues remain oversubscribed, performance in secondary trading has lost some steam. Investment grade spreads were largely unchanged, while high yield spreads fared better and were tighter on the week.

Stock market reaction

US equity markets ended a spectacular quarter with a solid weekly gain, while the S&P/TSX ended a modest quarter on a surging high note. We are finally starting to see the broadening out of strength from non-MAG7 stocks in the US, while in Canada, strength was also broad based, with all eleven GICS sectors ending in positive territory. Even Energy saw a weekly gain despite the failed mutiny in Russia. We will be paying close attention in the coming quarter to the direction of Strategic Petroleum Reserve flows that are now shifting from a source of supply to new demand. Another positive signpost for equity markets this week was the flurry of IPOs and corporate mergers and acquisitions. Savers Value Village launched a successful IPO, Brookfield delivered on their promise to grow insurance with their purchase of American Equity Investment Life, Thomson Reuters made a further move into AI with their purchase of Casetext, IBM is purchasing Apptio, and Park Lawn along with Brookfield’s involvement revealed their interest in larger industry peer Carriage Services. In other corporate news, CP Rail delivered a compelling growth outlook at their investor day, making the case for its new ‘Forever Journey’ as North America’s first true transcontinental railroad. Enjoy the long weekend, and happy retirement to Pat O’Toole.

What to watch next week

In Canada, the holiday-shortened week ends with the key employment report for June. The U.S. sees a busier calendar with various Institute for Supply Management (ISM) surveys, Federal Open Market Committee (FOMC) meeting minutes, an updated trade balance, and nonfarm payrolls. Happy Canada Day!

Adam Ditkofsky is Senior Portfolio Manager, Global Fixed Income; Pablo Martinez is Portfolio Manager, Global Fixed Income; Sandor Polgar, Portfolio Manager, Global Fixed Income; Steven Lampert is Senior Research Analyst, Investment Research; Craig Jerusalim is Executive Director and Portfolio Manager, Equities; and Rahul Bhambhani is Portfolio Manager, Global Equities.

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