Signs of progress

Another eventful week is almost behind us, with the market digesting another CPI report out of the US and a Federal Open Market Committee (FOMC) meeting at which the Federal Reserve (the Fed) left rates unchanged at 5.25-5.50%. The outcome of the FOMC meeting was expected by market participants, however, the focus was on the guidance as to whether the Fed still believed they would be able to start easing this year as signaled in their 2024 “Dots” projection.

The Committee was close to being evenly split between one and two cuts for this year, with the balance signaling one cut in 2024. The long-run dot also moved higher to 2.75%, up from 2.562% in the previous projection. The Fed’s Summary of Projections relating to economic activity remained unchanged while their forecast for unemployment estimates were moved higher for 2025 and 2026 by a 10th to 4.2% and 4.1%. Projections for Core PCE inflation was also moved higher by 0.2 percentage points to 2.8% in 2024, which moved 2025 expectations to 2.6%. When looking at both PCE and GDP growth forecasts, the Fed continues to expect a soft landing for the US economy.?

The bigger event on Wednesday which stole the show from the Fed was the US CPI report for the month of May. Core-CPI came in well below expectations and was the lowest core-CPI print since the summer of 2021. Core-CPI came in at +0.163% vs. 0.2992% the previous month, while year-over-year moved lower to 3.4% from 3.6% the previous month. One of the most constructive readings came from Core services ex-shelter, which came in at -0.047%, down materially from 0.464% in April. Policy makers certainly took this report as constructive and will point to it as a sign of progress in their battle to fight inflation. One reading alone is not an indication of “mission accomplished” however, more inflation readings—such as the month of May—will eventually give the Fed the foundation it needs to begin moving off its restrictive monetary stance later this year.

Economic data

There was little notable data out of Canada this week, however, the Canadian bond market benefited from the positive moves out of the US. Governor Macklem spoke at a fireside chat and reiterated that the Bank of Canada (BoC) can continue to remove its restrictive policy if inflation reports continue to show signs of progress towards their target. If Canada’s next inflation reading is anything similar to this week’s US report, it’s highly likely the BoC will once again cut rates at their July meeting.?

Bond market reaction: A phenomenal week

Government bond markets had another phenomenal week as interest rates again moved lower on the back of inflation reports continuing to show signs of progress. 10-year US Treasury bond yields moved lower by 25 basis points over the week while Government of Canada 10-year bonds moved lower in sympathy by a similar amount. The US Treasury issued both 10-year and 30-year bonds with both being well subscribed with the 10-year seeing the strongest demand in over a year. The Corporate Issuance calendar was also busy with deals being well subscribed as investors continue to be supportive of credit. Interest rate curves continued to bull steepen with the 5-year to 30-year Government of Canada curve moving steeper by 4 basis points with the same US Treasury curve moving steeper by a similar amount.

Stock market reaction: Canada slumped and the US soared

It was a tale of two tapes north and south of the border for equities this week. While Canadian markets slumped lower, US equities once again exceeded all-time record highs, led by big moves in large cap Technology juggernauts like Apple, Nvidia, Broadcom as well as Adobe's move this morning. Apple's surge higher added over USD $300 billion to its market cap this week alone, lifting it past Microsoft as the most valuable company in the world. There was a delayed reaction following Apple's A.I. developers conference due to the lack of any specific killer app. However, the move higher came the following day from the realization that the plethora of tiny A.I. enhancements will likely spur a massive hardware upgrade cycle that will benefit the company for years. We’re hoping to see an improvement in Siri's usefulness even if she's not voiced by Scarlett Johansson. Turning our attention back to Canadian markets, the big news was the move by National Bank to acquire Canadian Western Bank at a 100% premium. The highly strategic and potentially accretive acquisition solves a lot of problems for Canada's sixth largest bank so long as it can successfully integrate and culturally unify the two organizations. On the commodity front, oil regained all of last week’s OPEC induced slump, although energy equities are yet to see a recovery. Copper extended its recent slide, while gold gained even as the US dollar was stronger.

What to watch in markets next week

The excitement will continue next week with investors getting a look at retail sales out of the US for the month of May. Similarly, we’ll get Canadian retail activity for April. Investors will be looking at the US report for any signs of a slowdown from the US consumer while in Canada the hope will be a rebound from a poor report in March.

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

?The views expressed in this document are the views of CIBC Asset Management Inc. and are subject to change at any time. CIBC Asset Management Inc. does not undertake any obligation or responsibility to update such opinions. Certain information that we have provided to you may constitute “forward-looking” statements. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or achievements to be materially different than the results, performance or achievements expressed or implied in the forward-looking statements.

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