Stock Market - USA and Canada - WE July 12, 2024
Paul Young
Experience Senior Financial Planning, Analysis and Reporting SME seeking P/T or F/T job.
Equity markets rose alongside Fed Chair Powell's testimony to Congress, and encouraging U.S. inflation data. The S&P 500 gained 0.9%, with rate sensitives leading, while telecom services and the Nasdaq lagged. Meantime, the TSX jumped 2.8%, with all sectors posting gains.
In every tightening cycle, there comes a point when the risk of restrictive policy weighing too heavily on the economy outweighs the inflation pressure that policy first sought to correct—that point appears to be now. In testimony to Congress this week, Fed Chair Powell argued that risks around inflation and growth are now more two-sided. His prepared remarks said that “in light of the progress made both in lowering inflation and in cooling the labor market over the past two years, elevated inflation is not the only risk we face. Reducing policy restraint too late or too little could unduly weaken economic activity and employment.”
In a world where the transmission of monetary policy lags the data on the ground, policymakers have to act with some anticipation. U.S. real GDP growth has ebbed to a below-potential clip, the unemployment rate is up 0.7 ppts from the cycle low, and this week’s CPI report flashed a green light. Both headline and core inflation printed better than expected, leaving the 3-month annualized core rate at just 2.1%. If the Fed believed that policy was restrictive enough at this time last year when it paused its tightening campaign, real rates have only since pushed higher as inflation has cooled. Treasuries rallied this week with the 10-year yield down 8 bps and the 2-year falling 12 bps. The market has now fully priced in a 25 bp rate cut in September, coming full circle back to where it was early in the year.
Meantime, good news on U.S. inflation is good news for Canada, with the market now pricing about an 80% chance of a follow-up rate cut by the BoC later this month. Canada’s growth backdrop has been slower for longer than in the U.S., the job market has clearly loosened with vacancies down and the unemployment rate up 1.6 ppts from the cycle low, and if the U.S. has just seen its first one or two ‘good’ CPI reports, Canada has already seen four. Unfortunately the latest edition for May was a truly bad one, so that will leave next week’s June inflation report as the key piece of data to dictate if the Bank of Canada cuts rates again, or not, later this month. One bad print set amid five good ones could be deemed an anomaly, but two bad prints in a row might be considered a worrying trend.
For equity markets, the coveted soft landing scenario hinges critically on policymakers easing at the right time. The market is holding out optimism with the S&P 500 pushing new highs again, before backing down late in the week. That said, equity market strength is relatively thin, with both the equal-weighted S&P 500 and the small-cap index still below the early-2022 high. The former is trailing the S&P 500 by a whopping 17 ppts in the past year, a gap not seen since the late-1990s. This would corroborate some underlying softness in the economy that has been masked by outsized gains in a few specific names. As it turns out, the biggest winners from this week’s positive U.S. CPI report and Fed rate-cut chatter were not those high-flying names, but rather old-school rate-sensitive, cyclical and dividend-paying sectors that have been beaten up—that includes the TSX.
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Paul is a former IBM Customer Success Manager that has deployed over 300 data and AI solutions across industry and geographies for the past 8 years. Paul is a Financial Planning, Analysis, and Reporting SME working with data including integration of macro and micro indicators as part of the integrated business planning and reporting cycle.
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