Week of March 4, 2024

Dec Mullarkey, CFA , Managing Director, Investment Strategy and Asset Allocation

It was a data packed week, which ultimately delivered a lot of comfort that the economy is normalizing at a steady pace. Jobs dominated the story. Early in the week, the news of fewer job openings and average quit rates signaled a less frothy labor market. And the latest payroll numbers confirmed broad-based job growth but with wages continuing to cool.

In other news, U.S. Federal Reserve Chairman Jerome Powell caught up with Congress and opined that the Federal Funds rate is “likely” at its peak and “likely” to be dialed back this year. This was not a surprise, but certainly assuring to hear. The Fed’s Beige Book, comprising economic anecdotes from regional banks, reported that consumer spending had dropped slightly while demand for loans was stable to down. And another key highlight was employee wage expectations, which are now more in line with long term averages.

Service supply managers also weighed in this week. Their survey suggested moderation in both inflation and hiring. And while activity slowed over the month, the queue of new orders hit a six-month high.

The market appeared to take all the news in stride as supporting the expectation that the Fed will deliver a soft landing in rebalancing the economy without a severe shock.

Sources:? Bloomberg, Reuters, The Financial Times, 2024.

Linda Kong Ting, CFA , Senior Director and Credit Analyst, Asset Management

Bitcoin, gold and shares of a major high-momentum chipmaker hit all-time highs in all in the same week. Unlike in previous rallies, it appears no one is attempting to justify Bitcoin’s rise with any high-minded talk of new paradigms in currency, as it is quite clear that ETF approval and new flows into the cryptocurrency asset class have buoyed the sector as a whole. Similarly, while “AI fever” continues, commentators are now defending the rise of chip stocks by saying that other behemoth tech companies have underperformed or even declined relative to the index. Whether you accept this type of logic or not, it seems very clear that a non-ironic embrace of “Number Go Up” bouts of momentum appear to now be a tautological justification for any rally.

In such a paradigm, it is surprising that sentiment remains so negative on Chinese assets. Even as that government makes it very clear that it is prioritizing growth and is prepared to engage in multiple strategies to support equities and the housing market, multiple global investors have announced plans to slim their investment teams in the region.

We observe that the public mood appears unfavorable, and corporate governance in China has long been a concern for investors around the world. However, it will not be as easy to detach China from the West as it was with Russia even if more radical tariff proposals are implemented, and multiples in China are now unchallenging enough to appear attractive to some long-term investors. On top of that, interest rates are falling in China and inflation is not a concern, meaning that exporters may be able to keep their prices low despite the labor cost increases of the past several years. Why is it so hard to believe that market valuations could go up in China too?

Source: Bloomberg, 2024.

Andrew Kleeman , Senior Managing Director, Co-Head of Private Fixed Income

Weaker investor demand in investment grade private credit in 2023 became a distant memory in early 2024. Many private credit investors benefited last year from slack demand stemming from weaker insurance product sales and market volatility, resulting in solid relative value and allocations – especially in more broadly syndicated deals. This year most deals are oversubscribed, with price tightening from corporates to structured products. Deals offering longer duration in particular have experienced high demand. Even sectors that were out of favor last year, such as real estate investment trusts, are seeing strong bids, although relative value remains higher in that sector than normal. Increased competition could favor managers with the credit expertise and sourcing relationships in specific sectors to originate more bespoke deals.

Source: Private Placement Monitor, 2024.

Randall Malcolm, CFA , Senior Managing Director and Portfolio Manager, Public Fixed Income

The Bank of Canada (BoC) held its overnight rate steady at 5.00% this week and reiterated its commitment to normalizing its balance sheet. Pre-COVID, the BoC had just over $100B in assets on its balance sheet and then reached a peak of over $550B, mostly through increased purchases of Canada bonds. Its balance sheet today remains at over $300B as the central bank’s passive quantitative tightening policy has allowed maturing bonds to roll off.

While the BoC still seems to think it’s too early to consider lowering its policy rate, the central bank seems to recognize that the increase in the overnight rate has had some bite, and is now mulling how long it needs to stay at current levels. As usual, the market has moved forward in predicting multiple rate cuts for the remainder of 2024. With inflation still meandering around 3%, many inflation components still growing at over 3% and challenging shelter costs still the largest inflation contributor, we think the BoC will take longer than the market expects before starting to lower overnight rates. ?

Source: Bank of Canada, 2024.

The information may include statements which reflect expectations or forecasts of future events. Such forward-looking statements are speculative in nature and may be subject to risks, uncertainties and assumptions and actual results which could differ significantly from the statements. All opinions and commentary are subject to change without notice. SLC Management is not affiliated with, nor endorsing, any third parties mentioned within this article.

Market insights are based on individual portfolio manager opinions and market observations. These are observations only and are not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not?constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information posted here.

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