Lexicon Financial Group Weekly Update — June 26, 2024
“Potential is like a summer crop. If it don’t rain, it don’t grow.”
From the desk of Craig Swistun, CIM, MFA-P, Portfolio Manager, Raymond James Investment Counsel, and Wayne Hendry, Client Relationship Manager, Raymond James Investment Counsel
Looking Around
Summer is finally here! For some that means more gardening and more golf, for others it’s a chance to spend more time with children or grandchildren who are enjoying a summer break. However you enjoy your summer, enjoy it to its fullest!
But just because the season may have changed, it doesn’t mean that the markets have paused to notice. As you can see from the graph below, the United States (U.S.), the United Kingdom (U.K.) and the Eurozone went on a tear to raise interest rates to tame surging inflation in 2022-2023. (1)
Source: Statista
Yet, after pushing borrowing costs sharply higher and keeping them high to crush inflation, countries around the world are shifting gear. The European Central Bank (ECB) recently announced its first interest rate cut in five years, dropping its main lending rate from an all-time high of 4 per cent to 3.7 per cent. The Bank of Canada took a similar step after a flurry of similar moves in recent months by other countries including Sweden, Switzerland, Brazil and Mexico. The U.K. and U.S., where borrowing costs now stand at the highest rate in decades, are late to the party – they have yet to begin cutting interest rates although they are expected to do so in the near term.
Despite this, the decision to cut interest rates by the ECB and other central banks can be seen as an affirmation that the interest rate policy has helped tame inflation. After all, it is trending in the right direction across most of the globe. Inflation in the eurozone is 2.6 per cent, while in the U.K., it has fallen to 2.3 per cent – significantly down from a peak of over 11 per cent in late 2022. In the US, the personal consumption expenditures index (PCE) – the preferred inflation gauge for the Federal Reserve (Fed) – has dropped to 2.7 per cent. The release of the PCE for May this Friday could possibly provide further indication of where the Fed may go with interest rates going forward. Consensus is that it will remain flat for May.
Forecasters are still predicting at least one if not more rate cuts in the U.S. and the U.K. as well as in the eurozone this year with more to follow in 2025. This would be good news for businesses and households looking to borrow or those that are holding debt at higher rates. However, analysts expect the path down for interest rates to be slower and more halting than the climb up. This is in stark contrast to the prognostications from analysts earlier this year when they were calling for rates to come down more quickly. We get it (and you probably do too) – it’s a fine line that banks must walk. Cut rates too quickly and consumers and businesses will borrow and spend, driving inflation and prices higher. Cut rates too late, and the overwhelming burden of higher payments risks sending the economy into recession.
Business and consumers who have managed their debts effectively are clearly not impacted as much by these rate environments, but this all does trickle down into the general economy. Nobody foresees us returning to rate environments we’ve experienced since the 2008 financial crisis, which were close to zero.(2)
Frankly, we think we’re returning to a more reasonable trade off between present and future consumption. Low rates encourage reckless borrowing. High rates discourage spending. Can central banks find the goldilocks zone, where they are neither too high nor too low? Only time will tell.
Looking Back
Canada’s resource heavy main stock index, the S&P/TSX (TSX), ended lower last Friday thereby extending its weekly loss, as declines for commodity prices weighed on energy and metal mining shares. For the week, the TSX was down 0.4 per cent – its fifth straight weekly decline, which is the longest such stretch since May 2023.
The materials sector, which includes metal miners and fertilizer companies, fell 1.3 per cent as gold and copper prices declined. Concerns over surplus supplies and sluggish demand by leading metals consumer, China, also impacted copper prices, which have pulled back from a record peak in May. The energy sector fell 1.4 per cent as the price of oil settled 0.7 per cent lower at $80.73 a barrel. It is worth noting here that combined, the energy and materials sectors account for 32 per cent of the TSX’s weighting. (4)
Weekly North American Market Statistics
| Index | Week's Change | Year to Date |
| S&P 500 | 0.6% | 14.6% |
| Nasdaq Composite | 0.0% | 17.8% |
| Dow Jones Industrial Average | 1.5% | 3.9% |
| S&P/TSX Composite Index | -0.4% | 2.8% |
Source: Associated Press and Morningstar Direct 06/21/2024
U.S. markets recorded modest gains over the shortened trading week (markets were closed Wednesday in observation of the Juneteenth holiday), helping push the S&P 500 Index to new all-time highs. Last week also saw modest signs of a broadening and rotation in the market, with value stocks outperforming growth shares and most of the major benchmarks outperforming the technology-heavy Nasdaq Composite.
Read and Watch
Want deeper insight into topics in your Weekly Update? Then, read and/or right click:
Video and article: Under Biden, U.S. economic growth becomes the ‘envy of the world’
Growth, inflation, jobs: Biden and Trump’s economic records compared
The start of last week brought some additional evidence that easing labour demand and dwindling savings is potentially making consumers more cautious. On Tuesday, the U.S. Department of Commerce reported that retail sales had increased only 0.1 per cent in May, while falling a downwardly revised 0.2 per cent in April. Sales at bars and restaurants fell 0.4 per cent signalling less discretionary spending. On top of this, sales at grocery stores also fell 0.4 per cent, due perhaps to recent price cuts in certain food categories (retail sales data are not adjusted for inflation). This lackluster retail sales data appeared to push longer-term Treasury yields lower, but Friday’s stronger S&P Global readings brought them back up to end the week modestly higher.
Meanwhile the elections race in the U.S. continues to heat up. Whoever is elected as President could have a significant impact on the U.S. consumer, equity markets and the economy.
In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.79 per cent higher, rebounding as worries about political uncertainty appeared to fade and the outlook for monetary policy easing brightened. Major stock indexes rose: Germany’s DAX gained 0.90 per cent, France’s CAC 40 Index put on 1.67 per cent, and Italy’s FTSE MIB climbed 1.97 per cent. The UK’s FTSE 100 Index added 1.12 per cent.
Japan’s stock markets generated negative returns last week as the Nikkei 225 Index fell 0.6 per cent and the broader TOPIX Index was down 0.8 per cent. Uncertainty about the future trajectory of the Bank of Japan’s (BoJ’s) monetary policy weighed on investor sentiment. The yield on the 10-year Japanese government bond (JGB) rose to 0.97 per cent, from 0.93 per cent at the end of the previous week, as investors tried to digest data showing that inflation had accelerated in May and how this would factor in to the BoJ’s decision-making about when to next raise interest rates. The nationwide core consumer price index rose 2.5 per cent year on year in May, following a 2.2 per cent uptick in April, but this was slightly short of consensus expectations for a 2.6 per cent increase. BoJ Governor Kazuo Ueda again announced that a July rate hike is possible depending on data.
Chinese stocks fell back as mixed economic data put a dampener on investor sentiment. The Shanghai Composite Index fell 1.14 per cent, while the blue chip CSI 300 fell 1.3 per cent. In Hong Kong, the benchmark Hang Seng Index gained 0.48 per cent.
Industrial production rose a weaker-than-expected 5.6 per cent in May from a year earlier, slowing from April's 6.7 per cent. Fixed asset investment grew 4 per cent in May compared with a year ago but eased from the January to April period as real estate investment declines deepened. Meanwhile, retail sales increased an above-consensus 3.7 per cent in May from a year earlier and outpaced April’s 2.3 per cent gain. The nationwide urban unemployment rate remained steady at 5 per cent. The People’s Bank of China kept the lending rate unchanged at 2.5 per cent, as expected.
China’s new home prices fell 0.7 per cent in May, accelerating from a 0.6 per cent drop in April. This marks the steepest month-on-month contraction in nearly a decade. The data—which showed that new home prices declined for the 11th straight month—came after Beijing unveiled a historic rescue package in May to revive the property sector. Some analysts have cautioned that the measures in this package may not be sufficient to halt the housing market slump which has been and is still a major drag on the economy. (5)
The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable, but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors, and we recommend that clients seek independent advice from a professional advisor on tax-related matters.
Central Banks Extend Interest Rate Plateau, Martin Armstrong, Statista, December 15, 2023
Will the UK and US cut interest rates like Europe? Natalie Sherman, BBC, June 6, 2024
What History Reveals About Interest Rate Cuts, Julia Wending, Visual Capitalist, May 23, 2024
The close: TSX posts fifth straight weekly decline as resource shares fall, The Globe and Mail, June 21, 2024
Global Markets Weekly Update, T. Rowe Price, June 21, 2024
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Looking to Learn?
If you want to know more about some of the topics we wrote about this week, just click on the links below:
Personal Consumption Expenditures (PCE): What It Is and Measurement
Forecasts for May PCE Report Show More Improvement on Inflation
What To Expect in Friday's Report on the Fed's Preferred Measure of Inflation