Lexicon Financial Group Weekly Update — May 1, 2024
“I continue to believe that the American people have a love-hate relationship with inflation. They hate inflation but love everything that causes it. ”
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
This week the United States (U.S.) Federal Reserve announced its decision to keep its key rate steady at a 23-year high in the range of 5.25 to 5.5 per cent. The Fed also stated that it doesn’t plan to cut interest rates until it has “greater confidence” that price increases are slowing sustainably to its target of two per cent.
This decision was expected after inflation came in higher than expected for a third straight month in March. Core inflation, which excludes volatile food and energy items, in the U.S. is stuck at 3.8 per cent for a second straight month and has barely budged since late last year.
So, here’s the pattern that we’ve seen. Inflation numbers start to improve, analysts interpret the Fed comments and predict interest rate cuts, which translates into gains in the stock market. Which seems to be cycling back into the economy in the form of higher inflation, which causes the Fed to caution people to not get overly optimistic, which… it’s a spin cycle.
The U.S. Department of Labor reporting this week that total compensation for U.S. workers increased 1.2 per cent in the first quarter – up from a 0.9 per cent rise at the end of last year – didn’t help. Faster wage growth could further stoke inflation if employers pass these costs onto consumers through price hikes.
Fed Chair Jerome Powell said that it's unlikely the Fed would resume hiking rates even if inflation takes longer to tame unless there was a significant acceleration in consumer prices.
The unfortunate consequence here is that consumers and businesses will continue to struggle with higher borrowing costs. Also, it would appear that inflation is back, but is it?
According to Goldman Sachs, inflation has been sustained by a key trend – price increases for rent, car insurance, healthcare and other services. All of these are still catching up to wholesale costs that were rising. These are now cooling and this should filter through to consumer prices in the next few months. When this happens, the Fed will be able to cut rates in July and November as well as several times next year. Also, Powell has said that a weakening labour market – a scenario that many economists anticipate by the middle of the year – could prompt the central bank to reduce rates sooner rather than later.
Source: Bloomberg, Edward Jones. The graphs shows the year-over-year core CPI and PCE inflation measures both of which suggest that the pace of disinflation slowed in the first quarter but the trend remains lower.
Economists at Barclays, however, reckon that lingering COVID-induced labour shortages could keep pay increases and inflation higher for longer. Some forecasters say that could prevent the central bank from lowering rates at all this year and may even put additional rate hikes back on the table. (1)
I know we spend a lot of time talking about the U.S. But let’s face it, the U.S. economy still remain the world’s largest economy. That said, the Bank of Canada (at least according to central bank governor Tiff Macklem) strongly suggested that rates in Canada are getting close to coming down and staying down. That’s because in the Great White North, economic growth has stalled and there is an excess supply of goods. Wage increases have stabilized and the labour market has cooled. Those two things combined have created an environment where inflation (specifically “core inflation”) has abated somewhat. The Bank of Canada doesn’t meet again until June 5 and until then borrowers (like homeowners having to refinance their mortgages) will just have to hold their breath and tighten their belts some more.
Forecasts for the economy and the markets are just that, forecasts. They provide guidance but not always complete accuracy. Geopolitical and political events can throw a spanner into the works. Case in point: the U.S. elections this November. The outcome of these elections in the country with the world’s largest economy could have consequences for the rest of the world. According to Time Magazine, “globally, more voters than ever in history will head to the polls in at least 64 countries (plus the European Union) – representing a combined population of about 49% of the world.” These elections could prove consequential for years to come, so expect a bit more turmoil globally as voters make their way to the polls.
Looking Back
The Toronto Stock Exchange’s S&P/TSX composite index ended up last week as the materials sector rose 1.7 per cent as gold and copper prices climbed, with copper moving to a two-year high.
Energy also gained ground, rising 0.3 per cent, as the price of oil settled 0.3 per cent higher at US$83.85 a barrel on continued supply concerns due to tensions in the Middle East. (2)
Weekly North American Market Statistics
| Index | Week's Change | Year to Date |
| S&P 500 | 2.7% | 6.9% |
| Nasdaq Composite | 4.2% | 6.1% |
| Dow Jones Industrial Average | 0.7% | 1.5% |
| S&P/TSX Composite Index | 0.7% | 4.8% |
Source: Associated Press and FactSet 04/26/2024
Read and Watch
Want deeper insight into topics in your Weekly Update? Then, read and/or right click:
Video: Key takeaways from the latest Fed meeting – CNN Business
Visualized: Past Interest Rate Cut Cycles and 2024 Forecasts
Return to 2% inflation rate could be a bumpy one. Here’s why
The S&P 500 Index and most other major benchmarks managed to snap a string of three weekly losses as investors responded to the busiest week of the first-quarter earnings reporting season.
The technology-heavy Nasdaq Composite Index performed best, assisted partly by strength in Apple and a late rebound in chipmaker NVIDIA. Shares in Google parent Alphabet also surged late in the week following its announcement of better-than-expected first-quarter earnings along with the company’s first dividend payment. Conversely, Facebook parent Meta Platforms fell sharply - at one point erasing nearly USD 200 billion in market value – after CEO Mark Zuckerberg announced plans to continue heavy spending on artificial intelligence and other new technologies.
Last week started strongly due to investors trying to capitalize on recent declines in the tech sector as well as short covering, or buying to limit potential losses on bets that stocks will decline. The buying continued on Tuesday. This may have been due in part to some downside surprises in economic data – interpreted as good news for markets because of the reduced pressure it implied on inflation and interest rates. S&P Global reported that its gauge of U.S. manufacturing activity fell back into contraction territory (below 50.0) in April, at 49.9, well below consensus estimates of around 52.0.
The Commerce Department’s advance estimate released last week showed the U.S. economy expanding at an annualized rate of 1.6 per cent in the first quarter – well below consensus estimates of around 2.5 per cent and the slowest pace of growth in nearly two years. A sharp slowdown in government spending and a widening trade deficit were partly to blame, but consumers also continued to reduce spending, particularly on goods. Separate data released Wednesday showed that businesses continued to increase capital spending in March, but at a slower pace of 0.3 per cent than in February, where the gain was revised lower to 0.4 per cent.
Inflation data released last Thursday seemed to concern investors and raise worries that the U.S. might even be in danger of “stagflation,” or rising prices alongside flagging growth. The Commerce Department reported that its core (less food and energy) personal consumption expenditures (PCE) index rose more than expected and well above the Fed’s long-term inflation target of two per cent.
Friday also brought news, however, that the University of Michigan’s revised gauge of consumer sentiment in April fell back from a nearly three-year high in March, reflecting, in part, higher inflation expectations.
In local currency terms, the pan-European STOXX Europe 600 Index snapped a three-week losing streak and ended 1.74 per cent higher. Easing Middle East tensions and some encouraging corporate earnings results helped boost investor sentiment. Most major stock indexes also advanced. Germany’s DAX gained 2.39 per cent, France’s CAC 40 Index added 0.82 per cent, and Italy’s FTSE MIB climbed 0.97 per cent. The UK’s FTSE 100 Index climbed 3.09 per cent.
European government bond yields hit their highest levels this year. Strong U.S. economic data increased expectations that the Federal Reserve would keep interest rates higher for longer, which could force other major central banks to follow suit. Numerous European Central Bank policymakers have signalled that they expect to lower interest rates in June, barring any economic shocks. However, comments by those that are more hawkish appeared to cast doubt on reductions in borrowing costs thereafter.
Buoyed by historic yen weakness, Japan’s stock markets gained over the week, with both the Nikkei 225 Index and the broader TOPIX Index returning 2.3 per cent. Bank of Japan (BoJ) Governor Kazuo Ueda hinted that confidence to raise interest rates further is set to increase in the second half of this year. In the fixed income markets, the yield on the 10-year Japanese government bond rose to 0.91 per cent from the prior week’s 0.84 per cent.
Inflationary pressures showed some signs of easing, with the Tokyo-area core consumer price index (CPI) rising 1.6 per cent year on year in April, short of consensus expectations and down from 2.4 per cent in March.
Chinese stocks rose as investors grew more optimistic about the economy. The Shanghai Composite Index gained 0.76 per cent, while the blue chip CSI 300 added 1.2 per cent. In Hong Kong, the benchmark Hang Seng Index soared 8.8 per cent.
On the monetary policy front, Chinese banks left their one- and five-year loan prime rates unchanged at 3.45 per cent and 3.95 per cent, respectively, as expected, after the People’s Bank of China kept its medium-term lending rate on hold the prior week. Some analysts believe that policymakers have turned more cautious on monetary easing after the central bank withdrew cash from the banking system for a second consecutive month in April. (3)
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.
Fed holds interest rates steady, gives no sign it will cut soon as inflation fight stalls, Paul Davidson, Daniel de Vise and Medora Lee, USA Today, May 1, 2023
The close: Major North American indexes rise as mega-cap tech stocks rally, The Globe and Mail, April 26, 2024
Global Markets Weekly Update, T. Rowe Price, April 26, 2024
SUBSCRIBE
If you’d like to automatically receive the weekly Market Update by email, enter your email address in the box below.
We respect your privacy, and you can always remove yourself from the mailing at any time.
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:
What Is the Federal Reserve System (FRS)?
Why Are Interest Rates So High?
How US Interest Rates Move the World Economy
May FOMC meeting concludes with no changes to interest rates