Thursday, 2/29/2024 a.m.
- Markets get a lift from latest economic readings – Stocks moved higher in early trading on Thursday, responding favourably to a heavy batch of economic data, including a fresh read on U.S. inflation. While markets hadn't yet started to worry dramatically over this week's U.S. budget deadline, a report late yesterday indicating that Washington lawmakers reached an agreement to push back two funding deadlines and avert a government shutdown is also likely offering a little help to the market's mood. The bond market is fairly flat, though short-term yields are down modestly, while longer-term yields are little changed, which in our view reflects today's inflation data and the bit of additional flexibility it offers central banks around this year's rate cuts. Looking across markets, global equities are generally higher, as are gold and crude oil prices, with the latter boosted by an expectation for extended production cuts from OPEC+.*
- Inflation data in focus – Today brought the latest look at U.S. inflation in the form of the personal consumption expenditures (PCE) reading. While the consumer price index (CPI) is typically more recognized, core PCE is the Fed's preferred measure of inflation, making this data important to the markets. The outcome was fairly positive, if for no other reason than that it was in line with expectations and perhaps alleviated some anxiousness around a hotter-than-expected surprise, as was the case with the last U.S. CPI reading. In any event, we'd characterize the figures as confirmation that the broader trend in inflation is still one of moderation. January core PCE was up 0.4% versus the prior month and up 2.8% year-over-year, a slight downtick from the December reading. Underpinning the overall move was an outright decline (0.5%) in goods prices, while services prices continue to see some persistence, up 3.9% over the last year.* All told, this is consistent with our view that inflation remains on a downward track this year, though we don't think it will play out without a few kinks and disruptions along the way. This latest PCE figure doesn't materially alter the Fed's plans, in our view, but it does support confidence in the ability for policymakers to begin cutting rates later in the year.
- Consumers still in control – Domestic GDP, along with the U.S. labour-market, income and spending data, was also on the docket today, providing a fresh take on the state of the consumer. The first look at Canadian fourth-quarter GDP revealed that the economy expanded by an annualized rate of 1%. While still fairly tepid growth, this was a marked improvement from the 0.5% contraction in output in the prior quarter, with the fourth-quarter seeing a boost from household consumption. At the same time, business investment was weak (down 5%), which we'd attribute to some cautiousness from businesses around capital investment, given the deceleration in Canadian growth as 2023 progressed. This means average quarterly growth in the second half of last year was just slightly positive, consistent with our view that the domestic economy is hitting a soft patch, but not destined for a significant or prolonged recession. Also released today were weekly U.S. initial jobless claims, which ticked up slightly to 215,000, but remain near a historical low, indicating that employment conditions remain fairly healthy despite headlines of certain layoff announcements within the technology industry. The U.S. personal-income and spending report showed that incomes rose an impressive 1% in January versus the prior month, triple the rate of income growth in December. At the same time, spending growth did not match that pace, rising 0.2% month-over-month. We'd offer a bit of perspective on both, as total combined income in January was flattered by an upward adjustment to Social Security payments, while spending growth is coming off of a strong gain from December's holiday shopping. Overall, we look at the entirety of this data as an indication that the consumer is still in a good spot but likely to pull back a bit from the pace of spending in 2023. We expect labour-market conditions (hiring, wage gains) to soften moderately as we advance this year, which, coupled with excess savings that were drawn down last year, suggests household consumption will provide less horsepower to the U.S. economic engine this year.
Craig Fehr, CFA
- Rally pauses ahead of key inflation data - Stocks finished modestly lower ahead of the release of the Fed's preferred measure of inflation on Thursday. The narrative remains unchanged, but after a historically strong February so far (the fifth-strongest based on S&P 500 returns going back to 1980), markets are taking a breather*. Growth-style investments are lagging, as the mega-cap tech stocks in the U.S. and Shopify in Canada were lower, while consumer discretionary was the only one to finish higher. Better-than-expected earnings from RBC and National Bank of Canada failed to give the financial sector a boost. Also, reports that OPEC+ is likely to extend the voluntary output cuts through year-end pushed WTI oil prices higher, but those gains reversed. Elsewhere, government bond yields finished modestly lower, and the loonie weakened relative to the U.S. dollar to a near three-month low*.
- Healthy economic growth supports earnings - Today the second estimate for fourth-quarter U.S. GDP showed that the U.S. economy grew 3.2%, slightly below the 3.3% initial estimate, though consumer-spending growth was revised higher at 3%. Despite high borrowing costs and last year's inflation spike, the consumer has kept spending at a robust pace, not only helping keep the economy out of recession, but also supporting above-average growth. In turn, corporate earnings are now on track to reaccelerate after being pressured last year. With about 90% of the S&P 500 companies having already reported results, earnings growth for the quarter is tracking a solid 7.5%. Much of that is driven by the Magnificent 7 stocks and more broadly mega-cap tech, but the cyclical sectors should also see an improvement in profit, possibly in the second half of the year, as the Fed pivots to rate cuts. In Canada, the current reported quarter is expected to be the last of negative growth before earning growth turns positive in the first quarter. Rising earnings suggest that the uptrend in stocks will continue, though with possibly more volatility after the uninterrupted rally over the past three months.
- Fed and BoC to continue signaling patience for now - One of the notable macroeconomic developments over the past month has been a shift in interest-rate expectations, as the Fed has signaled that it will not be in a rush to cut rates. The labour market and the economy have proved to be resilient, while the pace of disinflation has slowed. As a result, the six rate cuts that were priced in by the markets at the start of the year have been reduced to three, now lining up with the Fed's and our own projections*. The good news is that markets have stayed calm as this adjustment has taken place, with better-than-expected earnings stealing the spotlight. As the earnings season is now winding down, the focus will shift back to inflation, with the Fed's preferred measure of inflation, the personal consumption expenditure price index (PCE), scheduled to be released tomorrow. Both consumer and producer prices jumped in January, which suggests that core PCE might also see its biggest increase in a year, reinforcing the Fed's message about patience. Our view remains that inflation will continue to moderate in the months ahead, driven by a slowdown in housing costs and services inflation, allowing the Fed and BoC to deliver its first rate cut for this cycle in June.
Angelo Kourkafas, CFA
- Stocks mixed ahead of key inflation data: Stock markets closed mixed on Tuesday, as investors await personal consumption expenditure (PCE) inflation data due on Thursday. The technology-heavy Nasdaq and the S&P 500 were modestly positive, while the Canadian TSX fell slightly. Treasury bond yields in the U.S. ticked higher, with the 10-year yield up to 4.31%, while the 2-year yield rose slightly to 4.70%*. In recent weeks, Treasury yields have risen rapidly, with the 2-year yield climbing around 0.55% from recent lows*, as the odds have increased for Fed rate cuts to be pushed to midyear. Nonetheless, despite higher Treasury yields, stocks have been able to climb higher this year, with the S&P 500 up over 6% this year so far*, given stronger-than-expected earnings growth and resilient consumption data.
- All eyes turn to U.S. PCE inflation data on Thursday: Investors will be closely watching the PCE inflation data for the month of January, which will be released on Thursday morning. PCE inflation tends to be one of the Fed's preferred inflation measures, and expectations are for monthly figures to climb, although year-over-year comparisons should ease from last month. Headline PCE inflation is expected to climb 0.3% month-over-month, higher than last month's 0.2% reading. However, on an annual basis, headline PCE inflation should come in around 2.4%, below last month's 2.6% and heading closer to the Fed 2.0% target*. Similarly, core PCE inflation, excluding food and energy, is expected to climb by 0.4% monthly, above last month's 0.2% reading. However, on an annual basis, core PCE inflation should moderate to 2.8%, below last month's 2.9% reading*. Overall, we believe PCE inflation is moving closer to the Fed's 2.0% target, and while January data may show some seasonally stronger inflationary trends, over the next several months we may see core PCE head below 2.5%, driven by the softening shelter and rent component as well as by moderating services inflation.
- Expectations for Fed rate cuts moderate to three in 2024: Over the first couple of months of 2024, we have seen expectations for Fed rate cuts moderate, from five to six rate cuts priced in earlier in the year, to now about three rate cuts expected, beginning in the June Fed meeting**. This shift in market expectations comes as inflation data surprised to the upside earlier in the year, and as Fed officials have talked about remaining patient before starting rate cuts, particularly given that economic growth has held up better than expected. In our view, this shift to three rate cuts starting in June is more aligned with the Fed's view as well as our base-case scenario for 2024. Keep in mind that the FOMC will update its economic and fed funds rate projections at the March 20 Fed meeting. We would expect the Fed to raise its economic growth forecast for 2024 somewhat and to reiterate its messaging on remaining patient and letting inflation fall more meaningfully toward 2.0% before embarking on rate cuts.
- Stocks mostly lower to start the week: Stocks were mostly lower on Monday, with the TSX shedding 0.3% and the S&P 500 lower by 0.4%.* Today's move lower follows a strong week that saw the TSX gain 0.7% and the S&P 500 gain roughly 1.7%.* Bonds were also weaker today as Treasury yields finished higher, with the 10-year GoC yield rising 0.03 percentage points to 3.49%, while the 10-year U.S. Treasury yield ticked higher to 4.28%.* Sector leadership favoured the information technology, consumer discretionary and energy sectors of the S&P 500, the latter of which was supported by higher oil prices.* U.S. small-cap stocks also outperformed today, with the Russell 2000 Index rising by about 0.7%.* Overseas, European markets were mostly lower, while Asian markets were mixed overnight, with Japan's Nikkei logging a modest gain and Chinese markets moving lower.* Outside of financial markets, there was no incremental news today regarding the potential for a U.S. government shutdown. The clock is ticking for U.S. lawmakers to reach a resolution to avoid a partial government shutdown before the March 1 deadline for certain agencies and March 8 for others.
- Canadian bank earnings and fourth-quarter GDP highlight the week: Despite a quiet day on the earnings and macroeconomic front today, the remainder of the week will be filled with several key reports for the Canadian economy and markets. Thursday will bring the release of Canadian fourth-quarter GDP, where expectations are for GDP to grow by 0.9% on a quarter-over-quarter annualized basis.* The Canadian economy showed signs of fatigue in the third quarter, with GDP contracting by 1.1% quarter-over-quarter.* More recently, economic activity has provided glimmers of optimism, which could support the case for positive fourth-quarter GDP growth. Last week's domestic retail-sales report showed that retail sales rose by 0.9% month-over-month in December, above consensus expectations, and the strongest monthly reading since April 2023.* On the earnings front, Bank of Montreal (BMO) and Bank of Nova Scotia (BNS) will report on Tuesday, followed by Royal Bank of Canada (RY) on Wednesday, and Canadian Imperial Bank of Commerce (CM) and Toronto-Dominion (TD) on Thursday. With the financials sector representing over 30% of the TSX, bank earnings could be a key driver for domestic markets this week. Turning to the big picture, expectations are for earnings of the financials sector of the TSX to modestly slow to 2% growth in 2024 compared with roughly 3% growth in 2023.*
- U.S. inflation back in focus: Inflation data will return to the spotlight this week with the release of U.S. personal consumption expenditures (PCE) inflation on Thursday. Expectations are for headline PCE to rise by 2.4% year-over-year, down from the December reading of 2.6%, while the Fed's preferred measure of inflation, core PCE, is expected to tick lower from 2.9% in December to 2.8%.* Earlier this month, the release of the U.S. January consumer price index (CPI) spurred a brief period of indigestion in stocks and bonds due to the higher-than-expected CPI inflation reading. Our view is that inflation will continue to trend lower throughout the year, but as we saw earlier this month, the trend lower may not be in a straight line. About one month ago, markets were assigning a roughly 50% probability to a Fed interest-rate cut at its March 20 meeting.* Expectations are now for the Fed to remain on hold at both the March and May meetings, with the first interest-rate cut coming in June.* We have viewed expectations for a March rate cut as overly optimistic, and the recalibration in expectations for Fed rate cuts to now begin in June is aligned with our view that cuts will begin around midyear.
Brock Weimer, CFA
- Global stocks hit fresh highs to end a strong week – Equity markets added to their recent gains following the best day in more than a year for U.S. large-cap stocks yesterday, though the Nasdaq took a breather today, posting a small decline*. There were no major economic data today, and sentiment remained broadly positive, supported by better-than-expected corporate earnings and excitement around AI. Among the notable movers, shares of Block rose more than 15%, and shares of Carvana surged 30%, after results exceeded estimates*. European markets are also higher after the Stoxx 600, like the S&P 500, closed at an all-time high, while Japan's Nikkei surged past its prior peak that was reached in 1989*. The TSX is still about 3% off its record high, as the lower tech and AI exposure has weighed on the relative performance of the index*. Elsewhere, government bond yields finished lower, and oil prices were down about 2.5% at $76.5*.
- Solid corporate profits provide a tailwind for stocks - About 90% of the S&P 500 companies have now reported results, and earnings growth for the quarter is tracking a solid 7.5%, an acceleration from the prior quarter*. Led by NVIDIA, which yesterday became the third-largest company in the S&P 500 by market capitalization, growth-style investments have propelled stocks to new highs. The communication services, consumer discretionary and technology sectors are the largest contributors to earnings growth, but results from the rest of the market are also encouraging, as companies are taking steps to protect profitability even as revenue growth slows. In Canada, about 60% of the TSX companies have reported, and so far earnings are on track for a small decline from a year ago, but expectations are for a return to positive growth next quarter. Last year's stock-market return was driven exclusively by valuation expansion, and this year we think that earnings growth will be the one to carry the torch. So far, the outlook for a reacceleration in earnings growth in 2024 suggests that the uptrend in stocks will continue, though with possibly more volatility after the uninterrupted rally over the past three months.
- Focus will shift back to inflation and the March Fed meeting - As the earnings season winds down, the spotlight will turn once again to inflation and the upcoming Fed meeting in March, which will include updated economic and interest-rate projections. Several Fed officials have indicated recently that the Fed will not be in a rush to cut rates given the strong economy and some uncertainty around the pace of disinflation. This has triggered a recalibration in market-implied odds for when the first rate cut will occur, which is now expected in June instead of March previously*. The Fed's preferred measure of inflation, the core PCE, is coming out next week and will be closely watched as it follows a hotter-than-expected CPI reading released last week. While the path to 2% will not be linear, we expect that housing costs will slow further; wage growth will continue to cool, helping other services inflation moderate; and the rise in productivity along with normalized supply chains will keep goods inflation low. All of this should help push inflation close to the Fed's target and open the window for rate cuts in the back half of the year. Beyond the markets and the economy, investors will also be keeping an eye on the looming U.S. government-funding deadlines, which are set for March 1 for some agencies and March 8 for the rest.
Angelo Kourkafas, CFA
Investment Policy Committee
The Investment Policy Committee (IPC) defines and upholds Edward Jones investment philosophy, which is grounded in the principles of quality, diversification and a long-term focus.
The IPC meets regularly to talk about the markets, the economy and the current environment, propose new policies and review existing guidance — all with your financial needs at the center.
The IPC members — experts in economics, market strategy, asset allocation and financial solutions — each bring a unique perspective to developing recommendations that can help you achieve your financial goals.
This is for informational purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation. While the information is believed to be accurate, it is not guaranteed and is subject to change without notice.
Investors should understand the risks involved in owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors can lose some or all of their principal.
Past performance does not guarantee future results.
Market indexes are unmanaged and cannot be invested into directly and are not meant to depict an actual investment.
Diversification does not guarantee a profit or protect against loss.
Systematic investing does not guarantee a profit or protect against loss. Investors should consider their willingness to keep investing when share prices are declining.
Dividends may be increased, decreased or eliminated at any time without notice.
Special risks are inherent in international investing, including those related to currency fluctuations and foreign political and economic events.