- Stocks give back Tuesday's gains – Equities closed lower on Wednesday, though we'd note that a breather in the recent run higher is to be expected given the strength of the broader rally that has the S&P 500 higher by more than 7% so far this year. The TSX received some help on the day from increases in oil and gold prices, with the Canadian index holding on to a nearly 7% year-to-date gain. Meanwhile international equities were mostly higher on Wednesday, led by healthy gains in European markets, which have outperformed over the last few months. The economic data calendar was quiet today, and there were no major market-moving implications from U.S. President Biden's State of the Union address (though we think partisan differences will likely set up some form of a debt-ceiling showdown ahead), keeping investors focus squarely on central-bank policy, employment trends and corporate earnings announcements.
- Rates steady near one-month high – Interest rates ticked down on Wednesday, with the 10-year Government of Canada bond rate holding just above 3% and the 10-year U.S. Treasury yield near 3.6%. Rates remain well below last year's high, as 10-year yields topped 3.7% in Canada and 4.2% in the U.S. in October, with the decline reflecting moderating inflation pressures and signs of economic weakness. Nevertheless, rates are up appreciably over the last week, with the recent blowout U.S. January jobs report fueling some hope for economic resiliency, which could keep the Fed on guard in its fight against inflation.
- Auto prices signal some uncertainty on inflation – The January read of the Manheim Used Vehicle Value Index revealed some mixed signals in auto-price trends. Used car prices rose 2.5% in January versus December, the first month-on-month increase in nine months.* We suspect the combination of ongoing strength in the labour market and wage growth supported renewed demand, while lingering supply constraints are also still showing up in prices. Importantly, however, used auto prices are down 12.8% over the past year, a favourable move for the broader inflation trend. The spike in used car prices last year had a significant impact on the consumer price index (CPI) increase, so the larger downtrend in auto prices is encouraging. Recent loan data indicate that auto-lending standards are tightening, which should help with further moderation in car prices ahead, consistent with our view that overall inflation, while still too high for comfort, will trend lower through the year.
Craig Fehr, CFA
- Markets reverse early losses to end the day higher: Equity markets ended the day higher, turning positive after hearing Fed Chair Powell's speech. Chair Powell expressed a somewhat dovish tone and indicated that he thinks inflation has started to ease. Growth-style stocks outperformed value style. In the bond market, however, yields rose slightly after the Fed comments, with the 10-year Treasury moving above 3.65%, sending bond prices lower. The oil markets rose as the chances of further tightening diminish, with oil finishing the day around $77/barrel, up more than 4% from the previous session. International equity markets were mixed. Two inflation data points were released today, with one showing a sharp rise in used car prices in January, while the other showed that the price of wholesale eggs has dropped significantly.
- Earnings continue to disappoint, and estimates are coming down: Fewer companies have exceeded analyst estimates for estimates for the fourth quarter compared with historical averages, with about 50% of the S&P 500 reporting so far. Analysts have started to downgrade first-quarter earnings estimates, with earnings estimates down about 3.3% from the end of 2022*. Persistent input pricing pressures and slowing consumer demand seem to be the biggest issues facing corporate profitability. However, a few silver linings are emerging, namely cost-cutting initiatives by firms and broadly lower supply-chain constraints, allowing for inventory rebuild efforts to continue.
- Keeping an eye on the Fed: The Fed is likely to be the driver for markets in the near to medium term as the central bank combats inflation. The recent decision to raise rates came with hawkish comments and occurred around the same time as a labour release showing far more job gains than estimated. Comments today from Federal Reserve Chairman Jerome Powell reiterated that the central bank is committed to combating inflation, but he indicated that inflation is indeed coming down. Investors were expecting some pushback from Powell on easing financial conditions, which didn't seem to materialize, raising investor sentiment. Powell also stated that he thought labour-market conditions will ease, but he reiterated that further rate hikes will be necessary if the labour-market strength continues to come in above expectations. Markets are generally expecting one more 0.25% hike this year from the Fed before the Fed pauses rate hikes and assesses the economic impact of higher interest rates*.
*CME Fed Watch Tool, FactSet
Sloane Marshall, CFA
Associate Analyst II
- Stocks start the week to the downside: Equities closed moderately lower on Monday as markets regroup following last week's gains, which closed out January with an impressive 6% increase for the month. Monday's weakness in stocks stemmed from a jump in rates, with the 10-year Government of Canada bond yield inching above 3% and the 10-year U.S. Treasury yield moving back above 3.6% after dropping below 3.35% last week. The increase in rates provided a lift to the U.S. dollar, while commodity prices were up as well, with oil moving higher after a sharp drop last week that pushed crude prices below $74 per barrel. Broadly, defensives like consumer staples and utilities held up best today, while cyclical areas such a small-caps and growth investments like technology lagged, consistent with a more "risk off" tone to kick off the week.
- Fed speak in focus: Last week's quarter-point rate hike from the U.S. Fed was met with some optimism in the markets, as comments from Chairman Powell indicated that the rate-hiking cycle is winding down. We think one or two more 0.25% hikes are likely, followed by a lengthy pause as the Fed evaluates the trend in inflation and the impact tighter monetary policy is having on the economy. We believe the Bank of Canada will pursue a similar approach, pausing rate hikes in the first half of 2023. We suspect comments and speeches from Fed officials in the coming days and weeks will seek to set reasonable expectations in the financial markets, with this rhetoric likely aimed at pushing back against the growing market expectation for a shift toward looser monetary policy in the not-too-distant future. We still think the end of the rate-hiking campaign is a good sign for market performance this year, but we expect that path to be a bit bumpier than we've experienced so far in 2023.
- Earnings painting a mixed picture: Roughly half of S&P 500 companies have now reported fourth-quarter earnings, with a mix of themes playing out. Revenue growth has been decent, but profits have been under pressure from rising labour and input costs. The technology, financial services, communications and consumer discretionary sectors have reported the weakest earnings results thus far, while industrial and energy profits were up the most last quarter. With a sharp focus on the health of the economy in 2023, we think the path for earnings will set the tone for market performance ahead. We've long believed that earnings estimates for 2023 will likely need to be revised lower, and that has started to take shape, with S&P 500 profit growth now expected to be in the 2%-3% range for the full year, according to Bloomberg consensus estimates. While that figure may still need to move lower, in our opinion, we don't think a severe drop in earnings will transpire. Thus, we think as the profit picture begins to improve, that will serve as an area of support as a new bull market takes shape.
Craig Fehr, CFA
- Markets fall after strong jobs report: The labour market added 517,000 jobs in January, far higher than the expected 187,000, sending equity markets lower and bond yields higher. Markets have started to price in an additional Fed rate hike after the blowout jobs report. Growth and high-multiple technology stocks lagged value today. Growth-style stocks generally have higher exposure to interest-rate risk, as they use higher levels of debt to fuel growth. International stocks were mixed, with Asia shares higher and European markets lower. The U.S. 10-year Treasury yield jumped to over 3.5% on the strong labour news. Energy markets held steady, with the price of oil hovering around $76/barrel, while natural gas continues to fall even with cold snaps gripping parts of the U.S.
- Labour market adds 517,000 jobs, beats expectations of 187,000: "Good news is bad news" today as the blowout jobs report adds to negative market sentiment and likely gives the Fed room to raise rates further if needed to cool inflation. The unemployment rate fell to 3.4%, beating estimates for 3.6%, and posting the lowest unemployment rate since May of 1969. Top drivers were in the leisure & hospitality sector. The services sector has been growing since the economy reopened, and consumer spending has shifted from goods. The Fed has been in hiking mode to try and cool the economy and bring down inflationary pressures. Many sectors of the economy, like housing, have seen a notable slowdown, and forward-looking indicators point to further softening in inflation; however; the labour market has been a bright spot of resiliency and adds to inflationary pressures. The Fed has looked to the labour market for hiking cues, looking for cracks as a sign to slow its tightening cycle.
- Big tech earnings disappoint: Amazon, Apple and Alphabet all reported earnings after the bell yesterday. All three provided disappointing results or disappointing forward guidance. Margin compression has been underway over the last year, as shortages and rising costs dent corporate profit. A strong labour market has meant companies have had to increase wages to retain talent, directly impacting margins. The NASDAQ underperformed today, likely a result of a confluence of factors from softening revenue growth, higher wages, and increased Fed rate expectations.
Sloane Marshall, CFA
Associate Analyst II
- U.S. markets move higher: U.S. equity markets were higher on Thursday, while the Canadian TSX closed largely flat on the day. The move higher in the U.S. was led by the technology-heavy Nasdaq which was up over 3.0%*. This comes as an earnings report from tech giant Meta (Facebook) surprised to the upside, and as the Federal Reserve and European Central Bank (ECB) both raised rates this week. In the U.S., Fed Chair Jerome Powell noted that the "disinflationary process has started," providing support to market sentiment. As markets have started to price-in a more gradual pace of rate hikes and potential rate cuts by year end, Treasury yields have moved substantially lower. The U.S. 10-year yield is now around 3.4%, well below the 3.8% it began just at the start of 2023. The move lower in yields have supported bond market returns this year thus far as well, with the Bloomberg U.S. Aggregate Bond Index up over 3.5% this year*.
- The Federal Reserve strikes a less hawkish tone: The FOMC raised rates by 0.25% as expected at yesterday's Federal Reserve meeting, bringing the fed funds rate to around 4.75%*, but investors interpreted Fed Chair Jerome Powell's tone as less hawkish overall. In the press conference, Chair Powell noted that the Fed "can now say for the first time that the disinflationary process has started." This was a welcome message for markets, especially as several leading indicators of inflation have started to move lower. Powell did reiterate however that while goods inflation and housing and rental inflation have showed signs of cooling, non-housing services inflation remains elevated still. This is in part driven by a tight labor market and high wage growth figures which they hope will start to ease as well. Tomorrow's jobs report will be another important datapoint for wage gain figures. Finally, when asked about the recent easing in financial conditions, Chair Powell didn't push back on recent market gains and noted that financial conditions have tightened since the Fed's rate-hiking campaign has begun. Markets welcomed these messages, and equity markets moved notably higher by the end of day.
- Fourth quarter earnings reports roll on: About 46% of S&P 500 companies have reported earnings for the fourth quarter, and results have been mixed but perhaps better than many had expected. Of the companies that have reported, 70% have had positive earnings surprises, in-line with long-term averages. Expectations for fourth quarter earnings growth have improved to 0.5%, well above the expectation of -4.0% growth coming into the quarter*. On Wednesday we heard from mega-cap giant Meta (Facebook) which beat revenue and earnings forecasts and is providing support to the broader technology space. On Thursday afternoon we will also hear from tech giants like Apple, Amazon and Google. While fourth quarter earnings growth has held up, we are starting to see the outlooks for the first and second quarter of 2023 weaken. According to FactSet, the forecast for first quarter earnings growth is -3.3%, while the forecast for second quarter is -2.6%. This is well below the expectation of over 5.0% growth that we saw just at the end of September last year*. While we would expect earnings revisions continue to soften, a large part of this down move may be behind us and markets could look towards a potential recovery ahead.
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