This week was relatively quiet with respects to market developments and economic data.  Despite the risk on sentiment in equity markets after last week’s Federal Reserve meeting resulted in no change to their policy but also came with an assurance that no future rate hikes were on the table.  On docket next week is U.S. CPI for April, if inflation inched downward last month it will be another positive indicator that rate cuts are coming in the U.S..  Our current expectation is for cuts to come in the U.S. as early as September, or as late as December. 

 

Given how data dependent the Fed is, this narrative can change quickly if (1) inflation is seen to have precipitously declined, (2) the labour market continues to show signs of weakness which will erode wage growth and consumer spending, or (3) the U.S. economy begins to slow down or approach negative GDP growth.  The likelihood of a recession in the U.S. by year end remains a probability, albeit a low one, so long as rates remain elevated – for further insight on that possibility read here: Global Insight U.S. Recession Scorecard - May 2024  For now the risk on sentiment in U.S. equities remains appropriate and I continue to recommend maintaining an allocation to U.S. large and mid-cap equities that aligns with your long-term investment and risk objectives.

 

Here at home there appears to some improvement in the labour market, as the Canadian economy added 90,400 jobs in the month of April.  Furthermore, the unemployment rate remained stable at 6.1%.  Another good news story from an economic perspective was wage growth in April increased 4.7% YoY relative to March’s 5.1%.  Though I appreciate the Canadian worker may not be happy about this news, from an monetary policy perspective it means that the Bank of Canada has the opportunity to cut rates in June or July.  Given wage growth is decreasing, this removes another support for higher inflation as consumer purchasing power will decline and therefore prices will need to adjust.  There remains a 67% probability that the Bank of Canada will deliver a 0.25% rate cut in June.  As long as there remain no significant upside surprises to inflation we continue to anticipate that decision from the BoC as well. Canadian employment jumped higher in April

 

Overseas in China, equity markets have rallied substantially on a year-to-date basis and as of market close on Friday had surpassed the S&P 500’s performance so far this year.  Despite this, headwinds remain that challenge the growth outlook for the country.

• Firstly, they appear to now be turning a corner in the residential housing market after relaxing home purchase restrictions to stimulate the sector late last year.  Buyers no longer need to meet criteria such as local residence permit (hukou), local social security as well as the number of apartments each buyer is allowed to buy.  This could have unintended consequences down the road, especially around affordability but current real estate values in the country remain deeply discounted relative their peak before the crisis started in 2021.  China Property Stocks Surge as Home-Buying Easing Gains Momentum - BNN Bloomberg

• Second, there continue to be ongoing trade tensions with the U.S. with the Biden administration potentially imposing tariffs on Chinese made EV’s, battery and solar equipment as early as next week.  Chinese manufacturers have been flooding foreign markets with cheaper alternatives in all three of these product lines – gaining the ire of domestic manufacturers, especially in the Eurozone. 

The performance in mainland and Hong Kong equity markets has also been supported by government intervention, with as recently as Friday the Chinese regulators were reported to be mulling a proposal to exempt individual investors from paying dividend taxes on Hong Kong-listed stocks bought via Stock Connect (a government owned trading platform).   Regardless, the story in China is mixed and a sluggish economy will continue to be drag on global growth.