To my clients:
It was a mixed week for North American stock markets with the Canadian TSX finishing up 0.4%; the U.S. Dow Jones Index down 2.3%; and the U.S. S&P 500 down 1.0%.
It’s the first week of a new month and, with it, comes the usual assortment of the “Big 3” economic Indicators…
First up came the ISM Manufacturing Index which, for the first time since November 2022, showed expansion of the manufacturing sector. Specifically, the index came in at 50.3 which was ahead of expectations and an improvement from the prior month’s reading of 47.8. As a reminder, the ISM indices indicate expansion/growth when above 50, and indicate contraction/decline when below 50. Crossing back above 50 is therefore, to quote Martha Stewart, “ a good thing.”
Next up was the ISM Non-Manufacturing Index (aka “Services”). Unlike the manufacturing sector, services have remained very resilient and expansionary throughout the market and economic turmoil of the past several years with just one negative reading since the immediate aftermath of the covid lockdowns in early 2020. That said, at a reading of 51.4, March “Services” came in below expectations and marked a second consecutive month of slower growth. Absent other economic concerns, I’d not put too much emphasis on this second consecutive reading of slower growth, but the metric should certainly be monitored to see if this mini-trend morphs into something more substantial
Lastly came this morning’s U.S. Employment Report. Like Manufacturing, Employment surprised substantially to the upside with 303,000 new jobs created in March. This is a very healthy reading no matter the economic landscape, and certainly defies the dwindling number of economic strategists forecasting recession. Further, year-over-year wage inflation continues to trend down. This too is a “good thing”.
Now, while the collective message sent by the “Big 3” this week is one of continuing U.S. economic strength, the downside to these reports is that they may cause the Fed to further hesitate before beginning the process of interest rate cuts. To wit, this week several Federal Reserve Committee members said they were not yet ready to vote for a rate cut and that further patience would be required. It was the possibility that the Fed may continue delaying the initiation of the rate cut cycle that led to mid-week weakness in North American stock markets.
Last note: I rarely comment on the Canadian Employment Report because, frankly, it is so wildly unpredictable and inconsistent to be of little value to me. That said, it is interesting to note that on the same day the U.S. reported exceptional job growth for March, the Canadian economy reported 2,000 job losses. I’ve been cautioning that the Canadian economy is, by a number of metrics, weaker than its U.S. neighbor, and this morning’s report suggests that perhaps this vulnerability is gaining steam. Certainly it would appear that the Canadian economy is more rate sensitive than the U.S. (not surprising given the high level of household indebtedness here in Canada), and were it not for the likely decline of the Canadian dollar in the face of rate cuts, I suspect the Bank of Canada (BoC) would cut rates now. But because the Canadian dollar likely would decline (which is inflationary), I’m sure the BoC would prefer to wait for the U.S. Federal Reserve to make the first move… but this may not prove viable if this morning’s poor Canadian employment report is confirmed by subsequent reports. We shall see.
That’s it for this week. All the best,
Nick
Nick Scholte, CIM, FCSI
Senior Portfolio Manager
Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
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