To my clients:
It was a mixed week for North American stock markets with the Canadian TSF finishing up 0.7%; the U.S. Dow Jones Index down 0.1%; and the U.S. S&P 500 up 1.0%.
Short update this week because I’m sure the message is getting a little repetitive for clients: the push, pull and shove of economic data, inflation and expectations for U.S. interest rate policy continues. Very simply, this morning, at a reading of 47.8, the ISM Manufacturing Index (one of the Big 3 economic indicators I invariably cite on a monthly basis) came in both below expectations and the prior month’s reading. A reminder to clients that any reading below 50.0 indicates contraction in the manufacturing sector. Yet on this news, the markets were up substantially today. Weird, right? Well, this is yet another iteration of bad news is good news in that weaker economic numbers likely indicate accompanying weaker inflation and, with these, a higher likelihood of a Fed rate cut sooner than later. For the most part I agree with this logic…
… BUT, the Fed should be careful not to snatch defeat from the jaws of victory. A so-called “soft landing” where the Fed engineers a return of inflation to its target WITHOUT triggering a recession has become of the base case of many, possibly even most, economists at this juncture. However, it’s not yet a fait-accompli and the lagged effects of previous rate increases may finally bite in a way that leads to a less rosy outcome. While a March rate cut seems highly unlikely at this point, I’d argue that the next meeting in May should be actively considered for same. Certainly I’d want/expect to see the first cut come by June at the latest. Next week we get the other two of the Big 3 indicators with the ISM Services release and the monthly Employment Report, both of which should add more context to the evolving situation. I will, of course, monitor closely.
There were no portfolio changes for discretionary clients this week, although I am considering a slight tweak to the mix of banking exposure on the Canadian side of portfolios.
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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