To my clients:

It was an mixed week for North American stock markets with the Canadian TSX finishing down 0.1%; the U.S. Dow Jones Index up 1.1%; and the U.S. S&P 500 up 0.6%.

This was a very interesting week for economic news and the markets. Not only is it the first week of a new month with the usual “Big 3” economic indicators, but we also had a Fed rate decision and significant moves from a couple of client portfolio holdings…

Beginning with the “Big 3”, ALL declined from the previous month; ALL were lower than economists expectations; and TWO were contractionary. Specifically, it was the two ISM indices that both showed economic contraction: the ISM Manufacturing Index came in at 49.2 and returned to contractionary territory (anything less than 50.0 indicates contraction) for the 16th time in the last 17 months, and the ISM Non-Manufacturing Index came in at 49.4 for the first contractionary reading in 1.5 years. The U.S. Employment Report was NOT contractionary, but it was significantly lower than expectations showing 175,000 jobs were created in April vs expectations that 238,000 jobs would be created and the 315,000 jobs created the previous month. Equally important in the Employment Report was that wage inflation slowed to just 0.2% month-over-month vs expectations for a 0.3% month-over-month rate.

So what is the take-away from the prior paragraph of data? My take (and apparently the market’s as well given the positive results seen today) is that the necessary economic slowing that the Fed has been trying to engineer with higher rates the past two years is finally starting to take hold. Economic slowing is most likely also a necessary ingredient to get inflation down the final 1 to 2% and back to the Fed’s target. All else equal, this week’s data will almost certainly encourage the Fed to put rate cuts back on the table at upcoming meetings. And rate cuts are what the market has been anxiously looking toward for over a year. Hence the nice pop in markets today.

I’ll also note that at this week’s Federal Reserve meeting and accompanying policy announcement, Chairman Jerome Powell was decidedly “dovish” in his comments (in economic speak, “dovish” means more likely to lower interest rates and make monetary conditions easier, and stands in contrast to its opposite – “hawkish”). Specifically, Powell was forceful in suggesting that, absent some truly unexpected economic development, the next Fed move is almost certainly going to be a rate cut, and NOT a hike as some strategists were beginning to whisper. The question for the Fed pertains more about “when” that first cut will happen and far less about “if” it will happen.

Now, I should comment at this juncture – be careful what you wish for! It is well known that there are lengthy lags in monetary policy, and it does seem that those lags are now coming due with the economic slowing cited above. While neither ISM Index is in egregiously contractionary territory, and the slowing seen in the Employment Report might well be described as “Goldilocks”, ALL of these indicators must be watched moving forward. Should the slowing trend accelerate, the market’s positive reaction as it anticipates rate cuts might morph into something worse as future bad news might actually get treated as “bad news” and fears of recession might begin to take hold. Needless to say, the future trend must be monitored but, for now, I fall in-line with the markets reaction and consider the current economic news to be both necessary and welcome.

Lastly, there were a number of significant developments resulting in outsize gains in several client holdings this week, most especially in Apple and Moderna. I won’t dwell on the specifics other than to say Moderna appears to have turned the corner from being overly (in fact, solely) reliant upon revenues from covid vaccines as it nears approval for an RSV vaccine (possibly within the week) and may receive accelerated approval for its cancer (yes, cancer! – specifically, melanoma) vaccine. For its part, Apple produced better than anticipated results despite the expected slowing in iPhone sales and, importantly, announced the largest share buyback ever adopted by any company -$110 billion over the next 12 months. Apple also has a developers conference in June, and chatter is sure to heat up over the next month with respect to possible AI (artificial intelligence) upgrades to its products.

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
3200-1055 West Georgia │ Vancouver, BC │ V6E 3P3
Toll Free: 1.844.665.9900 │Email: nick.scholte@rbc.com

Visit Our Website: www.nickscholte.ca

It’s an honor to receive referrals. If you have family or friends who would benefit from our services, please let us know.