Below is a summary of some of the relevant news items from the Capital Markets and the Economy from the past week extracted from RBC Global Insights and FactSet Research.

Markets

Market scorecard as of close on Friday June 25, 2021.

Equity Indices	Level	1 week	YTD	52-week
S&P/TSX Composite	20,230	1.2%	16.0%	31.0%
S&P 500	4,281	2.7%	14.0%	38.8%
NASDAQ	14,360	2.4%	11.4%	43.4%
Euro Stoxx 50	4,121	0.9%	16.0%	28.0%
Hang Seng	29,288	1.7%	7.6%	18.2%

Source: Bloomberg, RBC Wealth Management

• U.S. stock indexes hit new highs during the week as the dust settled in the aftermath of the previous week’s Fed meeting. Equity investors had initially been spooked by hawkish commentary regarding the prospect of the first rate hike, but comments by Fed officials over the weekend soothed these concerns, and stocks bounced back sharply at the start of the week.

• But we also note that stocks have historically shrugged off the start of rate hike cycles, as long as these hikes don’t trigger recessions. RBC Global Asset Management studied the last 17 U.S. rate hike cycles since 1954 and found the broad stock market posted a median gain of 13% 24 months after the first rate hike of the cycle, with even stronger gains during non-recessionary cycles. See chart below.

 

• Investors started to look ahead to Q2 2021 earnings season, with initial reporting expected the second week of July. According to Refinitiv, consensus forecasts expect S&P 500 earnings per share (EPS) to grow 64% y/y, up from a forecast of 54% at the start of the quarter.

• Global markets are wavering this morning, but remain on track to post positive returns for the month of June, which would be the fifth consecutive month of gains.

 

Economy

Canada

• The Federal Reserve’s shift in tone at its latest monetary policy meeting has sent ripples across financial markets with the spotlight firmly fixed on Fed commentary regarding its outlook for inflation and interest rates. The Government of Canada (GoC) yield curve flattened noticeably following the announcement as central bank comments south of the border prove to be a major focus for rates markets globally.

• Canadian retail sales experienced their sharpest decline in 12 months, falling 5.7% y/y in April, as reported by Statistics Canada. The decline coincides with the rise of the pandemic’s third wave, which resulted in renewed public health restrictions across most of the country.

U.S.

• On Tuesday, June 22, Fed Chair Jerome Powell added to the sense of relief by signaling that the policymaking Federal Open Market Committee will not pre-emptively raise interest rates on inflation fears alone. In an address to members of Congress, he acknowledged recent price increases had been larger than expected, but he suggested they are largely a function of reopening dynamics and that inflation should fall back to the Fed’s long-term goal.

• U.S. households got wealthier over the pandemic. In contrast to the 2008 financial crisis, Americans gained wealth during the coronavirus-driven recession. According to the Wall Street Journal, U.S. households gained $13.5 trillion in wealth in 2020, marking the largest increase on record going back thirty years. Over 70% of the rise in household wealth came from the top 20% of income earners.

Further Afield

• Asian stocks were mixed this week as investors digested commentary from Federal Reserve officials on the outlook for monetary stimulus. The governor of the Bank of Korea said at a press conference on June 24 that policy normalization should start this year in Korea, but normalization should not be seen as tightening.

• Japan’s au Jibun Bank flash Manufacturing Purchasing Managers’ Index fell to 51.5 in June from 53.0 in the previous month, while the services reading rose to 47.2 from the previous month’s 46.5. Strong exports have supported Japan’s manufacturers and helped the economy offset domestic weakness.

• The second-largest economy in the world, China now makes up a hefty 17% of global GDP and could contribute up to one-fifth of the total increase in world GDP in the next five years, according to the IMF. China is also the largest trading partner of more than 130 countries and regions. Its ability to sustain stable growth is key to the global economy.

• China’s 14th Five-Year Plan (FYP) aims for the country to reach “high-income” status, defined by the World Bank as an annual Gross National Income (GNI) per capita of more than US$12,700 (it is currently US$10,500). To this end, China set its 2021 GDP target to an easily achievable “over six percent.” RBC Global Asset Management forecasts year-over-year growth of nine percent in 2021, given the low base effect, and 5.5% in 2022.

 

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