Weekly Market Snapshot

Provided by:

Clarke Haynes
Wealth Management Consultant, Capital Core Financial

Weekly Market Snapshot

Highlights - May 11th, 2018

 

Highlights

Global equities posted solid gains. In North America, the advance was broad based, with only consumer staples and the utilities sectors underwater. All our tracked markets are back to flat or better on the year, with the exception of Canada. The tech heavy NASDAQ leads the way. Not surprisingly, the small cap Russell 2000 Index is besting its large cap brethren. It’s more domestic focus benefits from US economic strength and is better insulated from trade skirmishes and a see-saw US dollar. Notably, the S&P 500 has climbed back above all three of its 50, 100 and 200 day moving averages. Despite being negative on the year, the S&P/TSX is perking up, and we expect that trend to continue. Energy, materials and industrials (41% of the index and sectors typically associated with out-performance in the late-stage of the cycle) are currently doing the heavy lifting.

Bond yields moved higher in Canada, despite disappointing headline job creation numbers. The details of the report were much better than the decline of 1100 jobs would suggest: Full-time jobs rose by 28,800, offsetting the slightly larger decline in part-time positions - a positive theme that has persisted for the past year, with full time employment up by 378,000 jobs while part-time jobs shrunk by 100,000. The bond market no doubt focused on the upside in wage growth. The 3.6% y/y gain is close to the fastest pace of the cycle. The employment report shifted the expectations for the timing of Bank of Canada rate hikes, but the bottom line is that the market is pricing a 95% chance of at least one hike by year-end and a 36% chance of two. With wages rising at this pace and oil prices up ~50% year-over-year, we continue to lean toward expectations of two more rate hikes in 2018.

US bond yields rose ever so slightly, but the 10-year Treasury yield has yet to move sustainably above 3%. Keeping the cap on yields was a weaker-than-expected reading for US core inflation. Core prices rose 0.1%, but near-term annualized rates have really come off the boil, with the 3-month down to 1.8% from the near 3% run-rate of recent months. Notably, a $25 billion auction of US 10-year Treasuries (the largest for that maturity since 2010) saw solid demand and drew a yield of 2.995%, just missing the first 3% yield at auction since early 2014. We believe a sustained move above 3% for US 10-year yields would be a constructive development and one that equities can handle. We expect core inflation to drift higher given very tight labour markets, tariffs, firmer commodity prices and past weakness in the dollar. We see this keeping the Federal Reserve on track to lift policy rates three more times in 2018.

 

Chart of the week: Oil Higher on Mid-East Tensions, Tighter Inventories & Supply Disruptions

We think oil prices will struggle to maintain current levels for a number of reasons. If, when and by how much Iranian supply could be reduced due to US sanctions remains unclear. Trump is interested in negotiating a ‘new’ deal and the remaining signatories have not pulled out (although the nature of the US sanctions makes it difficult for any global business to deal there). Saudi Arabia has pledged to offset any declines in Iranian production. The OPEC/Russia production cap deal could be scrapped as the purpose of that deal was to raise prices and bring global inventories below their 5-year average – both have been accomplished. Outages in Venezuela and possibly Iran should make the OPEC/Russia deal obsolete. If not on paper, then in reality, as pressure to reap rewards in the form of revenues and capture the market share that is up-for-grabs will be too tempting for the deal partners not to cheat.

 

The week in review

·        Canadian employment (April) fell by 1,100 (versus +20,000 expected) following the solid 32,300 advance in the prior month. The participation rate slipped 0.1, helping hold the unemployment rate steady at 5.8%, matching the four-decade low. Average hourly wages rose 3.6% y/y.

·        US CPI inflation (April) rose 0.2% m/m (versus +0.3% expected), lifting the annual rate up to 2.5%. Core CPI rose 0.1% m/m (versus +0.2% expected), with the y/y pace holding at 2.1%.

·        US real average hourly earnings (April) rose by 0.2% y/y, down from 0.4% y/y pace in March.

·        US NFIB Small Business Optimism Index (April) rose 0.1 to 104.8, close to the February 2018 all-time high of 107.6.

·        US University of Michigan Consumer Sentiment Index (May) stayed flat at 98.8 (versus 98.3 expected).

·        The Bank of England left its policy rate unchanged at 0.50% and the asset purchase facility target at £435 billion.

·        Bank of Japan’s March meeting minutes underscored that policy normalization still remains in the distant future.

·        China consumer prices (April) rose 1.8% y/y (versus 1.9% expected), down from 2.1% prior. Producer prices rose 3.4% y/y (as expected), up from 3.1% prior.

·        China’s trade balance (April) swung back to a surplus of $28.8 billion.

 

The week ahead

·        Canada, US and China retail sales data

·        Canada, Japan, eurozone inflation data

·        US, Japan, eurozone and China industrial production data

·        Eurozone trade balance

 

With current conditions bringing volatility back to the markets, active portfolio managers have an opportunity to buy good stocks at attractive valuations.

To learn more, check out our latest edition of Market Matters on our website: April Market Matters   (advisors will be notified to view GLC’s latest edition of Market Matters through their weekly bundled news)

 

GLC’s introductory video provides a concise overview of who GLC is and how GLC manages money. This brief 1 minute video highlights GLC’s constant focus on delivering strong long-term investment performance for investors.

·        Watch it and learn a little more about GLC

·        Share it and start the conversation about the funds GLC manages.



Your Wealth Management Resources Team at Capital Core Financial

Clarke Haynes,
FPSC Level 1®, BBA, CIM®, EPC®, RRC®
Wealth Management Consultant, Capital Core Financial