February 09, 2024 | 12:06
Equity markets remain on a decent little roll at the start of 2024, on a surprisingly perky U.S. economy and prospects for rate relief later this year. Highlighting the solid start, the S&P 500 topped the 5000 level for the first time—you may have heard—up 5% so far this year and a towering 21% above the recent dip in late October (i.e., barely three months ago). Of course, earnings have also played a role in the upswing, with Q4 now on track for a 9% y/y advance, with fully 80% of companies topping expectations. Appreciating that it’s early days, but perhaps it’s the Year of the Bull, not the Dragon.
In a relatively light week for major U.S. economic developments, the thin gruel on offer was mostly tasty. The ISM services PMI echoed the factory release with a firmer-than-expected 53.4 in January, washing away a surprisingly soft result for the prior month (just 50.5). Initial jobless claims stayed low at 218,000; exports rose at the end of 2023, holding the trade deficit roughly flat; and, supply chain pressures did not reveal any deterioration (despite the Red Sea hostilities). Even the annual CPI revisions caused little stir, with the focus now turning to next Tuesday’s January reading. It’s also likely to be a low-drama affair, with a 0.2% m/m rise, cool enough to carve headline inflation four ticks to 3.0%, and core inflation easing a tick to 3.8% (+0.3% m/m).
Even the meaty Quarterly Refunding didn’t cause too much market indigestion. However, the ongoing heaviness of supply is gradually weighing on Treasuries. And with QT still churning ahead at full steam (see this week’s Feature) and the budget deficit enormous at $1.8 trillion (or $150 billion per month), the bountiful bond crop is not going to fail. It’s against this backdrop, and not simply on the economic data, that 10-year yields touched a two-month high of 4.18% on Friday, up 30 bps in just the past six sessions. Regional banking concerns? So last week.
Before getting too bulled up, we’ll point out that the S&P 500 is now up 48% from its pre-pandemic high of roughly four years ago. That is no doubt a solid advance, especially given the twin traumas of COVID and real inflation in between. And it translates into just over a 10% average annual gain since then, or roughly 2 ppts better than the 50-year median annual advance (8.2% before dividends). But, of course, there’s the small matter that it has been led by the Magnificent Six (plus the Megalomaniac One). The Dow has seen a much tamer rise, and even more so for the NYSE Composite. But, Japan’s Nikkei has matched the S&P nearly step for step, if not even topping it since 2020, without the AI-fuelled windfall among its major tech players. Meantime, the TSX is up at a pedestrian 4% annualized rate from four years ago (Chart 1), burdened by a less favourable mix (low tech, high interest sensitivity).
Curiously, despite the wildly different market mixes, the relative performances of equity markets have done a very good job of tracking the relative performances of the two economies. While the U.S. economy has defied the sceptics and the odds with above-trend growth over the past year, Canada has struggled to stay out of recession waters. We are not calling for an outright decline in GDP; but even with the moderate upturn late in 2023, we remain comfortable with our call of just 0.8% growth this year.
Running against that expectation of weak activity, the January jobs data roughly echoed the U.S. payrolls report, with a sturdy 37,300 employment rise, a surprising dip in unemployment to 5.7% and sticky wages at 5.3% y/y. While the details were much softer, with all the gains in part-time positions, the main point was that the Canadian job market is hardly sending distress signals. Governor Macklem’s main message this week, as well as from the Summary of Deliberations, was that the Bank needs more time before trimming rates. And the perfectly acceptable jobs results offer policymakers ample time. Somewhat countering that view was a hefty 14% drop in building permits the prior month. It’s not an indicator we typically highlight, but the heavy fall bears watching.
While Canada is struggling with a middling stock market performance and sluggish growth, China is mostly running fully against the global grain. Deflation is setting in, with the CPI down 0.8% y/y, and the fallout from the property slump spreading. Even with a policy-related bump this week, the CSI 300 is down nearly 20% from early 2020. Amazingly, the index led the global race out of the COVID slump, peaking in early 2021. But it’s been straight downhill since then, with the real estate slump and policy reversals greasing a 40% setback in those three years. Year of the Dragon, or the Dragging for China?
Sadly, forecasting the economy for a living doesn’t seem to give one a particular advantage in handicapping other aspects of the world. Like, say, certain sporting events. Aside: This topic is now fair game, what with sports betting moving out of the shadows and into apparently being the leading growth industry in North America—only a slight exaggeration, judging by the mass advertising campaigns. With that as a background, here’s the annual prediction for the football game—and not the half-time show, a possible marriage proposal, the colour of the Gatorade, or the best ad. The Niners have been favoured in every single game they have played this year, but, with apologies to our friends and colleagues in San Francisco, can’t see how/why that’s so this time: KC 35, SF 31. Past forecast record outright: 50/50.