Global Equity Weekly

October 13, 2023 | 16:32

Four's a Crowd for Inflation

Economist

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Equity markets were mixed this week as Treasury yields took a break from their relentless push higher. The S&P 500 gained 0.4% on the back of utilities and energy, while consumer discretionary lagged. The TSX added 1.1%, with a 5% jump in energy leading the advance.

The data flow this week wasn’t all that bullish. The September U.S. CPI was the headline act, and the headline inflation rate held steady at 3.7% y/y, a tick firmer than expected. Core inflation cooled two-ticks to 4.1% y/y, but accelerated month-to-month in part because of higher housing costs. Deeper below the surface, the ‘supercore’ measure (services ex-energy and housing) popped a strong 0.6% in the month alone. That leaves the 3-month annualized pace back up at 4.8%, while the year-over-year rate sits at 3.8%. However you spin it, the major inflation measures seem to be converging around 4% which is, of course, not ideal.

Indeed, underlying inflation on the services side of the economy still looks relentless and above where the Fed wants to see it. Note that core goods prices, however, were below year-ago levels for the first time since pandemic-era inflation broke open. The Fed is still going to lean against this, but also threw out some chatter this week that the recent bond market selloff is doing some tightening for them—they look to be on hold here.

The bond-market selloff continues to leave its imprint on the equity market. Over the past three months (i.e., roughly since 10-year Treasury yields begin to really break out of their previous range), both the S&P 500 and TSX are down by almost 4%. Utilities have been clobbered on both sides of the border by more than 11%, leaving them as the worst performers over this period—no surprise as they are typically the most rate sensitive. In Canada, there has been additional pressure on REITs and higher dividend-paying sectors such as telecom. Meantime, energy has held up best alongside a move up in oil prices since July—energy in both Canada and the U.S. is up about 10% over the past three months. And, U.S. technology and telecom services have outperformed the broad market despite loftier valuations.

Major Index Performance

North American Sector Performances

(% change over period)

Table 1 - S&P 500 Sector Performance

Source: BMO Economics, Bloomberg

Table 2 - TSX Sector Performance

Source: BMO Economics, Bloomberg

TSX Relative Sector Performance

(relative to the index, year-ago = 100; dashed line = 200-day m.a.)

S&P 500 Relative Sector Performance