Global Equity Weekly

April 19, 2024 | 15:50

Powell Play

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 continued their correction this week, with some firm economic data unable to counter the reality that rate cuts are not coming as soon or aggressively as previously thought. The S&P 500 fell 3.2% by late Friday, with technology, consumer discretionary and communication services posting the deepest declines alongside some steep selloffs from the likes of Netflix. Meantime, the TSX gave back a more modest 0.7% as the sector mix was relatively favourable.

Rate cut expectations continue to get dialed back, with Fed Chair Powell suggesting this week that the likelihood of near-term easing is getting declining. This comes in the wake of sturdy labour market data and frustratingly slow progress in underlying inflation metrics. For example, 3-month annualized rates of core and supercore inflation, in both the CPI and PCEPI, are running in the 3.5%-to-8.2% range. And for each of those four individual indicators, the 3-month rate has accelerated above the 6-month rate, which is also above the 12-month rate. This is not the stuff of rate cuts. As Powell said this week, “the recent data have clearly not given us greater confidence, and instead indicate that it’s likely to take longer than expected to achieve that confidence”. After getting hopped up on rate cut expectations coming into the year, when there was about 125 bps of easing priced in, the market is now pricing in just 40 bps, with the first full 25 bps only occurring by November.

Source: Bloomberg: As of 3:00 pm

Elsewhere, Canada’s federal budget landed with a bit of a thud in the investment community. The headline tax measure is a long-speculated increase in the capital gains inclusion rate, from 50% to 66.7%, although limited to corporations, trusts, and individuals with gains exceeding $250,000. While the capital gains threshold for individuals sounds high on the surface, consider that high real estate values will mean that many sellers of investment or cottage properties will get dinged by the higher inclusion rate. This will similarly be a concern for Baby Boomers passing down property to younger generations. This immediately had many wondering if the change, which takes effect on June 25, 2024, will trigger a wave of selling—maybe, but not necessarily. Presumably some owners of assets with a pending or looming sale will be incentivized to pull it forward, and Ottawa is indeed expecting some of that behaviour in the way they account for revenues—a high initial take followed by a lull. Some of the other rumoured tax changes were absent, namely a wealth tax, increase in marginal tax rates and targeted corporate tax changes. But, given the now steady yearly roll out of tax increases, allocators of capital are probably already asking: what’s next?

For a complete analysis and notable new measures, see our 2024 budget report here.

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