Global Equity Weekly

April 12, 2024 | 16:31

Driving Investors Loonie

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 struggled this week as a tough U.S. inflation print further dialed back rate-cut expectations. The S&P 500 fell 1.6%, with financials, health care and materials posting the deepest declines. A mixed bag of early bank earnings also weighed late in the week. Meantime, the TSX gave back 1.6%, as health care was trounced more than 12%, while higher-yielding names struggled.

The U.S. March CPI report was not pretty, with key shorter-term inflation trends deteriorating. Headline inflation accelerated to 3.5% y/y from 3.2% y/y in the prior month, while core inflation held firmer than expected at 3.8% y/y. The shorter-term metrics are where things get dicey, suggesting that inflation trends are getting worse, not better. Indeed, 6-month core inflation is now running hotter at 3.9% annualized, and 3-month core inflation is running even hotter still at 4.5% annualized. The 3-month annualized rate of ‘supercore’ inflation even popped above 8%. Needless to say, this is not the stuff of rate cuts, and the market reacted accordingly with higher yields and lower stocks.

Indeed, Fed easing expectations continue to get pushed out with a full rate cut now only priced in by September, and less than 50 bps total for 2024. The market views the June Bank of Canada meeting as about 50/50, after the Bank left rates unchanged this week, but earlier doesn't necessarily mean a lot more in terms of easing—there are just over two BoC moves now priced in for 2024. Still, as the BoC gets closer to easing while the Fed is seemingly stepping further away, the loonie is trading at the weakest level since November, especially with the leverage to oil prices just not what it used to be.

In the equity market, one can see this all playing out vividly when comparing cross border returns with and without currency exposure. The TSX has underperformed in the past year, up 6.5% versus the 24% jump in the S&P 500. But the C$-unhedged S&P 500 has seen returns juiced even higher to near 29%. Since early 2021, through the ensuing ups, downs, and ups in the market, the place for Canadian investors to be has been U.S. stocks in U.S. dollars.

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