Global Equity Weekly

April 01, 2022 | 16:27

No Foolin' on Rate Hikes

Economist

Senior Economist and Director
Economics

Robert has been with the Bank of Montreal since 2006. He plays a key role in analyzing regional economic, fiscal... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with the Bank of Montreal since 2006. He plays a key role in analyzing regional economic, fiscal... (Read more)

Equity markets were mixed this week, closing out a very volatile quarter mostly in the red. The S&P 500 added 0.1%, as banks shed more than 6% on the week, while energy, industrials and materials were also weaker. The defensive stalwarts (utilities consumer staples and health care), however, posted gains. With Q1 in the books, the index sits down 4.6% on the year, but still up 13% from year-ago levels. Meantime, the TSX gave back 0.2% this week, but held up much better through the quarter, still hanging on to a 3.4% advance in 2022.

The economic data were mixed this week. The U.S. payrolls report was the headliner, and it delivered a strong 431k increase in employment in March, along with positive prior-month revisions. The jobless rate fell to 3.6%, within a tick of matching the pre-COVID level, and a 53-year low. Job vacancies remain historically high, and wage pressure is still percolating, all the stuff of tighter Fed policy. Meantime, there were lighter results on the growth front, with real personal spending down 0.4% in February, and the manufacturing ISM falling 1.5 pts to 57.1. While still well in expansion territory, the heat is coming off quickly, down from above 60 in late-2021, while new orders are sinking even faster. On the inflation front, the core PCE deflator kept running in February, up 5.4% y/y and similarly on annualized basis over the past three months.

With all that in mind, we made some changes to our BoC and Fed calls this week, and now see more aggressive near-term tightening, along with a higher end point for rates.

Bank of Canada: We now expect a 50 bp rate hike at each of the next two policy announcements (April 13 and June 1), followed by a 25 bp move in July. That would put rates at 1.75%, before the Bank slows the cadence with 25 bp rate hikes at each of the following three MPR meetings (October, January and April ‘23), leaving policy rates at 2.5%.

Table 1 - Market Performance

Source: BMO Economics, Bloomberg

Federal Reserve: We now expect the FOMC to raise rates by 50 bps at the next two meetings before shifting back to a 25-bps-per meeting cadence for the reminder of the year, with the target midpoint hitting 2.375% by December. We suspect the Fed will move more cautiously (every second meeting) in 2023, with the target range settling at 2.75%-to-3.00% by mid-next year.

With loner-term interest rates backing off somewhat this week, and the market still pricing aggressive Federal Reserve moves in the near term, the 2s10s Treasury yield curve has now inverted. There is a lot to untangle with such a closely-watched move, so we’ll refer you to Michael Gregory’s feature in this week’s edition of Focus, found here.

Major Index Performance

North American Sector Performances

(% change over period)

Table 2 - S&P 500 Sector Performance

Source: BMO Economics, Bloomberg

Table 3 - 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