Global Equity Weekly

September 29, 2023 | 16:34

Fighting the Yield

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 bond yields continued to push higher and test valuations. The S&P 500 fell 0.7%, with utilities down sharply, while consumer stocks and financials also struggled. Ten-year Treasury yields continued to rise on the week, as did most of the yield curve, before backing off somewhat on Friday. That despite some sluggish data and a well-behaved 'supercore' inflation print, which rose just 1.7% annualized in August, or 3.4% over the latest three months.

Meantime, the TSX fell 1.2% as rate-sensitives and higher-yielding sectors struggled alongside new highs for GoC yields—as one example, the closely-watched 5-year yield pushed to 16-year highs.

The struggle is starting to look real in the Canadian economy, and the headwinds might only be getting stiffer. Canadian real GDP was flat in July, and a modest +0.1% initial read on August leaves growth for Q3 barely in positive territory. Over the past six months, real GDP is effectively unchanged, which starts to look pretty rough when considering that the population is exploding at a 3% per-year run rate. While we’d love to insert some rays of optimism here, the challenge is that the recent action in the bond market is not cooperating, pushing borrowing rates even higher, and the typical 12-to-18 months lags in monetary policy suggest that the most aggressive phase of the tightening cycle (last summer) is about to fully bite. As such, we continue to forecast very little real growth between now and next spring.

For the Bank of Canada, it’s complicated. This remains a tough spot where any signs of slowing are being countered by the inflationary impulse of torrid population growth, still-stubborn core metrics, and lags between turning points in the job market and wage growth. It all suggests that the Bank will keep leaning on the economy and inflation with the tightening that has already been put in place, while downside pressures continue to build.

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