Global Equity Weekly

July 28, 2023 | 16:30

The Waiting Is Now the Hardest Part

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 rallied this week on signs that the economy is holding firm despite ongoing rate hikes, while inflation continues to ebb. The S&P 500 gained 1.0%, with telecom services charging ahead almost 7%. Defensives and rate-sensitives lagged the pack. While the Fed raised rates as expected, the BoJ's tweak to yield curve control lifted bond yields, while the ECB also raised rates. The Nikkei and major European/U.K. indices were all higher on the week. The TSX, however, lagged with a 0.1% decline, as telecom, consumer staples and utilities were all lower.

The Federal Reserve raised interest rates by 25 bps, as fully expected, which now takes the overnight rate to the highest level since early-2001. That’s also now a cool 525 bps of tightening compressed into just a year-and-a-half. Yet the economy powers ahead. Real GDP growth came in at a better-than-expected 2.4% annualized in Q2, which now marks four consecutive quarters at 2% or better, with an average run rate of 2.6%. For equity investors, the good news alongside this resilience is that inflation continues to ease. Core PCE inflation slowed to 4.1% y/y, or 3.4% annualized over the latest three months (2% annualized in June alone). While not quite where the Fed wants it to be, sturdy growth and still-easing inflation is a good combo for stocks. And, in the endurance test to see what can hold on longer—inflation or economy—the economy is winning.

In Canada, there are signs that tighter policy is indeed working, and this week’s data flow added support to that narrative. While the economy bounced 0.3% in May, as expected, the more-anticipated early reading for June disappointed with a 0.2% contraction. Unlike in the U.S., the data flow to end the second quarter have been poor at best—the trio of retail, manufacturing and wholesale were all pointing to volume declines in the month. That leaves Q2 growth tracking at 1.2%, below the Bank of Canada’s latest (July MPR) 1.5% call; and we now see Q3 limping at a 0.8% clip (the BoC is at 1.5% there as well). Housing might get a psychological boost (again) if the BoC pauses here as the market expects; but there’s not a lot of actual mortgage rate relief in sight with 5-year yields hitting new highs this week. In the job market, we’ve already seen some signs that the extreme tightness has eased, with job vacancies now down by more than 250k in the past year. The unemployment rate is also up half a percentage point from a year ago, and wage growth at least isn’t sprinting higher. In other words, this is a job market going from extremely tight, to just tight. All that said, the BoC will still lean against the economy with these higher rates—we expect a long pause from here—and rate-sensitive sectors remained under some pressure this week.

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