Global Equity Weekly

November 15, 2024 | 16:26

Still the Inflation Era?

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 gave back some of last week’s gains as the post-election commotion has settled back down, and more mundane things like stubborn inflation and Fed policy have come back into focus. The S&P 500 fell 2.1%, with health care still under pressure, while technology and communication services were also down meaningfully. Banks and energy, both of which were post-election winners, sat firm at the top of the pack this week.

Meantime, the TSX added 0.5%, as a 12% surge in technology (i.e., Shopify) drove most of the gain in the index. Elsewhere, the results were much less inspiring. Energy added 1.2% alongside some solid earnings results, but most sectors including materials, health care and telecom were well in the red.

The October U.S. CPI report was right on expectations, but inflation remains stubborn. Core inflation held at 3.3% y/y in the month, while the index rose at a 3.4% annualized clip month-over-month. The 3-month trend is also running at a warm 3.6% clip. Aside from a very soft run from May to July, which has pulled the 6-month annualized rate down to 2.6%, it looks like underlying inflation has settled in just above 3%. Overall, it’s hard to do much better than that when owners’ equivalent rent is running steady in the 4%-to-6% range, but even ‘supercore’ (services) has warmed up again. We still see the Fed easing again in December, but if core inflation does in fact settle around 3%, it would slow the easing pace and could put a floor under the terminal rate for this cycle.

Fed Chair Powell subsequently weighed in with a less-dovish tone. He said that “the economy is not sending any signals that we need to be in a hurry to lower rates”...and that “the strength we are currently seeing in the economy gives us the ability to approach our decisions carefully”.

Source: Bloomberg

That’s Fedspeak for, ‘we probably won't be cutting rates at every meeting’. Indeed, the market is now pricing in less than full odds (call it roughly 60%) of a rate cut in December, and just under 50 bps of easing over the next four meetings. With a potentially higher terminal rate, sturdy growth and (presumably) deficit-widening fiscal policy ahead, 10-year yields have risen roughly 80 bps from the September low. Equity investors are back to calibrating their valuation models.

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