Sightline Weekly Market Update: Inflation and Interest Rate Concerns Impact the Markets
North American equity markets reached new highs early last week, only to falter by week’s end on continued inflation and rising interest rate worries. Interest rates rose to their highest levels in over a year, with the US 10-year Treasury reaching 1.75% mid-week and finishing the week at 1.72%. Meanwhile, Canada’s held up better than US Treasuries ending the week at 1.58%.
Equity markets finished the week with marginal losses except for the small-cap Russell 2000, which dropped 2.68% during the week. The TSX finished the week flat, the S&P 500 was off 0.8%, and the Nasdaq lost 0.8%. European indices fared better, with most ending the week with modest gains. The EAFE index gained 1.2% during the week. Oil was the big loser falling just over 6% during the week on rising US inventories and concerns over demand in Europe, with some countries planning to reinstate lockdowns. Slovakia moved forward with a temporary ban and fine of 1,000 Euros on all citizens traveling abroad.1 Worries over new coronavirus variants and the slow rollout of the vaccine have many wondering about the recovery speed.
Economic news during the week was less supportive than in prior weeks. Industrial production surprised experts, who expected a 0.6% increase following January’s .9% increase, by slumping 2.2% in February, with mining and manufacturing being the primary drag. Manufacturing fell 3.1% in February after January’s gain of 1.2% and mining nosedived 5.4% after January’s advance of 2.1%. Weather in the south and central parts of the country was said to contribute to the weak performance. Utilities jumped over 7% during the month after January’s 0.6% gain. Capacity utilization was as expected, with the weak production performance retreating to 73.8% in February from January’s 75.5%.3 Retail sales for February were off 3% compared to an expectation of flatness against January retail sales, which rocketed 7.6% in January as consumers spent $600 stimulus checks.3 With the next round of stimulus checks in the mail, it is expected that the April and May retail sales will show significant improvement. The weather was also blamed for the US housing market’s weak performance in February, slumping to a six-month low of an annual rate of 1.421 million units.4 Short supplies of inventories and strong demand suggest recovery as warmer weather takes hold.
On Thursday, the US Department of Labor’s initial jobless claims was 770,000, an increase of 45,000 over the previous week’s upward revised number of 725,000.5 The initial claims report remains stubbornly high compared to the 2007/2008 recession peak of 665,000. As mentioned previously, in a healthy labor market, 200,000 to 250,000 is considered a normal range for weekly jobless claims. Continuing claims decreased to 18,216,463, a drop of 1,902,005 from the previous week.
In the past couple of weeks, the jittery equities markets have required many supportive comments from the US Federal Reserve Chairman Powell. This week was no exception when once again he stressed, “The economy is a long way from our employment targets and inflation goals and is likely to take some time for substantial progress to be achieved.”6 Further, he stated, “With regard to interest rates, we continue to expect it will be appropriate to maintain the current 0 to ¼ percent target range for the federal funds rate until labor market conditions have reached levels consistent with the Committee’s assessment of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. I would note that a transitory rise in inflation above 2 percent, as seems likely to occur this year, would not meet this standard.” The expectation for inflation from the FOMC participants is 2.4% this year, dropping to 2% next year before rising in 2023. While the Fed Chairman’s comments are supportive for the short term, many analysts are not as optimistic over the long term, resulting in equity volatility as market sentiment fluctuates from one week to the next. As long-term rates push higher, it may become apparent that market participants are more concerned with fiscal sustainability than cost pressures caused by bottlenecks.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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