MARKET UPDATE: CONSUMER PRICE INDEX, PRODUCER PRICE INDEX, RETAIL SALES

What We Are Watching This Week

• Consumer Price Index
• Producer Price Index (indication of input inflation)
• Retail Sales

Highlights From Last Week

• ISM Services
• ADP Employment report
• Consumer Credit
• US. Nonfarm payrolls and unemployment rate

Growing anticipation of earlier interest rate cuts by the Federal Reserve buoyed the S&P 500 Index and S&P MidCap 400 Index to new record intraday highs, along with the Nasdaq Composite, although they retreated late Friday. Small-cap and value shares performed well, while mega-cap tech stocks lagged, influenced by reports of slowing iPhone sales affecting Apple. Novo Nordisk, a Danish pharmaceutical company, surpassed Tesla as the 12th largest public company by market capitalization, driven by solid demand for diabetes and weight loss drugs. The week started with a downturn, attributed partly to disappointing policy news from China, but stocks rebounded midweek amid signs of easing domestic demand and inflation pressures.

The S&P/TSX composite index closed with its fourth consecutive weekly increase in Canada, with technology stocks leading the gains. Moderating wage growth data in Canada and the United States has fueled expectations of central bank interest rate cuts this year. As of Friday’s close, the index reached its highest intraday level since April 2022. Technology shares rose by 0.8%, with Bitfarms and Hut 8, both bitcoin miners, posting significant gains. Healthcare stocks also saw a 1.5% increase, led by a surge in Tilray Brands, a cannabis company. The materials sector is expected to outperform other sectors this week, while telecom stocks experienced the most significant decline.

The pan-European STOXX Europe 600 Index reached a record high, marking a seventh consecutive weekly gain with a 1.14% increase. Among major stock indexes, Italy’s FTSE MIB rose by 1.43%, France’s CAC 40 Index by 1.18%, and Germany’s DAX by 0.45%. However, the UK’s FTSE 100 Index declined by 0.30%. Following the European Central Bank’s decision to maintain its monetary policy, ten-year government bond yields for Germany, Italy, and France decreased. The ECB signaled potential interest rate cuts in June, revising inflation and economic growth forecasts downward. ECB President Christine Lagarde expressed the need for sustainable inflation decline, with adjustments expected in June.

The weeks economic data came in mixed starting with the January U.S. factory orders declining by 3.6%, primarily due to reduced contracts for Boeing passenger planes. Economists expected a 3.1% decline. Excluding transportation, orders dropped by 0.8%. Despite this, there is a notable investment in new computing power, supported by Biden subsidies and advancements in artificial intelligence. However, other industrial sectors remain weak, with durable goods orders plunging by 6.2%, slightly higher than previously reported. Core capital goods orders were flat, and shipments of manufactured goods fell by nearly 1%. These figures could negatively impact the first-quarter GDP, suggesting limited business investment support. Manufacturers have faced challenges in achieving growth due to changing consumer spending habits and Federal Reserve interest rate policies. While Biden’s subsidies have bolstered industrial spending, potential Fed interest rate cuts later in the year might offer further support to businesses, potentially boosting investment when borrowing costs decrease.¹

On Tuesday, February’s U.S. Institute for Supply Management (ISM) services index presented a nuanced view of the economy’s primary sector. While business activity and new orders showed strength, there’s a growing focus on reducing workforces, signaling potential job losses ahead. Despite this, with inflation concerns easing, the Federal Reserve could have room for flexible response strategies. Although the headline index disappointed at 52.6, below January’s 53.4 and the consensus forecast of 53.0, business activity and new orders improved notably to 57.2 and 56.1, respectively, exceeding their six-month averages. However, employment softened, dipping into contraction at 48.0, the second sub-50 reading in three months, with a declining six-month moving average. This contrasts with historical trends where the ISM services employment index and nonfarm payrolls (to be released later Friday) showed a strong relationship. Despite indications of a cooling job market, forecasting negative payrolls based on ISM data would be bold, given past data surprises. Additionally, prices paid decreased, relieving concerns about core inflation. The market response includes falling Treasury yields and modestly rising expectations of a Federal Reserve rate cut. Overall, while the report suggests satisfactory activity and pricing, concerns about a potential broader economic slowdown persist, contrasting GDP growth estimates of 3% with ISM indices estimates of 1%.²

In February, American businesses added 140,000 new jobs, according to ADP Wednesday, suggesting a potential slowdown in labor demand following robust hiring in the previous year. Economists had anticipated a slightly higher increase of 150,000. However, it’s important to note that ADP’s estimate is not a precise indicator of the government’s official employment report, which will be released this Friday. Despite discrepancies, both ADP and government surveys generally align over time. The government is expected to announce 198,000 new jobs for February, including government positions, whereas ADP only tracks the private sector. In February, most of the new jobs were in industries such as restaurants and hotels, construction, transportation, and financial services. Larger and medium-sized companies were primarily responsible for the hiring, while small business employment saw minimal growth. Employment in the information sector, encompassing media, experienced a slight decline. January’s employment increase was revised upward to 111,000 from 107,000. However, wage growth has slowed, with workers in the same job seeing a 5.1% increase in pay over the past year, the lowest level since mid-2021. While the labor market shows signs of strain, it remains robust overall. The Federal Reserve aims for low unemployment but also hopes for a further slowdown in wage growth to address inflation concerns. The Fed may consider cutting interest rates later in the year, particularly if there’s more slack in the labor market. The chief economist of ADP, Nela Richardson, emphasizes that while job gains are solid and pay increases are moderating, they don’t significantly influence the likelihood of a Fed rate decision this year.³

On Wednesday, the Labor Department reported Job openings in the U.S. have plateaued at 8.9 million for three consecutive months, indicating sustained robust labor demand. The Federal Reserve seeks further labor market cooling to address potential inflation concerns. Although job openings have decreased from a peak of 12 million in 2022, they remain significantly higher than pre-pandemic levels. Fed Chairman Jerome Powell notes that labor demand exceeds worker supply. Additionally, the ratio of job openings to unemployed workers, while down from its peak, remains above pre-pandemic levels, a metric closely monitored by Fed officials.⁴

Also, on Wednesday, the Bank of Canada chose to keep its overnight rate target, Bank Rate, and deposit rate unchanged at 5%, 5.25%, and 5%, respectively, maintaining its stance on quantitative tightening. Global economic expansion slowed in Q4, with the U.S. experiencing unexpected growth while the Euro area stagnated. Inflation eased in both regions. In Canada, Q4 GDP surpassed expectations, but growth remains below potential. Inflation softened to 2.9% in January, but underlying pressures persist. Bank Governor Tiff Macklem cited global risks, emphasizing the need for higher interest rates to combat inflation.⁵

On Thursday, the U.S. Labor Department reported that the number of Americans filing for unemployment benefits for the week ending March 2 remained unchanged at 217,000, indicating stability in the robust U.S. labor market. New jobless claims have consistently stayed between 189,000 and 227,000 weekly in the first quarter of 2024, historically low levels. For the week ending February 17, the total number of weeks claimed for benefits across all programs stood at 2,121,432, marking a decline of 1,397 compared to the prior week. The unemployment data reduces the likelihood of Federal Reserve interest rate cuts in May.⁶

In January, total consumer credit surged by $19.5 billion, marking a substantial increase from the previous month’s modest gain of $919 million, as reported by the Federal Reserve. This translates to a 4.7% annual growth rate, up from 0.2% in December and nearly double economists’ expectations of a $10 billion rise. Revolving credit, such as credit cards, accelerated at a 7.7% rate, while non-revolving credit, covering auto and student loans, rose by 3.6%. Despite the growth, concerns linger among economists about elevated borrowing costs and potential strains on consumer finances, with some fearing a possible decline in consumer strength.⁷

On Friday, The U.S. Bureau of Labor Statistics said that in February, the economy generated an unexpectedly high number of new jobs, totaling 275,000, which could complicate the Federal Reserve’s deliberations on when to reduce U.S. interest rates. Economists expected a 198,000 increase in new jobs last month, but significant downward revisions to job creation figures for January and December reduced the overall employment growth by 167,000. Consequently, the February increase was less robust than initially perceived. Additionally, the unemployment rate climbed to a 25-month high of 3.9%, up from 3.7% in the preceding month. In February, hourly wages increased by a marginal 0.1%, a relief for the Federal Reserve after a spike in January. However, the annual wage growth slowed from 4.4% to 4.3%, a trend the central bank favors as it seeks wage growth around 3% or less to maintain low inflation. Despite concerns, the labor market has remained robust since the pandemic’s end, with ongoing hiring, minimal layoffs, and low unemployment. However, the weakness indicated by the household survey since last summer warrants attention.⁸

As the market maintains its upward momentum, we observe stretched valuations across multiple sectors, prompting a cautious stance.

1. https://www.census.gov/manufacturing/m3/prel/pdf/s-i-o.pdf
2. https://www.ismworld.org/supply-management-news-and-reports/news-publications/inside-supply-management-magazine/blog/2024/2024-03/report-on-business-roundup-february-2024-services-pmi/
3. https://mediacenter.adp.com/2024-03-06-ADP-National-Employment-Report-Private-Sector-Employment-Increased-by-140,000-Jobs-in-February-Annual-Pay-was-Up-5-1
4. https://www.bls.gov/news.release/pdf/jolts.pdf
5. https://www.bankofcanada.ca/2024/03/fad-press-release-2024-
6. https://www.dol.gov/ui/data.pdf
7. https://www.federalreserve.gov/releases/g19/current/
8. https://www.bls.gov/news.release/empsit.nr0.htm

Important Information: 

Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.  

Sightline Wealth Management LP (“Sightline”) is an investment dealer and is a member of the Canadian Industry Regulation Organization (CIRO) and the Canadian Investor Protection Fund (CIPF). Sightline provides management and investment advisory services to high-net-worth individuals and institutional investors.  

Sightline Wealth Management LP is a wholly owned subsidiary of Ninepoint Financial Group Inc. (“NFG Inc.”). NFG Inc. is also the parent company of Ninepoint Partners LP, it is an investment fund manager and advisor and exempt market dealer. By virtue of the same parent company, Sightline is affiliated with Ninepoint Partners LP. Information and/or materials contained herein is for information purposes only and does not constitute an offer to sell or solicitation to purchase securities of any issuer or any portfolio managed by Sightline Wealth Management or Ninepoint Partners, including Ninepoint managed funds.  

The opinions and information contained in this article are those of Sightline Wealth Management (“Sightline”) as of the date of this article and are subject to change without notice. Sightline endeavors to ensure that the content has been compiled from sources that we believe to be reliable. The information is not meant to be used as the primary basis of investment decisions and should not be constructed as advice. Each investor should obtain independent advice before making any investment decisions.