Weekly Market Wrap-Up: Monetary Status Quo
Brexit remained investors’ focal point of attention again this week. Recent polls and bookmakers’ odds suggest that the UK vote Thursday is down to the wire. As a result, investors spent most of the week hedging for Brexit risks, hence pushing stocks and commodity prices lower except for gold. On the latter, the bullion has been unable to push above the $1,300/oz resistance despite heightened risk aversion. In other words, gold(s) has hit a “time stop,” and a pause following this year’s strong advance seems in the cards. Otherwise, several central banks had policy meetings this week, and except for Indonesia which cut rates by 25bps, all struck a very dovish tone by holding the line on their monetary policy rates. The Fed did little to restore investors’ faith in the central bank with many FOMC members dialing back their rate-hike expectations. The Fed continues to walk in the bond market’s footsteps creating a sense of confusion when it comes to gauging its reaction function. As for stocks, investors should keep a close eye on the spread between the S&P 500 forward P/E ratio (~16x) and the VIX (~20). History shows that the “buy zone” for equities began when the spread drops below minus 5.
We visited clients in Western Canada this week, and among topics of discussion was the perspective for real bond yields given the impact of annual increases in oil prices in H2. This is a key issue given the hypersensitivity of cyclical stocks to real interest rates. Our Chart of the Week shows the possible path for US headline inflation should oil prices reach $40, $50 or $60 in March next year. Assuming constant inflationary pressures on all items excluding energy commodities, we calculated that headline CPI would move from 1.0% currently to 1.5%, 2.2% and 2.9% respectively. As such, unless a major pullback in bond yields occurs, odds are fairly high that real US 10-year bond yields turn negative late this year or next spring. Thus, considering that resource stocks usually peak near bottoms in real bond yields (see June’s Quantitative Strategist, page 9), any dips on a summer swoon ought to be bought.
Regarding economic data this week, in Canada, manufacturing sales improved 1.0% MoM owing to an upturn in petroleum and coal products, primary metals and transportation equipment. Meanwhile, headline and core CPI slowed to 1.5% (from 1.7%) and 2.1% (from 2.2%). A marked drop in food inflation (1.8% from 3.2% YoY) explains the setback in the headline number. In the US, headline and core CPI settled at 1.0% and 2.2% YoY respectively (from 1.1% and 2.1%), with higher prices for shelter, medical care services and energy more than offsetting deflation for new and used vehicles. Also, growth in US retail sales slowed to 2.5% YoY (from 3%), with gasoline stations (+2.1% MoM) and non-store retailers (+1.3% MoM) showing strong MoM increases. On housing, the NAHB index improved to 60 (from 58) but housing starts (-0.3% MoM) and building permits (+0.7% MoM) were a mixed bag. As for manufacturing activity, the NFIB increased to 93.8 (from 93.6), but industrial (-1.4% YoY) and manufacturing production (-0.1% YoY) remain weak. That said, a weaker trade-weighted US$ should stimulate production in H2. Finally, in China, retail sales (10% YoY) and industrial production 6% came in mostly unchanged from last month. However, fixed asset investment disappointed with a 9.6% YoY print, down from 10.5% despite new Yuan loans soaring to CNY 986B (from CNY 556B).
Next week, the Brexit referendum on June 23rd should draw the spotlights. Expectations are for the ECB and the BoE to issue a statement upon a Brexit. Otherwise, we await flash PMI releases globally, retail sales in Canada, and durable goods orders as well as existing and new home sales in the US.
The Canaccord Genuity research included in the Legacy Wealth Weekly is solely for Canadian residents. To subscribe to our weekly newsletter, click here.
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