June 7, 2019
Making Cents of the Markets
Be in the Know
This week leading up to Friday was all about how the Federal Reserve (Fed) was starting to pivot more dovish (easing monetary policy), and it helped markets move higher (4.4% on the S&P500 this week and 1.2% on the TSX). On Monday, James Bullard, the Fed vice-chair said that an interest rate cut “may be warranted soon” given the rising risk to economic growth posed by trade tensions. Then on Tuesday, we heard from the Fed Chair Jerome Powell. He signaled that the Fed was prepared to protect the US economy, indicating that they will cut interest rates if necessary. Those two speeches were enough to blast the markets higher on Tuesday, as we saw the Dow Jones Industrial Average gain over 500 points. What was once a headwind, has pretty clearly turned into a tailwind.
On Friday, we had the double jobs report with both Canada and the US reporting their May numbers. Canada surprised to the upside, with employment increasing another 28k in May, building on the outsized 107k increase in April. The unemployment rate fell to 5.4% in our country, which happens to be the lowest level since 1976 that we have comparable data for! The trend has been strong too, as that makes eight out of nine months of job gains for a total of 417k jobs created in that period. In the US, however, the report for May disappointed. They added just 75k jobs in May, far short of the 180k expectations. The jobless rate held steady at 3.6%, a near 50-year low, but businesses are clearly being more cautious given the trade uncertainty.
Following a -7% one-month pullback since the trade war was re-ignited, the markets were able to bounce this week. We mentioned how the markets were showing some very oversold conditions last Friday, and that appeared to be correct. The positive catalyst was clearly the Fed hinting at some financial flexibility this week as mentioned above, in what has to be seen as one of the quicker six month reversals of tone in the Fed’s history – from being “a long way” from neutral rates back in December, suggesting multiple rate hikes, to being ready to “act as appropriate” to sustain the expansion this week. Trade remains the wild card here, but we did get some positivity from the Mexico-US negotiations on Friday, along with some positivity from President Xi at a press conference in Russia. President Xi had three points worth noting, that there are big investors connecting China and the US, that Trump is his friend, and that the US is not interested in disconnecting with China. Still a long ways to go, but these were softer words than recent rhetoric has been.
For the short term, we do view the technical resistance at 2,880 on the S&P500 as hard to break without some sort of trade deal with China (we did briefly pop above that level on Friday, but it did not hold). If a deal happens, based on low inflation and much lower interest rates, the market could be in for leg higher. Given the negative bias to the trade talks, though, and some slowing economic numbers, there is likely to be some downside risk if talks do fall apart ahead of the G20 meeting later this month. With the current conflicting stances, our neutral positioning in the short term is appropriate. We need to be patient while we see how things turn out, and will be monitoring tweets this weekend.
Chart of the Week
Go Canada! Lowest unemployment rate since 1976 when comparable data was available at 5.4%:
Beyond the Markets
With the warmer weather rolling in, there are a plethora of events happening all over the Lower Mainland that will get you out and enjoying the season.
June 9 is Italian Day on the Drive so make your way to Commercial Drive for a day of music, food, and fun. The festival will feature performances by local and international Italian artists, food eating contests, fashion shows, and much more! Additionally, running every weekend from now until October 14, the Richmond Night Market is back and better than ever! As the largest night market in North America, this popular attraction features over 600 food items from around the world as well as a wide range of retail vendors.
Wherever you decide to go this weekend, you are sure to have a blast!
Listen to this week’s Making Cents of the Markets on CKNW. We talked all about tariffs, the housing market, balancing your portfolio, and asset location. Listen here.
Click here to read our latest North Shore News article for insight into the housing market and what it means for buyer choice and affordability.