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Weekly Market Pulse - Week ending January 21, 2022

Market Developments

Equities:

Global equities suffered their biggest weekly fall in nearly 12 months. Investors braced for the prospect of higher interest rates and shied away from speculative areas of the market. This was especially the case in the consumer tech sector, after Netflix reported disappointing quarterly earnings. The NASDAQ fell over 7% for the week. Canadian equities, which had largely bucked the broader negative trend to start the year, suffered their worst weekly decline since October 2021.  

Fixed income:

Canadian and U.S. yields were fairly muted for the week. Investors are keenly watching the outcome of the Bank of Canada and U.S. Federal Reserve meetings next week.

Commodities:

Oil prices notched another week of gains, hitting a seven-year high in the interim. Demand, especially in the U.S., has remained resilient in the face of high Omicron cases, and amid tight supply and geopolitical concerns. Gold prices inched higher, benefitting from concerns around inflation and a move away from risk assets such as growth equities and cryptocurrencies. Base metals prices also rose, buoyed by dwindling stockpiles.    

Performance (price return)

Performance table

  As of January 21, 2022

Macro developments

Canada – Manufacturing sales disappoint; CPI at highest level since 1991

Manufacturing sales in November increased 2.6% month over month, coming in below estimates of 3.0%, and a drop from the 4.6% reading in October. New orders were up 3% in November, while total inventories increased 1.2%. Sales of durable goods increased 3.5% and continued to outpace sales of non-durable goods which rose 1.8%.

The consumer price index declined 0.1% month over month in December. The index was up 4.8% on a year over year basis, its highest reading since 1991. CPI Core, which excludes food and energy, increased 3.4% year over year. Supply chain disruptions have led to continued price appreciation in durable goods. Transportation and shelter costs also continued to post strong gains. Services prices increased 0.4% month over month. Gasoline, which had been a strong driver of inflation through much of 2021, posted a second straight monthly decline. The historically high CPI reading amplified expectations of a possible Bank of Canada rate hike at its next meeting.  

U.S. – Empire state manufacturing survey plummets, though outlook stable

The Empire State Manufacturing Survey was the first reading into manufacturing activity for January. The reading dropped to -0.7 in January, from 31.9 in December, signaling a contracting manufacturing sector. Measures of orders and shipments decreased sharply, likely a result of the Omicron variant spreading rapidly through the state. Despite the sharp drop, manufacturers in the state remained upbeat about the outlook. A measure of future business conditions remained steady, reflecting a pickup in expected orders growth.

International – China’s GDP; Retail sales disappoint; Industrial output rises; Japan core machine orders rises; German ZEW survey index rises sharply; U.K. CPI rises to highest level since 1992

China’s Q4 GDP grew 4.0% year over year, above expectations of a 3.3% increase, but below the 4.9% reading in Q3 2021. GDP for the full year grew 8.1% year over year. The slowdown was driven by the property and consumption sectors facing severe downward pressures. The People’s Bank of China responded with a cut to its policy rate.

China’s retail sales grew 1.7% year over year in December, below estimates of a 3.8% rise, and down from 3.9% in November. Retail sales in 2021 grew 12.5% year over year. The slowdown in retail sales was most acute in industries such as restaurant/catering, furniture, household electronics, and automobiles.   

China’s industrial output grew 4.3% year over year in December, above estimates of a 3.7% rise, and above the 3.8% increase in November. Output grew 9.6% year over year in 2021. Mining and electricity/gas/water output grew 7.3% and 7.2% year over year, respectively. Specific industries that recorded large increases in output included food production, pharmaceuticals, telecommunications, power and heat, and special equipment.     

Japan’s core machine orders increased 3.4% month over month in November, above expectations of a 1.2% increase. The reading increased 11.6% year over year. This was the highest reading in two years. The measure tends to be a leading indicator of capital investment and suggests it was picking up before the Omicron variant hit.

As expected, the Bank of Japan kept its policy balance rate unchanged at -0.1% and continue to maintain a target around 0% for the 10-year Japanese government bond yield.

Germany’s ZEW Economic Sentiment Index increased to 51.7 in January, from 29.9 in December. The reading is the highest since July 2021 and suggests investor confidence is strong in Germany’s ability to recover from the current wave of COVID-19 infections. The most positive expectations came from consumer-related and export-oriented sectors, which represent a considerably large part of the German economy.

The U.K. consumer price index increased 0.5% month over month in December, and 5.4% year over year, to its highest level since 1992. CPI Core increased 4.2% year over year. Price increases were broad and led by increases in the cost of food, non-alcoholic beverages, restaurants and hotels, furniture and household goods, and clothing. Transportation and shelter prices surged considerably year over year as well. The reading increased the probability of another rate hike when the Bank of England meets next month.

Quick look ahead

Canada – Bank of Canada rate decision (January 26); CFIB Business Barometer (January 27)

The Bank of Canada could start its acceleration of interest rate tightening with its first meeting of the year. Markets are pricing in a 75% chance the Bank will hike its overnight rate at this meeting. The hawkish view comes on the back of the BoC’s Q4 business survey, which indicated an economy that is growing quickly, with significant labour shortages and record inflation expectations.

In Canada, the CFIB business barometer will provide an update on small business confidence. Omicron variant and labour shortages are expected to have played a large role in driving sentiment.

U.S. – Markit PMI (January 24); Conference Board Consumer Confidence (January 25); FOMC rate decision (January 26); Durable Goods Orders (January 27); Q4 GDP (January 27); Personal income and spending (January 28)   

We will have the preliminary results from the Markit purchasing managers’ index survey. Omicron cases could weigh on sentiment and activity. As usual, supply chain disruptions, inflationary pressures, and labour shortages will be key indicators to watch.

Consumer confidence in January is likely to be buffeted by concerns around Omicron and inflationary pressures on the one hand but balanced out by better employment prospects and a strong labour market on the other.

The Federal Reserve Open Market Committee will conduct its first meeting of the year. Consensus expectations are for rates and the pace of tapering to remain unchanged. There will also likely be greater guidance on the Fed’s approach to balance-sheet runoff. As always, market observers will keenly watch for updated comments on growth, inflation, and employment as well.    

Durable goods orders for December will be released. Expectations are for a 0.5% decline. Transportation orders are expected to lag, due to a decline in plane orders.

The first reading of Q4 GDP will be released. Economic recovery likely hastened in the quarter, as reopening continued up until the Omicron variant hit. Annualized GDP is estimated to have grown 5.3% quarter over quarter. 

Personal income is expected to have increased 0.5% month over month in December. Meanwhile, personal spending is expected to decline 0.6%, as rising Omicron case counts are expected to have been especially detrimental to services spending.

International – Eurozone and Japanese PMI (January 24); Germany’s IFO Survey (January 25)

PMI readings for eurozone and Japan will be released. In Europe, PMIs are expected to decline on both the manufacturing and services front. The reading will provide a closer look into whether the economy remained resilient in January or buckled under the pressure from the impact of the Omicron variant. In Japan, both services and manufacturing PMIs have displayed strength in recent months.

Germany’s IFO Business Climate survey is a leading indicator of German economic activity. Since peaking in June 2021, the indicator has fallen each month and expectations are for a small decrease in January.  

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This material is for informational purposes only. While this material has been compiled from sources believed to be reliable, Qtrade Investor does not guarantee the accuracy, completeness, timeliness or reliability of this information. Information, figures and charts are summarized for illustrative purposes only and are subject to change without notice. All investments are subject to risk, including the possible loss of principal.