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Weekly Market Pulse - Week ending January 28, 2022

Market Developments

Equities:

Equities experienced considerable intraday volatility this week. Markets declined at first, in anticipation of policy actions from the U.S. Federal Reserve. Fed Chairman Jerome Powell confirmed the end of the central bank’s asset purchase program, setting the stage for hikes to come as “the U.S. labour market was consistent with maximum employment.” Nonetheless, the S&P 500 Index rallied strongly on Friday and was able to recover its losses for the week.

Fixed income:

Yields rose slightly for the week as interest rates hikes are on the horizon. The Bank of England and European Central Bank are set to meet this week.

Commodities:

Oil prices rose once again even amid a Fed release as low stockpiles levels and tight supply continue to support the market. Copper prices fell on the Fed’s hawkish tilt, while gold prices sank on a higher dollar. 

Performance (price return)

Performance table

  As of January 28, 2022

Macro developments

Canada – “Hawkish hold” from the Bank of Canada; Small business sentiment falls

The Bank of Canada held rates at its meeting this week. The BoC opted instead for a “hawkish hold,” stating that economic slack was essentially absorbed and that the BoC had “decided to end its extraordinary commitment to hold its policy rate at the effective lower bound,” while holding rates steady nonetheless. Going forward, interest rates are expected to increase for the BoC to achieve its 2% inflation target as inflation is expected to remain close to 5% for the first half of the year.

Small business sentiment fell significantly in January, as the CFIB Business Barometer dropped to 54.3 from 62.6. Short-term sentiment declined in all provinces and was lowest in the retail sector.

U.S. – Fed announces conclusion to asset purchase program; Real GDP rises on inventory; Markit PMI declines; Consumer confidence wanes; Personal income rises while spending falls

The U.S. Federal Reserve said it would continue to reduce the monthly pace of asset purchases and bring them to an end in early March. The conclusion of this quantitative easing program would allow the Fed to hike as early as its March meeting. Fed Chairman Jerome Powell said that most participants agree the U.S. is at maximum employment and that there is quite a bit of room to raise interest rates without hurting the labour market, but emphasized that the Fed would continue to be nimble and flexible with its policy changes being data driven. There was no major announcement on the balance sheet runoff, and there was no indication of pace and timing other than the fact that the Fed intends to reduce its balance sheet at some point after the first hike. The Fed will continue to discuss this issue at upcoming meetings.

Real GDP rose 6.9% annualized in the fourth quarter, according to the advance estimate. Consumption rose 3.3%, driven by services. Investment surged, driven by a large increase in inventories. Excluding inventories, private investment rose just 1.3%. Government spending detracted from the reading, declining 2.9% in the quarter. If the advance estimate is accurate, real GDP increased 5.7% for the year.

The IHS Markit Flash US Composite Purchasing Managers’ Index fell to an 18-month low of 50.8 in January, compared to 57.0 in December. The Manufacturing PMI fell to 55.0 from 57.7 and Services PMI fell to 50.9 from 57.6. Output growth slowed significantly on a combined spike in cases and ongoing supply and labour shortages. Demand on the other hand remained resilient as new orders remained strong and firms expanded their workforce numbers modestly. Input price inflation continued to soften but output prices continued to rise, driven by upward wage pressure.

The Conference Board Consumer Confidence Index declined slightly to 113.8 in January, from 115.2 in December. Concerns of inflation remain elevated, and concerns over the pandemic rose.

Durable goods new orders declined 0.9% in December according to preliminary estimates. The decline was driven by a sharp decline in orders in the volatile aircraft sectors.

Personal incomes rose 0.3% in December, on an increase in compensation offsetting decreasing government social benefits. Consumer spending on the other hand declined 0.6%. Decreases in spending for goods were widespread across most components. Spending on services rose largely on an increase for health care.

International – Eurozone and Japanese PMI fall; Germany ifo business climate improves

The IHS Markit Flash Eurozone Composite PMI declined to 52.4 in January, from 53.3 in December. The Manufacturing PMI rose to 59.0 from 58.0, while the Services PMI declined to 51.2 from 53.1. The spread of the Omicron variant saw many countries reimpose restrictions, adversely affecting the services sectors. Manufacturing growth on the other hand accelerated despite being held back by capacity constraints due to staffing issues. Nonetheless, both the manufacturing and services sectors noted continued strong demand as backlogs continued to increase. Average selling prices, however, continued to grow at record paces, driven by wages and energy costs. Firms reported lower input price inflation linked to improving supply disruptions.

The au Jibun Bank Flash Japan Composite PMI declined to 48.8 in January, from 52.5 in December. The Manufacturing PMI held at 54.6 compared to 54.3, while the Services PMI declined to 46.6 from 52.1. The Omicron variant significantly impacted the services sector as restrictions came back in various regions of the country. The manufacturing sector continued to show solid growth in output and new orders, with increased hiring amid a strong outlook.

The ifo Business Climate Index rose to 95.7 in January, from 94.8 in December. Manufacturing and construction firms were more optimistic as supply bottlenecks saw some easing and capacity utilization rose. The services and trade sectors believed they were worse off, but are expecting their business situation to improve in coming months.

Quick look ahead

Canada – GDP (February 2); Labour force survey (February 4)

GDP numbers for November will be available. StatsCan had previously estimated that real GDP rose 0.3% in November. The preliminary estimate for December could show contraction as case counts rose due to the Omicron variant.

The focus for the week will be on the Labour Force Survey. Employment is expected to have suffered in January as provinces reintroduced social distancing measures. Consensus is for a decline in jobs of approximately 90K.

U.S. – Nonfarm payrolls (February 4)

In the U.S., employment is forecasted to increase by 150K jobs in January, even as COVID case counts were at their peaks. Jobless claims, however, remained relatively low, thereby possibly limiting losses due to COVID.

International – Chinese PMI (January 29); Eurozone GDP (January 31); Eurozone CPI (February 2); Bank of England and ECB meetings (February 3)

Chinese PMI numbers could see some weakness with COVID outbreaks and containment measures. Activity also tends to slow in these months prior to the week-long Lunar New Year holidays.

Over in Europe, countries will be releasing GDP and CPI numbers for the fourth quarter. The European recovery was likely dampened due to the spread of the coronavirus and supply chain disruptions. Inflation on the other hand will remain strong on high energy prices.

There is also some heavy central bank action in Europe for the week of January 31. The Bank of England is forecasted to hike rates for a second time by 25 basis points to 0.5%. If rates do rise, it would also start the unwinding of the bank’s balance sheet based on previous guidance provided.

The European Central Bank on the other hand should hold steady. The press conference will be of interest as President Christine Lagarde had previously indicated that the ECB would not raise rates before medium-term inflation reaches the 2% inflation target. Markets however have started pricing in hikes this year.

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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.