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Weekly Market Pulse - Week ending March 18, 2022

Equities:

Equities rallied strongly on hopes of a resolution to the Russia-Ukraine conflict. Negotiations showed some progress as the two countries are in talks for Ukraine to explore becoming a neutral country. China pledged to ease regulatory crackdowns, ensure financial stability, and stimulate the economy. Meanwhile, the U.S. Federal Reserve hiked rates for the first time since the pandemic, citing strong U.S. economic activity and the importance of price stability for a healthy economic expansion.

Fixed income:

Yields continued to rise strongly as the Russia-Ukraine war could end on a neutrality peace deal. At the same time, the U.S. Federal Reserve kicked off its rate hike cycle and the Bank of England hiked rates for a third time.

Commodities:

Oil prices continued to show signs of cooling and gold prices declined on news of a potential peace deal. Copper prices rose as China pledged measures, including monetary policy, to support the economy. 

Performance (price return)

Performance table

  As of March 18, 2022

Macro developments

Canada – CPI surges; Manufacturing sales rise; Retail sales increase

Canadian CPI rose 1.0% in February, following the 0.9% increase in January. Increases were widespread, with prices rising in all eight major categories. Transportation prices rose 1.9% as gasoline prices increased 6.9% amid the Russia-Ukraine conflict. Food prices increased 1.3% and shelter rose 0.6%. On a year-over-year basis, CPI accelerated to 5.7% from 5.1%, marking the largest increase since 1991.

Manufacturing sales rose 0.6% in January. The increase was led by petroleum and coal (+6.8%) and wood (+6.5%), while sales of motor vehicles declined 17.5%. Motor vehicle assembly plants experienced shutdowns during the month on supply chain disruptions. Sales in constant dollars were down 1.8% overall, indicating that higher sales were a result of higher prices.

Retail sales rose 3.2% in January, rebounding from the 2.0% decline in December. Motor vehicle sales rose 5.3%, furniture sales surged 10.0%, and building materials and garden equipment increased 8.9%. StatsCan estimates sales declined 0.5% in February.

U.S. – Fed starts rate hiking cycle; Empire manufacturing contracts; Retail sales rises; Industrial production increases

The Fed hiked rates for the first time since the onset of the pandemic, increasing rates by 25 basis points to 0.5%. In terms of voting, eight members voted in favour, with one dissenter favouring a 50-bp hike instead. The 25-bp hike was widely expected by markets as inflation has surged in recent months, but what caught investors’ attention was the latest iteration of the Fed’s Summary of Economic Projections. The Fed dot plot, which reflects Fed officials’ outlook for the fed funds rate, saw the median projection rise to seven hikes, or a 1.9% rate, for 2022, four hikes more than the 0.9% previously forecasted in December for this year. If accurate, there are six hikes to come with six meetings left to go in 2022. At the same time, 2022 growth expectations for the year were revised down to 2.8% from 4.0%, while PCE inflation expectations rose to 4.3% from 2.6%. Chairman Jerome Powell stressed the importance of returning to price stability and said the goal is for a soft landing. Powell appears unconcerned by the possibility of a recession this year given economic strength. There was no further information in terms of the Fed shrinking its balance sheet, but Powell said the decision could be made shortly with an announcement that could come as soon as the next meeting in May.

The Empire State Manufacturing General Business Conditions Index fell to -11.8 in March, from 3.1 in February. Business conditions turned contractionary as new orders and shipments declined. On the other hand, unfilled inventories and employment continue to increase. Price indicators also continue to indicate substantial increases.

Retail sales increased 0.3% seasonally adjusted in February. Gasoline station sales surged 5.3% on higher prices. Excluding gasoline stations, sales decreased 0.2%. Other areas of strength were food services sales (+2.5%), motor vehicles (+0.8%), building material and gardening equipment (+0.9%), and clothing (+1.1%).

Industrial production rose 0.5% in February. Manufacturing production led the increase, rising 1.2%. Mining production was relatively unchanged at 0.1%, while utilities declined 2.7%.

International – Bank of England hikes rates for a third time; German ZEW survey expectations plummet

The Bank of England raised interest rates by 25 basis points to 0.75%, the third consecutive hike. Inflation was previously expected to peak around 7.25% in April before dissipating over time, according to previous forecasts. However, the Russian invasion of Ukraine is putting further pressure on inflation in energy and commodity prices, and inflation is now expected to increase to around 8% in the second quarter with the possibility of running even hotter later in the year. Eight committee members voted in favour of the increase, against one member who favoured keeping rates steady. The one dissenter recognized high inflation and the tight labour market, but was also concerned over the negative impacts of higher commodity prices on real incomes and activity, as well as the increase of uncertainty and decline in business confidence, which appear to be exacerbated by Russia’s invasion of Ukraine.

The Germany ZEW Indicator of Sentiment plummeted to -39.3 in March, from 54.3 in February. The 94-point drop marks the latest drop since the series began in 1991, even beating out the 58-point decline due to COVID. The Ukraine-Russia war and sanctions against Russia have weakened the economic outlook and increased inflationary pressures.

Quick look ahead

Canada

A quiet week in Canada with no major data releases.

U.S. – Durable goods orders and Markit PMI (March 24); Fed officials issue statements

The durable goods new orders numbers for February will be available. Orders are likely to have declined due to a drop in aircraft orders. Orders excluding transportation could have otherwise increased, as previous surveys have pointed at solid capital expenditure intentions by firms.

The only other major release that will come out is preliminary March Purchasing Managers’ Index readings, which will provide some insight into how activity is holding up given the war and higher commodity prices.

Several Fed officials are scheduled to speak this week. Fed Chairman Jerome Powell will speak at the annual National Association for Business Economics conference on Monday, and other members will follow throughout the week.

International – Japan and Eurozone PMI (March 24)

The preliminary March iteration of PMI surveys for Japan and the eurozone will be available. As in the U.S., markets will watch how business activity is holding up given the uncertain outlook due to the war and rising commodity prices.

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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.