On a day that Stifel cited commodities as “a pivotal indicator” of equity direction, Canada’s main stock market lost about 50 points over the last hour of Monday’s session to end it down more than 20 points. Not even a gold price settling at record highs could save the resources heavy Toronto Stock Exchange from the loss, as the oil price settled lower and, thus, weighed. But, the TSX did remain shy of the near two year highs hit Friday.
Today, the TSX was buoyed by Battery Metals (up 1.85%) and Base Metals (up 0.8%), even while held back some by the Energy sector (down 1.15%) and Health Care (down 1.8%).
Fresh market talk around the Bank of Canada — which is slated to make a policy announcement on Wednesday — leaving its monetary policy restrictive for too long may also have weighed on investor sentiment.
Of commodities today, gold prices closed at a new record high even as treasury yields rose. Gold for April delivery closed up $30.60 at US$2,126.30 per ounce, the highest ever after topping the prior peak set on Friday.
But West Texas Intermediate crude oil closed lower, even after OPEC+ said, as expected, it will extend 2.2-million barrels per day of voluntary quota cuts from some of its members through the second quarter. WTI crude for April delivery closed down $1.23 to settle at US$78.74 per barrel, while May Brent crude, the global benchmark, was down US$0.92 to US$82.63.
In citing commodities, Stifel in the summary of a Market Commentary/Strategy note entitled ‘Current U.S. Equity Strategy Views Slide Deck for Middle 2024’ — a note of potential interest to those who invest across North America equity markets — said a “solid U.S. economy and bottoming abroad, combined with sticky inflation” (CPI, Core PCE especially SuperCore PCE which is about half of PCE) may cause high-P/E ratio growth stocks “to top” while broadening the S&P 500 rally. Stifel noted economic growth plus sticky inflation are more rewarding for ‘Cyclical Value’ (Banks, Cap Goods, Energy, Financial Services, Insurance, Materials, Real Estate and Transports), which should rally in the first half of 2024 and perhaps well into summer 2024. “This is all in context of a longer term, inflation-adjusted S&P 500 that we believe is likely about flat in 2034 versus 2024, with commodities a pivotal indicator of the equity direction,” Stifel added.
Meanwhile, on rates, Desjardins in a note entitled ‘Strategic View: Bank of Canada Misjudging Core Inflation’ said after CPI-common was “summarily dismissed: during the pandemic, Central Bank officials have relied heavily on CPI-median and CPI-trim when making policy decisions. “The problem,” Desjardins added, “is that those measures have become biased, likely overestimating the true underlying inflation rate.”
Desjardins said: “After accounting for these biases, we find that core inflation has continued its downward trend and is now below 3%. That’s consistent with a host of other indicators, but is in contrast to the Bank of Canada’s characterization of inflation. Seemingly based solely on the latest available CPI-median and CPI-trim readings at the time of the January Monetary Policy Report, officials judged that core inflation remained elevated in the range of 3.5% to 4.0%, whereas we believe that underlying inflation was closer to 3% at the time.”
In concluding the same note, Desjardins added: “If the Bank of Canada ignores our findings, officials risk leaving monetary policy restrictive for too long, inflicting unnecessary pain on households and businesses. Central bankers need to employ bias-corrected versions of CPI-median and CPI-trim when taking policy decisions. Given the tightrope Canadian central bankers are walking, they can’t afford any missteps.
“Markets are not fully pricing in a rate cut until July, and are only braced for three 25bp reductions for the year as a whole. We believe the latest inflation reading, which came in significantly below forecast, has given the Bank of Canada cover to adopt a more dovish stance this week, even if policymakers don’t want to admit that their preferred measures of core inflation might have led them astray.”
