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Dip buyers emerged near the end of yesterday’s trading session with the S&P 500 finishing up 0.6%, and the NASDAQ up 1.6% to start the month. Canadian equities ended the day relatively flat. Meanwhile, U.S. treasuries continued their push with the 10-year treasury yield hitting an intraday high of 3% only to retreat to 2.98 by end of day. The intraday advance put the 10-year at its highest level since 2018 when yields peaked at 3.24%. All eyes are on the Fed tomorrow when it concludes its two-day meeting. It is widely expected to announce a 50 basis point increase to its key target rate range to 0.75% to 1.00%, the biggest rate hike since 2000. This follows in the footsteps of the BoC who raised by 50 basis points at its April meeting.
Speaking of rate hikes, traders in the world’s biggest bond market are preparing for another round of price swings driven by this week’s Fed meeting. This comes as the market also digests the Treasury Department’s quarterly debt-sales announcement and the continuing global economic uncertainty which is fueling large moves in the FX market. The Labor Department will release its monthly jobs report this week which will give investors a sightline into the country’s economic growth and the wage pressures fueling inflation.
The loonie is especially sensitive to the global economic outlook with Canada being a major producer of commodities. Yesterday, the loonie traded 0.3% lower at 1.29 to the greenback, after reaching its weakest level in four months. Chinese factory data added to investor concerns about the global economic outlook as factory activity contracted at a steeper pace last month as widespread Covid lockdowns halted industrial production and disrupted supply chains, raising fears of a sharp economic slowdown in the second quarter that will weigh on global growth.
More on China as its recent lockdowns to curb Covid infections are continuing to take a significant toll on their economy as well as disrupt global supply chains. The damage from shutdowns in April was laid bare by the first official data for the month released over the weekend with both manufacturing and services activity plunging to their worst levels since February 2020. The strain on global supply chains is also becoming apparent, with the PMI data showing suppliers face the longest delays in more than two years in delivering raw materials to their manufacturing customers. Inventories of finished goods climbed to the highest level in more than a decade, while indexes for exports and imports slumped.
Whoops, says Citigroup. A sell-off in European stock markets yesterday in the early hours of trading was driven by a flash crash in the Nordic region. The OMX Stockholm index recovered swiftly after it declined 8% in just five minutes. Technical glitches and an external attack were ruled out, leaving the possibility of human error as the likely culprit in the decline. The Nasdaq Stockholm has advised that it will not cancel any trades on the Nordic markets, leaving those responsible to absorb the loss. Citigroup is taking responsibility.
A leaked supreme court draft document published by Politico suggests Roe v. Wade, the 1973 precedent that established a constitutional right to abortion, may be overturned. However, the authenticity of the draft could not be confirmed, and the Supreme Court and White house declined to comment on it. The draft dated from February declared that Roe was “egregiously wrong and deeply damaging” and that “the Constitution does not prohibit the citizens of each State from regulating or prohibiting abortion”. Following Trump’s successful nomination of three justices to the court, a resounding conservative majority of 6-3 would ultimately vote whether to overturn the landmark decision.
The push for EVs is happening in Canada. Stellantis NV, formed from the merger of Fiat Chrysler Automobiles NV and PSA Group, announced they will invest C$3.6 billion to retool two Canadian assembly plants to build EVs, more than doubling an earlier commitment made during union negotiations. The announcement came with special guests at the event - Prime Minister Justin Trudeau and Ontario premier Doug Ford were in attendance to show their support. The federal government and the province of Ontario will spend up to about C$1 billion to support the project.
Pfizer reported higher Q1 results and kept its existing outlook for sales of its Covid-19 vaccine and treatment for the year unchanged. Management will likely face questions on the conference call about Pfizer’s unchanged guidance for sales of its Covid products that investors have been expecting to drive growth.
Restaurant Brands International beat analyst expectations on earnings and sales amid a strong performance from its franchise brands. System-wide sales growth at Tim Hortons was 12.9% compared with a contraction of 4.9%, while for Burger King, growth was 16.5%, up from 1.8%. Popeyes system-wide sales growth fell to 3.1% from 7%.
Speaking of fast food. Wendy’s just launched breakfast in Canada. The new breakfast menu includes items like Breakfast Baconator, Sausage or Bacon, Egg & Swiss Croissant, Frosty-ccino, and Seasoned Potatoes. By the way, the Breakfast Baconator has six halved strips of bacon.
Commodities
Farmers around the world are going to be testing the limits of how little chemical fertilizer they can utilize without ruining their harvest yields. According to industry consultant MB Agro, a 20% cut in potash use in Brazil could cause a 14% decline in yields of soybeans. In Costa Rica, if they cut their fertilizer application by a third, a coffee cooperative representing 1,200 small producers sees output falling as much as 15% next year. Inflated prices for synthetic nutrients will result in lower crop yields and could trickle down to higher grocery-store prices for everything from milk to beef to packaged foods for months or even years to come across the developed world.
All eyes on Canada’s pot...ash. Saskatchewan is capturing “renewed interest” for its potash resources due to supply disruptions from Belarus and Russia, which accounts for 40% of global potash production and exports. Canada is the other major source for the commodity and according to Saskatchewan’s energy ministry, the province has roughly 1.1 billion metric tons of potassium oxide, enough to supply the world for several hundred years. There is only a small fraction of that is in production, with 10 mines in the province operated by K+S Potash Canada, Nutrien and Mosaic Co.
Fixed income and economics
The RBA moved as expected overnight, raising their cash rate by 25 bps to 0.35% with stronger hawkish language compared to previous meetings. Governor Lowe stated a hike of 40 bps was considered adding “I expect that further increases in interest rates will be necessary over the months ahead. The board is not on a pre-set path and will be guided by the evidence and data”. He further added that it would not be “unreasonable” for the policy rate to return toward a 2.5% proxy for the neutral policy rate. Updated data forecasts now target CPI to hit the RBA’s 2-3% inflation target range by 2024 with guidance pointing to further near-term increases in inflation. A full roll-off of maturing Australian government bonds is planned but there is no desire to outright sell holdings for now. All this took the two and ten-year Australian bond yield up 20 bps and 14 bps respectively with futures markets now pricing the cash rate target to rise toward 3% by year-end.
The Fed starts day one of its policy meeting today against a U.S. data calendar highlighted by factory orders for March and a vehicle sales update at session’s end. Of course, officials will be having their discussions in view of a nonfarm payroll update from the BLS this Friday that is expected to see +390K jobs added to the economy. Initial jobless claims held fairly steady at low levels between nonfarm reference periods in March to April so we could see an upside surprise here. More significant will be the labor cost figure that is currently predicted to rise by +10% (!) for the quarter and nearly ten-fold from prior. That should translate into a tidy wage inflation level increase for the month and a potential +6% year over year jump. Overall joblessness is expected to fall to yet another multi-decade low of just 3.5% as well.
Chart of the day
Markets
Quote of the day
Nothing in life is to be feared, it is only to be understood. Now is the time to understand more, so that we may fear less. Marie Curie
Contributors: A. Innis, A. Nguyen, D.Mak, J. Price, P. Kwon