Today
Equities are moving higher this morning while bond yields fell after the latest U.S. jobs report bolstered confidence the Fed may in fact be able to start cutting rates this year. The latest nonfarm payrolls report showed 175,000 jobs gained in April, below the 240,000 jobs expected by economists, while the unemployment rate rose to 3.9%, versus 3.8% in the prior month. Investors are taking today’s weak jobs report as a sign that demand is slowing in the labour market, something that is needed to push the Fed towards rate cuts. Yields are dropping quickly across the curve with Fed-dated OIS shifting dovishly, now pricing in the first rate cut into the September meeting from November. Further out the curve, around 52 bps of cuts are priced in by the FOMC’s December meeting.
Weaker U.S. productivity gains in Q1 pose a challenge to the Fed’s efforts to combat inflation without causing a rise in unemployment, potentially hindering progress on price stability amidst a slower economic growth. While a surge in worker productivity last year helped the U.S. economy expand, the latest data reveals a mere 0.3% increase in productivity, leading to a jump in unit labour costs. This has prompted questions about the Fed’s reliance on supply-side improvements to quell inflation and the potential need to curb demand, which could impact employment. Despite these concerns, Powell remains optimistic about returning inflation to the target without significant labour market disruptions, however, uncertainties persist and the inflation fight may take longer than anticipated. As the Fed monitors economic indicators like the employment report for April, it faces the challenge of maintaining a balance between sustaining job growth and managing inflation expectations. Powell’s recent statements signal a shift towards patience in monetary policy adjustments, amid concerns about financial tightening and the potential impact on inflation dynamics.
Canada unexpectedly swung to its deepest trade deficit since June, recording a goods trade deficit of $2.28 billion in March. The deficit marked a significant reversal from the previous month’s surplus of $1.39 billion. The quarterly data revealed that while goods imports increased slightly by 0.4% in the first quarter of 2024, exports fell by 1.4%, indicating that the trade sector was a drag on the economy in the first quarter. The decline in exports was led by decreases in metals, minerals, energy, and motor vehicles. Notably, gold exports fell sharply by 32.5% after reaching a record high in February. Energy exports also declined, primarily due to lower exports of crude oil and bitumen. Imports also decreased by 1.2%, with declines seen in electronics, metals, minerals, and aircraft. These figures underscore the challenges facing Canada’s economy amidst the BoC’s aggressive rate-hiking campaign, with policymakers now considering rate cuts as they seek evidence of sustained inflation progress.
A new poll found that experts expect the Canadian dollar to strengthen less than previously forecasted over the next year, with analysts projecting a 0.7% appreciation to 1.36 per USD in three months and advance to 1.32 in a year. This adjustment is attributed to the BoC’s progress in curbing inflation, potentially leading to interest rate cuts ahead of the Fed. Governor Tiff Macklem indicated a readiness to lower the benchmark interest rate from its current 5%, citing increased confidence in inflation gradually decreasing despite strength in economic activity. Money markets anticipate a 60% chance of a rate cut in the next policy meeting and expect around 60 bps of easing by the end of 2024. The inflation trends seem to support the BoC’s dovishness, but they are also taking other factors into consideration, namely GDP. Canada’s economy (projected to grow at 1% this year compared to 2.6% for the U.S.) is deemed more sensitive to higher borrowing costs due to elevated household debt and a shorter mortgage cycle, meaning that the U.S. economy can most likely stomach rate remaining higher while Canada may not be able to.
Fund flows into fixed income, finally. According to Bloomberg intelligence data, fixed-income mutual funds are attracting new investments, breaking a two-year streak of outflows that amounted to over half a trillion dollars. Investors have invested nearly $110 billion into mutual funds this year, with most of the cash going to active managers, in contrast with the dominance of ETFs in recent years. The surge has been driven by investors looking to capitalize on high bond yields before potential interest rate cuts by the Fed (although they don’t seem in a huge rush to do that). Despite the continued drawdown in U.S. bonds, fueled by persistent inflation and strong economic growth, yields remain attractive, prompting investors to favour fixed-income assets. On the equity side, equity mutual funds have continued to see outflows, while equity ETFs have attracted significant inflows in recent months. Cash may be king though with money-market fund assets in the U.S. surpassing $6 trillion for the first time in nearly three weeks, with a $23.6 billion inflow recorded in the week ending May 1. Retail investors have been flocking to money funds since the Fed began aggressive tightening in 2022, while institutional investors have been reallocating cash from prime money-market funds ahead of impending SEC regulations.
With the tax deadline behind us, let’s hope no one finds themselves in this situation. A man in Pennsylvania, received a shocking tax bill recently, claiming he owed over $34 billion in overdue taxes, penalties, and interest. The amount was so large that it couldn’t even fit on one line. The man’s accountant discovered a mistake on his 2022 return and filed an amended return, which luckily even resulted in a refund from the IRS on the same day he received the bill. A spokesperson for the revenue department said that the reason for the error is confidential but confirmed that the issue had been resolved.
Diversion: You are getting very sleepy
