Market in brief
Despite a good start to the week, Tuesday’s session was catastrophic for the markets after the publication of the CPI (index which measures inflation in the United States) that turned out to be higher than expected. The Dow fell 3.94%, the NASDAQ 5.16%, and the S&P 500 4.32%, their worst day since June 2020. Investors felt they had been far too optimistic regarding their estimation of inflation and realized that the Fed’s inflation target was far from being met.
While the drop of Tuesday market rout was impressive, the S&P 500 only reversed gains made in the past four sessions that had been fuelled by expectations of cooling inflation that would give the Federal Reserve room to temper its tightening path.
“An easing in inflationary pressure later this year will allow the Fed to broaden its focus again in order to manage the economic slowdown. However, we are not there yet,” said Mathieu Racheter, head of equity strategy at Bank Julius Baer. “In the meantime, earnings estimates will likely continue to be adjusted downwards, while higher real rates keep valuations at bay.”
All stocks that compose the Dow index ended the session in negative territory while NASDAQ giants such as Apple (-5.87%), Amazon (-7.06%), Alphabet (-5.86%) or Meta (-9.37%) all ended lower.
The indexes regained some strength on Wednesday. The Volatility Index (VIX) retreated, and investors flocked to the battered stocks from the previous session, including Tesla (+3.59%), Amazon (+1.36%), Netflix (+2.75%) and Apple (+0.96%). However, the gains were not significant enough to recoup the huge losses incurred the day before.
“Markets remain extremely sensitive to inflation-related data, investors are very concerned that the Fed, which was slow to react during the rise in inflation, will not be able to react quickly enough to avoid a recession one once the inflationary storm has passed,” said our president and Portfolio Manager, Philippe Pratte. “Good news is seen as bad news giving the Fed even more flexibility for faster interest rate hikes,” he added.
Here’s the three main indexes average for the week after Friday’s open.
- Dow
- NASDAQ
- S&;P 500
Inflation
Inflation data (CPI) announced on Tuesday proved to be higher than expected. Inflation was 8.3% in August on a year-over-year basis, compared to 8.5% in July when analysts had expected inflation to be 8%.
The latter believe that the Fed will proceed with another hike at its next meeting scheduled for next week. “It is becoming increasingly clear to operators that the tightening already carried out by the Fed has not been sufficient to cool the economy and bring down inflation,” reacted Charlie Ripley, of Allianz Investment Management.
However, prices continued to rise in August, putting even more pressure on inflation, still very present. The food price spike continued as bread prices rose 2.2% this past month and 16.2% from a year ago. Eggs jumped 2.9% and are up 39.8% for the 12-month period, and canned fruits were up 3.4% and 16.6%, respectively.
Despite the rise in prices, several sectors recorded a decline in the last month. For example, the price of plane tickets fell by 4.6% over the month, due among other things to a fall in the price of gasoline (-10.1% since July). Gas and used car prices also fell.
For more than a year and a half, the cost of living has exploded for Americans, signalling a long way to go towards the Fed’s inflation target. The Fed should therefore continue its stricter monetary policy initiated in recent months.
“The level of inflation, a low unemployment rate, opens the door to the Federal Reserve to continue the increases and continue to fight inflation with multiple increases to be expected,” said our president and portfolio manager Philippe Pratte.
Real Estate Canada
Home prices fell 1.6% in Canada in August from July, to C$777,200 ($589,800), down 7.4% from their last peak in February. The number of sales also fell by 25% in one year.
The Bank of Canada’s hike in interest rates has cooled the real estate market after overheating during the pandemic. Moreover, analysts expect a further rise at the next meeting scheduled for October.
“We’ve never seen interest rates increasing at such a pace for decades,” Daren King, an economist at National Bank of Canada, said in an interview before the figures were released. “So, buyers, and even sellers, are waiting to see where interest rates are going to stop increasing.” “That’s the whole point of the monetary policy: to slow down inflation and also to slow down the housing market. The Bank of Canada is doing that on purpose,” King said. “Now, are they overshooting, are they doing too much? That’s the question that every economist is asking right now.”
The most notable declines were observed in Ontario and British Columbia. Home values fell 1.9% in the Greater Toronto Area and 1% in Montreal.
Pratte Portfolio Management is a firm registered with the Autorité des marchés financiers (AMF) and the Ontario Securities Commission (OSC).
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