AIMSTAR FINANCIAL INSIGHTS – May 21, 2024

Vikki Zhao

 

PUBLISHED May 21, 2024, 11:30 AM EST. 6 min read.

Last Week, Canadian Inflation Data and June Rate Cut Possibility; US Debt Snowballing to 130% of GDP; Dow Jones Industrial Average (DJIA) Hits 40,000 Points; Chinese Real Estate and Stock Market Slowdown; China Issues First Batch of 30-Year Government Bonds

Equity markets have recently experienced a surge, buoyed by optimism following the Federal Reserve’s “dovish” stance revealed in the April FOMC announcement and a favorable jobs report.

The S&P 500 is approaching its previous peaks, while bond yields have reverted to their 50-day moving average. The focal point shifted to today’s CPI data, which provided a positive surprise.

 April’s Core CPI increased by 0.29% month-over-month, a comforting change after three consecutive months of approximately 0.4% increases. This result led to a decrease in bond yields and propelled the S&P 500 to new record highs.

 

Market response to the April CPI has been favorable, and when combined with a weaker April retail sales figure, suggests a potentially more “dovish” approach from the Fed. This aligns with the current market narrative.

 

Although today’s CPI report marks progress, the Fed’s aim remains achieving and maintaining lower inflation levels. Consistent CPI readings below 0.3% are necessary to boost confidence in achieving the inflation target.

 

The recent data supports a positive outlook for equities over the next year. The economy remains robust, supported by a tight labor market and fiscal stimulus, and inflation appears to be on a decline, with potential Fed rate cuts in the horizon.

 

 However, Amstar’s analyst advised that given the uncertainty around disinflation rates and the Fed’s future actions. The reliance on monthly government data, which is subject to significant revisions, may contribute to market volatility. Overall, while the trend for equities points upwards, some setbacks are anticipated.

 

Key factors to monitor include:

 

– **Market Momentum**: It’s important for equities to build on their recent gains and sustain new highs. A swift decline would suggest a return to range-bound trading.

 

– **Sector Performance**: Notably, the Consumer Discretionary sector has shown weakness, hitting new lows in relative strength, indicating consumer pressures from persistent high inflation and interest rates. Conversely, the banking sector has shown improvement and positive revisions following Q1 results. Upcoming earnings reports, particularly from consumer-focused companies, will provide valuable insights into market dynamics.

 

– **Market Breadth and Sector Rotation**: A shift towards broader market participation and strength in cyclical stocks would be preferable over the current defensive market leadership.

 

– **Economic Indicators and Federal Communications**: The upcoming economic data and Fed communications will play crucial roles in shaping market sentiment, influencing bond yields, and affecting equity markets.

 

 

*This article’s viewpoints are attributed to Tony Yuan and authored by Olena Li.

GOOD NEWS

 

Good news for Sony shareholders: Sony Japan’s stock price surged 10% last Wednesday, announcing a US$1.6 billion buyback and stock split.

 

Good news for Rayat shareholders: Rayat Holdings (RAY.US) made its debut on the US stock market, surging over 38% at the opening last Wednesday to $5.53, triggering a circuit breaker. The IPO price was $4.

 

Good News for Reddit and OpenAI Shareholders: OpenAI announced a new partnership with Reddit, where OpenAI will gain access to content on the Reddit website, and Reddit will incorporate new artificial intelligence features.

 

 

Good News for Chinese Real Estate Stock Shareholders: Last Friday before the market opened, significant policies regarding the Chinese property market were introduced, including the lowering of the minimum interest rate for personal housing loans, lowering of the interest rate for housing provident fund loans, and adjustments to the down payment ratio by the central bank. In response to these policies, Fangdd Network Group (NASDAQ: DUO) surged by 265.83%, while KE Holdings Inc. (NYSE: BEKE) rose by 6.7%. Additionally, real estate developers and property management stocks once again experienced significant gains, with China Evergrande Group soaring by 25.85%, along with more than 20 other stocks such as Vanke A, Rong’an Real Estate, China Jinmao Holdings Group, Poly Developments and Holdings Group, and China Fortune Land Development, continuing to rise.

 

Good news for Pinduoduo shareholders: Before the market opened on May 22, Pinduoduo surged 7%, with revenue exceeding expectations by 10 billion yuan and profit doubling expectations.

BAD NEWS

 

Bad News for GameStop Shareholders: GameStop (NYSE: GME) plummeted by 21.32% before the market opened last Friday, and also experienced a sharp decline of 30% on Thursday.

 

Bad News for Bitcoin Holders: Before the market opened on Friday, the world’s largest futures exchange planned to launch “Bitcoin trading,” causing Coinbase (COIN.US) to plummet by 9% upon hearing the news.

 

 

Bad News For Target Shareholders: US retail giant Target (NYSE:TGT) fell 8% before the market opened on May 22, and its latest quarterly profit fell short of expectations.

Focus On Canada

 

Canada’s Housing Market Sees Surge in April Listings, Achieving Balance

Reported on AIMSTAR.CA on May 16 – Canada’s housing market saw a surge of listings in April to their highest level in five years. Newly listed homes rose 2.8 per cent from the month before, making the 6.5 per cent jump in the number of properties on the market the second largest month-over-month gain on record.

 

Shaun Cathcart, chief economist with the Canadian Real Estate Association which released the data, said this spring was the opposite of last when a rush of buyers jumped into the market when new listings were at a 20-year low. With home sales down and listings up, Canada’s housing market is more balanced than since before the pandemic, said CREA.

Will Canada cut interest rates in June? Inflation is continuing to cool

Reported on May 21 AIMSTAR.CA – On Tuesday, Canada released the latest inflation data. For the Canadian economy, the inflation rate has dropped to the lowest level in three years. The CPI fell to 2.7% in April, while in March is 2.9%. This decline has led economists to generally expect that the Bank of Canada’s tightening cycle will end and that it will usher in its first interest rate cut in June. AimStar analysts believe that in response to the current changes and continued weakness in the Canadian economy, cooling inflation is indeed good news, opening up the possibility of the Bank of Canada cutting interest rates, which may help stimulate overall economic activity in Canada. Read the full article: https://aimstar.ca/the-interest-rate-cut-is-coming-for-canada/

 

*The author of this article: Tony YuanHead of Products and Strategy at  AimStar Capital

Focus On International

 

Core CPI In The US Posts Its First Decline In Six Months, The Treasury Market Rallied

Reported on AIMSTAR.CA on May 15 – Data from the US Bureau of Labor Statistics revealed that overall CPI rose by 0.3% compared to the previous month and increased by 3.4% from the same period last year. The Bureau noted that housing and gasoline expenditures accounted for over 70% of this growth. While these figures may offer some hope to the Federal Reserve that inflation is beginning to recede, officials are awaiting further data to gain confidence in considering rate cuts. Federal Reserve Chair Powell stated yesterday that the Fed will “need to be patient and let the restrictive policies take effect,” with some policymakers not expecting any rate cuts this year at all.

 

Following the release of CPI data last Wednesday, traders solidified their bets on Fed rate cuts in September and December. US 2-to-10-year Treasury yields fell by over 10 basis points intraday after the CPI announcement. Additionally, spot gold briefly surged by around $17, hitting a high of $2378.37 before retreating, now trading at $2372.93 per ounce. The US dollar index also saw a short-term dive of around 40 points, hitting a low of 104.4046 before recovering some losses, now standing at 104.5266. Also, the surge on Wednesday pushed 10-year yields lower by as much as 10 basis points to 4.34%, the lowest in more than a month, before paring some of the move.

China’s Three Major Financial Measures to Support the Property Market

Reported on AIMSTAR.CA on May 17 – The People’s Bank of China announced three significant support policies for the real estate market in the financial sector: lowering the interest rate for housing provident fund loans, reducing the minimum down payment ratio to historic lows, and abolishing the national policy floor for mortgage rates. Firstly, for residents purchasing commercial residential properties with loans, the minimum down payment ratio for the first home purchase has been adjusted from 20% to no less than 15%, and for the second home purchase, it has been adjusted from 30% to no less than 25%, both reaching historical lows. Simultaneously, the interest rate for personal housing provident fund loans has been lowered by 0.25 percentage points. The interest rates for first-home personal housing provident fund loans, for both periods under 5 years (inclusive of 5 years) and over 5 years, have been adjusted to 2.35% and 2.85%, respectively. For second-home personal housing provident fund loans, the interest rates for both periods under 5 years (inclusive of 5 years) and over 5 years have been adjusted to no less than 2.775% and 3.325%, respectively. Additionally, the national-level policy floor for mortgage rates for first and second home purchases has been abolished.

 

China Issues First Batch of 30-Year Ultra-Long Special Bonds

Reported on AIMSTAR.CA on May 17 – China’s Ministry of Finance issued the first batch of 30-year ultra-long special bonds, which received strong market demand. Following the release of the bidding results, the yield of China’s ten-year treasury bonds rose. According to the issuance arrangement, the bonds discovered today are special bonds with a maturity of 30 years, totaling 40 billion yuan, with interest accruing from May 20, 2024. Interest will be paid semi-annually, with payment dates on May 20th and November 20th each year, and the principal will be repaid along with the final interest payment on May 20, 2054. The weighted average bid rate was 2.57%, with a bid-to-cover ratio of 3.9 and a marginal bid-to-cover ratio of 382.6. After the data was released, the yield of Chinese government bonds rose, with the yield on the active 10-year Treasury bond 240004 increasing by 1.4 basis points to 2.3240%.

 

UK Inflation Cools Less Than Expected

Reported on AIMSTAR.CA on May 21 – The British inflation rate fell less than market expectations in April, pouring cold water on investors who were counting on the Bank of England to cut interest rates next month, and also foreshadowed the possibility of global inflationary pressures. Still stubborn. Data from the British Office for National Statistics show that the annual consumer price index (CPI) slowed to 2.3%, a significant fall from 3.2% in March, reaching the lowest point since July 2021. However, this figure was still higher than market forecasts of 2.1%. What is particularly critical is that service sector inflation – the core indicator used by the Bank of England to assess domestic price pressures – increased instead of decreasing, rising from 6.0% in March to 5.9%, exceeding the expected value of 5.5%. Economists had previously forecast a deeper fall in inflation, citing a 12% cut in regulated household energy price tariffs since last month. After the April inflation data is released, a series of official labor market data and May inflation will be released one after another, providing the basis for the Bank of England’s next round of policy decisions on June 20.

 

Close to the peak after World War II! Goldman Sachs warns: U.S. debt snowball could double to 130% of GDP

Reported on AIMSTAR.CA, May 22 – Goldman Sachs analysts said in a note that they now expect the debt-to-GDP ratio to reach 130% by 2034, which is significantly higher than their earlier forecast of 97% . The report reflects the serious challenges of the fiscal environment over the past five years, which is reflected in the fact that even when the economy is at full employment, the primary deficit after deducting interest costs continues to exist, and the scale exceeds the historical norm of 5% of GDP. Currently, the U.S. debt-to-GDP ratio has risen by 19 percentage points to 98%, and Goldman Sachs points out that this trend is heading toward exceeding the post-World War II peak level.

 

Additionally, interest rates on new Treasury debt have nearly doubled, which has not only exacerbated the growth trajectory of the debt-to-GDP ratio but also increased real interest payments as a share of GDP. Goldman Sachs’ latest forecast is based on consideration of the long-term average interest rate on government debt, nominal GDP growth and the non-recession primary deficit. The analysis reveals that the debt-to-GDP ratio is unusually sensitive to the difference between interest rates and GDP growth rates (r-g). They adopted an r-g difference assumption of -0.25 percentage points, which is consistent with historical levels of non-high inflation. Historically, substantial reductions in the debt-to-GDP ratio have often been achieved through a variety of channels, including sustained fiscal surpluses, favorable interest rate and growth rate differentials, high inflation, or financial repression policies. However, the current situation in the United States shows that there is insufficient political motivation to reduce the deficit, which has raised concerns about fiscal sustainability and discussion that a historically rare fiscal surplus may be needed to stabilize the debt.

Reported on May 20, AIMSTAR.CA – This week, the Federal Reserve will release the minutes of its latest meeting, and a large number of Fed officials will continue to speak. At the same time, expectations of interest rate cuts were revived, pushing U.S. stocks higher. Artificial intelligence (AI) darling Nvidia (NASDAQ: NVDA) will release its financial report, and many parts of the world will release PMI data, which is expected to help investors gain insight into the health of the global economy. The UK will release closely watched inflation data and the Reserve Bank of New Zealand will hold an interest rate meeting.

AimStar Capital Group Inc. is an independent full-service investment dealer with the Investment Industry Regulatory Organization of Canada (IIROC), specializing in providing Investment advisory and tailored wealth management services to individual investors, family trusts, and institutional investors. If you have any inquiries regarding personal financial services, investment portfolio adjustments, or private wealth management, please email us at info@aimstar.ca. We are committed to assisting you and ensuring the security of your privacy. Additionally, the AimStar expert team is available to provide one-on-one financial advisory services. We look forward to navigating your financial future together.

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