Will the Bank of Canada be first to take the leap?

Market recap

• Equity markets dipped this week alongside some mixed earnings results and decent overall economic data flow.

• The S&P 500 dipped 0.5%, with Technology and Industrials down, while Energy and Utilities outperformed on the week.

• Meantime, the TSX gave back 0.2% with weakness in Industrials and Utilities, along with choppy post-earnings action among the major banks.

Consumers

A couple of weeks ago in this space, I mentioned that we’d be closely monitoring Target’s earnings announcement for further signs of a shift in consumer spending. Previously, Walmart had reported great numbers tied to strong spending on lower-cost goods. Target’s numbers, which were released last week, didn’t look as great in comparison, but they did confirm the trend we’d suspected: even in stores that offer both higher-margin discretionary items and lower-priced staples, consumers are choosing the essentials. Walmart, in its earnings announcement, mentioned the consumers were looking for value buys. We’re also seeing this trend in other areas—airline and hotel business is down compared to the period immediately after COVID. People are still going on vacations, but now they’re looking for savings and discounts rather than paying full price. These developments highlight why we remain underweight Consumer Discretionary and overweight Consumer Staples in our portfolios.

Bottom Line: Consumer sentiment appears to be shifting, and as such, we continue to prefer Consumer Staples to Consumer Discretionary.

Bank of Canada

Has the moment finally arrived? This week, the Bank of Canada (BoC) meets for its much-anticipated interest rate decision, and the consensus expectation—which we share—is that they will cut rates for the first time this cycle. The economic data shows a weakening consumer, a slowing economy, and a wounded housing market, as well as an improving inflation picture. Together, that’s a pretty compelling case for easing rates. Furthermore, it is highly anticipated that the European Central Bank will be cutting shortly thereafter, so the BoC would not be alone. That said, we expect the BoC to remain data-dependent going forward—if the economic numbers stay relatively flat or deteriorate further, then they’ll likely keep cutting rates. If the rate-cutting cycle does begin this week, that could give a bit of a boost to the Canadian market, and especially Canadian bonds. However, it will also put pressure on the Canadian dollar, which is something the BoC will have to be mindful of.

Bottom Line: While not a certainty, we think the BoC will cut rates this week, potentially providing a boost to Canadian markets.

U.S. Equities

With earnings season now over, should investors expect some “selling on the news?” In short, yes—we anticipate some profit-taking as we head into the summer months. We don’t think money’s going to leave the market necessarily, but there could be a rotation to companies with lower price-to-earnings (P/E) multiples, which are perceived to be safer investments. We were a little surprised to see Nvidia continue to move higher even days after its earnings announcement. This shows that there’s still room for some big names to move up, and is also likely tied to Nvidia’s stock split and dividend increase, which broaden the company’s investor base. Overall, it’s likely that some areas that demonstrated good earnings potential will start to show some weakness, which could play out as a rotation to other names and sectors. In particular, we expect Financials and Healthcare to benefit. The key takeaway, however, is that we’re likely to start seeing a bit more volatility in markets, as well as some short-term downside pressure until the earnings cycle picks up again.

Bottom Line: On the heels of earnings season, we expect to see some profit-taking and a rotation to areas like Financials and Healthcare.

Positioning

For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled The Fed’s Last Stand: A Solitary Rate Cut Expected for 2024.