Market Pulse - The week in review - May 1st 2023

THIS WEEK’S RECAP:

 

▪ US Q1 GDP came in well below expectations at +1.1%. Consumer spending activity remained buoyant throughout the quarter whereas business activity slowed considerably. Much of the slowdown occurred in March, likely due to spillover effects from the banking sector stress. The Federal Reserve will be pleased with this outcome as they try to engineer a cooldown for the US economy.

 

▪ Though we are expecting them to continue to come down, US inflation indicators remain elevated. In response, the Federal Reserve is widely expected to deliver a 25bps hike next Wednesday (May 3). This would bring their overnight target interest rate to 5-5.25% (compared with 4.5% in Canada). This hike will possibly be the last one before the Fed follows the Bank of Canada and pauses. The question for both Central banks will then become how long these elevated rates then persist.

 

▪ The ongoing US debt ceiling saga is intensifying in Washington. Political maneuvering is in full swing, and although several leaders have affirmed that a debt default will not happen, the process of increasing the debt limit is expected to be challenging and may cause market instability over the next few weeks and months. However, this week, tax revenues rose, providing the US Treasury with additional time to meet its financial responsibilities, including government and debt payments.

 

▪ Earnings from Big Tech companies have in general depicted a better picture than anticipated. Although they are cautious about the economic context, their results comforted investors and pushed stocks higher, which is impressive given how much they already have gained year-to-date. The divergence between the negative tone of the news flow and the more constructive behavior of markets continues. Ultimately, it is the latter that is important for investors.

 

 

ON DECK FOR NEXT WEEK:

 

▪ Apart from the FOMC meeting scheduled for Wednesday, Australia and Europe will also release their monetary policy statements. The European Central Bank (ECB) is expected to increase its target rate by 25 basis points to 3.25% on Thursday, while the Reserve Bank of Australia (RBA) is anticipated to maintain its overnight rate at 3.6%.

 

▪ On the economic data front, updates on global manufacturing activity through country-specific Purchasing Managers Index (PMI) reports will be released throughout the week. Additionally, Canadian and US labour activity updates on Friday will be of high interest.