US Fed assures on interest rates

The Big Picture

US Fed assures on interest rates

The week got off to a good start with supportive comments from Fed chief Janet Yellen who assured the markets that low interest rates were here to stay. Yellen’s comments come on the heels of a Fed policy meeting over two weeks ago at which officials discussed the trajectory of interest rate increases. That discussion led many market participants to believe rates may be rising sooner rather than later – something Yellen went out of her way to discount. Tuesday saw a snapback in ISM manufacturing data for March after cold weather hurt the numbers the previous two months. The non-manufacturing ISM report released Thursday also turned higher. Meantime, a Thursday jobless claims report showed the number of people filing for benefits last week rising to 326,000; the expected number was 320,000. In Europe, the ECB made it clear Thursday it would be open to further economic stimulus – including unconventional stimulus – to try to combat lower inflation in the Eurozone. Interest rates across the Eurozone stand at .25% and inflation fell to .5% last month; more than a four-year low. The economic release with the greatest potential to move markets is the US non-farm jobs report due out this morning (April 4). Consensus estimates have the unemployment rate falling to 6.6% from 6.7%. Finally, first-quarter earnings season reporting gets underway south of the border next week.

 

Markets

Stocks rally on Fed comments

Yellen’s comments helped underpin a near week-long rally that helped the Dow hit an all-time intraday high Thursday as did the S&P 500 – its eleventh this year. For the four-day period covered in this report the Dow jumped 249 pts. to end at 16,572, the S&P 500 gained 31pts. to close at 1,888 pts. and the Nasdaq added 82 pts. to settle at 4,237. The TSX also had a good week rising 142 pts. to end Thursday at 14,402; getting closer to its all-time high of 15,073 set June 2008.

 

Our Recommendations

Spring thaw brings bounce back in economic data, but markets likely to move side-ways in near-term

Equities - Himalaya Jain, Director, Portfolio Advisory Group wrote “Back in February, we were perplexed at the parallel upward moves in equities, gold, and bonds. We suggested that the loss of momentum in economic data was being interpreted differently by investors, but that the spring thaw would reveal which asset class had made the right interpretation. With the pace of economic data starting to show an uptick it appears recent equity gains have been justified, while gold and bonds have started to under-perform (again). While we expect Canadian and US equity markets to end the year higher than current levels, we continue to cite valuation as a barrier to significant gains in the near-term. Furthermore, seasonality, hawkish tone from the Fed, and geopolitical concerns reinforce our expectation that equity markets could remain range bound. Should economic data start to regain momentum, we expect financial, industrial, and energy sectors to outperform while interest rate sensitive sectors such as utilities, telecom, and REITs could under-perform. We continue to recommend holding higher levels of cash or cash equivalents and investors should seek to deploy on any meaningful pullbacks.”

Preferreds - Tara Quinn, Director, Portfolio Advisory Group wrote “It seems as if every week, holders of preferred shares receive a redemption notice for their existing 2014 rate resets which carry a high dividend rate (6.25%) and a wide reset spread (+4.00%). While these notices are expected, the search for replacement ideas has become very difficult as there is a limited number of bank preferred shares outstanding and the strong demand has pushed prices of certain securities to expensive levels. With all the redemptions/re-investment and benchmark yields lower quarter over quarter it was not surprising to see strong first quarter performance for the preferred share market (+2.70%). Looking ahead, further price appreciation may be limited but will be dictated more on supply/demand than relative yields. For those investors still holding non-bank perpetuals – now might be a good time to lighten up exposure following the recovery from December’s tax loss lows.”

 

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