A rare event in recent months: a bad week for the markets

• The S&P 500 Index dipped after a long stretch of high performance.
• U.S. retail sales beat expectations, while the Canadian Consumer Price Index (CPI) was weaker than expected, signaling divergent rate cut paths.
• Earnings season has begun.

Last Friday’s weak markets carried into this week, with the S&P 500 Index dropping 2.6% across Friday and Monday, the sharpest two-day decline in over a year. This downward trend persisted all through the week, leaving the index in its weakest technical condition in over six months. Our podcast listeners heard last week that this was fully expected and is normal within a healthy market.

Treasury bonds continued to lose value as interest rates rose, driven by robust U.S. economic data, notably a significant increase in retail sales. The U.S. Dollar Index achieved new highs for the year, and the U.S. dollar reached new multi-decade highs against the Japanese yen. Conversely, in Canada, the Canadian dollar weakened after CPI data was released, pushing the Canadian dollar to a recent low versus the U.S. dollar. Overall, the CPI was weaker than anticipated, with a monthly rise of 0.6% against a forecast of 0.7%. Post-release, Bank of Canada Governor Macklem commented at the Washington Forum that the drop in March's core CPI indicated that inflationary pressures were diminishing and continuing to move in the right direction. The speech also included clues that Canada could move to cut rates before the U.S. Federal Reserve (the Fed).

In the U.S., retail sales exceeded expectations with a 0.7% rise, well above the 0.3% forecast, demonstrating the consumer’s resilience in the face of higher interest rates. This rekindled doubts about the timing of incoming rate cuts, or if in fact the Fed was going to cut rates at all. The economic divergence between Canada and the U.S. is likely to heighten the volatility between the Canadian dollar and U.S. dollar in the coming months, particularly as the Bank of Canada (BoC) is expected to reduce rates this summer, in contrast to the increasingly unlikely rate cut by the Fed.

Earnings season is underway, and once again we start with the big banks in the U.S. Bank stocks had a rough beginning to the first quarter, with the bank index falling sharply, led by a 6% decline in JP Morgan stock, and continuing to drop on Monday, despite strong results from Goldman Sachs. However, the market seemed to change its mind and the dip in financials appeared somewhat bought through the week, with various bank stocks that had very poor initial reactions to their results staging a strong comeback. On the industrial front, Fastenal remarked that despite soft demand in Q1, indicators suggest solid growth for Q2. Regarded as an early indicator of industrial health, this company's outlook is closely watched. Another interesting development was Delta Air Lines reporting exceptionally strong travel demand. One impressive stat was that Delta’s 11 highest sales days in history all occurred this year. Who says all-time-high credit card debt is stopping anyone from spending? Corporate travel also saw a significant upturn, growing 14% year over year, with Delta projecting record corporate revenues in the latter half of the year. The earnings season is set to peak next week, with 37% of companies due to report.

Listen to this week’s podcast for further insights.