Oil rises and manufacturing expands amid economic optimism

• The S&P 500 Index and Japan's Nikkei Index soared in Q1, driven by an accommodative Fed, a likely soft landing and wider market gains.
• Oil prices rose due to geopolitical tensions and Ukraine's strikes on Russian oil.
• The ISM Manufacturing PMI indicated economic expansion, with a rise to 50.3, signalling cautious optimism in the economic outlook.

It was an end-of-quarter week, so let’s start with a quick recap of the last few months. Stocks did very well in the first quarter. The rally was fuelled by expectations of an accommodative U.S. Federal Reserve (the Fed), the growing probability of a soft landing and growing breadth in stock market gains. This sentiment propelled the S&P 500 Index to a rise of over 10% in the first quarter, marking a rare occurrence of back-to-back double-digit quarterly gains (the first time in more than 10 years). Similarly, Japan's Nikkei Index enjoyed its best performance since the second quarter of 2009, surpassing its previous high from 1989.

However, the bond market didn't fare as well, with persistent inflation and a strong economy leading investors to expect fewer rate cuts. The dominant story for markets in the first quarter was the global economy's surprising strength, despite the highest interest rates in four decades. Notably, the U.S. economy expanded at an annualized rate of 3.4% in the fourth quarter, and job growth remained robust with nonfarm payrolls increasing by +229,000 in January and +275,000 in February, showcasing the resilience of the economic backdrop. This positive data helped propel risk assets. The S&P 500 Index in particular managed to secure 16 out of 18 weekly gains for the first time since 1971.

On the weekly front, oil markets continued to see prices escalate amid ongoing geopolitical tensions and a broader commodity rally. West Texas Intermediate (WTI) crude exceeded $86 per barrel during the week. This rise was partly due to continued drone strikes by Ukraine on Russian oil facilities, which even the U.S. was not too happy about, apparently. Strong oil is like a tax on the consumer and bad for the global economy but tends to favour Canadian stocks.

Fed Chair Jerome Powell signalled that rate cut decisions would hinge on forthcoming economic data, with expectations for cuts "at some point this year". His comments led to a bull flattening of the yield curve. The robust U.S. dollar exerted pressure on both emerging and developed market currencies. This is bad news for world central banks, as a very strong U.S. dollar leads to a need for higher interest rates, instead of lower (which is what they want). Amid all this, gold prices hit new all-time highs once again this week.

On the manufacturing front, the ISM Manufacturing PMI rose to 50.3 from 47.8, surpassing forecasts and indicating expansion. The report also highlighted a spike in prices, with the prices metric reaching 55.8 from 52.5, ahead of expectations. This resurgence in manufacturing activity, alongside improved demand and output, suggests a positive outlook for the economy.

Listen to this week’s podcast for further insights.