Fed Might Delay Rate Cuts on Stronger than Expected U.S. Jobs Reports

The Week in Review

It was a fairly rocky week in the markets, with the major markets fluctuating quite a bit on the news of a number of economic indicators and policymakers’ commentary.

One of the biggest takeaways of the week was the anticipation that the US Federal Reserve might delay initial rate cuts into the latter half of the year and this led to a drop off more than one percent in the major indices on Thursday, with a slight recovery on Friday that still resulted in a weekly declines in the US markets. North of the border, the TSX eked out a small gain of just under 1/2%.

There was lots of jobs related news out this week. In the labor market, the U.S. saw a March gains with 303,000 jobs added, outpacing economists' expectations and marking the largest increase in 10 months. We’ll talk more about the U.S. jobs picture in a following post.

The strong job growth led to a decrease in the unemployment rate to 3.8%.

Here in Canada, the unemployment rate jumped to 6.1% in March, up from 5.8% in the earlier month, and now at the highest level since October of 2021. Expectations were a rate of 5.9%. More coverage in a post below.

In other news this week:

🪙🛢️ Commodities like oil and gold continued their upward price trend, with U.S. crude oil nearing $87 per barrel and gold prices hitting a record high of around $2,345 per ounce.

📈 Market volatility also spiked, with the Cboe Volatility Index reaching its highest closing level in over five months before slightly retreating. This surge in volatility reflects investors' growing concerns over the economic outlook, especially in light of strong U.S. economic readings that raised doubts about the Federal Reserve's timeline for rate cuts.

Overall, investors remain keenly focused on central bank moves, especially the Fed's approach to interest rates in response to surprising economic resilience and inflation trends. Despite the challenges, there's optimism that economic and corporate earnings growth could support a bullish market outlook, albeit with potential hiccups along the way.

In this Edition of The Pulse:

• Canada Unemployment Rate Jumps

• U.S. Posts Strong Jobs and Unemployment Numbers

• Disney Wins Proxy Battle with Nelson Peltz

• Ford Changes EV Strategy

• Microsoft Forced to Unbundle Teams from O365

• RBC CFO Ousted Following Employment Ethics Breach

• Market Movers | Winners & Losers

THIS WEEK’S POLL QUESTION
(Results in Next Week’s Newsletter)

LAST WEEK’S POLL RESULTS

S&P 500 Weekly Overview

S&P TSX Weekly Overview

Overbought

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Oversold

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THE ECONOMY
Canadian Unemployment Jumps

Canada's labor market saw a surprising downturn in March, with the unemployment rate climbing to 6.1%, the highest it's been in more than two years. Statistics Canada reported a net loss of 2,200 jobs, sharply below the expected creation of 25,000 jobs.

The difference was mainly due to an increase in the number of people either searching for work or on temporary layoff.

The reaction to Canada's labor market report was swift among traders, leading to speculation that the Bank of Canada might cut interest rates soon, possibly as early as June, but more likely in July.

This speculation is grounded in the recent labor market performance, which includes six consecutive months of declining employment rates and challenges in generating jobs for a record influx of immigrants. Despite the central bank maintaining the overnight lending rate at 5%, the expectation of rate cuts has grown due to these labor market struggles, hinting at a softer economic outlook.

When you dig into the details, it’s notable that a significant number of job losses were reported in key sectors such as accommodation and food services, and wholesale and retail trade, leading to a 0.3% decrease in total hours worked across the economy.

As a spin-off effect, this downturn will probably have a negative impact on Canada's gross domestic product, which had previously shown strong gains.

Finally on this topic, the average hourly wages in Canada have risen by 5.1% over the past year, complicating the Bank of Canada's efforts to rein in inflation, which has eased to 2.8% from a mid-2022 peak but remains above the target.

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Disclaimers:
This content is sponsored by BMO Exchange Traded Funds.
This content is intended for information purposes only. Beavis Wealth is compensated under this arrangement by BMO Exchange Traded Funds.
Click here for full disclaimer¹

THE ECONOMY
U.S. Jobs Numbers Strong

The U.S. labour market showed strong performance in March, beating expectations with job growth and consistent wage increases and possibly changing the Federal Reserve's timeline for anticipated interest rate cuts.

The unemployment rate dipped to 3.8% from 3.9%, thanks to a strong rebound in household employment which absorbed the increase in the labour force. This period now marks the longest stretch of unemployment below 4% since the late 1960s, highlighting the U.S. economy's resilience despite the Federal Reserve's aggressive rate hikes aimed at controlling inflation.

The labour market's strength was obvious with the addition of 303,000 jobs last month, with job gains averaging 276,000 per month in the first quarter, outpacing the previous quarter.

And it wasn’t just one or two sectors showing strength. The diversity of job growth across industries, with significant contributions from healthcare, government, construction, and leisure and hospitality, underscores the economy's broad-based growth.

Wage growth maintained a steady pace, rising 0.3% in March, with a year-on-year increase of 4.1%, suggesting moderation towards the Fed's inflation target.

That said, the labour market's strong demand, coupled with an increase in labour supply through immigration, presents a nuanced picture of the economic landscape. This balance between job creation and wage pressure is crucial for the Fed's rate decision strategy, particularly in light of the next inflation data.

When you look at this data from different angles, the resilience of the U.S. labour market, buoyed by immigration and sectoral growth, paints a promising picture of economic stability and growth potential, despite the complex dynamics of inflation and interest rate policies.

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CORPORATE GOVERNANCE
Disney Wins Battle with Peltz

Disney was back in the news this week, as the company fended off an attempt by activist investor Nelson Peltz to join its board, with shareholders showing strong support for the current leadership under CEO Bob Iger during the annual meeting. This comes on the heels of the recent truce Disney struck with Florida Governor Ron DeSantis, reported in this newsletter last week.

This outcome, which wasn’t a sure thing, represents confidence in Iger's vision for the company, but it also sets the stage for Disney to tackle several critical challenges in the year ahead. Shareholders expect Iger to make significant progress in areas like turning Disney's streaming services profitable, defining ESPN’s digital future, achieving box-office success, and setting a clear succession plan.

One of Iger's main focuses will be on making Disney's streaming services, including Disney+, Hulu, and ESPN+, profitable by the end of this fiscal year.

This goal is part of a broader strategy initiated five years ago when Disney decided to invest heavily in the streaming sector, despite the inherent challenges and costs. The company is also looking to redefine ESPN's position in a rapidly changing media landscape, transitioning from traditional cable packages to a digital-first approach, potentially complicating consumer choices with its array of offerings.

The box office presents another area for improvement, as Disney aims to recover from a series of underperforming releases. The hiring of David Greenbaum as president of Walt Disney Motion Picture Studios is a strategic move to rejuvenate Disney's film production, with the company seeking to replicate the success of past blockbusters.

Despite the defeat of shareholders’ votes, activist investor Nelson Peltz kept up a brave face, and said that as long as Disney does what it has promised, he’ll be happy.

Perhaps the most pressing and longstanding issue is identifying a suitable successor to Bob Iger. Having delayed his retirement multiple times and even returning as CEO after his successor's tenure fell short, Iger faces the task of finding someone capable of steering Disney through its next chapter.

AUTOMOTIVE SECTOR
Major Changes at Ford

Ford has announced it will be revising its electric vehicle (EV) strategy, delaying the introduction of a new all-electric large SUV and a pickup truck to focus more on expanding its hybrid vehicle offerings across its North American lineup by 2030.

This move is a reflection of the broader automotive industry's cautious approach towards EV adoption, which has been slower than anticipated, and the high costs associated with producing these vehicles.

Initially planned for 2025, the production of the three-row electric SUV at Ford’s Oakville Assembly Plant in Ontario, Canada, is now rescheduled for 2027. As well, the launch of the next-generation pickup, codenamed “T3,” has been postponed from late 2025 to 2026.

These decisions are part of Ford's response to the current market dynamics, including slower EV adoption rates and the financial challenges of manufacturing EVs at a profit. Despite these delays, Ford remains committed to its EV initiatives, as evidenced by its significant investments in new production facilities and battery plants.

The transition to a hybrid-focused lineup by 2030 doesn’t mean Ford is stepping back from its electric ambitions. Instead, the company is taking a pragmatic approach by allowing more time for the market for three-row EVs to mature and to leverage advancements in battery technology that could offer consumers improved durability and value.

Despite the EV business unit’s significant losses in 2023, Ford’s overall vehicle sales show a promising trend, with electric vehicle sales increasing by 86% and hybrid sales by 42% in the first quarter compared to the previous year.

TECHNOLOGY
Microsoft O365 Teams Unbundling

Microsoft has announced a significant change in how it will sell its popular chat and video application, Teams, by offering it separately from its Office suite globally.

This decision comes after Microsoft initially unbundled these products in Europe to avoid potential antitrust fines from the European Union.

The move is a response to an ongoing investigation, sparked by a complaint from Salesforce-owned Slack, by the European Commission into Microsoft's practice of combining Office and Teams, a strategy that began in 2017. The complaint argued that Microsoft's bundling of these services provided an unfair market advantage.

Starting April 1, Microsoft will introduce a new lineup of Microsoft 365 and Office 365 suites without Teams for regions outside the European Economic Area and Switzerland. Additionally, a new standalone Teams offering will be available for Enterprise customers.

Despite these changes, Microsoft may still face EU antitrust charges in the coming months, as rivals have criticized the fees for the standalone products and the interoperability of their messaging services with Office Web Applications.

With a history of 2.2 billion euros in EU antitrust fines over the past decade for similar practices, Microsoft could risk a fine up to 10% of its global annual turnover if found guilty of antitrust breaches once again.

BANKING
RBC CFO Out After Ethics Breach

The Royal Bank has made headlines by terminating its Chief Financial Officer, Nadine Ahn, following an investigation that unveiled Ahn was involved in a personal relationship with another employee, leading to allegations of preferential treatment regarding promotion and compensation.

Ahn's dismissal is particularly notable given her stature within the bank and the broader financial community. Appointed CFO in 2021, Ahn had over two decades of experience at RBC and was recognized for her leadership and advocacy for the advancement of women in finance.

RBC has assured its stakeholders that this situation has not impacted the bank's financial statements, strategic direction, or its performance. This is an important clarification, especially following the recent closure and integration of RBC’s monumental $13.5-billion acquisition of HSBC Bank Canada.

In the interim, Katherine Gibson, a seasoned executive with more than twenty years at RBC, steps into the CFO role. Her experience and reputation as a trusted advisor within the bank are expected to provide stability and continuity as RBC seeks a permanent replacement for Ahn.

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