Daily Commentary

MarketMinder’s View: Canada’s headline Consumer Price Index ticked up in April to 2.8% y/y from 2.4%, but beyond gasoline and energy prices, there are few signs inflation poses a credible risk up north: “Energy prices overall rose a whopping 19.2 per cent year-over-year in April, following a 3.9 per cent increase the month before. Statistics Canada said the cost of gasoline specifically rose even quicker, and was 28.6 per cent higher year-over-year, thanks to the supply crunch in the Strait of Hormuz and because of the switch to the more expensive summer blend of gasoline.” As the report goes on to explain, some of that rise is because of oil prices’ climb on the Iran war. But it is also skewed upward in Canada because of base effects. Last April, the government waived an 18 cent-per-liter federal carbon tax. That lowered gasoline prices over the past 12 months, but it fell out of the comparison base now. As Statistics Canada explained, excluding gasoline only—just gas—CPI rose 2.0% y/y, slowing from March’s 2.2%. Canada is yet another nation where inflation measures show the war’s effect on oil prices hasn’t swayed prices beyond fuel at this point—and it likely won’t affect them much, given money supply growth is tepid.

MarketMinder’s View: It isn’t super shocking to us that sentiment toward stocks generally among professional fund managers, as measured by BofA’s Fund Manager Survey, has snapped positive in May, following markets’ returning to all-time highs in April and fully reversing the war-driven mini-correction. Sentiment measures like this can follow market movement, and that seems at work here. Now, we suspect that pace of warming will cool, but it is a matter worth watching. At this point, it seems expectations are most heated toward chip stocks and US Tech, which presents a hurdle to their continuing to lead markets, as they have since the mini-correction low. Sentiment towards Europe is much cooler, as this documents, which we think is a sign a reversal to non-US stocks’ earlier leadership is taking shape. Of course, this is only one sentiment measure and no single indicator is complete or descriptive of sentiment at large. But we think it is an interesting marker.

MarketMinder’s View: Kevin Warsh officially became Fed Chair last Friday, replacing Jerome Powell. While pundits have spilled far too many pixels ruminating on where he will try to steer interest rates, Warsh also has some ideas for broader Fed reforms. For instance, during last month’s Congressional confirmation hearings, he suggested dialing back all the press conferences and interviews. The article deems this a mixed bag. It acknowledges Fedspeak can stoke confusion instead of adding clarity, especially when policymakers veer from their prior guidance, but it also argues guidance and Fed forecasts are important policy tools. Overall, we think a more streamlined approach would be beneficial in theory, with actual results depending on the details and execution. Longer Fed statements came with a bigger balance sheet and more complicated (and convoluted) policy. The more Fed folks speak, the more opportunities there are for them to sow confusion and open the door to contradicting themselves. This is why former Fed head Alan Greenspan invented the art of Fedspeak in the first place, “mumbling with great incoherence” (as he put it) in order to avoid boxing the Fed into a corner. While this piece calls forward guidance a policy tool that can prevent bigger rate hikes, we see this opposite. By talking down the likelihood of rate hikes in 2021 and early 2022, the Fed ended up catching everyone by surprise with aggressive, steep hikes later in 2022. The U-turn, not the hikes themselves, sowed confusion and thus market volatility. The more the Fed defies its prior guidance, the more it diminishes its credibility. We see a lot of compelling evidence markets care more about credibility than transparency. So while we shall have to wait and see exactly how (and whether) Warsh amends the Fed’s communication protocols, we don’t think having fewer Fed utterances will be a net negative for investors.