Late spring brings plenty of sunshine to the markets

• Rate cuts kick off: the Bank of Canada and European Central Bank cut rates by a quarter of a percentage point, signalling easing ahead.
• NVIDIA tops US$3 trillion: the company briefly overtook Apple, boosting the S&P 500 Index to a new all-time high.
• July jolt: as we approach summer, keep an eye on the market. July has a history of delivering surprising gains.

With the Bank of Canada’s (BoC) announcement this week that it’s cutting its key interest rate by a quarter of a percentage point, we’re finally on the path of monetary easing. Despite the BoC mentioning inflation risks in its statement, it would be hard for it to justify a pivot away from easing; we expect more cuts to follow. While the start of an easing cycle is generally good news for the Canadian economy, one cut is a long way from stimulating an otherwise lacklustre economy. Just as interest rate increases take six to 18 months to impact the economy, interest rate cuts will also take time. The more immediate consequence of the rate cut and accompanying messaging is the impact on the Canadian dollar against the U.S. dollar. With the BoC in easing mode and uncertainty around the timing of the U.S. Federal Reserve’s (the Fed) first cut, the loonie is facing further downward pressure. The BoC will need to carefully balance lowering interest rates to support the Canadian economy while avoiding weakening the loonie.

The BoC was not alone in cutting its interest rate and beginning an easing cycle. The European Central Bank (ECB) has just confirmed, as anticipated, a rate cut of a quarter of a percentage point across the board. After nine months of holding rates steady, the ECB deemed it appropriate to moderate policy restrictions. Since September 2023, inflation has dropped by over 2.5 percentage points. Restrictive financing conditions have helped anchor inflation expectations and reduce demand, contributing significantly to bringing inflation down. However, despite recent progress, the ECB highlighted persistent domestic price pressures due to high wage growth, predicting that inflation will stay above target into next year. The bank also revised inflation forecasts upwards for 2024 and 2025. You read that right: the ECB has increased its inflation expectations while cutting rates.

Finally (and this will feel like a broken record), NVIDIA achieved another milestone this week. The AI chip company reached a $3 trillion valuation, briefly surpassing Apple's value. Amid the market's response to some unfavourable macroeconomic data, particularly from manufacturing, the AI surge has continued, propelling the S&P 500 Index to an all-time high, with a 30% increase from its October lows. If you ever needed a reminder that the economy and the stock market are two vastly different entities, this is it. Speaking of non-economic factors influencing markets, let’s consider seasonality. As we approach summer, it may surprise you to learn that July has been a positive month for U.S. equity markets for the last nine years in a row. When looking specifically at the Nasdaq, this trend extends to 16 years. In fact, since 1928, the first two weeks of July have boasted the best average two-week returns of the year. This might not seem significant, but it certainly challenges the adage "Selling in May and going away."

Listen to this week’s podcast for further insights.