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S&P 500 Rally Hits a Wall in Run-Up to CPI Report: Markets Wrap

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(Bloomberg) — Wall Street kicked off the week with small moves in stocks, bonds and the dollar ahead of inflation figures that will help define the scope and timing of Federal Reserve rate cuts.

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Less than 24 hours before the consumer price index, the S&P 500 wavered. While the data is expected to underscore further disinflation, traders remained unwilling to commit to big bets. That sense of caution also prevailed after five straight weeks of gains that drove equities above overbought levels, triggering some calls for at least consolidation.

“Keeping the age-old adage in mind that ‘trees don’t grow to the sky,’ we think it’s important to keep the party hats in the box for now,” said John Stoltzfus at Oppenheimer Asset Management. “We remain positive on stocks, view bonds as complimentary to stocks for prudent diversification and look for a further broadening of the equity rally which emerged from the lows of late October.”

The S&P 500 lost steam after approaching 5,050. The Nasdaq 100 underperformed, led by declines in Microsoft Corp., Apple Inc. and Tesla Inc. Chip designer Arm Holdings Plc soared 29%. Nvidia Corp. briefly overtook Amazon.com Inc. in market value. Treasury 10-year yields were little changed at 4.17%. Bitcoin hit $50,000.

“Most people will be fixated on this week’s inflation numbers, but there’s also a potential tug-of-war between how extended the current market rally may be versus the buzz surrounding the S&P 500 topping 5,000,” said Chris Larkin at E*Trade from Morgan Stanley. “While it’s true the S&P has often pushed higher after crossing ‘round-number’ thresholds like this one, it hasn’t always done it after the type of rally that has unfolded since late October.”

The S&P 500 is approaching a technical roadblock after eclipsing 5,000 for the first time — triggering a contrarian sell signal for stocks on Friday, according to Piper Sandler’s Craig Johnson.

“The current state of the equity market can be summed up by the 1981 hit from 38 Special: “Hold on loosely, but don’t let go’,” Johnson wrote in a note to clients. “To be clear, we are not bearish on the stock market. However, as ‘bad breadth’ lingers, the market is ripe for a healthy correction, likely in the range of 5% to 10%.”

The gauge’s quick journey to 5,000 has already left the consensus Wall Street target for 2024 tracked by Bloomberg — 4,819.40 as of Friday — in the dust.

Because of the old adage that “large round numbers act like rusty doors and require several attempts before finally swinging open,” investors now wonder if it is time to take some profits, according to Sam Stovall at CFRA.

If history is any guide, while short-term digestions of gains have indeed occurred, they have been fairly short in duration, he noted.

When looking at the S&P 500’s cumulative return in the 3-, 6-, and 12-months after crossing above the 100, 500, 1,000, 2,000, 3,000, and 4,000 levels, the gauge posted average price gains of 4.7%, 9.8%, and 12.3% — and rose in price during 83% of all periodic observations, Stovall said.

“This run to 5,000 has been supported by the fundamentals, with a soft landing looking increasingly likely and earnings season nicely exceeding expectations after a messy start,” said Jeffrey Buchbinder at LPL Financial. While the current valuation seems high, “it’s reasonable if the US economy avoids recession and earnings grow double-digits this year — which is not out of the question.”

The S&P 500 is currently trading around 20 times forward earnings — a level it has only hit in two other periods over the last 25 years: the dot-com bubble and the post-pandemic bull market, said Nicholas Colas at DataTrek Research.

“Valuations get to these levels when investors have high confidence in three factors: monetary/fiscal policy, the US/global banking system, and strong corporate earnings,” Colas added. “Even with 2022’s bear market, investors feel that the future is highly predictable. It will likely take an exogenous shock to change their minds.”

To Rob Swanke at Commonwealth Financial Network, some caution is warranted at the current valuation levels.

“I wouldn’t say we’re in bubble territory, but the market is pricing closer to perfection now and companies will have to continue to hit high earnings targets in 2024, something they didn’t have to do in 2023,” he added.

Last week’s news and data reinforced the four drivers of this bull market: Fed rate cuts by May, solid economic growth, continued disinflation and strong earnings, according to Tom Essaye at the Sevens Report.

“It’s important to acknowledge that this rally has been driven by actual good news and bullish expectations being reinforced by actual data,” Essaye said. “At the same time, the risks that kept investors worried in October (and even throughout 2023) haven’t been vanquished — they simply haven’t shown up yet.”

The annual CPI is forecast to have dropped to 2.9% in January from 3.4% the prior month, according to consensus estimates of economists surveyed by Bloomberg. That would be the first reading below 3% since March 2021.

A survey conducted by 22V Research showed 51% of investors polled think the market reaction to CPI on Tuesday will be “risk-on” — and only 19% said “risk-off”.

US consumer expectations for inflation over the medium term fell to the lowest level since at least 2013, a Fed Bank New York survey showed Monday. Fed Governor Michelle Bowman reiterated the central bank’s benchmark lending rate is in a good place to keep downward pressure on inflation, and she doesn’t see a need to ease policy soon. Fed Bank of Richmond President Thomas Barkin said it’s premature to believe inflation pressures are over.

Traders started pricing in that the Fed will carry out just four — or five at the most — quarter-point rate cuts in 2024, only slightly more than the three penciled in by policymakers. That’s a sharp shift from the end of last year, when futures traders were wagering on seven such moves.

“It’s important not to lose sight of the big picture, which is that continued disinflation should allow the central bank to start easing this year,” said Mark Haefele at UBS Global Wealth Management. “This is a significant change in the investment landscape, so we think it’s less important whether the Fed cuts three, four, or five times this year.”

Even if the Fed doesn’t scale back interest rates, the S&P 500 can still extend its climb this year, according to Bank of America Corp.’s Savita Subramanian.

“Recall that our constructive view on stocks is not because of what the Fed will do, but what the Fed has already done,” she added, referring to central bank taming inflation without a recession.

Corporate Highlights:

  • The Federal Reserve slapped Citigroup Inc. with a series of demands to change the way it measures the risk of its trading partners, according to a Reuters report, the latest blow to Chief Executive Officer Jane Fraser’s turnaround effort.
  • Diamondback Energy Inc. agreed to buy fellow Permian Basin driller Endeavor Energy Resources LP in a $26 billion deal that’ll create the largest explorer focused exclusively on the western hemisphere’s busiest oil field.
  • Gilead Sciences Inc. agreed to purchase CymaBay Therapeutics Inc., a developer of an experimental liver disease drug, for $4.3 billion in equity value.
  • Hewlett Packard Enterprise Co. is seeking as much as $4 billion from Autonomy Corp.’s former bosses following a London judge’s finding that they fraudulently boosted the value of the company before its sale.

Key Events this Week:

  • Germany ZEW survey expectations, Tuesday
  • US CPI, Tuesday
  • Eurozone industrial production, GDP, Wednesday
  • BOE Governor Andrew Bailey testifies to House of Lords economic affairs panel, Wednesday
  • Chicago Fed President Austan Goolsbee speaks, Wednesday
  • Fed Vice Chair for Supervision Michael Barr speaks, Wednesday
  • Japan GDP, industrial production, Thursday
  • US Empire manufacturing, initial jobless claims, industrial production, retail sales, business inventories, Thursday
  • ECB President Christine Lagarde speaks, Thursday
  • Atlanta Fed President Raphael Bostic speaks, Thursday
  • Fed Governor Christopher Waller speaks, Thursday
  • ECB chief economist Philip Lane speaks, Thursday
  • US housing starts, PPI, University of Michigan consumer sentiment, Friday
  • San Francisco Fed President Mary Daly speaks, Friday
  • Fed Vice Chair for Supervision Michael Barr speaks, Friday
  • ECB executive board member Isabel Schnabel speaks, Friday

Some of the main moves in markets:

Stocks

  • The S&P 500 was little changed as of 4 p.m. New York time
  • The Nasdaq 100 fell 0.4%
  • The Dow Jones Industrial Average rose 0.3%
  • The MSCI World index was little changed

Currencies

  • The Bloomberg Dollar Spot Index was little changed
  • The euro was little changed at $1.0774
  • The British pound was unchanged at $1.2628
  • The Japanese yen was little changed at 149.34 per dollar

Cryptocurrencies

  • Bitcoin rose 4.2% to $50,156.96
  • Ether rose 5.6% to $2,643.7

Bonds

  • The yield on 10-year Treasuries was little changed at 4.17%
  • Germany’s 10-year yield declined two basis points to 2.36%
  • Britain’s 10-year yield declined three basis points to 4.06%

Commodities

  • West Texas Intermediate crude rose 0.2% to $77.03 a barrel
  • Spot gold fell 0.2% to $2,020.19 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Alexandra Semenova, Michael Mackenzie, Liz Capo McCormick, Ye Xie and Denitsa Tsekova.

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Transat AT reports $39.9M Q3 loss compared with $57.3M profit a year earlier

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MONTREAL – Travel company Transat AT Inc. reported a loss in its latest quarter compared with a profit a year earlier as its revenue edged lower.

The parent company of Air Transat says it lost $39.9 million or $1.03 per diluted share in its quarter ended July 31.

The result compared with a profit of $57.3 million or $1.49 per diluted share a year earlier.

Revenue in what was the company’s third quarter totalled $736.2 million, down from $746.3 million in the same quarter last year.

On an adjusted basis, Transat says it lost $1.10 per share in its latest quarter compared with an adjusted profit of $1.10 per share a year earlier.

Transat chief executive Annick Guérard says demand for leisure travel remains healthy, as evidenced by higher traffic, but consumers are increasingly price conscious given the current economic uncertainty.

This report by The Canadian Press was first published Sept. 12, 2024.

Companies in this story: (TSX:TRZ)

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Dollarama keeping an eye on competitors as Loblaw launches new ultra-discount chain

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Dollarama Inc.’s food aisles may have expanded far beyond sweet treats or piles of gum by the checkout counter in recent years, but its chief executive maintains his company is “not in the grocery business,” even if it’s keeping an eye on the sector.

“It’s just one small part of our store,” Neil Rossy told analysts on a Wednesday call, where he was questioned about the company’s food merchandise and rivals playing in the same space.

“We will keep an eye on all retailers — like all retailers keep an eye on us — to make sure that we’re competitive and we understand what’s out there.”

Over the last decade and as consumers have more recently sought deals, Dollarama’s food merchandise has expanded to include bread and pantry staples like cereal, rice and pasta sold at prices on par or below supermarkets.

However, the competition in the discount segment of the market Dollarama operates in intensified recently when the country’s biggest grocery chain began piloting a new ultra-discount store.

The No Name stores being tested by Loblaw Cos. Ltd. in Windsor, St. Catharines and Brockville, Ont., are billed as 20 per cent cheaper than discount retail competitors including No Frills. The grocery giant is able to offer such cost savings by relying on a smaller store footprint, fewer chilled products and a hearty range of No Name merchandise.

Though Rossy brushed off notions that his company is a supermarket challenger, grocers aren’t off his radar.

“All retailers in Canada are realistic about the fact that everyone is everyone’s competition on any given item or category,” he said.

Rossy declined to reveal how much of the chain’s sales would overlap with Loblaw or the food category, arguing the vast variety of items Dollarama sells is its strength rather than its grocery products alone.

“What makes Dollarama Dollarama is a very wide assortment of different departments that somewhat represent the old five-and-dime local convenience store,” he said.

The breadth of Dollarama’s offerings helped carry the company to a second-quarter profit of $285.9 million, up from $245.8 million in the same quarter last year as its sales rose 7.4 per cent.

The retailer said Wednesday the profit amounted to $1.02 per diluted share for the 13-week period ended July 28, up from 86 cents per diluted share a year earlier.

The period the quarter covers includes the start of summer, when Rossy said the weather was “terrible.”

“The weather got slightly better towards the end of the summer and our sales certainly increased, but not enough to make up for the season’s horrible start,” he said.

Sales totalled $1.56 billion for the quarter, up from $1.46 billion in the same quarter last year.

Comparable store sales, a key metric for retailers, increased 4.7 per cent, while the average transaction was down2.2 per cent and traffic was up seven per cent, RBC analyst Irene Nattel pointed out.

She told investors in a note that the numbers reflect “solid demand as cautious consumers focus on core consumables and everyday essentials.”

Analysts have attributed such behaviour to interest rates that have been slow to drop and high prices of key consumer goods, which are weighing on household budgets.

To cope, many Canadians have spent more time seeking deals, trading down to more affordable brands and forgoing small luxuries they would treat themselves to in better economic times.

“When people feel squeezed, they tend to shy away from discretionary, focus on the basics,” Rossy said. “When people are feeling good about their wallet, they tend to be more lax about the basics and more willing to spend on discretionary.”

The current economic situation has drawn in not just the average Canadian looking to save a buck or two, but also wealthier consumers.

“When the entire economy is feeling slightly squeezed, we get more consumers who might not have to or want to shop at a Dollarama generally or who enjoy shopping at a Dollarama but have the luxury of not having to worry about the price in some other store that they happen to be standing in that has those goods,” Rossy said.

“Well, when times are tougher, they’ll consider the extra five minutes to go to the store next door.”

This report by The Canadian Press was first published Sept. 11, 2024.

Companies in this story: (TSX:DOL)

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U.S. regulator fines TD Bank US$28M for faulty consumer reports

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TORONTO – The U.S. Consumer Financial Protection Bureau has ordered TD Bank Group to pay US$28 million for repeatedly sharing inaccurate, negative information about its customers to consumer reporting companies.

The agency says TD has to pay US$7.76 million in total to tens of thousands of victims of its illegal actions, along with a US$20 million civil penalty.

It says TD shared information that contained systemic errors about credit card and bank deposit accounts to consumer reporting companies, which can include credit reports as well as screening reports for tenants and employees and other background checks.

CFPB director Rohit Chopra says in a statement that TD threatened the consumer reports of customers with fraudulent information then “barely lifted a finger to fix it,” and that regulators will need to “focus major attention” on TD Bank to change its course.

TD says in a statement it self-identified these issues and proactively worked to improve its practices, and that it is committed to delivering on its responsibilities to its customers.

The bank also faces scrutiny in the U.S. over its anti-money laundering program where it expects to pay more than US$3 billion in monetary penalties to resolve.

This report by The Canadian Press was first published Sept. 11, 2024.

Companies in this story: (TSX:TD)

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