TSX Completes Near 250 Pts Turnaround To Close Up a Dozen Pts; BMO Canadian Strategy Snapshot With View on Yield Sectors and Interest Rate Regimes

Canada's main stock market recovered from being down near 240 points in the early minutes of Thursday's session, eventually pulling out a modest gain of a dozen points, with the resources heavy Toronto Stock Exchange buoyed by higher commodity prices and signs of positive market sentiment around domestic economic data that is seen as continuing to outperform expectations.

The S&P/TSX Composite Index closed up 11.66 points to 21,885.38.

Positive data could open the door for a Bank of Canada rate cut as early as in June, regardless of what is going on in the United States, even given the likelihood of a divergence between the two nations on an expected rates path.

Thursday afternoon, David Doyle, head of economics at Macquarie, published a note in which he cited "ongoing strength" in U.S. growth and the increased potential for no rate cuts there in 2024.

Desjardins in the summary of an 'Economic & Financial Outlook' note said it believes the Federal Reserve will hold off until the fall before initiating monetary easing. It noted economic data continue to outperform expectations in Canada, with real GDP growth coming in stronger and inflation weaker than anticipated at the start of 2024, while the labor market has also shown tentative signs of a slowdown. "If this trend persists through to the Bank of Canada's next interest rate announcement, it will all but cement our call for rate cuts to begin in June."

Among sectors Thursday, most were lower, led by Information Technology, down 1.8%. But Base Metals was the biggest percentage mover in gaining near 2%, while Energy was up 0.7%.

Of commodities today, gold was shining midafternoon on Thursday, edging up for the first time in four days as the price of the metal corrects after closing at a record high last week and the dollar and treasury yields moved higher. Gold for June delivery was up $7.10 to US$2,345.50 per ounce.

Also, West Texas Intermediate crude oil closed with a gain, rebounding from a day-prior loss after a large drop in US inventories was reported on Wednesday, while US first-quarter gross domestic product rose less than expected in the first-quarter. WTI crude oil for June delivery closed up $0.76 to US$83.57 per barrel, while June Brent crude, the global benchmark, closed up $0.99 to US$89.01.

Staying on sectors, BMO's Brian Belski published his latest Canadian Strategy Snapshot, this one entitled 'Our View on Yield Sectors and Interest Rate Regimes'.

Bottom line for BMO, against the backdrop of rising long-term interest rates year to date, "ALL" the Canadian yield-heavy sectors have underperformed. However, from the bank's perspective each of these areas are "excessively oversold and are extremely overdue for a sharp reversal to the upside once interest rate concerns stabilize". While BMO does subscribe to the "higher-for-longer" interest rate narrative, its work shows that these sectors can post "solid absolute returns" and, in some cases, even outperform when long-term interest rates are in a range.

Indeed, BMO noted, the Real Estate sector typically posts its best absolute and relative performance when interest rates are range bound and is historically one of the least interest rate sensitive high-yielding sectors in the TSX. It also noted while the Communication Services sector is interest rate sensitive, the bank believes the sector "should be doing much better on an absolute basis" given we are likely at or near peak long-term interest rates. And Utilities, it noted, is historically the most correlated with interest rates, but typically sees a clear inflection of performance once long-term interest rates peak and is generally a Market Perform in range-bound rate environments.

Lastly, BMO said Canadian banks have "become too interest rate sensitive in our view". Historically, BMO noted, while there "IS" a relationship, particularly on the tails of interest rate moves, the sector can outperform in most interest rate environments and typically posts its best absolute performance when interest rates are range bound or rising gradually. "Overall," BMO added, "while we continue to urge income investors to focus on dividend growth, we believe many of these sectors are oversold and can rebound sharply when interest rate concerns subside."