Market update

Easing recession risks and positive jobs data buoyed the markets this week to continue the fightback from a gloomy June.

Canadian unemployment rate fell to 4.9% in May, a record low and below 5.1% expectations.

Canadian manufacturing activity expanded at a slower pace in June amid persistent inflationary pressures and material shortages. Business sentiment slipped on concerns about the global economy and lingering implications of the pandemic.

Canada’s exports rose in May, supported by strong exports of energy products, transportation and parts, while imports decreased. The trade surplus increased positively by double that of market expectations.

U.S. trade deficit narrowed in May despite imports and exports rising. Exports hit a record high while rising prices and slowing domestic demand weighed on imports.

U.S. unemployment rate remained unchanged in June at 3.6% despite US non-farm payrolls were 372,000 in June, above consensus.

President Joe Biden is looking to roll back some of the trade levies imposed by the former administration.

The change in U.S. month-over-month factory orders was higher than the market forecast.

U.S. ISM non-manufacturing Purchasing Managers Index (PMI) was 55.3 in June versus an estimate of 54.3 pointing to strong growth for the services sector.

Boris Johnson announced on Thursday he would quit as British Prime Minister after he dramatically lost the support of his ministers and most Conservative lawmakers, but said he would stay on until his successor was chosen.

June Eurozone services PMI dropped to a 5-month low of 53.0, compared to expectations of 52.8 and a May reading of 56.1. Eurozone retail sales edged higher on both a month-over-month basis and year-over-year basis.

Norwegian oil and gas workers called off their strike, easing fears of an energy supply crunch.

China is considering a US$220 billion stimulus plan which will be used to fund infrastructure projects. Beijing city said COVID vaccinations would now be required to enter sports arenas, entertainment venues and more starting next week.

Oil prices stabilized in the back half of the week with markets weighing in on supply chain challenges and recession risks.

Weekly change: TSX: 1.7%; DOW: 1.2%; S&P 500: 2.0%; NASDAQ: 4.8%; GOLD: -3.5% WTI: -3.2%

 

Bloomberg Market Updates - https://www.bnnbloomberg.ca/markets

Schwab Market Updates Podcasts - https://www.schwab.com/resource-center/insights/section/schwab-market-update

 

America's Noncession by Avery Shenfeld Link to Article

Despite current media coverage measures, economists don’t define two consecutive quarters of negative GDP growth as a recession. One needs to see a material decline in a broader range of activity measures, and the key missing ingredient thus far has been in the labour market. There can be job-free recoveries for a while, but the very definition of a recession essentially rules out having one without job losses, let alone a recession with a hiring boom.

But some of the GDP disappointment captures weakness in the output of high productivity sectors like construction, and gains in weaker productivity services, implying less growth in output than in hours worked. Even within services, the shift from online to in-store shopping would likely lower output per hour.

Big swings in the contribution of inventories have contributed to volatility in real GDP, and some of that relates to supply-chain bottlenecks that mask the true trend in demand. We can’t easily distinguish between a tendency to reduce inventories in fear of sales weakness ahead, from parts and product shortages that prevent firms from manufacturing as much as they would like, or that keep store shelves and car dealer lots bare.

Bond market measures for inflation expectations have eased significantly, Commodities that feed into inflation, including crude oil and some raw foods, have stopped climbing or have started to retreat, particularly those with a tie to global growth.

That’s not going to help the CPI much in the here and now but is consistent with our view that we won’t need an outright recession to have inflation looking a lot lower a year from now.

 

Searching for Peak Inflation by Eric Lascelles Link to Article

Negative Themes

• Consumer and business sentiment fallen sharply
• Financial conditions have tightened significantly
• Russia-Ukraine War continues with escalating sanctions
• Recession risk elevated for 2023

Positive Themes

• Risk assets have risen recently
• Hard economic data still resilient
• Inflation may be peaking, including inflation expectations
• Supply chain problems continuing to ease
• Commodity prices fell recently

Interesting

• Rapid rate hikes continue
• Peak policy rate could be lower than previously imagined
• Inventory cycle turning

Eric suggests the primary driver of inflation over the last two years is rising commodity prices and supply chain issues, and recently we have seen commodity prices soften as well as shipping costs continued to trend downwards. 

GDP Forecasts for both second half of 2022 and 2023 have been downgraded globally and most notably across developed nations.

Aggressive rate hikes expected into 2023 likely peaking by April 2023. In 2023 there will likely be a point where rates will become unsustainable with inflation trending downwards and will likely see rate cuts in back half of 2023.

“The Great Resignation” tightened labour markets – was already starting before the pandemic, increasing retirement, declining job tenure which was exacerbated by the pandemic with additional challenges like layoffs, infection aversion and generous jobless support. Some challenges still persist post pandemic, but there are positives in being able to transcend geography with employment and more flexible work arrangements.

 

Global Insights

Shinzo Abe, the politician who dragged Japan out of deflation, was assassinated in the street by a lone gunman on Friday. The silencing of a polarizing, unorthodox economic reformer will have wider repercussions for Asia’s most successful democracy.

Reuters

Canada announced additional sanctions related to Russia's invasion of Ukraine on Friday, adding 29 state-sponsored disinformation and propaganda agents and 15 entities controlled or owned by the Russian government, the foreign ministry said.

Reuters

When French President Emmanuel Macron whispered in Joe Biden's ear last month that top global oil exporter Saudi Arabia has very little additional capacity to increase output, the U.S. President looked surprised. Biden is due to land in Riyadh later this month, and he will likely hear the same sobering message.

Reuters

 

CIBC Private Wealth Management consists of services provided by CIBC and certain of its subsidiaries, including CIBC Wood Gundy, a division of CIBC World Markets Inc.

"CIBC Private Wealth Management" is a registered trademark of CIBC, used under license. "Wood Gundy" is a registered trademark of CIBC World Markets Inc.

If you are currently a CIBC Wood Gundy client, please contact your Investment Advisor.

This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. © CIBC World Markets Inc. 2022.