Market update

Despite receiving resilient economic data, particularly on the jobs front, markets were neutral - lower for the week. This likely signals the need for rate increases to continue more persistently than the US Fed gestured last week.

Canadian manufacturing activity lost momentum in July as production and new orders declined for the first time since the beginning of Covid-19. Firms continue to face sustained rising costs with reductions in both output and new orders.

Canada’s exports rose in June while imports rose by less. Canada’s trade surplus widened above analyst estimates.

Canada’s economy lost a little over 30,000 jobs in July, which is two consecutive months of losses. However, Canada's unemployment rate was unchanged from the previous month at 4.9% in July, below expectations of 5%, extending the robust recovery of the labour market from the pandemic.

The U.S. economy incredibly added 528,000 jobs in July, above forecasts of 250,000, showing resiliency while the unemployment rate remain steady at 3.6%. Markets reacted negatively to this as it is likely a signal of more persistent rate hikes than was alluded to by the US Fed last week.

US new job openings (JOLTS) shrank and also came in below expectation. 300,000 less jobs were posted in June than the expected 11 million.

The U.S. trade deficit narrowed by in June to a six-month low.

US Purchasing Managers Index (PMI) also showed signs of economic resiliency with ISM non-manufacturing (Services) PMI rebounded to a reading of 56.7 last month ending three straight monthly declines. Thirteen industries, including mining, public administration and wholesale trade reported growth.

Eurozone retail sales dropped by more than expected in June, falling 1.2% month-on-month for a 3.7% year-on-year decline as prices continued to rise.

Global factory data in Europe supported economic slowdown fears as investors assess whether last month’s rally has further to run.

The Bank of England hiked interest rates by 50 basis points, its largest increase since 1995, as it tries to stop a surge in inflation.

U.K. house prices saw a twelfth successive monthly increase, keeping the annual price growth in double digits nine months in a row.

The Bank of England provided a gloomy outlook for United Kingdom, predicting that the country will enter recession in the fourth quarter of 2022, with the downturn expected to last for five quarters.

China's services activity grew at the fastest rate in 15 months in July as easing COVID curbs boosted consumer confidence. Oil prices surge to end the week as chances of OPEC+ supply boost begin to fade.

Oil prices were down for the week as demand concerns overtake supply challenges.

Weekly change: TSX: -0.4%; DOW: -0.1%; S&P 500: 0.4%; NASDAQ: 2.7%; GOLD: 0.5% WTI: -10.0%

 

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Employment: How slow is slow enough? by Avery Shenfeld Link to Article

Despite any confusion about the Economic state of the U.S., one thing is clear: the jobs data over the next few months, including July’s reading, will be decisive in setting market and central bank views on where we’re headed. We’re going to need a cooler US labour market to contain inflation, but how slow is slow enough?

Some economists believe based on the “natural” unemployment rate we need for at least a mild recession, or a need for higher unemployment for two years or more to get inflation to target. If they’re right, the Fed can’t quickly back away from a tightening path on the first signs of a labour market slump.

But there are equally eminent economists, who urge the Fed to tread more carefully from here, and don’t see a recession or a huge increase in joblessness as a necessary condition for tumbling inflation. They don’t believe the early 1980s are a reliable guide for this cycle.

There are countries that don’t have overheated demand that are also experiencing elevated inflation, where a levelling off in cost oil and food commodities and improved auto supply for example, could do the heaviest lifting in the inflation deceleration. Not to say a material slowdown in hiring isn’t necessary but could mean the difference between a few decimal points, not a few percentage points in the unemployment rate.

In both Canada and the US, we’ve begun to see less hiring, but not mass firing, which is likely what we’ll need to see if we’re going to avoid the shoals of recession or excessive inflation.

 

Weekly Commentary by Fred Demers BMO Global Asset Management Link to Article

Q2 Earnings

Two themes persisted throughout earnings season: high inflation and strong revenues—although the latter is slowing as we near the top of the profit margin cycle. Companies with sufficient market power have been able to pass on costs to the consumer but, at some point, we have to stop looking in the rearview.

As households struggle with elevated inflation and lose purchasing power, firms have lowered their guidance. In recent months, some large retailers, such as Walmart and Target, have spoken publicly about slashing prices to eliminate excess inventory as inflationary pressures bite into sales and margins. If this continues, businesses will face a much more challenging environment in 6 to 12 months.

Bottom line: Revenues were better than expected, but, as usual, companies were skilled at lowering future expectations.

75bps (US Fed Rate Hike)

The U.S. Federal Reserve’s 0.75% rate hike in July came as no surprise—the signals were clear. The big debate, however, is where the Fed will take policy as inflation comes down (though it will likely remain elevated over the foreseeable future).

If the economy does indeed slow faster than expected, it becomes a tough balancing act. As much as the equity response was spectacular following the aggressive rate hike—the best day on the NASDAQ since late 2020—the market is perhaps a little too confident about the speed at which inflation will drop.

The US Federal Reserve is no longer saying what they intend to do in the near term, making monetary policy more unpredictable and increasingly difficult to navigate. This is where the market might be too benign in its interpretation of the Fed’s announcement. In reality, unemployment is around 3.5%, nowhere near the suggested 5.5% required to normalize inflation.

Bottom line: The Fed’s message seems to be that economic pain is needed to solve the inflation problem.

Energy Prices

For many investors, the word “recession” triggers an automatic response to activate the cyclical selling playbook.

BMO GAM believe these fears are overblown—the employment picture remains strong in North America, and it’s unlikely that there will be demand destruction as long as people retain their paycheques.

And then the implications of the Russia-Ukraine conflict and the Nord Stream 1 pipeline. The exhaustive implications of this balancing act won’t be known until December, when the sanctions are fully imposed, but the consensus is that energy prices will decrease regardless. Whereas we think, at the very least, there should be a floor on prices.

Bottom line: Given the supply-demand imbalances and political concerns, BMO GAM think the market is too pessimistic on the oil trade.

 

Global Insights

'Glimmer of hope' the first ship to carry Ukrainian grain through the Black Sea since Russia invaded Ukraine five months ago left the port of Odesa for Lebanon on Monday under a safe passage deal described as a glimmer of hope in a worsening global food crisis.

Reuters

Factbox: Sanctions China has imposed on Taiwan over Pelosi visit: China on Wednesday suspended exports of natural sand to Taiwan and halted imports of fruit and fish products from the self-governed island

Reuters

The latest Leger survey conducted on behalf of RATESDOTCA and BNN Bloomberg found that 35 per cent of potential travelers have made changes to their plans due to recent problems at airports, such as rampant delays and cancellations, lost luggage, or luggage that fails to arrive at the intended destination on time.

Bloomberg

America's largest warehouse market is full as major U.S. retailers warn of slowing sales of the clothing, electronics, furniture and other goods that have packed the distribution centers east of Los Angeles. The merchandise keeps flooding in from across the Pacific, and for one of the busiest U.S. warehouse complexes, things are about to get worse.

Bloomberg

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