Market update

Canada’s Gross domestic product rose at a 3.3% annualized rate versus 4% forecast in the second quarter, supported by surging commodity prices and a boost from the lifting of Covid restrictions.

The total value of building permits in Canada declined in July, mainly due to the residential sector, which fell 8.6%. The non-residential sector also dropped slightly by 2.1%.

U.S. August Non-Farm Payrolls added jobs above expectations but was the smallest job gain since April of 2021. The U.S. unemployment rate rose to 3.7% in August from 3.5%, the highest level since February.

U.S. job openings rose to top 11.2 million in July, well above the estimate of 10.45 million and nearly double the available workers. The July numbers reinforced that there is still a considerable shortage of workers for available positions.

U.S. jobless claims declined to total 232,000 versus 245,000 expected. Claims fell to their lowest level since late June, a sign that the labor market is resilient amid a slowing economy.

U.S. ISM Manufacturing Purchasing Managers Index (PMI) came in at 52.8 vs. against a forecast of 52, indicating a continuing slight expansion.

The Conference Board said on Tuesday its consumer confidence index rose to 103.2 this month from 95.3 in July. Economists polled by Reuters had forecast the index climbing to 97.7.

Euro zone inflation in August hits another record of 9.1%, above expectations of 9%, as food and energy prices soar.

Euro Zone Industrial producer price index rose to 38% annually in July, above expectations. Euro zone manufacturing activity shrank for a second month in August as consumers stay cautious.

A survey of economists predicts the European Central Bank will hike by 75bps next week.

Russia halted gas supplies to Europe, intensifying an economic battle between Moscow and Brussels and raising the prospects of recession and energy rationing in some EU regions.

Britain's services businesses reported a record increase in costs over the past three months and are downbeat about the future with inflation headwinds.

China's manufacturing sector remained in contraction as expected, as new COVID infections, the worst heatwaves in decades and an embattled property sector weighed on production.

Industrial metals fell after China locked down Chengdu’s 21 million residents to contain a Covid-19 outbreak.

China cut its benchmark lending rate and lowered the mortgage reference rate by a bigger margin than expected in an effort to support a weakening economy.

West Texas Intermediate crude oil will end the week lower as fears of reduced fuel demand weighed on OPEC output expectations and middle eastern conflicts.

Weekly change: TSX: -3.2%; DOW: -3.4%; S&P 500: -3.7%; NASDAQ: -4.6%; GOLD: -1.5% WTI: -6.4%

 

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ECONOMIC FLASH! Canadian GDP: Cooler trends by Andrew Grantham Link to Article

While growth in Q2 as a whole was solid at an annualized +3.3%, similar to Q1 pace, it was disappointing relative to consensus expectations (+4.4%) and largely driven an early spring acceleration. While still expected that the Bank of Canada will hike interest rates further to combat high inflationary pressures, a cooling economy supports the view that the interest rate peak will be lower than financial markets have been pricing in.

GDP growth in the second quarter was driven largely by a surge in consumer spending on services, as restrictions continued to ease and demand for travel, dining out etc. continuing its recovery. Inventories made a big positive contribution which was helped by a surge in imports. Net trade made a big negative contribution to Q2 GDP effectively neutralizing inventory growth.

June's monthly GDP detail showed that while recoveries in hotels & restaurants, air travel and arts & entertainment continued, they were at a slower pace than seen in previous months possibly due to supply constraints. Real estate, finance and construction continued to see declines in activity, likely related to the rapidly cooling housing market.

Implications & actions

Economic forecast — Today's GDP figures were far from a disaster, and still show that the Canadian economy managed to achieve solid growth during a period of time that the US economy was contracting. However, somewhat cooler growth in Q2 and Q3 than the Bank of Canada recently forecasted should give policymakers comfort that inflation will start to ease later in the year.  CIBC Economics forecast a 75bp hike from the Bank next week, into a range that policymakers think is restrictive (above 3%). However, CIBC Economics also expect a pause after that as the Bank reassess the impact of these restrictive rates on growth and inflation.

Markets — Bond yields and the Canadian dollar moved lower after the release, as markets reassessed just how aggressive the Bank of Canada would have to be in terms of interest rate hikes to cool growth and inflation.

 

 

Time for some Schadenfreude? by Avery Shenfeld Link to Article

Typically, gaining any joy out of someone else’s misery isn’t all that virtuous, but in this case, North America could actually benefit if both the EU and the UK tumble into recession.

In Canada, we’re almost always rooting for strong growth in all corners of the planet, since it can still contribute to buoyant prices and demand for our country’s resource-tilted exports. But right now, at least in the aggregate if not in each sector, we’re cheering for slower growth to contain inflation.

A weak European economy will soften demand for consumer and industrial goods, which should provide a bit of downward pressure on North American export demand - and prices. Rate hikes will not have to be so aggressive domestically if our exports are weaker.

But there’s a catch. Some of the economic turmoil in European industry from soaring power costs and uncertain energy supply will impact their exports to North America, diminishing hopes for improvements in supply chains as a buffer against inflation. Evidenced by China’s Covid-19 lockdowns this year – helpful for gasoline inflation, but not such good news for the supply of other consumer goods.

History reveals that while a US recession almost always causes one in Canada, this relationship is not so fixed between Canada and Europe. As such slower or negative growth in EU and/or UK could support curbing inflation.

 

Global Insights

Global oil companies are pumping billions of dollars into offshore drilling, reversing a long decline in spending on the decades-long projects including some in the remote iceberg waters far off Canada's Atlantic coast.

Reuters

The Taliban administration is in the final stages of talks in Moscow over the terms of a contract for Afghanistan to purchase gasoline and benzene from Russia, Afghan commerce ministry officials told Reuters.

Reuters

Liz Truss, on course to become Britain's prime minister on Monday, looks set to walk straight into a financial market firestorm that she will have to act fast to extinguish. The pound had its worst month against the dollar in August since shortly after the Brexit referendum in 2016 and fell against the euro too.

Reuters

Group of Seven finance ministers agreed on Friday to impose a price cap on Russian oil aimed at slashing revenues for Moscow's war in Ukraine while avoiding price spikes, but Russia said it would halt oil sales to countries imposing it.

Reuters

 

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