Market update

The Bank of Canada hiked interest rates by three-quarters of a percentage point to a 14-year high on Wednesday, as expected, and said the policy rate would need to go even higher as it battles raging inflation.

Canadian labour market contracted this month, with a 40K decline in jobs marking the third consecutive monthly decline. However, unlike the prior two months, the latest drop can't be easily brushed aside as a consequence of reduced labour supply.

Canada's July merchandise exports decreased 2.8%, while imports were down 1.8%. Canada's merchandise trade surplus with the world narrowed in July as a result of this decrease in net exports.

Equifax Canada says total consumer debt rose in the second quarter, up 8.2% compared with the same quarter last year.

Federal Reserve Chair Jerome Powell reiterated that the U.S. central bank will continue to raise interest rates in order to tame surging inflation and warned against prematurely loosening monetary policy.

The U.S. trade deficit narrowed to a 9-month low in July, generally in line with market forecasts. Total exports were up 0.2% to a new high while imports were down by 2.9%.

U.S. Jobless claims fell last week to a three-month low, underscoring the robustness of the labor market even as the Federal Reserve raises interest rates. Claims came in at 222,000 which was well below forecast.

The European Union proposed a price cap on Russian gas on Wednesday after President Vladimir Putin threatened to cut off all energy supplies

The European Central Bank delivered its biggest-ever interest rate hike to combat inflation, raising them by 0.75% on Thursday. They also signaled to deliver another historic 75 bps increase in October.

U.K. Prime Minister Liz Truss announced a UK energy aid plan to help citizens with soaring energy bills. Truss stated the typical household “will pay no more than £2,500 per year for each of the next two years” which will give the average household a saving of £1,000 per year.

Data showed German industrial production slightly fell in July on supply bottlenecks due to ongoing pandemic-related distortions and the war in Ukraine.

Ukraine has recaptured more than 700 sq km (270 sq miles) of its territory in the east and south during a lightning counteroffensive, a Ukrainian general said on Thursday, offering the first official assessment of the operation.

Data showed China’s exports grew 7.1% in August from a year earlier but missed estimates of 12.8% forecast as high inflation stalled overseas demand and new COVID-19 curbs and heatwaves disrupted output.

China's central bank said it will cut the amount of foreign exchange reserves that financial institutions must hold, a move to slow the yuan's recent depreciation.

China’s consumer inflation came in at 2.5% in August, lower than the 2.7% recorded in July as lockdowns impacted spending and food price growth slowed.

Oil fell for the week with fears of weaker demand and the prospect of more interest rate hikes despite President Vladimir Putin threatening to cut off energy supplies if price caps are placed on the country’s oil and gas exports. There was a late recovery, though still ended down for the week.

Gold gained as the U.S. dollar eased and with continuing worries of higher interest rates.

 

Weekly change: TSX: 2.6%; DOW: 2.7%; S&P 500: 3.6%; NASDAQ: 4.1%; GOLD: FLAT WTI: -1.2%

 

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ECONOMIC FLASH! Bank of Canada Says We're Not There Yet by Avery Shenfeld Link to Article

The 75 bp hike to an overnight rate of 3.25% was widely expected, but we took note that the final paragraph opted to retain the view that “interest rates will need to rise further.” CIBC Economics target for the end of this tightening cycle has now risen with another 25-50 bps on tap for October.

Even in October, the Bank is likely to want to leave the door open for a further move until it gets more definitive evidence of a deceleration in growth and inflationary pressures. A front-end loaded strategy for rate hikes is designed to take rates up quickly, though giving some breadth to pause at some point, given that there is a lag in seeing that response in growth, and an even longer lag for its impacts on inflation.

It noted the high recent core CPI reading as a reason to give less weight to the gasoline-related drop in headline prices. It expressed concern about high short-term inflation expectations, opting not to mention the reasonably well-anchored expectations further out and despite conceding Q2 real GDP growth missed their forecast, they emphasized the strength of domestic demand.

There were only two small indications that rate hikes might come to an end anytime soon. They expect growth to slow ahead and the moderation in resource prices other than natural gas. Given some of the recent conflicting economic data, the Bank of Canada might opt to hold off on anything material until the Monetary Policy Report in October, and the need to have a fully updated forecast before weighing in too strongly.

Implications & actions

Re: Economic forecast — The BoC appears ready to sacrifice more growth than we expected to get inflation falling on a faster trajectory, and we'll be bumping down our GDP projections for Canada in an updated forecast to be released next week. CIBC Economics are considering what BoC’s next steps and whether rates will head to 3.5% or 3.75%. If 3.75% seems likely, that would be a half point above what was built into prior GDP estimates, and therefore somewhat material to the outlook.

Re: Markets — Yields had been falling going into the announcement but ticked up a bit on the news, and the Canadian dollar was a bit stronger. The fact that the Fed is also talking fairly tough these days, and days and might also be leaning to hike a bit more than we had projected, dulls the benefits to the loonie of a more hawkish Bank of Canada. We still judge it as unlikely that the peak overnight rate in Canada will end up exceeding that of the US.

 

ECONOMIC FLASH! Canadian trade (July); Starting to come back down to Earth by Andrew Grantham Link to Article

With oil prices starting to come back down to Earth in July, so too did Canada's surplus in goods trade. The $4.1bn surplus was down from a slightly revised $4.9bn in the prior month and was a little wider than the consensus expectation ($3.8bn). The further decline in oil prices seen since July should see the trade surplus continue to narrow ahead.

Exports fell by 2.8% on the month, although that move was driven by price declines. In real terms, exports were actually up by 1.7%. Exports of energy products fell by 4.2%, albeit due primarily to lower prices.

Imports also fell during the month (-1.8%), although in this case the reduction was mainly due to volumes rather than prices, although there was an improvement in autos which is good news for a sector that has struggled the most with supply chain issues.

The deficit in services continued to widen, with imports (+3.7%) rising sharply but exports holding broadly stable. Imports of travel services rose by 20.5% as Canadian travel abroad continued to recover. However, this area of imports remained 32% below its pre-pandemic levels, showing that there is room for the services trade deficit to widen further in the months ahead.

Implications & actions

Re: Economic forecast — Looking ahead, there is still room for the deficit in services to widen, particularly in the winter months due to the rebound in travel, while the continued downtrend in oil prices through August and into September should trim the surplus on the goods side further. As a result, the overall trade balance, while remaining in surplus territory for now, is expected to narrow further.

Re: Markets — There was little market reaction to the broadly in-line with consensus data release.

 

Global Insights

The crowning achievement of Britain's Queen Elizabeth, who died on Thursday after 70 years on the throne, was to maintain the popularity of the monarchy across decades of seismic political, social and cultural change that threatened to make it an anachronism.

Reuters

The European Union proposed a price cap on Russian gas on Wednesday after President Vladimir Putin threatened to halt all energy supplies if they took such a step, raising the risk of rationing in some of the world's richest countries this winter.

Reuters

Explainer: How could Europe cap surging energy prices? Reuters

High-profile universities and state-run research institutes in China have been relying on a U.S. computing chip to power their artificial intelligence (AI) technology but whose export to the country Washington has now restricted, a Reuters review showed.

Reuters

The Calgary Real Estate Board says August's benchmark price for a home in the city rose by 11 per cent since last year, while the number of sales was almost unchanged in the same period.

Bloomberg

 

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