Market update

The Parliamentary Budget Officer on Thursday estimated Canada is on track for a deficit this year that’s less than half of the government’s projection. The watchdog said that, under status quo policies, Canada could post a $25.8-billion deficit in 2022-23. In April, the government called for a $52.8-billion deficit this fiscal year.

The Canadian Real Estate Association (CREA) reported that September sales were down 3.9% compared with August. Compared with a year ago, home sales in September were down 32.2% and about 12% below the pre-pandemic 10-year average for the month.

U.S. September CPI rose month-over-month to 8.2% in September versus the expectations for 8.1%. The annual Core CPI accelerated to 6.6% in September versus a 6.5% forecast.

U.S. weekly jobless claims rose to 228,000 versus the expectations of 225,000.

U.S. retail sales came in at 0.0% versus the 0.2% forecast in September as high inflation and rising borrowing costs hit consumer demand. Receipts were down at motor vehicle parts dealers, and gasoline stations while sales at grocery stores rose due to rising prices in food.

U.S. producer prices increased more than expected in September, but underlying goods prices posted their weakest reading in nearly 2-1/2 years as supply chains improved further, offering some hope in the battle against inflation.

The average contract rate on a 30-year fixed-rate mortgage in the U.S. rose by 6 basis points to 6.81% for the week ended Oct. 7 while the MBA's Market Composite Index, a measure of mortgage loan application volume, fell 2.0% from a week earlier and is down roughly 69% from one year ago.

In the U.K, 20 and 30-year bond yields hit their highest level since 2002 at 5.195% and 5.1% respectively, passing above 5% for the first time since the BoE began buying bonds on Sept. 28 to calm turmoil triggered by Prime Minister Liz Truss's tax cut plans.

The Bank of England is further boosting its emergency bond-buying plan to include inflation-linked bonds and warns of market dysfunction.

The G7 is holding a virtual meeting today on Ukraine support following Russia's missile strikes as the EU presses Turkey to align on Russia sanctions.

The International Monetary Fund cut its global growth forecast for next year to 2.7%, 0.2% lower than its July forecast.

Aluminium prices on the London Metal Exchange (LME) soared on Wednesday after Bloomberg reported that the United States was considering a ban on Russian Aluminium in response to the conflict in Ukraine.

West Texas Intermediate crude prices slid for the week as recession fears and a flare-up in Covid-19 cases in China raised concerns over global demand. Oil prices stabilized finding continued support from an OPEC+ decision last week to tighten global supply.

China’s Covid cases have spread to Shanghai with authorities asking for patience with a fresh set of testing and lockdowns. China's state media endorsed the country's zero Covid strategy as Covid cases continue to climb.

 

Weekly change: TSX: -1.4%; DOW: 1.2%; S&P 500: 1.6%; NASDAQ: -3.1%; GOLD: -3.1%; WTI: -8.2%

 

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

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

 

 

CIBC Economics Quick Take: US CPI (Sep) by Katherine Judge

The September inflation data for the US showed that core price pressures remained red hot, adding urgency to the Fed's rate hiking path. Total prices advanced by 0.4% m/m (vs. 0.2% expected), as higher food prices combined with strength in core prices, which left annual inflation at 8.2% vs. 8.1% expected. Core prices were up by 0.6% m/m (vs. 0.4% expected), extending the momentum seen in August. The rise in core prices reflected ongoing increases in the shelter component, which lags developments in the housing market by around a year. But price pressures were broad based, compounding pressure on the Fed to act, as medical care services, car insurance, new vehicles, and household furnishings/operations also rose strongly. That left annual core inflation three ticks higher at 6.6% (vs. 6.5% expected).

 

BMO Weekly Commentary by Sadiq S. Adatia Chief Investment Officer Link to Article

Oil Price Surge

Last week OPEC+, a consortium of oil producing countries including Russia, agreed to cut production by two million barrels per day. From a portfolio standpoint, the reduction was encouraging, as we expected supply-demand dynamics to remain supportive of higher energy prices.

What some investors don’t recognize is that although OPEC can easily increase capacity, they have no interest in raising output at this time. Energy producers also benefitted, with higher oil prices offering greater confidence for their plans to invest in new projects that require upfront investment.

Bottom Line: With inflation dominating headlines through the summer, markets underweighted the geopolitical risks in energy prices.

U.S. Trade Deficit

Reports that the U.S. trade deficit shrank in August was met with optimism last week. But unfortunately, the news does not impact our perspective of where to invest. U.S. markets are still sound, though valuations remain concerning amid a slowdown on the consumer side.

Companies will likely see earnings weakness in territories outside the U.S., which represent their primary growth opportunities. All that happened was imports fell less than exports—an unsurprising trend given the impact of China’s zero-Covid policy on manufacturing output. Looking ahead, a permanent re-opening in China would counterbalance those numbers.

Bottom Line: The shrinking U.S. trade deficit does not make us anymore—or less—bullish on U.S. equities.

Bonds Upside

One of the big themes this year has been the re-rating of asset classes. At this stage, the impact of rising interest rates will likely be minimal. Markets have priced in monetary policy actions.

The downside risk appears to be significantly lower moving forward, and higher yields make the asset class much more attractive overall. More importantly, bonds are starting to act like bonds again. If we see a big down day in equities, fixed income assets are no longer matching them step for step.

Bottom Line: Our stance on fixed income can be upgraded from underweight to neutral now that the worst of interest rate hikes are behind us.

 

Global Insights

Russia has conducted a broad mobilization of Russians to reinforce its long front after Ukraine won back territory in recent weeks. Moscow has also threatened to use nuclear weapons to defend territory including four regions of Ukraine it annexed late last month but does not fully control.

Reuters

The Biden administration’s new restrictions on doing business with China are sending shock waves through the global semiconductor industry, with chip-equipment makers girding for perhaps the most painful fallout.

Bloomberg

Since Russia annexed Crimea in 2014, American companies have been prohibited from dealing with MMZ Avangard, a state-owned firm that makes missiles for Russia. But even as the United States was taking actions to blunt MMZ Avangard's business, a publicly traded American company, Extreme Networks was providing MMZ Avangard with computer networking equipment for its office IT systems.

Reuters

New bank lending in China nearly doubled in September from the previous month and far exceeded expectations after the central bank acted to spur an economy weakened by a property crisis and a resurgence of COVID-19 cases.

Reuters

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