Wicks Houghton group BI-Weekly Market Update

IN A NUTSHELL: Another two weeks of mixed news across North America as markets reacted positively to material shifts downward in inflation data in the US, labour markets remain relatively resilient despite global manufacturing continuing to contract. Britain’s cooling labour market could be the deflationary assistance BoE was looking for.

The Bank of Canada will raise interest rates by a quarter-point for a second straight meeting to 5.00% on July 12 following a five-month pause earlier this year. Economists expect BoC to hold rates steady well into 2024 now.

The S&P Global Canada Manufacturing PMI declined to 48.8 in June from 49.0 in the previous month. Output, new orders and employment all decreased as high borrowing costs continued to hamper economic activity.

Canada's unemployment rate rose to 5.4% in June from 5.2% the previous month, the highest level since February 2022.

Canada recorded a surprise trade deficit in May, a sign economic growth may be slowing, as energy and grains dragged down exports and unwrought precious metals and motor vehicles contributed to a surge in imports. The country's trade deficit is the largest since October 2020.

The U.S. Labor Department on Wednesday reported the consumer price index rose at an annual rate of 3% in June, below economists' expectations and the lowest reading since March 2021. It marked a material leg down in a figure that was recorded at 4% in May this year.

The ISM manufacturing gauge fell to 46 and this is the longest stretch of readings below 50, which indicates shrinking activity, is the longest since 2008-2009. However, price pressures at the factory gate continued to deflate, a silver lining for the economy. The ISM non-manufacturing PMI increased however to 53.9 last month from 50.3 in May. The services industry accounts for more than two-thirds of the economy.

The U.S. trade deficit narrowed in May, with imports of goods dropping to their lowest level since late 2021 as higher borrowing costs slow domestic demand. The trade deficit decreased 7.3% for the month of May.

U.S. initial jobless were down after rising last week to be well below expectations. Private payrolls also increased by 497,000 in June vs. the 228,000 expected. Leisure and hospitality led the way, followed by construction. The unemployment rate also decreased to 3.6% in June from 3.7% in May.

The S&P Global/CIPS UK Manufacturing PMI fell to 46.5 from 47.1 in May, its lowest reading this year and one of the weakest since the 2008-09 financial crisis, but revised up from an earlier preliminary reading.

Pay pressures in Britain's labour market cooled further in June, according to a survey of recruiters published on Monday that could help ease some of the Bank of England's (BoE) concerns about inflation pressure. The survey showed the availability of staff rose for the fourth month in a row in May, the steepest month-on-month increase since November 2009 excluding the coronavirus pandemic period.

Euro zone manufacturing activity contracted faster than initially thought in June as persistent policy tightening by the European Central Bank squeezed finances, according to a survey which painted an increasingly gloomy outlook for industry. The downturn was broad-based with surveys showing factory activity in all four of the euro zone's biggest economies contracted last month.

Germany's manufacturing sector contracted at the fastest rate in more than three years in June, with both output and new orders falling, a survey showed on Monday. The HCOB manufacturing PMI, which accounts for about a fifth of Germany's economy, fell to 40.6 from 43.2 in May, the fifth consecutive monthly decline.

China's factory activity growth slowed in June, with sentiment waning and recruitment cooling as firms grew increasingly concerned about sluggish market conditions. The Caixin/S&P Global manufacturing PMI eased to 50.5 in June from 50.9 in May, indicating a marginal expansion in activity.

China's export slump is expected to have accelerated in June, as sluggish overseas economies struggling with inflation and rising interest rates buy up fewer goods from Chinese factories. Outbound shipments from the world's second-largest economy were projected to have fallen 9.5% year-on-year, following a drop of 7.5% in May.

West Texas Intermediate crude oil rallied over the 2 weeks  on optimism about higher energy demand and a weaker dollar as well as some supply constraints and disruptions occurring across the globe. WTI is poised to register a third straight week of gains.

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

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

 

Market Data	S&P/TSX	S&P 500	DOW	NASDAQ	STOXX EU	WTI	GOLD
This Week	+2.2%	+2.4%	+2.3%	+3.3%	+2.7%	+1.9%	+1.4%
Last Week	-1.6%	-1.2%	-1.9%	-3.1%	-3.7%	+4.6%	FLAT

 

 

ECONOMIC FLASH! Bank of Canada: Even more to come? by Andrew Grantham Link to Article

The Bank of Canada has increased its overnight rate to 5.0% in response to evidence of excess demand and persistent core inflation. The bank's forecast for growth and inflation is higher than previously expected, with quarterly growth predicted to be 1.5% in the second and third quarters. The bank anticipates achieving its inflation target of 2% by mid-2025, later than previously projected. However, there is a possibility that the economy may underperform the bank's forecasts, leading to quicker progress in inflation and potentially an interest rate cut in April 2024.

Re: Economic forecast — With expectations for near-term GDP growth set higher than has been typical in recent MPR's, and with the Bank having now pushed back its projection for inflation returning to target, there appears to be greater scope for the economy to underperform the BoC's current forecasts from here and for inflation to make quicker progress back to target than the Bank expects. However, that underperformance may not come soon enough to prevent another 25bp hike at the September meeting, which given the tone today now seems likely. These recent interest rate hikes may ultimately, however, prove to be more than is needed to bring inflation back down to target, and as a result we have pulled forward our expectation for the first rate cut in 2024 slightly to April, from June previously.

 

 

Why Canadian commercial real estate could prove relatively resilient compared to the US By David Andrich, CFA Link to Article

The Canadian commercial real estate market may be more resilient compared to the US due to several factors. The three main factors are:

• Canadian lenders have the ability to seek recourse, which limits the number of liquidation sales by banks and supports asset values.
• Canadian owners have access to below-market rates, particularly for certain asset classes such as multi-family properties through CHMC financing.
• The ownership of commercial real estate in Canada is more consolidated, particularly for office properties, which allows large institutional owners to carry assets at a negative yield for longer periods of time.

Despite challenges such as a reduction in demand for office space and higher financing costs, the Canadian market may still prove to be relatively resilient compared to the US.

 

 

Quick Take:  US CPI (June) by Katherine Judge

Total inflation decelerated sharply in the US in June, with the total CPI index registering a 3.0% annual  pace, down from 4.0% in the prior month, and representing the slowest pace seen since early 2021. That drop was helped by base effects, as a strong year-ago increase dropped out of the calculation, and the 0.2% m/m increase in the headline CPI was a tick below expectations, along with the annual pace. Price pressures also looked more subdued than expected on a monthly basis in core categories. Excluding food and energy, prices rose by the 0.2% m/m, below the consensus expectation of 0.3%, and the slowest monthly increase seen since mid-2021. That left annual prices at 4.8% (vs. 5.0% expected), a five tick deceleration from the prior month. Encouragingly for the Fed, there was relief in policymakers' preferred measure which tracks core services ex. rent of shelter prices, and is a better gauge of underlying price pressures tied to demand. That measure showed a -0.01%  monthly pace in June, a sign that past rate hikes are starting to work to cool inflation.

 

 

Still Overvalued By Brian S. Wesbury, First Trust Chief Economist Link to Article

Prior to 2008, banks actively traded federal funds (reserves) amongst each other, which set the federal funds rate. However, since the introduction of Quantitative Easing, the Fed has flooded the system with reserves and now pays banks to hold them, breaking the direct link between interest rates and the money supply.

The market may be underestimating the possibility of the Fed raising short-term rates again this year, given strong economic reports and high inflation. The low unemployment rate also suggests the Fed may be more aggressive. This could impact stock valuations, and the article recommends more defensive strategies.

Further to this, the significant drop in the M2 measure of the money supply has the potential to pull the US into a recession. This is something investors are less worried about because they think the Fed will cut rates again in 2024. Overall, investors may be too optimistic about how the Fed is managing the current economy and need to remain cautious.

 

 

MacroMemo - June 27 – July 17, 2023 by Eric Lascelles Link to Article

Canada enjoys growth advantage

Canada suffers from the same population issues as other developed countries, yet its overall demographic profile is markedly superior thanks to enormous immigration numbers. In fact, due primarily to immigration, Canada’s population increased by a record 1.05 million people in the year to March 2023.

It should be conceded that very little of the population growth is domestically generated and forecasts suggest that Canada’s population will grow another 19% by 2050, which is faster than any other country. RBC Economics suggests that Canada’s actual population growth will be somewhat faster than this, as the UN forecasts predate the federal government’s latest upgraded immigration target.

 

 

 

NOTABLE NEWS

 

Global public debt surged to a record $92 trillion in 2022 as governments borrowed to counter crises, such as the COVID-19 pandemic, with the burden being felt acutely by developing countries, a United Nations report said.

Domestic and external debt worldwide has increased more than five times in the last two decades, outstripping the rate of economic growth, with gross domestic product only tripling since 2002.

Reuters

 

U.S. President Joe Biden's administration will cancel $39 billion in student debt for more than 804,000 borrowers, the Education Department said on Friday, describing the relief as the result of a "fix" to income-driven repayment (IDR) plans.

Reuters

 

 

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Aurie Wicks, CA, CPA, CFP                                   Bram Houghton, CFA, CFP

Wealth Advisor                                                          Wealth Advisor

(403) 835 – 4785                                                      (403) 690 – 9376

Aurie.Wicks@CIBC.com                                                 Bram.Houghton@CIBC.com

 

 

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