Wicks Houghton Group Bi-Weekly Market Update

In a Nutshell: Inflation appears to have stabilized across the developed world despite the continuing impacts of housing and energy costs. Bank of England held rates last week while Canada’s economy appears to be stalling faster than that of the US.

Canada’s GDP was unchanged in July following a decline in June. Services-producing industries edged up for the month, while goods-producing industries contracted.

Canadian September employment rose more than expected by 64,000 (+0.3%) vs. the 20,000 forecast. Wage growth rose slightly to 5.3% vs. the 5.1% expected. The unemployment rate was unchanged at 5.5% for the third consecutive month.

Canadian retail sales increased in July from the previous month, led by increases at food and beverage retailers. Core retail sales, which exclude gasoline stations, motor vehicle and parts dealers, were up beyond expectations.

Canada's manufacturing sector downturn deepened in September as weak market demand weighed on production and new orders, data showed on Monday. The S&P Global Canada PMI fell to a seasonally adjusted 47.5 in September, its lowest level since May 2020, from 48.0 in August.

Canada posted a surprise trade surplus in August as trade rebounded a month after labour strikes shut down ports on the West Coast, data showed on Thursday. Transfers of gold to the United States and higher crude prices helped exports outpace a rise in imports.

Underlying U.S. inflation moderated in August, with the annual rise in prices excluding food and energy falling below 4.0% for the first time in more than two years. U.S. consumer spending increased in August, but underlying inflation still moderated.

The U.S. in September added far more jobs than expected. However, the unemployment rate was unchanged at 3.8%, slightly above expectations. U.S. initial jobless claims inched higher, though well below market expectations remaining close to a seven-month low.

The U.S. trade deficit narrowed more than expected in August as exports increased solidly, likely positioning trade to support economic growth in the third quarter. The trade deficit contracted to the lowest level since September 2020.

Bank of England (BOE) held the current interest rates steady at 5.25% last week. The decision, that surprised many, was largely influenced by the recent inflation data.

Inflation in the euro zone fell to its lowest level in two years in September, with consumer prices rising by 4.3% in September, the slowest pace since October 2021, from 5.2% one month earlier.

The unemployment rate in the eurozone hit a record low of 6.4% in August, reflecting a robust labor market that has spurred wage growth and increased inflation. This development aligns with economists' expectations and matches the previous record low set in June.

Euro zone retail sales fell much more than expected in August, data showed on Wednesday, pointing to weaker consumer demand as inflation remains high.

The European Union's statistics office Eurostat said retail sales in the 20 countries sharing the euro fell 1.2% month-on-month for a 21% year-on-year decline in August.

China's factory activity expanded for the first time in six months in September, suggesting the world's second-largest economy has begun to bottom out. The PMI rose to 50.2 in September from 49.7, according to the National Bureau of Statistics, edging above the 50-point level demarcating contraction in activity from expansion.

West Texas Intermediate crude oil declined  over the last two weeks as fuel demand concerns and interest rates higher for longer outweighed supply tightness heading into winter and strong holiday demand from China.

 

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	-1.5%	-0.2%	-0.3%	+1.6%	-0.8%	-8.8%	-1.2%
Last Week	-1.2%	-0.7%	-1.4%	FLAT	-0.7%	+0.8%	-4.0%

Market data taken from https://www.marketwatch.com/

 

 

The least bad by Avery Shenfeld Link to Article

 

In the UK, the latest inflation numbers showed a CPI of 6.3%, with a tepid 5.9% when excluding food and energy. This led the Bank of England to maintain its current stance on interest rates. In the US, the August CPI was at 3.7%, with a 4.3% pace when excluding food and energy. This supported the Federal Reserve's decision to hold off on a rate hike. However, in Canada, the August CPI reading of 4.0% (3.6% excluding food and energy) led many to believe that the Bank of Canada's decision to pause on rates was premature.

When comparing core inflation measures, Canada's inflation rate excluding food and energy is the least severe among the three countries. However, its recent economic performance is not as strong as the US. The US has seen less evidence of a growth slowdown and has outperformed Canada in per capita GDP gains and jobless rate increases.

Considering these factors, the likelihood of another rate hike in Canada is lower compared to the US. Additionally, the impact of interest rates would be more significant in Canada due to the refinancing challenges faced by Canadians who took on ultra-cheap mortgages in 2020. While high inflation numbers in Canada do not rule out the possibility of further rate hikes, it is important not to assume that Canada's monetary policy will mirror that of the US, especially if Canada's economy continues to show less resilience compared to its American counterpart.

 

 

BMO GAM’s Monthly House View by Frederick Demers Link to Article

 

US Outlook

Spending has accelerated in the US, which is a positive sign of economic resilience and could potentially impact future interest rate decisions by the US Federal Reserve. Real wage growth has become positive, benefiting households, and that the country has reached a state of full employment. These factors contribute to a strong economic backdrop.

 

Canada Outlook

In Canada, there was a contraction in the economy during Q2, measured by real GDP. Despite a growing population, the per capita basis shows a gloomier picture with a shrinking economy. This is attributed to the impact of rate hikes by the Bank of Canada (BoC), despite a healthy labor market Canadians are facing higher mortgage rates and lingering inflation, making the overall outlook increasingly challenging.

International Outlook

The economic outlook for Europe is challenging, with interest rate hikes and high energy prices limiting economic activity. The severity of the upcoming winter and energy demand will determine the potential headwinds.

Japan stands out as a brighter spot within the EAFE region, with a resilient economy and wage increases driving monetary policy normalization.

 

Key Risks

• There is still a risk of a second wave of inflation, in large part due to energy, but it is more manageable now than it was last year

• We may see another rate hike from the Fed, but the end of the cycle is near

• Recession In Canada likely approaching and may already have arrived, though it should be mild

• The US will have to wait a while longer

• The US consumer is resilient

• The Canadian consumer is starting to struggle

 

 

MacroMemo - October 3 -30, 2023 by Eric Lascelles Link to Article

 

Recession still ahead?

The US 10-year yield has reached its highest level in over 16 years, surpassing expectations in response to rate hikes. The term premium, which measures the additional yield investors demand for holding longer-term bonds, has also been rising and is now in positive territory according to the Federal Reserve Bank of New York. Several factors contribute to the increase in yields, including quantitative tightening, the U.S. debt downgrade, the large U.S. fiscal deficit, rising Japanese and European yields, and China's defense of its currency. Tighter monetary policy typically impacts the economy with a lag, and historically, there has been an average lag of 27 months from the first US rate hike to the onset of a recession. Therefore, the possibility of a monetary policy-induced recession is just opening, with June 2024 being the 27-month historical norm for the start of a recession based on the U.S. Federal Reserve's first rate hike in March 2022.

 

 

The lagging economic impact of rate hikes – History suggest a US Recession in June 2024

 

US Q3 GDP tracking

The US Q3 GDP estimates are characterized by unusually high uncertainty, and the outcome could range from decent to great.

 

 

Canadian Q3 GDP tracking

July GDP in Canada remained flat at 0.0%, However, there is a slight decline projected for September GDP. When these figures are combined, it results in a small annualized gain of +0.1% for the third quarter. This modest growth, following a slightly negative print in the second quarter, does not provide a strong endorsement of the Canadian economy.

 

 

Higher mortgage rates lift Canadian shelter inflation

 

 

 

 

Inflation

In the US, the Consumer Price Index rose from slightly above consensus but in line with forecasts. In Canada, the annual increase more materially over the year. One difference between the two countries is how shelter costs are captured, with Canada including mortgage interest payments, which have surged due to rising mortgage rates.

This has generated a positive inflation impulse, preventing shelter costs from decelerating despite easing home prices. In the US, the main concern was that core inflation rose by more than the previous two months.

While there are some inflationary pressures, the underlying inflation story remains stable and indicates gradual improvement rather than a problematic spike in inflation.

 

High inflation in the U.S. is becoming much less broad

 

 

 

Hawkish pauses

Recently Central Banks have slowed down their tightening measures. The U.S. Federal Reserve, Bank of Canada, and Bank of England have all kept their policy rates unchanged in their most recent meetings, while the European Central Bank has indicated that its rate increase in September may have been the last for now.

The central banks are heavily dependent on data and face uncertainty regarding the future path of the economy and whether inflation is truly under control. As a result, there are various possible scenarios, ranging from further tightening to aggressive monetary easing. However, the most likely scenario is a period of time with policy rates remaining relatively stable at their current elevated levels.

Central banks are cautious about raising short-term rates further, but they also want to avoid signaling near-term rate cuts, as this could lead to lower bond yields and undermine their efforts to control inflation. The recent decision by the US Federal Reserve demonstrated a hawkish stance, with participants upgrading their GDP and unemployment forecasts and indicating a reduced urgency to cut rates in the coming years. While some believe that the neutral policy rate may have increased more than expected, it is still speculative, and it is premature to heavily bet on rate cuts in the coming months.

 

 

NOTABLE NEWS

 

The 216-to-210 vote marked the first time in history that the House removed its leader. McCarthy told reporters he would not make another run for speaker.

Reuters

 

The U.S. Commerce Department on Friday added 42 Chinese companies to a government export control list over support for Moscow's military and defense industrial base, including supplying the Russian sector U.S.-origin integrated circuits.

Reuters

 

When you read the content we share and it causes you to think of others in your life who would benefit from seeing it, please don’t hesitate to share it with them.

 

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

 

Wicks Houghton Group are Investment Advisors with CIBC Wood Gundy in Calgary, Alberta, Canada. The views of Wicks Houghton Group do not necessarily reflect those of CIBC World Markets Inc.

CIBC Private Wealth consists of services provided by CIBC and certain of its subsidiaries, including CIBC Wood Gundy, a division of CIBC World Markets Inc.

The CIBC logo and “CIBC Private Wealth” are trademarks of CIBC, used under license. “Wood Gundy” is a registered trademark of CIBC World Markets Inc.

If you are currently a CIBC Wood Gundy client, please contact your Investment Advisor.

This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. © CIBC World Markets Inc. 2023.