May 27, 2022Money Financial literacy Economy In the news News
What's Happening Today - May 27
I must say this was a much more pleasant week on the markets. Not to say that it’s all sunshine and roses again, but there seems to be some positivity creeping into the investor psyche of late. Also, the Canadian banks just posted their earnings, and most have chosen to raise their dividends. Remember that the stock market is a leading indicator of economic health, so it generally goes down ahead of declining productivity, but then leads the way back up before the economy turns the corner. Now I’m in no way suggesting that we’re out of the woods, but of the three major issues impacting growth (inflation, Covid, and the war), two are starting to show signs of having a dissipating impact. My favorite little bit of news in this department is the signs that the supply chain is healing. Interest rate hikes can cool consumer demand, but inventory builds will also help to correct the supply/demand imbalance.
Here in Canada we’re expecting another 50 bps rate hike by the Bank of Canada in June. Unless we are thrown a big curveball by the statisticians next week, the levels of both headline GDP and final demand from the private sector should both be around 1.5% above their 2019 fourth quarter level as of quarter one 2022, but below their pre-pandemic trends. Now, we should not take that to mean that there is no excess demand in the Canadian economy at all. The recovery in demand for services is now starting to exceed supply in some areas. Canadian households are continuing to spend more on goods per capita than before Covid struck, although that excess consumption is nowhere near as excessive as in the U.S.. But by and large, excess demand in Canada is much more concentrated in one area: housing. That also just happens to be the area of the economy that is the most sensitive to interest rate increases, and an area that recent home resale data suggests is already starting to slow from the “exceptionally high” levels that the Bank of Canada described in its last policy statement. Due to the differing ways housing is included in Canadian and US inflation baskets, a moderation in house prices will also have a direct impact on CPI.
Down in the States, yesterday's Core Retail Sales data showed consumer resiliency despite rising inflationary pressures, as sales rose +2.4% month-over-month verses the +2.1% forecast. U.S. personal spending rose 0.9% in April, above consensus. Our economics team was expecting a +0.7% month-over-month gain for incomes (flagged by decent wage growth/jobs), and +0.8% for spending (flagged by strong gains in retail sales/pickup in services). All are slightly above consensus, and we expect solid gains for inventories as well. Markets continue to assess whether inflation has reached its peak, as the Fed continues to battle persistent red-hot price pressures. On the data front, today's U.S. Michigan Sentiment Index release shows a flat reading of 59.1, indicating consumer expectations have stalled with respects to growth. Most Fed officials endorse 50bps hikes for the next two meetings, agree to move “expeditiously” to neutral while restrictive policy may become appropriate, and a ‘number’ support Mortgage Backed Securities sales. The “well positioned” headline supported risk, and hit the USD, once it was out, given the chatter of a possible ‘pause’ later this year. But again, that’s a fade considering that the path back to the Fed’s inflation target is going to be long and winding. In other news, Manchin says that he’s serious about talking to Schumer on a deficit reduction package.
European markets edged up with consumer and technology stocks leading the gain. Utilities and energy stocks slipped amid the U.K. government’s plans of a windfall tax on oil and gas companies. Sunak says that the package will have under 1% impact on inflation. The European Central Bank’s De Cos says that the process of increasing rates should be ‘gradual’ with decisions on speed still data dependent. Ukraine officials said that Russian forces have the upper hand in Donbas, while the U.S. rejected Putin's proposal that he will facilitate Ukraine grain and fertilizer exports only if sanctions are lifted.
Asian markets advanced on strong results from regional technology firms, with shares in Hong Kong leading the gains. Shanghai authorities have been allowing more businesses to reopen as it aims to end its lockdown on June 1. China’s industrial profit growth in April fell 8.5% from a year ago, the fastest pace in two years, primarily due to supply bottlenecks brought on by the pandemic. Taiwan lowered its 2022 GDP growth forecast citing global inflation and Covid. Bloomberg reports that unpublished remarks from Premier Li contain concerns that economic growth is slipping out of the “reasonable range”. In Japan, CPI comes in at +2.4% year-over-year (versus expected +2.5%) while the ex-fresh food gauge came in at +1.9% year-over-year (versus +2.0%). The Bank of Japan’s Kuroda says that core CPI is likely to stay around 2% for around one year, unless energy prices drop sharply. Prime Minister Suzuki announced that the country will reopen for tourism from June 10th. Australia’s retail sales rose 0.9% in April, just below estimates for a 1% increase.
Finally, there are still a few seats available for Kristin Yarker’s presentation in the boardroom on Monday. Let us know if you’d like to pop by!
As always, give us a call if you have any questions, or if you’d like to come in for a review.