June 30, 2022Money Education Financial literacy Economy Good reads Professionals Commentary In the news News Trending Weekly update
What's Happening Today - June 30
It’s month end, and it looks as though the markets are going to limp into the long weekend. If you own or follow Shopify (SHOP), please note that today the 10 for 1 stock split settled, and so SHOP owners now have 9 additional shares, for every share they previously own. Share price has been adjusted accordingly. As previously noted with stock splits, it is generally seen as an positive move for share value. However, the split was planned prior to the market correction, so until things get back to normal we can expect continued share price volatility. Other than that, it’s a pretty light news day, so let’s have a look at the recent release from our CIBC Economics group:
This week saw Fed Chair Jerome Powell admit to some of the mistakes his Bank, and others, made during the pandemic. Yet while the speedy recovery in demand caught many off guard, he appeared to pin much of the blame still on supply issues. Policymakers are now working to “get smarter” on forecasting the supply side of the economy, because previously “much too much” emphasis had been placed on managing demand.
However, while it is true that supply dynamics have been much more important than is typical during the pandemic-driven recession and recovery, for the US economy more than most others, demand has also played a big role in driving inflation.
On the goods side, it’s very easy to see that demand is still excessive relative to pre-pandemic norms. While other countries have seen retail sale volumes return to levels that are broadly consistent with, or even below, a 2% annualized growth rate since the start of the pandemic, that has clearly not happened in the US. Increased spending on services as they reopened was not funded through a substitution away from goods as had been expected.
Indeed, it is other countries, including Canada, that seem to have suffered more from supply disruptions. While retail sales volumes haven’t been as strong relative to the US, the inventory to sales ratio (viewed as a sign of inflationary pressure) has actually fallen slightly further. Bridge blockades, weather events and companies potentially redirecting shipments to fill the insatiable appetite of the US consumer have likely all contributed to that trend.
There is even evidence that the US hasn’t been hit quite as hard as other countries by labour shortages in key consumer-facing service industries, despite high vacancy rates and an overall labour force participation rate still below its pre-pandemic level. In accommodation & food services, where the cost of labour most directly impacts pricing, total hours worked in the US are still 7% below end-2019 levels, despite a full recovery in demand. However, in Canada hours are down 8.5% on the payrolls survey and an even larger 15% if you trust the labour force numbers. The UK data are also still showing a double-digit decline relative to 2019.
If demand is a bigger factor driving inflation in the US than it is in many other countries, a valid question would then be why aren’t we forecasting more rate hikes than the Fed itself? The simple answer is that interest rate increases are not the only factor working to slow the US economy this year, with the turn in fiscal policy and squeeze on disposable incomes from high inflation also weighing. Indeed, a lack of further upward momentum in our reopening index (covering services such as air travel and restaurant bookings) in recent months suggests that demand may already be softening.
While economic activity will likely have to be weaker than the Fed’s recently downgraded projections to bring inflation back to target, interest rates shouldn’t have to go much above 3% to make that happen.
Across the pond, European stocks slid on worries that central banks determined to tame inflation will hamper global economic growth. Russian forces have relinquished control of Snake Island in the north-western Black Sea, which has been battled over since the beginning of the war.
Asian stock markets closed mixed. Chinese stocks marked their best month in nearly two years supported by signs of an economic recovery after the easing of COVID-19 restrictions, while Japan's Nikkei dropped on weak monthly production data.
Oil prices dipped as the market weighs supply concerns.
Finally, I’d like to thank Dr. Neville Winchester for his talk on Islands in the Sky and the concerns around global warming. We like to provide a wide range of topics for our seminar series, and we’re certainly open to suggestions for our next season, starting in the Fall.
As always, let us know if you have any questions, or if you’d like to get together for a review.