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What's Happening Today - July 5
I hope everyone enjoyed the Canada Day long weekend! The markets were solidly in the green on both sides of the border (and weekend) in staggered sessions. Today, unfortunately, we’re seeing the hangover from the party as it appears we’ve decided to be “risk off” in early trading.
Post the long weekend, it’s something of an interesting week here in Canada, as we face several data releases of high significance in terms of the trade balance on Thursday, and employment on Friday. Yesterday, the focus was on the Bank of Canada’s second quarter Business Outlook survey. Our colleagues in CIBC Capital Markets Economics anticipate that the Bank’s surveys will be closely watched for signs of whether current high inflation rates are beginning to impact longer-term expectations. Such indications would prove notable for Bank of Canada terminal rate assumptions. We continue to expect that the BoC will prove to be less aggressive than the Fed into year-end, albeit this has yet to be material priced. The surveys will be a key input for the July 13th BoC rate decision, and we expect wage pressures will keep a 75bps hike firmly on the table. Currently the market is pricing in around 70bps for next week. In other news this morning, Canadian Building Permits month-over-month for May were -0.6% versus a +2.4% consensus expectation. There was some positive news this morning, as a strike affecting certain CNR employees ended after union workers agreed to binding arbitration
Recession concerns continue to grow in the U.S. despite extended U.S./China talks aimed at reducing tariffs, as President Biden looks to ease some of the trade restrictions imposed by the former administration. Such fears were amplified by the slide in new order and employment in the U.S. manufacturing ISM print on Friday, the weakness in the latter encouraged an aggressive U.S. Treasuries rally into the close. However, as the Fed is set to remain more activist than most other central banks, even if the market has pared year-end Fed expectations by around 40bps since the mid-June peak, the USD is likely to remain well supported. Another economic data release showed the final durables print for May should come in-line with the advance print (core orders grew by 0.7%, while core shipments should be around +0.8%).
Over in the Eurozone, the German government has drafted a law that would allow it to take ownership stakes in firms that have been hurt by soaring costs of imported gas. The law could be passed as early as this week and would set the table for a bail-out for Germany’s largest importer of Russian gas, and would allow it to pass on higher costs of gas to consumers (which are currently receiving gas under long-term contracts not open to renegotiation). Nordstream 1 will undergo maintenance beginning July 11, and there’s a good chance that it might not come back on-line. As of last week, flows were 60% lower than where they were for most of 2021. Norwegian offshore workers are planning to strike from today which would affect oil and gas output by a meaningful degree. On the data front, June Eurozone services Purchasing Managers Index (PMI) dropped to 5-month low of 53.0, compared to preliminary 52.8 and a May reading of 56.1.
Asian markets closed mixed. Despite the positive news flow, mainland China stocks fell as traders watched for developments in Anhui over its Covid-19 outbreak. Senior officials from China and the U.S. discussed economic sanctions and tariffs amid reports President Joe Biden is looking to roll back some of the trade levies imposed by the former administration. Services PMI comes in at 54.5 for June taking the composite figure back to 55.3 (from 42.2). Clearly, it’s the effects of re-opening. Reuters reports that China will set up a state infrastructure fund to boost spending and revive activity. The fund is expected to be set up by the third quarter. The Financial Times has a great read on the inflation backdrop in Japan. For what it’s worth, former Bank of Japan economist Kameda says that he expects the BoJ to raise its price forecast but doesn’t expect an imminent policy shift. South Korea and Taiwan stocks bounced strongly. Down Under, the Reserve Bank of Australia hiked by another 50bps, taking the overnight cash target rate to 1.35%. Importantly, the board expects to take “further steps in the process of normalizing monetary conditions”, while the size and timing of further increases will be “guided by the incoming data and the Board’s assessment of the outlook for inflation and the labour market.”
Oil prices fell as concerns of a possible global recession curtailing fuel demand outweighed supply disruption fears, highlighted by an expected production cut in Norway.
As always, give us a call if you have any questions, or if you’d like to get together for a review.