July 8, 2022
Making Cents of the Markets
Listen now to the most recent Making Cents of the Markets on CKNW, where we discussed what’s happening in markets and the economy, from oil prices to the real estate market.
We also talked about the importance of finding purpose in retirement and Lori provides ideas on how to manage your newfound free time as a retiree!
Beyond the Markets
Vancouver’s largest free Music + Arts Festival is back July 9th after a 2-year hiatus! Khatsahlano features multiple stages showcasing more than 50 of Vancouver’s top musical performers, local artisans and street performers.
This 10-block street fair, spanning from Burrard to MacDonald Street also features over 50 food trucks, patios, giveaways and so much more.
There is something for everyone in the family!
Be in the Know
“I often say to entrepreneurs, ‘If Lehman Brothers were Lehman Brothers & Sisters, it wouldn’t have gone into bankruptcy.” – former Japanese Prime Minister Shinzo Abe, 1954-2022
Like Bambi on ice
This week, investors appeared tired of being tired. The S&P 500 rose for four days in a row, today missing the 3,900 mark by 0.1%. More importantly, technology stocks gained 4.6%. The panic has calmed, at least for now.
Canada wasn’t so fortunate due to a correction in oil over the past month, which briefly broke below $100 per barrel. Natural gas, which almost doubled this year, is down 30% in recent weeks as well. As a result, energy stocks have fallen, bringing the TSX with it. Lower oil and gas prices are great for the broader stock market and the fight against inflation. We’ll comment more on oil below.
Despite the market’s recent optimism, central banks are poised to raise rates quite a bit more. Today’s U.S. jobs data showed an estimated 372,000 jobs added in June, toning down fears of an economic slowdown but reaffirming the Fed’s need to keep raising rates. Especially with wage growth clocking in at a 5.1% growth rate.
The Canadian jobs numbers surprised economists by losing 43,000 jobs last month, the first drop in the job market since January. As a result of more people leaving the job market, the unemployment rate fell from 5.1% to 4.9%.
“The job market still looks very strong after looking through some of the monthly noise,” said a BMO economist, though he is expecting a “meaningful slowdown in the economy later this year.”
The price we pay
The psychology of inflation has set in. The Bank of Canada’s quarterly surveys of executives and consumers showed that expectations are for high inflation to remain for longer than previously believed. On average, consumers expect 5% inflation in two years, a record high.
According to the Wall Street Journal, the Biden administration is expected to announce a pause on Trump-era tariffs ranging from 7.5% to 25% against Chinese goods such as clothing and school supplies and will allow importers to request tariff waivers. Applying pressure on China had bi-partisan support, and tariffs had the effect of increasing imports from Vietnam, South Korea and Canada.
But, as Treasury Secretary Janet Yellen puts it, tariffs increase prices which hurts the U.S. economy. Others argue that relaxing tariffs takes the pressure off of China to act better. American labour unions and progressives are against the cuts, which view low-wage Chinese workers as competitors.
In the end, sometimes politicians must appear to “do something”, and in this fight against inflation, compromise is a must. And it’s true, tariff cuts would reduce prices (all else being equal), albeit modestly.
And where does the bond market think inflation is headed? The Fed’s 5-year inflation rate – a measure of expected inflation derived from the 5-year U.S. Treasury bond, has finally started to fall:
The dreaded “R” word
It’s not just inflation on everyone’s mind. The “R” word is as well. Below is a chart of number of google searches for the word “recession”:
RBC has become the first Canadian bank to predict a recession for 2023, though they predict it will be a “moderate contraction” and “short-lived”.
Did the fog of war raise oil prices?
Alberta reported a $3.9 billion surplus. Its finance minister says they will not make the same mistake as previous governments by spending it all. “What goes up will come down,” is how he rationalized it.
And down oil has been of late. Most media is pointing to fears of recession but what about the fact that the IEA’s prediction back in April of a 1/3rd cut in Russian oil production due to sanctions? That estimate amounted to 3 million barrels, “the biggest supply crisis in decades.”
Four months after war broke out, Russian exports are roughly on par with pre-war levels. Perhaps this is the biggest reason for the cooling of oil prices.
Japan is proposing a price cap on the price of Russian oil at about half its current level, a move Russia’s Dmitry Medvedev warned (without merit) could push prices to $300-400 per barrel. Such a scenario could occur only with the remote possibility of Russia holding back all of its supply, which would hurt them far more than others.
A good start to the second half of 2022 indeed. Sellers got tired, markets bounced, and our portfolios finished the week on a positive note.
Looking ahead, all eyes remain on economic data as it continues to show the impact of an increasingly tighter monetary environment brought to you by the Fed.
Markets do recognize that a cooldown in economic activity has begun and we have seen many commodity prices fall in recent weeks such as oil, copper, and fertilizer prices. All of this should help lower inflation in the coming months. It just takes time. However, other economic data such as this morning’s jobs report still displays a resilient economy with a solid labour backbone in place.
Mixed signals from data are what’s keeping markets busy and volatile. We remain patient for a clear signal before we consider adding back exposure, recognizing that a confirmation in market sentiment can only come with a sufficient catalyst in place in order to see a longer-term rally for markets.
Among some of the closely watched data, is next week’s expected US inflation update for the month of June. A cooldown in prices could signal the Fed that it may be time to take their “brick foot” off the gas from raising rates, however, the July increase looks to already be set in stone. A less aggressive Fed could be the trigger for the ultimate turnaround in markets and we know investors are looking forward to better times in the markets.
In other news, a new earnings season is upon us and we have started on a good note. Our Legacy portfolios hold Aritzia which had another great quarter as net profits soared 86% on a big jump in revenues. The Vancouver-based company says it earned $33.3 million in the first quarter, up from $17.9 million a year earlier. The strong performance was driven by the public reception of its spring and summer product line, and an 81% increase in U.S. revenues.
We look forward to another quarter ahead and some very attractive opportunities as markets look to rebound in the second half of the year.
Visual of the Week
Finally, a break at the pump is here!
Ahead of the weekend on Friday, July 8, gas prices around Metro Vancouver dipped below $2 a litre. It’s the first time gas has been that low since April 2022.
Enjoy the weekend ahead!
The comments and opinions expressed in this newsletter are solely the work of Pinkowski Wealth Management, not an official publication of Canaccord Genuity Corp., and may differ from the opinion of Canaccord Genuity Corp’s. Research Department. Accordingly, they should not be considered as representative of Canaccord Genuity Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this newsletter, is for general information only, does not constitute legal or tax advice, and the author Pinkowski Wealth Management does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability.
CANACCORD GENUITY WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA