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Weekly Market Snapshot - July 13th, 2018
Week of July 13th, 2018
Equities rose on a solid start to Q2 earnings reporting, despite a mid-week set back due to sabre-rattling on trade. The US released, earlier than expected, the list of $200 billion worth of Chinese products that are to be subject to a 10% tariff. The Chinese were fairly quiet with their response and do have time to ponder their next move as these US tariffs will not be implemented until September at the earliest. Markets have been climbing a ‘wall of worry’ on the trade fears with US and Canadian equities up roughly 9% since correcting back in March when the trade rhetoric initially ramped up. Either markets are sanguine on the extent to which the trade wars might escalate, or they are too complacent. One does need to consider that investors believe they have a Trump ‘put’. This is the notion that because the President has claimed ownership for the rising stock market, a marked decline in US equities (say ~ -10%) on trade fears alone, would elicit a softening in the US’ position. The President has shown that he is prepared to walk back on issues when faced with enough domestic backlash i.e. child separation at the border.
Commodities didn’t overcome the trade concerns and the potential negative impact on growth, with oil prices down sharply. Oil prices were also buffeted by supply-side developments: Libya restarted some production; Russia’s Energy Minister said OPEC and its allies could boost oil production by more than the 1 million bpd if needed; the US signaled it might show some flexibility with sanctions on buying Iranian crude; and, following the unexpected June shutdown, Syncrude Canada increased its July production forecast. Energy stocks managed to buck the downward trend in oil prices.
Canadian bond yields were little changed as the Bank of Canada (BoC) rate increase was largely expected. However, the tone of the statement wasn’t as dovish as expected, signalling that the BoC’s bias continues to lean toward higher rates. The Bank noted that the composition of Canadian economic growth is shifting with exports and business investment picking up, while housing and consumption decelerate. This is a welcome and healthy development and something the Canadian economy has been waiting many years to see. Worries about trade were prominent and the BoC is now including the impact of US and Canadian tariffs in their forecasts. Despite the trade risks, the GDP growth forecast was actually revised 0.1% higher in 2019 to 2.2% and 1.9% for 2020. The BoC sees the positive impact from higher oil prices roughly offsetting the negatives from trade. With two rate hikes in the books this year, market-based odds are roughly split, with a 45% chance of another hike in 2018. If the data evolves as the bank expects, and the trade tensions stay contained, our call is for another hike by the end of the year.
Chart of the week: US Inflation - More Than Meets the Eye
While on the surface US inflation looks to be ramping up, a deeper dive suggests just the opposite. The latest numbers are likely the strongest we will see for a while, as the near-term trend is flagging a slowdown. The annualized 3-month rate of change sits at just 1.7% and has been falling since peaking at 3.1% in February. Part of the Q1 inflation spike was simply due to easy y/y comparisons from the first half of 2017 and these are set to roll off as of July 2018. The first quarter 2018 inflation spike roiled equity and bond markets as it was accompanied by a surprisingly strong print for US wage growth. The recent trend in wage growth has since softened, along with the CPI number, leaving a trend that is less worrisome for both central bankers and capital markets.
The week in review
- The Bank of Canada increased the overnight rate 0.25% to 1.50%.
- Canadian housing starts (June) jumped 28.0% to 248,100 annualized units (versus 210,000 expected).
- US consumer prices (June) rose 0.1% m/m (versus +0.2% expected) and the y/y rate rose 0.1% to a 6½-year high of 2.9%. Core prices rose an expected 0.2% m/m, lifting the y/y rate 0.1% to 2.3% (as expected).
- NFIB small business optimism index (June) fell 0.6 to 107.2.
- Preliminary University of Michigan consumer sentiment index (July) fell 1.1 to 97.1 (versus 98.0 expected).
- Eurozone industrial production (May) rose 1.3% m/m or 2.4% y/y.
- UK GDP (May) grew 0.3% m/m, a notch higher than the 0.2% growth in April. UK industrial production (May) fell 0.4% (versus +0.5% expected).
- China's trade surplus (June) spiked to $41.6 billion, from just $24.9 billion prior as import growth slowed from 26.0% y/y to 14.1% in US dollars, while export growth slowed from 12.6% y/y to 11.3%.
- Chinese consumer prices (June) rose 1.9% y/y (as expected).
- US Q2 earnings season kicked into gear. JPMorgan and Citigroup beat earnings expectations, while Wells Fargo missed.
The week ahead
- Canadian inflation, retail sales and house price data
- US retail sales and industrial production data
- Japan, eurozone trade and inflation data
- Chinese GDP, retail sales and industrial production data
- US Fed Chairman testimony to Congress and Commerce department hearings on auto tariffs
Your Wealth Management Resources Team at Capital Core Financial
Clarke Haynes, FPSC Level 1®, BBA, CIM®, EPC®, RRC®
Wealth Management Consultant, Capital Core Financial