It was a down week for equity markets due to the ugly CPI print (+9.1% Y/Y) on Wednesday (July 13). Some recovery occurred on Friday with markets using the +1.0% M/M Retail Sales number as the latest hope that the economic slowdown will result in a soft-landing.
Equities’ Peak Changes
Universal Value Advisors
While the coincident and lagging indicators make it appear that the economy is just slowing, nearly all the leading indicators are flashing caution (see chart above). Thus, our view continues to be that markets get oversold and rally on the hopes of a soft landing. But we remain doubtful that one will be achieved. For example, the 1% growth in nominal retail spending looks great on the surface, but when set against the backdrop of a 1.3% rise in the CPI, Real Retail Sales were negative in volume terms.
Viewing Future Inflation
The June CPI spike was due to soaring energy prices which peaked right around the time the June price surveys were conducted. The PPI (Producer Price Index) was also hot for June coming in at +1.1% M/M with the energy segment up a whopping +9.9% M/M. Because food and energy prices are often volatile (no kidding!), inflation watchers look at “core” CPI and PPI which exclude food and energy. The table shows “core” Y/Y inflation data.
Core Y/Y Inflation
Universal Value Advisors
While the reductions are not dramatic (yet), the trend is in the right direction.
Of course, food and energy are essential to everyday life, so, if these continue to skyrocket, it’s a big problem. Let’s also acknowledge that inflation is a rate of change, not a level, so if all the prices were suddenly frozen at their current levels, inflation would be 0% even though prices would still be high.
Here is the good news! The price of oil (WTI crude for August delivery) which was $123.70/bbl. on March 7 and $122.11 as late as June 7, closed at $97.57 on Friday (July 15). That’s a -21% fall from the peak. According to AAA, the national average for a gallon of regular gasoline in mid-June was $5.01. In mid-July it had fallen to $4.58, an -8.5% drop. While not as dramatic (yet) as the fall in WTI, it is still coming down, (Yes, gas prices always go up much faster than they come down!) The good news is that there will continue to be downward pressure in prices at the pump. The chart shows that the price of WTI crude has fallen in four of the past five weeks.
Oil Down in Four of Past Five Weeks
Bloomberg, Rosenberg Research
The good news doesn’t stop there. In the agricultural trading pits, the 2022 pop in ag prices has completely reversed (see chart) and this is substantially true for all commodities (see second chart).
S&P GSCI Agriculture Index
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CRB Commodity Index
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Remember, inflation is the change in prices. So, the implication of what we are seeing in the oil, ag, and commodity pits are future falling prices, i.e., a bit of welcome deflation. Here are some specific examples: Between July 1 and July14, oil: -13%; base metals: -13%, food commodities: -11%, and, as noted above, between mid-June and mid-July prices at the pump: -8.5%. We have also seen downward price pressures in the cost of shipping. The Baltic Dry Index, which measures the cost of shipping dry bulk materials, has fallen -64% from its recent peak.
Causes
What’s causing this? Part of the fall in commodity prices, especially in the metals complex, is the stagnation in China’s economy as a result of their zero-Covid policy. Their city shut-downs have been well publicized. They just reported Q2 Real GDP at +0.4% and there is much skepticism about that number among China watchers. Europe’s economy is already in Recession and perhaps headed for Depression. And, as noted below, the U.S. economy is less than healthy. The result is that futures prices are in a state of “backwardation” as traders in the commodity pits see lower future demand and lower future prices.
To sum up the good news, it does appear that the rate of inflation peaked in June and will fall rather quickly in the foreseeable future, i.e., through the end of the year.
The Labor Market’s Health
As we noted in our last blog, the unemployment rate is calculated from the Household Survey which showed -315K job losses (although that number was completely ignored by the media). The unemployment rate stayed at 3.6% because the denominator, the labor force, supposedly shrunk. The Household Survey showed up with negative numbers in two of the last three months and, historically, has been a better indicator of the health of the labor market than the headline Payroll Survey (+372K). Unemployment is a lagging indicator. Because employee turnover is expensive, businesses hold on to their employees for as long as they can, first reducing hours worked (and that’s what we are seeing). And that’s why employment data are lagging indicators. Thus, when the weekly Initial and Continuing Unemployment Claims begin to rise, one knows something sinister is afoot.
Initial Unemployment Claims rose +21K the week of July 8 (Not Seasonally Adjusted; +9K Seasonally Adjusted). Until this most recent report, Initial Claims had been rising, but slowly. But now, since the low point last spring, Initial Claims are up nearly +80K. Historically, once Initial Claims rise above 60K, recessions have typically followed. Initial Claims are a flow variable, meaning that Claims are now rising 80K per week. Doing the math, at the current rate, in 13 weeks (one GDP Quarter), there will be a million+ more people unemployed. So, this is not trivial.
Continuing Claims (those unemployed more than one week) also jumped +72K in the July 1 week (Continuing Claims are reported with a week-lag). That’s 72,000 people that were previously laid off who haven’t found another job. The total out of work for more than a week is now 1.4 million. What has happened to that tight labor market?
Not Keeping Up
To make matters worse, inflation has eaten into America’s standard of living. The first chart below shows that Average Weekly Earnings have been negative on a Y/Y basis since April 2021.
US Real Average Weekly Earnings YoY%
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The next chart shows that the average employee is no better off today than they were in April 2019; that’s more than three years ago and prior to the Pandemic.
US Real Average Weekly Earnings
Universal Value Advisors
We also note that credit card balances have spiked as consumers have attempted to maintain their living standards. This, however, won’t last as credit limits are approached.
For several blogs, we have highlighted the University of Michigan’s Consumer Sentiment Index. The overall survey is at the lowest level in its 70+ year history.
Consumer Sentiment
Universal Value Advisors
And, it doesn’t look any better for the housing industry, the auto industry, or for the manufacturers and sellers of big-ticket items, like appliances, carpeting, home improvement etc. We’ve included the chart for houses below and note that recent headlines have bemoaned the fact that housing markets are cooling as interest rates have risen, and there have even been the first signs of falling housing prices in some formerly hot markets.
Buying Conditions for Houses
Universal Value Advisors
Final Thoughts
The next set of Fed meetings are the week of July 25. The bloated CPI numbers (remember, this is a lagging indicator) have put a 100-basis point (1 pct. point) rise in the Fed Funds rate into play. There are two possible reasons this Fed might raise the Fed Funds rate from its current 1.50%-1.75% range to 2.50%-2.75%. The first is that it is truly fixated on the 9.1% Y/Y rise in the CPI, a lagging indicator, which, as explained above, will be the peak for this cycle. The second, and in our view, more credible reason, is that they may want to get to a “neutral” policy position, which economists have calculated in the 2.50% range. Give the rapid deteriorating data, the July meeting may be their last chance to do so if, as we expect, the data shows Recession and falling inflation by the time they are scheduled to meet again (September).
In any case, we believe that at least a 75-basis point rate hike is a lock for the July meeting, but also believe that it will be the final or near final rate hike of this cycle because, by September, even the lagging economic indicators will have deteriorated to the point where they can’t be ignored and the inflation data will be moving to the downside. Finally, if indeed this scenario plays out (an end to rate hikes) after the Fed’s September meeting, the equity markets may respond positively.
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
