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Canada's economic growth lags expectations, but unlikely to deter another big BoC rate hike – The Globe and Mail

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Canada’s economic growth wasn’t as strong as expected in the second quarter and appears to have decelerated in July, signs that rising interest rates are cooling economic activity sooner than many forecasters anticipated.

Softening growth, however, is unlikely to deter the Bank of Canada from another oversized interest rate hike when it makes its monetary-policy decision next week, economists said.

Canada’s economy grew at an annualized rate of 3.3 per cent in the second quarter, Statistics Canada reported Wednesday, driven by strong consumer spending and business investment in inventories.

This was moderated by a fall in residential property spending and an increase in imports relative to exports, which pushed the quarterly GDP result below the Bank of Canada’s forecast of 4-per-cent annualized growth and the Bay Street consensus of 4.4-per-cent growth.

Preliminary estimates for July show that GDP declined by 0.1 per cent that month. That suggests third-quarter growth is on track to undershoot the central bank’s estimate of 2 per cent, on an annualized basis, and could mark a turning point for the Canadian economy after a period of heightened economic activity that accompanied the lifting of pandemic-related restrictions.

“While GDP growth was solid in Q2 as a whole, it was weaker than anticipated and a slow end to the quarter, plus soft start to Q3 suggest that the economy is reacting quicker to rising interest rates than the Bank of Canada may have been anticipating,” Canadian Imperial Bank of Commerce economist Andrew Grantham said in a note to clients.

The central bank has increased interest rates at four consecutive meetings since March, including a full percentage point rate hike in July, the largest single move since 1998. This campaign to raise borrowing costs is explicitly aimed at slowing down economic activity in an effort to tame runaway inflation.

While rate increases can take six to eight quarters to have a full impact, Wednesday’s GDP data show that higher borrowing costs are already squeezing rate-sensitive sectors like housing. Residential property spending contracted around 28 per cent on an annualized basis in the quarter.

That’s unlikely to push the Bank of Canada off course, private-sector economists argue. Governor Tiff Macklem signalled this month that he intends to keep raising interest rates into what economists call “restrictive territory,” where borrowing costs act as a brake on economic activity.

Financial markets are pricing in a 75-basis-point rate hike for the Sept. 7 rate decision, while Bay Street forecasters suggest that increases of 50, 75 or 100 basis points are all on the table for next week. (A basis point is one hundredth of a percentage point.)

“Inflation remains priority 1, 2, 3, and 4 for the BoC, so we don’t think today’s print will change the bank’s thinking heading into the September interest rate announcement (particularly given the strength in household spending),” Toronto-Dominion Bank rate strategists Andrew Kelvin, Robert Both and Chris Whelan wrote in a note to clients.

“We continue to look for a 75bp rate hike next week, but the softer hand-off into Q3 hints at trouble ahead,” they wrote. Looking further ahead, they suggested that the central bank may need to slow its pace of rate hikes in October, and could opt for a 25-basis-point rate hike at that point.

Royce Mendes, head of macro strategy at Desjardins Capital Markets, said that a 50-basis-point rate hike next week is now more likely.

“With the Bank of Canada already having raised rates 100bps in July, central bankers might be willing slow the pace of hikes ahead of their peers by only pushing rates up another 50bps next week. It’s possible that monetary policymakers move more than that, but there are clearly cracks beginning to form in the foundation of the economy,” he wrote in a note to clients.

While growth was weaker than expected, Canada continues to outperform peer countries, including the United States where economic activity contracted in the second quarter.

Canadian consumer spending remained robust as people bought new clothing and shoes for return to office work, and splurged on travel, restaurants and other services that have reopened as pandemic restrictions have lifted.

Business spending on inventories also boosted growth in the quarter, with a particularly notable jump in farm inventories.

“Increased production of agricultural products in the second quarter, notably wheat and canola, resulted in the largest increase in farm inventory investments since 1961, the year when quarterly data were first recorded,” Statscan said.

This was offset by a decline in residential property spending and consumer spending on durable goods. Net trade also weighed on GDP in the quarter, with a rise in imports exceeding exports.

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Why selloff in gold is not over: $1600 danger zone for gold price – Kitco NEWS

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(Kitco News)Gold is trading near 2.5-year lows after a hawkish Federal Reserve sent the U.S. dollar and Treasury yields higher. This macro environment is likely to push more people away from gold, creating a great buying opportunity, according to analysts.

Volatility in the markets and dramatic FX plays did not leave gold untouched as the precious metal fell another 1.7% this week. After raising rates by 75 basis points for the third time in a row, the Fed upped its funds rate to 4.4% by the end of 2022 and to 4.6% in 2023.

For markets, this could translate into another 75-basis-point hike in November and an additional 50-basis-point increase in December.

“We’ve seen significant increases in the markets’ estimates of what the federal funds rate will do over the next year. It is quite a big difference from a month ago, and it is in line with the Fed being more aggressive,” TD Securities global head of commodity markets strategy Bart Melek told Kitco News. “The real rates are rising. That’s negative for gold. High cost of carry and high opportunity cost will probably drive capital away.”

Also, this type of hawkishness means that the peak in the U.S. dollar rally is still some time away, which is bad news for gold.

“Looks like this dollar rally is not peaking. The current market environment will likely remain unsettling. Fed rate hike expectations are widely swinging. We are not going to see that ease up until we see inflation come down,” OANDA senior market analyst Edward Moya told Kitco News. “The problem is that we do not see the economy weaken quickly. When we do, that’s when you’ll see a peak in the dollar. For gold, it is all about when we see that.”

With the Dow touching the lowest level of the year Friday and more volatility ahead, gold is unlikely to see a strong rally in the short term. “We will not get a strong rush to buy gold just yet. There are low volatility instruments out there that are now giving you some yield. That is taking away from gold,” Moya added.

Eventually, gold will become a safe haven again as the appetite for equities wanes. But before that happens, the economy needs to slow, and inflation needs to decelerate. “Once we start seeing inflation moving into a more benign type level, the Fed can quickly turn. As they went from dovish to hawkish, they can go the other way. But it is unlikely any time soon,” Melek pointed out.



The big risk for the precious metal is a drop below $1,600 an ounce. “If we break $1,600, then $1,540 would be the line in the sand where we start to see buyers emerge. Gold will benefit from safe-haven flows abroad,” said Moya.

Melek also sees gold falling below $1,600 an ounce as likely. “Volatility will be higher going forward. As volatility increases, margin calls increase. Long positions can’t be extended. We are not going to see a big reentrance of positions. Nasty environment for gold,” he described.

Gold is watching the upcoming employment and inflation data from September. “The market is still looking at very tight labor conditions in the U.S. and implication that wage pressures will continue to be an issue,” Melek said.

Market consensus calls are looking for the U.S. economy to have created 300,000 positions in September, with the unemployment rate at 3.5%, which is near 50-year lows.

On a positive note, gold at these levels is a great entry point for buyers.

“This makes physical gold cheaper. It’s a buying opportunity. The Fed has been stressing that they have a dual mandate. And as inflation gets under control, the Fed could be quick to reverse in 2023. Real rates will be much more friendly to gold. I do expect gold to do well in the long-term,” Melek said.

However, for now, resistance is at $1,678-80, and support is around the $1,580 an ounce level, he added.

Next week’s data

Tuesday: Fed Chair Powell speaks, U.S. durable goods orders, CB consumer confidence, new home sales
Wednesday: U.S. pending home sales
Thursday: U.S. jobless claims, GDP Q2
Friday: U.S. persoanl income and PCE price index, Michigan consumer sentiment

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Risk assets crushed with few signs drama is over – BNN Bloomberg

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A selloff in the riskier corners of the market deepened as the U.K.’s plan to lift its economy fuelled concerns about heightened inflation that could lead to higher rates, adding to fears of a global recession.

It was a sea of red across equity trading desks, with the S&P 500 briefly breaching its June closing trough — and failing to pierce its intraday low for the year. Chartists looking for signs of where the rout might ease had identified that as a potential area for support. Yet the lack of full-blown capitulation may be an indication the drawdown isn’t over. Goldman Sachs Group Inc. slashed its target for U.S. stocks, warning that a dramatic upward shift in the outlook for rates will weigh on valuations.

As risk-off sentiment took hold, Wall Street’s “fear gauge” soared to a three-month high, with the Cboe Volatility Index momentarily topping 30. Throughout the year, the U.S. equity benchmark has hit near-term lows when the VIX was above that level, according to DataTrek Research.

A surge in the greenback to a fresh record swept aside global currencies. The euro slid to its weakest since 2002, while sterling hit a 37-year low — with former U.S. Treasury Secretary Lawrence Summers saying that “naive” U.K. policies may create the circumstances for the pound to sink past parity with the dollar. 

Treasury 10-year yields fell after earlier topping 3.8 per cent. Meanwhile, two-year US rates climbed for 12 straight days — an up streak not seen since at least 1976. 

“It appears that traders and investors are going to throw in the towel on this week in what feels like ‘the sky is falling’ type of event,” said Kenny Polcari, chief strategist at SlateStone Wealth. “Once everyone stops saying that they ‘think a recession is coming’ and accepts the fact that it is here already – then the psyche will change.”

Liz Truss’s new U.K. government delivered the most sweeping tax cuts since 1972 at a time when the Bank of England is struggling to rein in inflation, which is running at almost five times its target. The plunge in gilts means that investors are now betting the central bank boosts its benchmark lending rate by a full point to 3.25 per cent in November, which would be the sharpest increase since 1989.

Amid heightened fears over a hard economic landing, commodities got hammered across the board. West Texas Intermediate settled below $79 a barrel for the first time since January, posting its longest stretch of weekly losses this year. Not even gold — a haven asset — was able to gain due to a surging dollar, and sank to the lowest level in two years.

The greenback’s strength has been unrelenting and will also exert a “meaningful drag” on corporate earnings — serving as a key headwind for stocks, said David Rosenberg, founder of his namesake research firm.

KKR & Co. sees potential trouble ahead, including a mild recession next year, with the Fed narrowly focused on driving up unemployment to tame inflation. The US labor shortage is so severe that it’s possible the Fed’s tightening doesn’t work, wrote Henry McVey, chief investment officer of the firm’s balance sheet.

“This is a more draconian outcome than corporate profits falling,” he noted, “because it will encourage the Fed to tighten even further.”

Investors are flocking to cash and shunning almost every other asset class as they turn the most pessimistic since the global financial crisis, according to Bank of America Corp. Investor sentiment is “unquestionably” the worst it’s been since the turmoil of 2008, strategists led by Michael Hartnett wrote in a note.

“It’s a realization that interest rates are going to continue to rise here and that that’s going to put pressure on earnings,” said Chris Gaffney, president of world markets at TIAA Bank. “Valuations are still a little high even though they’ve come down, interest rates still have a lot further to go up and what impact that will have on the global economy — are we headed for a sharper recession than the recession everybody expected? I think it’s a combination of all of that, it’s not good news.”

‘MEANINGFUL DRAG’

Amid heightened fears over a hard economic landing, commodities got hammered across the board. West Texas Intermediate tumbled below $79 a barrel for the first time since January, posting its longest stretch of weekly losses this year. Not even gold — a haven asset — was able to gain due to a surging dollar, and sank to the lowest level in two years.

The greenback’s strength has been unrelenting and will also exert a “meaningful drag” on corporate earnings — serving as a key headwind for stocks, said David Rosenberg, founder of his namesake research firm.

KKR & Co. sees potential trouble ahead, including a mild recession next year, with the Fed narrowly focused on driving up unemployment to tame inflation. The US labor shortage is so severe that it’s possible the Fed’s tightening doesn’t work, wrote Henry McVey, chief investment officer of the firm’s balance sheet.

“This is a more draconian outcome than corporate profits falling,” he noted, “because it will encourage the Fed to tighten even further.”

Investors are flocking to cash and shunning almost every other asset class as they turn the most pessimistic since the global financial crisis, according to Bank of America Corp. Investor sentiment is “unquestionably” the worst it’s been since the crisis of 2008, strategists led by Michael Hartnett wrote in a note.

“It’s a realization that interest rates are going to continue to rise here and that that’s going to put pressure on earnings,” said Chris Gaffney, president of world markets at TIAA Bank. “Valuations are still a little high even though they’ve come down, interest rates still have a lot further to go up and what impact that will have on the global economy — are we headed for a sharper recession than the recession everybody expected? I think it’s a combination of all of that, it’s not good news.”

EXTREME PESSIMISM

Stocks are indeed still far from being obvious bargains. At the low in June, the S&P 500 was trading at 18 times earnings, a multiple that surpassed trough valuations seen in all previous 11 bear cycles, data compiled by Bloomberg show. In other words, should equities recover from here, this bear-market bottom will have been the most expensive since the 1950s. 

Bleak sentiment is often considered a contrarian indicator for the US stock market, under the belief that extreme pessimism may signal brighter times ahead. But history suggests that equity losses may accelerate even further from here before the current bear market ends, according to Ned Davis Research.

In another threat to stocks, different iterations of the so-called Fed model, which compares bond yields to stock earnings’ yields, show equities are least appealing relative to corporate bonds and Treasuries since 2009 and early 2010, respectively. This signal is getting attention among investors, who can now know look to other markets for similar or better returns.

“The next question is when and how far do earnings estimates decline for 2023,” said Ellen Hazen, chief market strategist and portfolio manager at F.L. Putnam Investment Management. “Earnings estimates for next year are too high, they really have not come down, and as that happens you’re going to have further equity pain because in addition to the multiple coming down via the yield mechanism, the earnings you’re applying that multiple to are going to come down as well.”

As slower growth and tighter financial conditions start catching up to companies, a wave of downgrades will come for the US investment-grade corporate bond market.

That’s according to strategists at Barclays Plc, who say companies are facing margin pressure thanks to high inventories, supply chain issues, and a strong dollar. The firm expects the average monthly volume of downgrades to increase to $180 billion of bonds over the next half year. The current monthly average is closer to $40 billion.

Some of the main moves in markets:

Stocks

  • The S&P 500 fell 1.7 per cent as of 4 p.m. New York time
  • The Nasdaq 100 fell 1.7 per cent
  • The Dow Jones Industrial Average fell 1.6 per cent
  • The MSCI World index fell 2.1 per cent

Currencies

  • The Bloomberg Dollar Spot Index rose 1.3 per cent
  • The euro fell 1.5 per cent to $0.9693
  • The British pound fell 3.5 per cent to $1.0868
  • The Japanese yen fell 0.6 per cent to 143.30 per dollar

Cryptocurrencies

  • Bitcoin fell 2.2 per cent to $18,823.63
  • Ether fell 2.4 per cent to $1,292.77

Bonds

  • The yield on 10-year Treasuries declined four basis points to 3.68 per cent
  • Germany’s 10-year yield advanced six basis points to 2.02 per cent
  • Britain’s 10-year yield advanced 33 basis points to 3.83 per cent

Commodities

  • West Texas Intermediate crude fell 5.3 per cent to $79.06 a barrel
  • Gold futures fell 1.7 per cent to $1,651.80 an ounce

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Retail sales fall for 1st time this year as consumers start to tap out – CBC News

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Facing sky-high inflation, consumers put away their wallets more often in July, new data revealed Friday, as retail sales fell for the first time since 2021.

Canadian retailers rang up $61.3 billion in sales in July, Statistics Canada reported Friday. That’s a decline of 2.5 per cent from the previous month’s level as lower sales at gas stations and clothing stores led the way down.

Sales at gas stations fell by 14 per cent. A big part of that was lower prices for the fuel itself, but even in volume terms sales were down by seven per cent. Fewer people were filling up during the month, which was in keeping with the vehicle segment overall as auto sales edged down 0.5 per cent. Both new and used car dealers reported declines.

Consumables like food and drink also weren’t flying off the shelves, as supermarkets and grocery stores saw sales slip by 0.9 per cent, while liquor stores saw a decline of 1.2 per cent.

The soft retail sales numbers suggest consumers are starting to put away their wallets in the face of sky-high prices and a gloomy outlook for the economy.

“This retail sales report was unambiguously weak, suggesting that consumers tightened their purse strings in July,” TD Bank economist Ksenia Bushmeneva said of the numbers. “Consumer demand appears to have broadly cooled across most categories of spending.”

“All in all, given the triple headwinds emanating from higher consumer prices, rapidly rising interest rates and a drop in wealth, consumers are becoming more frugal,” she said.

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