In the Coming Week:
- U.S. services and manufacturing PMI
- Durable goods orders
- Powell’s opening speech at Jackson Hole
- Higher long-term bond yields, China fears
- Canada inflation jumps 3.3% spurs rate talk.
- U.S. retail +0.7%, Fed debates hikes.
- Canada housing up, U.S. housing +3.9%.
- Canadian July CPI and housing starts.
- U.S. retail sales
- FOMC minutes
- U.S. leading indicators
Stocks experienced a widespread decline driven by higher long-term bond yields and concerns about a potential economic slowdown in China. The S&P 500 Index closed the week with a 5.15% drop from its peak on July 26. Rising rates typically affect growth shares more due to discounted future earnings, but the Russell 1000 Growth Index fared slightly better than its value counterpart. Small-cap stocks suffered the most. Program trading, technical aspects and lower summer trading volumes likely amplified market volatility. The TSX struggled with oil falling more than 3% during the week.
On Tuesday, Canada’s July inflation rate surged to 3.3%, surpassing expectations, with core measures remaining high and potentially prompting another interest rate increase. Analysts predicted 3% inflation, but the Consumer Price Index rose 0.6% month-over-month, driven by a base-year effect in gasoline prices. The Bank of Canada’s core measures averaged 3.65% – slightly lower than June’s 3.7%. The Central Bank’s benchmark rate reached 5% in July – the tenth increase since March of last year. Despite rising inflation, not all economists anticipate a September rate hike, given a softening job market and the Bank’s projection of 3% inflation for a year, dropping to 2% by mid-2025. July’s unexpected job loss and a 5.5% jobless rate could influence the decision. Grocery prices increased by 8.5%, but excluding food and energy, prices rose by 3.4%. The bank awaits second-quarter GDP data before its September 6 rate announcement.1
In July 2023, the trend in housing starts in Canada reached 242,525 units – an increase from June’s 235,819 units. This trend, calculated using a 6-month moving average of the seasonally adjusted annual rate (SAAR) of total housing starts, has risen for the second consecutive month due to robust housing starts in July. Vancouver and Toronto experienced declines in total SAAR housing starts, dropping by 23% and 29%, respectively. Conversely, the Montréal, Calgary and Edmonton census metropolitan areas (CMAs) saw respective increases of 12%, 33% and 67% in total SAAR housing starts during the same period.2
Also on Tuesday, the U.S. Census Bureau released their advanced estimate of July retail and food services sales. U.S. retail and food services sales surged 0.7% from the previous month, totaling $696.4 billion. This growth also marked a 3.2% increase compared to July 2022. Sales for May 2023 to July 2023 rose by 2.3% compared to the previous year’s period. Internet retailers experienced a notable 1.9% increase in sales, following a similar recent gain. Amazon had its most successful sales day ever during a two-day event. Internet sales rose 10.3% over the past year, more than twice the inflation rate. Furthermore, bars and restaurants saw a 1.4% rise in sales, often indicating a healthy economy and job security. Conversely, during economic uncertainty, restaurant sales tend to decline. Sales also climbed in home centers, grocery stores, department stores and clothing stores. However, sales of new vehicles and auto parts dipped by 0.3% last month, although they grew by 7.6% over the past year. Gasoline sales saw a slight increase. Retail sales, excluding car dealers and gas stations, displayed a stronger 1% increase, giving insight into consumer demand. Overall, while changing spending habits have led to a slight slowdown, retail sales continue to rise, signaling a resilient economy. Although real incomes have risen and partly offset inflation, the potential impact of rising interest rates on consumer spending and the economy remains a concern. The robust July retail report could even prompt the Federal Reserve to consider rate hikes.3
The New York Federal Reserve’s August Empire State Business Conditions Index, which assesses manufacturing activity in the state, experienced a significant decline of 20.1 points, reaching a negative reading of -19. This latest decline marks the first negative reading since May. Any value below zero indicates a contraction in activity. Critical aspects of the report highlight substantial drops in new orders and shipments indexes, showing declines of 23.2 and 25.7 points, respectively. Although price indicators increased, the average workweek index fell to -10.7. Conversely, a measure of expectations for the next six months surged by 5.6 points to 19.9, its highest level in over a year, accompanied by firmer capital spending plans. Overall, the manufacturing sector has faced challenges due to stricter lending standards, higher borrowing costs and weakening business demand, resulting in fluctuations in the headline index throughout the year.4
On Wednesday, the Federal Reserve reported that July saw a 3.9% increase in privately-owned housing starts, focusing on new homes due to a shortage of existing listings. Housing starts, the pace of new construction, reached a 1.45 million annual rate. This uptick was primarily led by single-family construction, notably in the West, with a 28.5% surge. While apartment buildings remained flat, the construction boom in this sector is slowing. Building permits rose 0.1% to 1.44 million, indicating future construction plans. Despite the growth, concerns linger about demand, as mortgage rates remain high, leading builders to offer incentives and cut prices. Economists suggest that, while housing activity stabilizes, it remains relatively weak.5
In July, U.S. total industrial production grew by 1%, recovering from two previous months of decline. Manufacturing output increased by 0.5%, led by a 5.2% surge in motor vehicle and parts production, while other manufacturing saw a marginal 0.1% rise. Mining output, including oil and gas, increased by 0.5%, and utility output climbed by 5.4% due to high temperatures increasing the demand for cooling. Total industrial production in July reached 102.9% of its 2017 average – slightly below the level from a year earlier.
Capacity utilization rose to 79.3%, a rate of 0.4 percentage points below its long-run average from 1972 to 2022. Although the increase seems robust, manufacturing remains relatively weak, with goods producers adjusting inventories. We anticipate challenges ahead, such as weakening goods demand and higher interest rates.6
On Wednesday, the Federal Reserve released the minutes from the July policy meeting, revealing that “most” officials still perceive significant inflation risks, potentially necessitating further interest rate hikes. The primary concern is whether the current policy interest rate is “sufficiently restrictive” to reduce inflation to the 2% target. While the majority sees upside inflation risks requiring tighter monetary policy, some expressed apprehensions about economic downturn risks despite overall resilience. These officials worried that previous rate hikes might dampen growth in the future. While a few advocated for steady rates, the majority voted for a 25-basis point increase, bringing the benchmark federal funds rate to 5.25-5.5% – the highest level in 22 years. The decision for further hikes will depend on upcoming data, with the next meeting in September being deemed “live” for potential rate adjustments7.
On Thursday, initial unemployment claims for the week ending August 12 came in at 239,000 – a decrease of 11,000 over the previous week. The four-week moving average was 234,250. Benefits paid for all programs for the week ending July 29 decreased by 17,663 to 1,834,497.8
The leading economic index declined by 0.4% in July, marking the 16th consecutive month of decline. While this historical pattern would typically signal an approaching recession, other indicators suggest a recession is not imminent. Despite the index decline, the economy is expanding, and the third quarter is expected to show robust growth of potentially 5% or more in GDP. The coincident index, reflecting current conditions, rose by 0.4% in July, implying a more positive economic view. Despite economists backing away from recession predictions, the Conference Board still forecasts a brief recession from late 2023 through early next year. However, the accuracy of the leading indicator has been questioned, given the economy’s resilience. The economy remains vulnerable due to rising interest rates and potential further Fed rate hikes. The leading index implies an upcoming economic deceleration and mild contraction.9
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
Sightline Wealth Management LP (“Sightline”) is an investment dealer and is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF). Sightline provides management and investment advisory services to high-net-worth individuals and institutional investors.
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