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Risk appetite returned to markets this morning as tech stocks lead the advance following a rally in China on optimism they may ease up on its plans to clampdown on tech usage. Today’s moves come after U.S. equities fell back toward session lows in the last hour of trading. Despite being pulled down by tech, including Shopify, Canadian equities, were able to squeeze out a modest gain thanks to energy and materials. The risk of an economic downturn amid price pressures and rising borrowing costs remains the major worry for markets. Adding to this, data released yesterday is showing China’s industrial output and consumer spending hit the worst levels since the pandemic began.
Canadian consumer confidence continues to decline after recording its sharpest weekly fall since the height of the pandemic. Sentiment hit an all-time high last July but has been inching lower as the initial optimism around vaccines and the reopening from Covid has faded and consumers now face record high inflation. The Bloomberg Nanos Canadian Confidence Index dropped to 54.3 last week, suggesting the combination of rising prices, higher rates, and the war in Ukraine is starting to weigh on consumers. The data shows that roughly 40% of Canadians found that their personal finances have worsened over the past year. The recent sentiment shift has investors piling into cash as the outlook for global growth falls, pointing to a continued stock market decline. A recent Bank of America survey found that cash levels among investors has hit the highest level since September 2001, with investors becoming increasingly bearish.
Home prices in Canada fell for the first time in two years as rising interest rates looks to cool the hot housing market. Benchmark home prices declined 0.6% in April from the month before, the first drop since April 2020 while the number of sales fell 12.6%. The shift is coming as the BoC continues its aggressive campaign of rate increases to fight inflation running at a three-decade high. About 55% of Canadians expect home prices to continue increasing, down from 59% last week and as high as 64% last month. Even with the decline, however, housing price expectations still remain above historical averages.
There are fears that China’s recent lockdown will raise inflation, but recent economic data is showing that some of those fears may be exaggerated. Supply shocks certainly impact inflation, but in the latest round of supply-chain bottlenecks, there are indications that businesses might be less likely to pass on the increased costs to consumers. Supply and demand for most goods is now more in balance than at any time since the pandemic began with the ‘Inventory-to-Sales’ ratio of General Merchandise returning to pre-pandemic levels (relative to sales, inventories now exceed the average from 5 years ago). In short, supply-chain bottlenecks may become the new normal, but that may not necessarily lead to higher inflation, as long as demand adjusts accordingly.
Finland and Sweden’s push to join NATO is facing opposition from Turkey as the country’s president Recep Tayyip Erdogan has accused the two countries of harbouring what he said were Kurdish militants. With Turkey likely holding the decisive vote, Erdogan has laid out demands for the two countries to join the alliance, including dropping any restrictions of arms sales to Ankara. While senior officials from Sweden and Finland have offered to meet with Turkey officials to address their concerns, Erdogan scoffed at the suggestion that any in-person meeting would change his mind, saying that by adding the two countries, it would make NATO a “a place where representatives of terrorist organizations are concentrated.”
Permanent vacation anyone? If you're ready to make up for the lack of vacations over the last couple of years, why not live on a cruise ship? Living at sea appears to be a new trend. One 'luxury community at sea' is offering residences aboard its new ship which includes a movie theatre, 20 restaurants, three swimming pools and a wellness centre. Storylines cruise ship is offering lease agreements for 12, 24, and 60 year terms starting at $500k, and will start its 1,000-day journey to 6 continents in 2024.
It’s retail earnings day today with bellwether Walmart reporting a big earnings miss and cutting its profit outlook due to inflationary pressures, especially in food and fuel. The company known for its “everyday low prices” is now finding it difficult to keep prices lower as higher costs for merchandise, transportation and labour pose a growing threat to profitability. That’s raising the stakes as Walmart and other retailers decide how much of vendors’ price increases they will pass along to consumers.
Home Depot, on the other hand, is boosting their outlook for the year. An unexpected jump in first-quarter same-store sales is showing continued demand for home-improvement supplies. Although the number of customer transactions fell 8.2%, the average purchase price surged about 11% year over year in a sign that consumers are still willing to spend money on home improvement despite inflation. Today’s report is a nice turn of events from the previous quarter when disappointing profit margins sent Home Depot shares to their biggest drop in almost two years.
Abbot Labs, the largest U.S. infant formula maker, has reached an agreement with the FDA to reopen its infant formula plant, paving the way for increased baby formula supply amid the ongoing shortage. The supply shortage was triggered in part by the closure of Abbott Nutrition’s manufacturing plant in Michigan after four infants who consumed formula from the facility fell ill from bacterial infections, two of whom subsequently died.
The FDA has been busy and just approved Eli Lilly’s Mounjaro, a once-weekly injection for adults with type 2 diabetes. Patients enrolled in the Phase 3 clinical trial reported that the therapy reduced hemoglobin A1C between 1.8% and 2.4%, depending on the dose. The newly approved diabetes drug is expected to bring in $14 billion in sales by 2030.
OK, let’s see if you can follow along. JetBlue Airways Corp. has made a hostile $3.3 billion cash bid for Spirit Airlines Inc. This comes after Spirit rejected JetBlue’s $3.6 billion offer in favour of an existing deal with Frontier Airlines. With this new offer, JetBlue is now appealing directly to shareholders to block the discount carrier’s acceptance of a rival bid by Frontier Group Holdings Inc. JetBlue is offering $30 a share in cash in its tender offer, but would be open to paying its initial offer price of $33 a share if Spirit comes to the negotiating table and provides data that JetBlue has requested. JetBlue said the tender price reflected what JetBlue called Spirit's unwillingness to share necessary information.
Commodities
Oil hit its highest in seven weeks this morning, supported by the EU's ongoing push for a ban on Russian oil imports that would tighten supply and as investors focused on higher demand from an easing of China's Covid lockdowns. At the time of writing, NYM WTI Crude futures are up +0.46% to US$114.72/bbl and ICE Brent Crude futures are down +0.68% at US$115.02/bbl.
As we note below, the broad commodities complex, as measured by Bloomberg’s index is trying to get back to its highs hit in mid-April. The index is heavy towards energy in the forms of Nat Gas (13.6%) and Oil (16%), and also has a healthy allocation to gold (11.9%) which has not participated in driving towards these new highs.
Fixed income and economics
The steady stream of data showing that the global economy is slowing is getting bond buyers to jump back in, albeit not with two feet yet. Bond markets are looking for some hints, and where better to find them than the ramblings of the Fed? There are nine Fed officials slated to speak this week, including Chair Jerome Powell’s appearance today. We will see if they mention the 10-year Treasury yields hitting 3.20% last week, since it is now back below 3% (2.91% this morning) and also listen for more chatter on the potential for a 75 bp hike.
Despite commodity prices continuing to surge, bond markets seem to believe that inflation may be coming under control - the five-year breakeven rate, a key indicator of debt-market expectations for inflation, is down about 60 basis points since its recent peak on April 22, to just 3.08%. With plans for aggressive rate hikes, central banks may be able to diminish demand which underscores the view that central banks may risk a recession to tame cost pressures. Even the Fed, which is guiding a course for the fastest policy tightening since the 1980s and Chair Jerome Powell has admitted it may be beyond his control to tame inflation without triggering a recession.
Chart of the day
Markets
Quote of the day
I must govern the clock, not be governed by it. Golda Meir
Contributors: A. Innis, A. Nguyen, D.Mak, J. Price, P. Kwon