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Summer doldrums...not yet, with investors preparing for one of the busiest weeks of the year with the Fed’s latest policy meeting, tech earnings, and key economic data releases. Estimates of second quarter GDP will be released on Thursday which will give investors an idea if we are heading for a recession (or if we are already in one). With all this in mind, futures reversed earlier declines this morning as earnings expectations outweigh concerns about a possible recession. Stocks fell on Friday as disappointing results from social-media companies and weak economic data added to recession fears. Despite Friday being a bad day, the S&P 500 posted its best week in a month, paring this year’s market rout to about 17%, while the TSX is down just over 10%.
Canadians are still spending with retail sales rising 2.2% in May to $62.2 billion. The lift came from higher gas prices and sales at new car dealers, however, an early estimate by Stats Can pointed to a slowdown in the pace of sales gains for June. Taking a closer look at the report, several categories such as gasoline, clothing, and sporting goods, saw sales fall in inflation-adjusted terms while core retail sales (which exclude gasoline stations and motor vehicle and parts dealers) increased only about 0.6%. With inflation rising, higher prices have been giving a lift to nominal retail sales figures, so economists have been putting more emphasis on inflation-adjusted numbers. The gain in core retail sales was led by a 1.9% gain in sales at food and beverage stores, while the largest decline to core retail sales came from a 6.7% drop in miscellaneous store retailers which includes pet stores, cannabis stores, and office supplies and stationery stores.
Faced with rising borrowing costs, many Canadian businesses are reconsidering their expansion plans. Record low interest rates during the pandemic encouraged companies to load up on cheap debt, with non-mortgage borrowings of non-financial corporations in Canada rising 10% to $817 billion in the first quarter of 2022 from a year ago. After the BoC’s 1% interest rate hike last week, on top of tight labour markets and uncertain demand outlook, companies are putting their feet off the gas. Stats Canada reported that the impact of rising cost could be felt most by small and medium enterprises that employ over 80% of the labour force.
After raising rates in June, the Fed is expected to approve another 75 bps hike this week and signal its intention to keep moving higher in the months ahead. Growth in the U.S. is already slowing in response to the Fed’s repeated interest rate increases, with the housing market softening, technology companies curbing hiring, and unemployment claims edging up. Powell has said that failing to restore price stability would be a bigger mistake than pushing the U.S. into a recession, however, he maintains that they can avoid a recession and execute a soft landing of the economy, arguing that the economy has underlying strengths.
Have you changed your renovation aspirations lately? You’re not alone. Anecdotally, contractors are sharing stories about the lower volume of renovation inquiries they are receiving, and budget cuts for projects in the pipeline. As homeowners grapple with rising loan costs and declining real estate values, the improvements that used to pay for themselves upon the sale of a home, is no longer a guarantee homeowners want to bet on. Noteworthy, Canada’s housing market including renovations made up more than 8.5% of GDP during the pandemic which means any decline would have a meaningful impact on the country’s growth (or lack thereof).
Pope Francis began his visit to Canada yesterday to apologize to Indigenous peoples for abuses made at residential schools. The Pope flew into Edmonton where he was greeted by Justin Trudeau and Mary May Simon, an Inuk who is Canada's first Indigenous governor general. He is expected to give his formal apology today, however, Indigenous groups are seeking more than just words. Groups are also pressing for access to church archives to learn the fate of children who never returned home from the residential schools. They also want justice for the abusers, financial reparations, and the return of Indigenous artifacts held by the Vatican Museums.
In a rare promotion, Apple is offering four days of discounts in China on its top-tier iPhones and related accessories in advance of the launch of its next-generation devices. Apple, who rarely discount prices, will take up to 600 yuan ($89) off the price of its top-line iPhone 13 Pro series between July 29 and Aug. 1. There’s a catch of course, to be eligible, buyers have to use one of a select number of payment platforms, such as Ant Group Co.’s Alipay. Certain AirPods and Apple Watch models are also part of the promotion.
Tesla announced a robust capital expenditure plan in the billions of dollars with CEO Elon Musk referring to the carmaker’s new factories as “gigantic money furnaces.” The company now expects $6 billion to $8 billion of capital expenditures this year and each of the next two years. Tesla had previously estimated it would spend between $5 billion and $7 billion on ramping manufacturing facilities and other items. Despite struggling to boost production of Model Y sport utility vehicles at factories that opened last quarter near Berlin and in Austin, Texas, Tesla still managed to beat estimates in their latest quarter, and the stock got a boost with Musk’s optimism about emerging from supply chain challenges.
Loblaw Companies Ltd. says it plans to eliminate all single-use plastic shopping bags from its stores by the end of the first quarter of 2023. The parent company of Loblaws and Shoppers Drug Mart says the move will apply to its corporate and franchise grocery stores, pharmacies and PC Express service. The company said as single-use plastic shopping bags are phased out systematically, customers will have a variety of reusable alternatives.
Commodities
Oil prices are higher this morning with a weaker U.S. dollar, making commodities in general more attractive. Benchmark crude prices have been facing bearish sentiment as of late, posting its third straight weekly decline as recession fears increased with the Fed set to announce another big interest-rate hike this week as it combats surging inflation. In Europe, German business confidence tanked, indicating it is also on the brink of a recession. The oil market has been extremely volatile, characterized by sharp swings and low liquidity, as investors juggle competing supply and demand outlooks. Crude still remains up 25% year-to-date, but has given up most of its gains after Russia’s invasion of Ukraine in late February.
Iron ore prices is continuing to rebound and extended its advance above $100 a ton, bringing a two-day increase to more than 7%, on optimism that a move by China to establish a real estate fund to support developers will help boost the property market. China’s State Council approved a plan late last week to set up a fund to provide financial backing for 12 developers and for a few new distressed developers that were recently nominated by local authorities.
Fixed income and economics
It’s an economic data heavy last week of July with several noteworthy highlights ready to set the table for August. Priority one is the FOMC whom is widely expected to hike the overnight interest rate band by 75 bps on Wednesday. The accompanying statement will be followed by a live presser by Chair Powell. On Thursday we will see the first reading of Q2 GDP with consensus expecting a mildly positive reading that hopes to stem the tide from Q1’s contractionary period and avoid the technical definition of a recession. Friday’s PCE update is calling for a +0.9% print in June and +6.7% annualized. This measure for the Fed’s preferred gauge of inflation typically treads slower than headline CPI from the BLS as it uses a changing basket of goods to reflect consumers’ shift in consumption. Consumer confidence (Tuesday), new home sales (Tuesday), durable goods orders (Wednesday), weekly jobless claims (Thursday) and income and spending during June (Friday) will round out the calendar. North of the border we have Canada also reporting a GDP update for May with preliminary June guidance being released on Friday. The survey is calling for a mild negative in the month based on advance guidance from StatsCan but annualized output is poised to still increase from prior.
Chart of the day
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Quote of the day
Laziness may appear attractive, but work gives satisfaction. Anne Frank