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North American futures and global stocks climbed this morning as investors weighed prospects of aggressive central bank rate hikes against reassuring earnings. U.S. stocks were mixed on Friday after the July jobs report was much better than expected. Investors assessed what a strong labour market would mean for the Fed’s rate tightening campaign. Canadian equities wavered as well on Friday, but for different reasons, as the disappointing jobs report fueled concerns about a slowing economy.
China’s economy continued to rebound last month after months of Covid restrictions. The trade surplus in China rose to a record in July as exports grew faster than expected, easing some concerns over waning global demand. The trade balance climbed to about $101 billion, surpassing the previous record set in June. The strong export growth continues to help China’s economy as recovery remains fragile, weighed down by a slowdown in the property sector, weak domestic demand, and virus flareups.
The U.S. Senate voted over the weekend to advance a $430 billion climate and economic bill intended to fight climate change, lower drug prices and raise some corporate taxes. The procedural vote was 51-50, with all Republicans opposing the motion and Vice President Kamala Harris casting the tie-breaking vote. If that support holds, it is enough to pass the bill through the Senate and send it to the House in the coming days. The legislation, called the Inflation Reduction Act, includes major spending to combat climate change and extend health care coverage, paid for with savings on prescription drugs and taxes on corporations. Electric vehicle and renewable energy stocks are rallying pre-market on the news. The bill extends a popular $7,500 per vehicle consumer tax credit for the purchase of EVs, though new cars that cost more than $55,000 for pickups and $80,000 for SUVs won’t qualify for these credits.
All roads lead to a rate hike. U.S. employers added 528K jobs last month, unemployment rate fell to a five-decade low of 3.5%, and wage growth accelerated. The FOMC is expected to raise interest rates by 75 bps when it meets in September, matching the moves it made in June and July as it works to cool inflation. The strong numbers could also suggest the central bank will need to keep rates higher for longer, contrary to market expectations for rate cuts in 2023. Meanwhile, Canada’s economy showed signs of cooling when our jobs numbers showed the country shed 30,600 jobs in July. Despite the economic weakness, the BoC is expected to continue their rate hike campaign.
Less than half of all flights going through Pearson Airport were on time last week, but the Greater Toronto Airport Authority says the situation is improving. Officials reported that 44% of flights were on time over the last week, an improvement from an average of 35% over the previous four weeks. Wait times have improved in recent days for security screenings as well as baggage arrivals. A surge in travel demand pushed Pearson Airport to the top of global flight delay lists with 52.5% of scheduled flights between May 26 and July 19 delayed, making Pearson the worst airport in the world for when it comes to delayed flights. The moral of the story is that if you are travelling soon, maybe still plan on getting to the airport early.
Buying the dip. Berkshire Hathaway was a net buyer of equities in Q2, reporting $3.8 billion in purchases, stepping in as the S&P 500 shed 16% in the latest quarter. Still, the conglomerate showed a massive cash hoard of $105.4 billion at the end of June even though the giant has been more active in deal-making and picking stocks. The same market weakness increasing Buffett’s buying power is weighing on his company’s results. The company reported a net loss of $43.8 billion due to a $53 billion loss in the company’s investment portfolio. Berkshire downplays those results and told investors not to focus on quarterly fluctuations in its equity investments. On the bright side, the company reported an operating profit of $9.2 billion as the insurance and railroad businesses posted gains.
In M&A news, Pfizer has agreed to buy Global Blood Therapeutics the maker of a drug for sickle-cell disease, in a deal worth $5.4 billion. Both company boards have unanimously approved the transaction. To its portfolio, Pfizer will gain Oxbryta, Global Blood’s therapy for sickle-cell disease. The drug was approved in the U.S. in November 2019 and is has been cleared in the European Union and other countries. Net sales for Oxbryta were approximately $195 million in 2021.
Whirlpool Corp. has agreed to buy Insinkerator, Emerson Electric Co.’s waste-disposal business, in a $3 billion transaction. The all-cash deal is expected to close in the fourth quarter of this year, subject to regulatory approvals. The acquisition comes as Whirlpool conducts a review of its business to concentrate on areas with high growth and margin potential by focusing on the Americas, on countertop appliances and on the commercial segment. It announced the sale of its Russian operations in late June.
The Rogers outage could have helped here. Telus reported a rise in profit in the second quarter, benefiting from more customers joining its services and higher revenue in the period. In the period, the company said it brought in 247,000 new customers, up 24,000 over the same period last year. These new customers included 93,000 mobile phones and 92,000 connected devices, while 34,000 were internet.
Not so high anymore. Canopy Growth reported a wider-than-expected loss for its fiscal first quarter. Canopy incurred a noncash goodwill impairment charge of C$1.73 billion related to its cannabis operations, the latest sign of the rough patch that the country’s large pot producers have been stuck in. This pushed the company into the red for the period, as it reported a net loss of $2.09 billion, compared to a net profit of $392,418 a year. Since peaking in mid-October 2018 amid euphoria surrounding the legalization of recreational cannabis in Canada, Canopy’s stock price has disintegrated.
Commodities
Oil prices are lower hovering near levels not seen since the war in Ukraine started, as recession fears hurt demand outlook and data pointed to a slow recovery in China’s crude imports last month. Oil’s initial drop this morning came despite data released at the weekend that showed China’s imports of crude rose in July from the lowest in four years as travel and transportation activity improved after Covid-19 curbs eased. Still, the country’s year-to-date total remains about 4% lower. Data showed China imported 8.79 million bpd of crude in July, up from a four-year low in June, but still 9.5% lower than a year ago. Chinese refiners drew down stockpiles amid high crude prices and weak domestic margins even as the country’s overall exports gained momentum. This week, the U.S. Energy Information Administration is set to issue its short-term outlook on Tuesday, followed by monthly snapshots from producer group OPEC and the International Energy Agency on Thursday.
European natural gas prices swung between gains and losses as lower shipments from Norway compounded supply risks, but the pace of replenishing storage sites continued near average levels. Traders are closely monitoring supplies from Norway this week as several facilities that are crucial for sending gas to the U.K. and continental Europe are scheduled to start seasonal maintenance. Still, prices have been kept in check in recent days as Europe’s campaign to stockpile gas before the winter sets in has gained pace. Inventories are about 72% full, near the five-year average.
Fixed income and economics
The dominant focus over the next two weeks will be updates on global inflation with nations including the U.S., Canada, U.K., China, India, Japan and Mexico all providing their lates CPI figures in the middle of summer. Our focus of course will be on the former two with potential guidance changes from central banks looming as well. Expect to see the usual flagging of material progress in tempering price acceleration and the chance of revised higher targets heading into the back half of 2022. One area of discussion we expect to see is a reassessment of supply chain pressures amid evidence of easing but still high constraints as businesses are fundamentally re-evaluating and redesigning their operation models in the wake of the Russia/Ukraine crisis. U.S. CPI is out this Wednesday with the survey calling for a +8.79% yearly increase (+9.1% prior) and +0.2% monthly print on the headline. Core inflation is set to increase however to +6.1% from +5.9% year-over-year and that’s where markets will be fixated as cheaper gas prices in July are already well known (all-grade retail gasoline prices fell by over -7% last month). Having said all of that, the release should be viewed in a singular lens as it’s just one print and there will be another CPI update on September 13th before the next FOMC decision on September 21. Canada’s inflation figures for July are set to be updated next Tuesday the core poised to rise +5.8% annualized from +5.3% prior.
Chart of the day
Markets
Quote of the day
If everyone is moving forward together, then success takes care of itself. Henry Ford