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Inflation fears persist this morning as major retailers warn of rising cost pressure after releasing their earnings, pushing equity markets down. This morning’s reversal comes after markets mounted a comeback off recent lows. Stocks in Europe and North America are also struggling to build on the recent rally as investors assessed hawkish comments from Fed Chair Jerome Powell (more below) and the latest data on inflation and economic activity. Data released this morning shows that Canadian CPI rose 6.8% year over year, indicating that the BoC will need to be even more aggressive in their rate hikes. Despite disappointing economic data coming out of Canada, retail sales in the U.S. grew at a solid pace in April, suggesting demand for merchandise remains strong despite high inflation.
Canadian business insolvency filings rose last quarter, and current market conditions could push the number even higher. Business insolvency filings in Canada rose 33.8% in Q1 of this year, compared with the same quarter last year. Many of the businesses are pointing to rising inflation and the end of pandemic-related government support as the cause for insolvency. With many businesses just starting to recover from Covid related lockdowns, experts have indicated that supply chain disruptions and rising costs goods will put a further strain on these companies.
The U.S. government is set to fully block Russia’s ability to pay U.S. bondholders after a deadline expires next week. After Russia’s invasion of Ukraine, the U.S. levied sanctions against Russia, however, Russia was still allowed to pay investors in order to avoid default on its government debt. This is set to change next week when the Treasury Department’s Office of Foreign Assets Control will allow a general license to lapse which could bring Russia closer to the brink of default.
Goldman Sachs has announced unlimited vacation days for its senior bankers (sorry associates). The venerable 153 year old Wall Street firm announced the policy as it tries to retain top talent amidst a tight labour market. This comes as the firm looks to evolve the culture and environment of very long workdays it is widely known for. Companies, particularly tech companies, have long adopted this policy and more traditional companies look to experiment with varying HR policies that will appeal to a myriad of employees including four-day work weeks and more casual dress codes. Note, this is a policy, whether the partners and managing directors actually use the unlimited days is a different story.
Speaking of jobs, interns are the latest target for companies as they fight for talent in the tightest labour market in decades. As the struggle to recruit employees continues (U.S. job openings hit an all-time high in March), companies have hired more than 20% more interns since last year to fill entry level roles. The boost in intern headcount was even higher for the finance industry, which increased hiring by 31%, while the tech industry more than doubled its intern workforce with a surge of 138%. As the battle for new recruits intensifies, some firms are sending offers to college students more than a year before they start with the company. Meanwhile, overall labour force participation rates remain low, not having fully recovered from the pandemic.
Hooray. Airlines are stepping up to feed high consumer demand for travel after two years of reduced routes and cut services. United Airlines announced it will resume its Boeing 777-200 jetliners ahead of the busy summer season after some of the jets were grounded 15 months ago due to engine failure. The FAA approved the fixes to the engines late Monday the company announced. This could not come at a better time as air travel demand and fares have soared as avid travelers return in droves after many choosing to be grounded over the last two years. The airline’s higher revenue outlook lifted the shares up 7.8% yesterday. Happy travels.
If you are looking for a sale, you got one. Target shares are looking to open nearly –20% lower after the discount retailer missed earnings estimates and trimmed its profit forecast as a surge in costs during the first quarter shows little sign of easing. With margins being squeezed, Target reported operating profit will amount to 6% of sales this year, below at least 8%, which is in line with its long-term goals. Target is echoing other retailers like Walmart, with bleaker outlooks due to cost pressures, and said fuel and freight were $1 billion more than expected during the first quarter, while additional hits came from higher pay for warehouse employees and markdowns driven by bloated inventories.
Unlike Home Depot, Lowe’s Cos. reported a drop in same-store sales, a sign the retailer may struggle to keep pace with its rival amid accelerating inflation and rising mortgage rates. Lowe’s sales compare unfavorably with those of Home Depot, which a day earlier reported a gain in the comparable measure and boosted its annual outlook. On a positive note, Lowes reiterated its outlook for the year, saying revenue by that measure may rise as much as 1%.
It worked the first time, so why not try it again, Biebs and Timmy’s are back. After the successful campaign of Timbiebs Timbits, Justin Bieber and Tim Hortons are back together again for another brilliant collaboration called "Biebs Brew" — a French vanilla cold brew. Fans in both Canada and the U.S. can try it starting June 6. According to Tim Horton’s parent company Restaurant Brands International CEO Jose Cil, Bieber’s last promotion “was one of the more successful traffic-driving initiatives in recent memory and outperformed our internal expectations.”
Commodities
We can help. Canada, in particular Alberta, is saying they can increase oil production by 900,000 bpd to make up for supply losses from Russia’s war in Ukraine. This statement came from Alberta’s Premier Jason Kenney who appeared before the U.S. Senate committee, and contradicts the estimate delivered weeks ago by Natural Resources Minister Jonathan Wilkinson. According to Kenney, approximately 300,000 bpd of unused capacity exists in the North American pipeline system which can be filled this year through higher output. He added, another 200,000 barrels of crude oil could be shipped by rail and “if midstream companies get serious about it, and if regulators approve it,” a further 400,000 barrels could be added through pipeline reversals and technical improvements. It sounds easy doesn’t, but experts are saying that boosting Canada’s output by that amount will not happen quickly. Something needs to be done, because it’s like a broken record writing about record high gasoline prices at the pumps.
Fixed income and economics
Powell is not convinced yet. When Fed Chair Jerome Powell speaks, markets listen and he says that no one should doubt the U.S. central bank’s ability to curb the highest inflation in decades, even if that means pushing rates into restrictive territory. Powell added that the Fed will keep raising interest rates until there is “clear and convincing” evidence that inflation is in retreat. The Fed raised interest rates by a half point at their meeting earlier this month and Powell said two similar moves were on the table in June and July. With the probability of a 100 bp point move with two rate hikes over the summer on the rise, bond markets once again sold off after a short-term rally. The U.S. 10-year Treasury yield is now up and knocking on 3.0% again as markets reflect the upcoming hikes. So, with the taming of forward inflation and a super hawkish Fed, the yield curve is flattening once again.
Chart of the day
Markets
Quote of the day
If you are lonely when you're alone, you are in bad company. Jean-Paul Sartre
Contributors: A. Innis, A. Nguyen, D.Mak, J. Price, P. Kwon