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Futures fell this morning as a rally that has propelled equity prices higher appears poised for a breather. Uncertainty remains in the market as worries the Fed and BoC’s aggressive rate-hike path outweigh strong corporate earnings and China’s stimulus plans. Investors today will continue to comb through corporate earnings from the retail sector, even after U.S. retail sales were little changed in July.
Housing starts slow as higher mortgage rates, and a deteriorating economy are tempering sales. The deteriorating outlook is leaving home builders with a sizable number of unsold properties leading to construction starts in the U.S. falling to the slowest pace since early 2021. Residential starts dropped by nearly 10% in the states to a 1.45 million annualized rate from a revised 1.6 million pace in June, while applications declined 1.3% to 1.67 million. Homebuilder sentiment slid for an eighth-straight month in August, marking the worst stretch since 2007.
Chipmakers are bracing for a big shift in the coming months. The semiconductor market saw massive orders during the pandemic, which drove stock prices to new highs and triggered a global rush to find enough supplies. The lack of supply led governments to intervene, the most notable being Biden’s $52 billion Chips and Science Act to subsidize domestic production. The coming decline is expected to be especially pronounced due to a weakening global economy. Experts are predicting that if an inventory correction happens at the same time the economy slides into recession, the industry will not get the same speedy rebound it saw after the last slump.
Despite Canadian investors feeling more optimistic these days, foreign investors are not as hopeful. Foreign investors pulled the most money out of Canadian stocks in 15 years amid fears that a recession would hit an equity market highly sensitive to changes in the economic cycles. These investors reduced their exposure by $12.6 billion in June, the third consecutive month of outflows with the biggest outflows coming from bank stocks, which make up about 20% of the TSX.
Yesterday Joe Biden signed the Inflation Reduction Act into law, a sweeping tax, climate, and health-care bill. The roughly $437 billion bill would cap and lower the price of medicines for seniors in part by letting Medicare negotiate drug prices for the first time. The bill contains $374 billion in energy and climate provisions, including tax credits for electric vehicles and incentives for clean-energy projects, in what the White House says is the largest-ever single investment to address climate change. Despite being a significantly reduced version of the $1.75 trillion Build Back Batter plan, the bill is expected to reduce the deficit by more than $300 billion over the next decade.
Does anyone believe Elon’s tweets anymore? Using his favourite platform that he no longer wants to acquire, Musk tweeted yesterday that he was buying storied football club Manchester United, only to tweet four hours later that he’s not buying any sports team and that it was a long running joke on twitter (haha?). This is not the first time Musk has used the platform to make market moving announcements, including making a play for the company itself earlier this year. The hearing to enforce the deal that Musk is trying to walk away from is scheduled for October.
Pandemic merch is all on sale. Target missed consensus earnings estimates in the second quarter, with profits plunging nearly 90% after the retailer was forced to slash prices to clear unwanted inventories of clothing, home goods and other discretionary items. In early June, Target warned that it was canceling orders from suppliers and aggressively cutting prices due to a pronounced spending shift as the pandemic eased. Retailers were blindsided by the quick switch from spending on goods for the home items, like TVs and small kitchen appliances, to dinners out, movies and travel. Walmart, Target's larger big box rival, said Tuesday that improving spending trends, as well as actions the group has taken to shift excess inventory, will ease some of the pressures it expects to face in terms of overall profits over the back half of the year.
Lowe's Companies reported fiscal second-quarter profit that topped expectations but sales that surprisingly declined, citing a "shortened spring" and lower demand in certain discretionary categories. Comparable sales for the quarter were below the average analyst estimate, as home renovators wrestle with a slumping U.S. housing market and the highest inflation in decades. Lowe’s earnings report contrasts with strong trends reported yesterday by rival Home Depot, whose sales beat estimates in the second quarter and said that strength continued in August.
Two Canadian retailers are teaming up. Hudson’s Bay and Mountain Equipment Company announced the launch of MEC shop-in-shops in three premier Hudson’s Bay GTA locations, including Yorkdale and Square One Shopping Centres and the flagship store on Queen St. in Toronto. Starting this fall, these shops will feature a well-curated assortment of gear, footwear and apparel to inspire everyone in Canada to get active outside. Later in the season, an extended MEC offering is set to debut on TheBay.com.
Commodities
It’s happening now in Europe. We wrote about aluminum processing plants having to curb output in China due to hydro issues yesterday. Europe’s energy crisis has claimed another victim in the power-hungry metals industry, with Norsk Hydro ASA planning to shutter an aluminum smelter in Slovakia at the end of next month. Aluminum is one of the most energy-intensive metals to produce, and the closure of the facility adds to growing signs of stress in Europe’s industrial economy as power prices surge to record highs. The area has already lost about half of its zinc and aluminum smelting capacity over the past year, as producers dialed back output, but Norsk Hydro and others are now moving to shut down plants entirely.
Oil prices are down to a 6-month low despite OPEC Secretary-General Haitham Al-Ghais stating that global oil markets face a high risk of a supply squeeze this year as demand remains resilient and spare production capacity dwindles. He also said that fears over slowing consumption in China and the wider world, which have pushed crude prices 16% lower this month, have been exaggerated. The OPEC chief remains confident that world oil demand will increase by almost 3 million bpd this year, bolstered by China’s return from Covid-related lockdowns.
Fixed income and economics
A pair of data points highlight the U.S. economic calendar this week that are sending further cautionary warning to a suddenly very inverted 2/10 Treasury yield curve. The Empire Manufacturing Survey released on Monday disappointed at -31.3 versus +11.1 in July and the +5.0 consensus. It’s the lowest print since May 2020 at the height of Covid pandemic, effectively unwinding all positive sentiment that has built during this time. Prices paid slipped to +55.5 compared to +64.3 prior and the lowest since January 2021 while new orders fell dramatically to -29.6 from +6.2 previously (also the lowest since May 2020). Shipments declined to -24.1 from +25.3 prior and employment was softer at +7.4 versus +18.0 in July. It's tempting to suggest this is a result of the Fed's policy normalization efforts; however it's also a function of the decline in energy prices that remains evident with front-month WTI at $86.50 this morning. U.S. retail sales out just now came in firmer than expected on a core basis, rising +0.4% last month and ahead of the -0.1% survey. The advanced headline was flat to narrowly miss a contraction for the first time in 2022. That said, the retail control group posted a +0.8% gain to improve from June and above expectations. All in a strong consumer is unlikely to deter the current flight path of policy normalization.
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I say luck is when an opportunity comes along and you're prepared for it. Denzel Washington