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Futures fell this morning as investors consider if higher oil prices after OPEC announced cuts to oil supply will further weaken growth. While rising energy prices could push inflation higher, some economists are speculating that it will impact company earnings, potentially encouraging central banks to slow monetary tightening. Investors are now awaiting a report on U.S. initial jobless claims later today and the official NFP tomorrow to assess the strength of the U.S. economy.
Expect more pain at the pumps. OPEC+ agreed to cut 2 million barrels of oil a day, or about 2% of the world’s daily oil production, the biggest cut since April 2020. The move is expected to push oil prices higher and thereby benefit oil exporting countries including Russia. Through its oil industry, Russia has managed to protect itself from EU and U.S. sanctions and fund its war on Ukraine. Despite OPEC+ publicly saying the reduction was a technical response to a slowing Global economy, the White House rebuked the announcement stating, “It’s clear that OPEC+ is aligning with Russia”. In response to the production cuts, President Biden released another 10 million barrels of oil from the U.S.’s SPR, a move not expected to have an impact on prices.
In the U.S. demand for services remained healthy last month, despite growing concerns about the economy’s strength. Growth at service providers remained strong in September, reflecting solid business activity and orders. While measures of business activity declined from strong readings from earlier in the year, they remain elevated. A new report also indicated supply chains are continuing to normalize with order backlogs falling to a four-month low and supplier delivery times increasing at its slowest pace since February 2020.
As the BoC continues its rate-hiking campaign, home-buying activity continued to slow last month. In Toronto, home sales dropped almost 11% from August, as buyers worry about higher borrowing costs while prices fell 1.2% for the month. Prices have seen a steep drop and are down 17% from their spring peak. Benchmark prices are now $1.1 million for homes in the GTA, their lowest level since last October. Meanwhile, in Vancouver, benchmark prices fell 2.1% in September, bringing the cumulative decline in the last six months to 8.5%.
U.S. credit markets are expected to continue to feel the pain. Fed tightening and recession worries sent investment-grade bonds, high-yield debt, and leveraged loans tumbling in September. Debt across the quality spectrum suffered last month, with investment grade bonds falling over 5% on a total return basis, high yield debt declining nearly 4%, and loans seeing their worst September since 2008. Experts expect losses to continue this month for low-grade bonds and loans as debtholders grapple with rising economic risk, market volatility, and a hawkish Fed. While spreads may be nearing a peak for higher-rated U.S. corporate bonds, some see plenty of room for lower-rated debt spreads to widen.
More fees to get the freebees. Starting today, businesses in Canada will be able to pass credit card fees on to their customers. The change is the result of a recent class-action settlement involving Visa and Mastercard over what are known as interchange or swipe fees, which is the money credit card companies, banks, and payment processors collect from merchants on every transaction. A survey found that 19% of small businesses are considering adding a surcharge on credit card transactions to offset processing fees, while most remain on the fence for fear of losing customers.
Loblaw and Gatik made history in Canada yesterday launching its first driverless delivery truck. For about two-and-a-half years, Loblaw has been working with Gatik Inc., an autonomous technology company based in Silicon Valley, to run a fleet of five driverless trucks guided by cameras, laser sensors and sonar. Despite the successful launch, the trucks will still run with a safety driver in the passenger seat as a precaution, next to a red, tangerine-sized button known as the emergency stop, or the "kill button." The hope is that by next year, all five trucks will run without anyone in them at all, making Loblaw's e-commerce deliveries more efficient and less reliant on a tightening labour pool. Just in case you were wondering, it is not legally required to have a person in the truck in Ontario, since the provincial government is running a pilot program that allows for certain autonomous vehicles to run without a driver. Gatik has also been running trucks for Walmart Inc. in Arkansas without anyone in the vehicle at all.
Interesting diversification. Brookfield Asset Management Inc. is joining with independent publisher Primary Wave Music in a $2 billion deal to invest in music copyrights. Unlike Primary Wave's existing funds, which have a typical 10- to 12-year lifespan, the new vehicle is structured to hold catalogs as long as it wants to have them and never has to sell. The deal also brings on Creative Artists Agency as a strategic partner and minority investor in Primary Wave, tapping the talent agency's film, television, theatrical and branding teams to help market and find uses for the acquired copyrights.
Suncor Energy has agreed to sell its solar and wind projects to ATCO Ltd., for C$730 million and will allow Suncor to focus on complementary energy projects. The transaction, which is expected to close in the first quarter of next year, includes interest in Magrath, Chin Chute and Adelaide wind farms, as well as the Forty Mile Wind Farm Project that’s forecast to be operational this year, the company said. It also includes development-stage renewable power assets.
Commodities
As if natural gas needs more problems. Malaysia will be curbing LNG shipments to Japan this winter after a pipeline leak disrupted exports, another hit to already strained global supplies. Petroliam Nasional Bhd. has made a request to reduce contracted deliveries to several Japanese customers through the year-end - Petronas declared a force majeure on supply to its LNG export facility due to a leak on Sabah-Sarawak Gas Pipeline on Sept. 21. The reduction in scheduled shipments threatens to intensify a scramble in Asia to find replacement cargoes, boosting competition with Europe for scarce supply. Japan, which imports most of its energy needs, is grappling with a worsening shortfall, and narrowly avoided blackouts earlier this year. The government is expected to call on residents and businesses to conserve power this winter.
Zinc and copper are higher, after the LME said it will restrict new deliveries of the metals from Russia’s Ural Mining & Metallurgical Co. and one of its subsidiaries. The metals from the two companies can only be delivered to LME warehouses if the owner can prove to the exchange that it won’t constitute a breach of recent sanctions on the firm’s co-founder, Iskandar Makhmudov. The move is by far the most significant restriction on Russian supplies by the world’s main metals market since the invasion of Ukraine.
Fixed income and economics
With tomorrow’s labour update due from StatsCan, domestic markets will have their focus on BoC Governor Tiff Macklem whom will deliver a speech titled the “Current Economic Situation” before the Halifax Chamber of Commerce this morning followed by a press conference at 1PM EST. The appearance is especially notable as it will be the last from any senior BoC official before entering the blackout period two Tuesdays from now ahead of the October 26 policy update. Markets have still priced in a 50 bps hike and a terminal policy rate of 4% (which we believe to be conservative) but the key issue is whether he revisits prior guidance that they wish to get into restrictive territory defined as above the 2%–3% neutral rate range. His last comment on September 7 was that that the job was not done yet when they said “Given the outlook for inflation, the Governing Council still judges that the policy interest rate will need to rise further”. But a lot has happened since including jobs falling, core inflation creeping lower, and GDP remaining robust in Q3. Watch the tape for all the post-speech reaction.
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Expect the best, plan for the worst, and prepare to be surprised. Denis Waitley