Equity futures are down this morning as investors ready for the start of the Fed’s two-day September policy meeting and digest the latest inflation numbers out of Canada. Stats Canada reported this morning that the rate of inflation rose unexpectedly for the second consecutive month, with the CPI (y/y) increasing by 4% in August, exceeding the estimate of 3.8%. On a monthly basis, the index rose 0.4%, double the expectation. It is worth noting that the gains were largely driven by higher gasoline prices, which some believe may allow the BoC to look past the setback. Unfortunately, trim and core rates also increased, averaging 4% from an upwardly revised 3.75% a month earlier, exceeding the 3.7% pace expected by economists. Today’s numbers once again highlight a challenge in the current phase of the inflation battle, where the decline toward the 2% target is expected to be more difficult than thought.
The OECD is forecasting global growth will ease to 2.7% in 2024 after an already “sub-par” expansion of 3% this year. This would mean that with the exception of 2020 when Covid hit, it would mark the weakest GDP reading since the global financial crisis. The OECD also warned that risks could be worse with past rate hikes having a stronger impact than expected and more tightening may be necessary if inflation continues to be sticky. It called China’s struggles a key risk for output around the world. The OECD cautioned against easing up, with core-price gains remaining stubborn in many countries even as headline gauges head lower. There’s limited scope for any rate cuts until “well into 2024.”
Canada has decided to postpone a planned trade mission to India scheduled for early October, amid escalating tensions between the two countries. This decision follows a contentious meeting between Justin Trudeau and Indian Prime Minister Narendra Modi during the G-20 summit in New Delhi. It comes as broader trade talks between Canada and India have stalled. Things got worse for relations after Justin Trudeau shared Canadian intelligence which suggested that the “agents of the government of India” were involved in the killing of a prominent Sikh leader, Hardeep Singh Nijjar, in Canada. Nijjar's death in June in Surrey, British Columbia, had raised tensions between Sikh separatists and the Indian government.
It’s not only Canada who is having real estate problems. Homebuilder sentiment in the U.S. dropped to a five-month low in September, reflecting the impact of higher mortgage rates on the housing market. The National Association of Home Builders Index fell 5 points to 45, marking the largest back-to-back decrease in nearly a year. Mortgage rates above 7% have begun to deter potential homebuyers, and builders are increasingly resorting to incentives to attract buyers. The decline in builder sentiment, along with lower measures of current and expected sales, signals potential challenges for the housing market in the coming months.
Canada's transport regulator, the Canadian Transportation Agency, is dealing with a backlog of over 57,000 air passenger complaints, with more than 3,000 new complaints per month in the past year. Dissatisfaction over flight cancellations and compensation continues, driven by issues related to the pandemic. In June, the government passed legislation to overhaul Canada’s passenger rights charter, aiming to strengthen penalties and close loopholes regarding traveler compensation, however, some reforms won't take effect until September 30. Advocacy groups argue that more immediate measures, such as raising maximum fines for airline violations, are needed to protect passenger rights effectively.
Yesterday was an inaugural day for women’s hockey with the first draft of the brand new Professional Women's Hockey League. The league was created over the summer, after the Premier Hockey Federation, another professional league for women's hockey that started in 2015, was bought out in July. Similar to the NHL, the PWHL will have six founding franchises (Boston, Montreal, Minnesota, Ottawa, New York, and Toronto) and is owned by Mark Walter, chair of the Los Angeles Dodgers and owner of the Mark Walter Group. Tennis legend Billie Jean King also sits on the board.
On the hot seat. Executives from major grocery chains, including Loblaw, Metro, Empire, Walmart, and Costco, have met with federal cabinet ministers to discuss measures to stabilize grocery prices. Grocery prices in Canada have risen significantly, with an 8.5% year-over-year increase in July, well above the overall inflation rate of 3.3%. Finance Minister Chrystia Freeland and Industry Minister François-Philippe Champagne called for action from these grocery chains, emphasizing the expectation of Canadians for them to take steps to lower prices. While the meeting was described as productive, details about specific actions or price reductions were not provided at this time, so still expect high prices next time you’re shopping.
The ongoing autoworkers' strikes in the U.S., involving major automakers like General Motors, Ford, and Stellantis, have raised concerns about their potential impact on the U.S. economy and job markets. The strike is now on its 5th day, with no signs of a quick resolution. Concerns that the strike will expand are now also rising. Treasury Secretary Janet Yellen expressed hope for a swift resolution and noted that the impact on the economy would depend on the strike's duration. Joe Biden is sending administration officials to Detroit to support negotiations, and the UAW seeks wage increases of 36% over four years, while the companies have offered around 20%.
Grocery delivery company Instacart priced its long-awaited IPO at $30 a share yesterday. That’s toward the top of the expected range and gives the company a value of about $10 billion on a fully diluted basis, a significant difference from when it was valued at $39 billion in early 2021 at the height of the Covid pandemic. The stock is set to debut on the Nasdaq today under the ticker "CART”.
Heather’s Picks are back. Heather Reisman, the founder of Indigo Books & Music Inc., has returned as the CEO of the company, filling the vacancy created by Peter Ruis' abrupt resignation earlier this month. Reisman, who had previously served as CEO until last year when Ruis took over, expressed her commitment to the company's mission and its employees. Alongside her return as CEO, Reisman has been reappointed to the company's board. The changes come after several directors left the board and concerns were raised about board leadership.
Oil prices are not backing down and continues to move higher, extending a rally that may rekindle inflation, as supply cuts from OPEC+ tighten markets. The latest push has been marked by technical moves in timespreads, with Brent’s three-month spread earlier inflating to more than $4 a barrel in backwardation, a bullish pattern. That compares with a differential of $1.26 a barrel about a month ago. Yesterday, Saudi Arabia Energy Minister Prince Abdulaziz bin Salman told a conference in Canada that OPEC was working to keep markets stable and improve energy security, without targeting a specific price, and that output plans will be reviewed every month. In other words, they are not changing course. WTI is closing in on $93, while Brent is trading near $95.
Gold markets have seen a significant decrease in volatility, reaching levels not seen since February 2020, despite factors like a rising U.S. dollar and inflation-adjusted Treasury yields. Gold prices have largely stayed within a range of $1,900 to $2,000 per ounce since mid-May, thanks to consistent support from gold buyers who have essentially created a price floor around $1,900. While gold ETF holdings have decreased by 5% this year, robust buying by central banks has contributed to gold's resilience. Still, the precious metal saw its prices rise the most in over three weeks as traders closely watch economic data ahead of the Fed's interest-rate decision, showing that even in a relatively stable market, external factors can still influence price movements.
Fixed income and economics
The two-day FOMC meeting starts today culminating with a rate decision tomorrow at 2 pm ET when it is widely expected for the Fed to remain pat on rates, a move that even the most hawkish Federal Reserve officials have long telegraphed. However, where most will be looking is the Summary of Economic Projections with an update Fed Dot Plot. The two main questions are whether policymakers will retain their projections for one more 25 basis-point hike by year-end, and how much easing they are expecting for 2024. In June, they projected 1 percentage point of cuts.
A U.S. Treasury bond due in May 2050 briefly fell below 50 cents on the dollar yesterday, highlighting the significant pain faced by investors who entered long-term bonds at very low interest rates during the pandemic and then confronted the Fed's aggressive monetary tightening. Although the U.S. is not at risk of default, the bond's price decline illustrates the sensitivity of long-duration bonds to rising interest rates. Longer-term US Treasuries, with the highest price sensitivity to rate changes, have declined 4% this year, compared to double-digit losses in 2022. Still, these bonds also offer positive convexity, meaning they could gain significantly if yields fall.
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Contributors: A. Innis, A. Nguyen, P. Kwon, M. Letchumanan