Equity futures edged higher this morning as the market awaits the Fed interest rate decision at 2 pm ET. The central bank is expected to hold rates at their current level for the second time this year following as signs show inflation is cooling (must be nice). Still, the Fed is expected to leave the door open for another increase as early as November. With investors now hoping that market rates will start to reverse as inflation eased, the 10-year Treasury yield eased this morning after touching the highest yield since 2007 yesterday.
In Canada, public support for strikes and unions appears to be stronger than usual, reflecting a shift that's also occurring in the U.S. Factors such as the pandemic, inflation, and rising interest rates have contributed to greater public sympathy for striking workers and union causes. A recent poll by Angus Reid Institute indicated relatively high union support, and experts suggest that union messaging and a spotlight on certain industries, like grocery, have resonated with the public. However, experts caution that this window of opportunity for strong public support may not last indefinitely.
Silver lining. Yesterday’s CPI print was disappointing, but looking closer at the numbers, there was one thing to celebrate. In August, grocery price inflation in Canada showed signs of slowing, although prices remained elevated. The deceleration in food prices was partly attributed to slower price growth in fresh fruit, cereal, and chicken compared to the previous month. According to Statistics Canada's monthly inflation report, food prices increased by 6.9% year-over-year in August, compared to an 8.5% increase in July. Additionally, grocery prices decreased by 0.4% on a monthly basis in August. However, grocery prices are still considerably higher compared to the overall year-over-year CPI increase of 4% for August.
Retail investors have been cautious with energy stocks, despite rallying oil prices. While the S&P 500 Energy Index has risen about 14% since late June, oil prices have surged roughly 30% to over $93 per barrel. This gap between oil prices and energy stocks has yet to convince retail investors to enter the sector, despite more institutional investors jumping in. So why the hesitation? Some attribute this caution to the rising popularity of AI and technology stocks, which have drawn attention away from energy stocks. Additionally, specific large-cap oil stocks, like Chevron, have struggled, affecting the overall performance of the energy sector. While energy has been the best-performing sector in the S&P 500 in Q3, skepticism remains about its future outperformance.
Companies listed in Hong Kong are increasing share buybacks amidst a challenging stock market environment. These repurchases are expected to reach approximately $11.9 billion, which is nearly four times higher than the previous five-year annual average. The Hang Seng Index, Hong Kong's benchmark, has fallen about 9% in 2023, making it one of the worst-performing major regional indices globally. The surge in buybacks indicates that these companies believe their shares are undervalued, despite the broader market's struggles. This trend follows a similar buying spree in 2022 when corporate stock repurchases rose by 175% as the Hang Seng Index declined.
Justin Trudeau's allegations of India's involvement in a separatist leader's murder has put Joe Biden in a challenging position between a close ally and an increasingly important partner in countering China. This incident threatens to disrupt the U.S.'s efforts to strengthen its relationship with India, as it aims to build trust and collaboration with the nation in its competition with China. While the White House reacted cautiously, experts suggest that Biden is in a difficult position, as taking sides could strain relations with either Canada or India. This dispute could impact various aspects of the relationship between the U.S. and India, including trade talks and military communications.
The United Auto Workers said more of its members will go on strike at General Motors Co., Ford Motor Co. and Stellantis NV facilities starting at noon Friday unless substantial headway is made toward new labour contracts. The new deadline raises the stakes for talks between three of the biggest automakers in the US and the union representing 146,000 of their workers. Friday will mark one week since the UAW called its first-ever walkout across all three of the legacy Detroit manufacturers. According to S&P Global Mobility, the strike is costing the companies output of about 3,200 vehicles a day. On a positive note, workers at Ford Motor Co.’s Canadian unit avoided a strike, reaching a tentative agreement late Tuesday after extending negotiations by 24 hours from a previous deadline.
Amazon is set to hire 250,000 logistics workers as the company gears up for the holiday season. Over 6,000 of those hires will be in Canada, covering various roles including full-time, seasonal, and part-time positions. These hires will be involved in Amazon's operations network, focusing on tasks such as picking, packing, sorting, and shipping customer orders. Additionally, Amazon is investing more than $70 million in pay increases for fulfillment and transportation employees, raising their average hourly wage from $17 in 2018 to $21. This move is part of Amazon's continued expansion in Canada, where it operates numerous logistics sites and plans to open two more locations this year.
Online grocery delivery business Instacart IPOed yesterday up 43% in its trading debut. Instacart’s shares opened at $42 after selling for $30, to raise $660 million for the company and selling stockholders in the year’s fourth largest US IPO. Instacart’s valuation rises to more than $12.5 billion on a fully diluted basis. That’s a steep plunge from its $39 billion valuation in a 2021 funding round when its business boomed amid pandemic lockdowns, but still ranks it as one of the biggest companies to go public in almost two years. Instacart’s listing combined with Arm Holdings Plc’s is giving equity capital markets much-needed relief after the longest drought since 2009 in the depths of the financial crisis.
Crude oil prices fell approximately 1% this morning after reaching $95 a barrel, showing signs of being overbought on a technical basis. Despite the rally, driven by supply cuts from OPEC+ members and positive economic outlooks, concerns exist about the potential impact of high oil prices on central bank decisions, particularly the Fed. US inventories, however, have been declining, which supports the recent bullish sentiment in the oil market.
Iron ore prices have risen this morning due to Chinese authorities' support for the property sector. The Chinese government eased home-purchase restrictions in some cities, boosting steel demand, leading to restocking by steel mills ahead of the National Day holiday. Despite these positive factors, concerns remain about steel demand during the usual construction season after China's summer lull. Iron ore prices currently stand at $121.70 per ton in Singapore.
Fixed income and economics
Treasury yields rose ahead of the Fed's next rate decision today, driven by expectations that the central bank will adopt a hawkish stance to combat inflation. The Fed faces a complex situation as it navigates rising inflation and supply shocks, including climbing oil prices, which could curb economic growth. Analysts suggest that the risks of headline inflation increasing in the coming months are growing, posing challenges for policymakers. Market expectations of a "peak" in interest rates have shifted from November to December, indicating a potential central bank pause. The focus today will be on the Fed's updated rate projections, especially whether there will be one more quarter-point rate hike this year and if projections for 2024 will scale back the previously forecasted 100 basis points of rate reductions. The U.S. 10-year yield closed at a 4.36% yield, the highest since 2007.
Yesterday, Canada inflation data accelerated by more than expected for the second straight month, but gains driven largely by higher gasoline prices likely won’t faze the BoC. CPI (y/y) came in at 4% compared to the estimate of 3.8%, the quickest pace since April and an increase from the 3.3% print in July. Two key yearly inflation measures that filter out components with extreme price fluctuations and are tracked closely by the central bank, the so-called trim and median core rates, also increased, averaging 4% from an upwardly revised 3.75% a month earlier, exceeding the 3.7% pace expected by economists. A three-month moving average of the measures that Governor Tiff Macklem has flagged as key to his team’s thinking rose by a full percentage point to an annualized pace of 4.49%. This is the first of two inflation reports before the Bank of Canada’s next rate decision on Oct. 25. Currently, the majority of economists expect the BoC to hold borrowing costs steady at 5%.
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The only way to have a friend is to be one. Ralph Waldo Emerson