Futures are looking to start the day down, deepening losses for the week, as investors come to terms with the Fed’s plans to keep interest rates at higher levels for a longer time period than hoped. Tech shares have led the losses this week as investors may rethink buying growth-oriented stocks if interest rates are going to remain high. Treasury two-year yields are now hovering near the highest since 2006, while the yield on 10-year bonds climbed toward the highest since October 2007, with bond traders bracing for Treasury yields to keep pushing higher.
Something to cheers about. The Bank of England kept rates unchanged for the first time in two years ending (for now) the most aggressive cycle of interest-rate rises in more than three decades. The BOE held at 5.25%, ending a series of 14 successive hikes since December 2021, when rates were just 0.1%. It was a close one though, five members of the Monetary Policy Committee voted to leave rates unchanged and four wanted to raise them to 5.5%, and Governor Andrew Bailey, who had the casting vote, chose to hold. This will be relief for households facing the threat of even higher mortgage costs and indebted businesses, as mounting fears of recession set in. The BOE (just in case) signaled that the decision was only a pause and would continue to act if inflation remains persistent – inflation is currently more than three times above the 2% target.
Higher for longer. The Fed left its benchmark interest rate unchanged yesterday but signaled that it will likely raise rates one more time this year. The central bank's FOMC held the target range for the federal funds rate at 5.25% to 5.5%. This comes as updated quarterly projections show that 12 of 19 officials favour another rate hike in 2023 to ensure inflation continues to decelerate. Officials anticipate less easing next year, reflecting renewed economic strength and less pressure on the labour market. Treasury two-year yields reached their highest level since 2006 after the announcement, signaling a prolonged pause in rate hikes.
The SEC has implemented new rules that impose stricter regulations on naming investment funds, particularly those claiming to be related to ESG investments. The SEC has been concerned that funds use misleading labels to attract investors, particularly in the ESG space, where standards have been inconsistent. These new rules aim to ensure that a fund's name accurately reflects its actual strategies, providing clarity for investors. The regulations will apply to funds with trillions of dollars in assets and will require quarterly portfolio reviews and 90-day compliance periods for temporary deviations from investment focus.
Tensions have risen between India and Canada, with each nation expelling one of the other's diplomats due to a dispute over the murder of a Sikh separatist leader. India has urged its nationals in Canada, especially students, to exercise caution amid growing anti-India activities and politically-condoned hate crimes. Canada has been investigating allegations of potential involvement by Indian government agents in the murder of Hardeep Singh Nijjar in British Columbia. Not everyone is on Canada’s side though, with the U.S. expressing concern over Canada's accusations as the situation begins to cause diplomatic strain between the countries. Tensions escalated this morning with Canada saying that it would reduce the number of diplomats in India due to security concerns, while Prime Minister Narendra Modi’s government appeared to suspend visas for Canadians.
Taking a toll. A recent survey highlights growing financial uncertainty among Canadians due to rising inflation. The cost of living is a top concern for 77% of respondents, with many expressing an inability to save as much as they'd like and increased financial stress. Over one-third of Canadians lack an emergency fund, further limiting their financial flexibility. Concerns about a potential recession are also rising, with respondents believing it would be tougher to weather an economic downturn now than in 2008. If inflation persists into 2024, 72% of those with debt worry about taking on more, and 21% might postpone retirement.
Home sales may be down, but home prices in Canda continued to rise in August, marking the sixth consecutive monthly increase. The index showed a 0.6% rise from July to August before seasonal adjustments, and a 1.6% increase after seasonal adjustments. All 11 metropolitan areas included in the index reported higher home prices in August, with the strongest growth seen in Calgary at 3.5%. Despite recent efforts by the BoC to tighten monetary policy, the report suggests that strength in the housing market may be short-lived, with interest rates expected to impact prices in the near future.
Time to book a flight to Portugal! In São Lourenço do Bairro, Portugal, a startling event unfolded as approximately 2.2 million liters of red wine gushed onto the streets following the bursting of two tanks at Destilaria Levira. This extraordinary scene, captured in a viral video, depicted a "river of wine" coursing down the town's hilly streets. The wine, stored as part of a government program aimed at reducing market surplus, fortunately resulted in no injuries but did flood a cellar. Local authorities are now addressing the cleanup and mitigating potential harm to farms, vineyards, and water supplies.
Beefing up security. Cisco Systems has agreed to buy software company Splunk Inc. in a deal valued at about $28 billion, marking the computer networking equipment maker’s biggest acquisition. The combination will help make companies more resilient to cybersecurity threats. Cisco has been expanding its software and services business in an attempt to rely less on its hallmark networking hardware. The Silicon Valley giant has traditionally generated the bulk of its revenue from equipment that forms the backbone of computer networks, but that’s been changing.
Amazon is unveiling a series of new and updated devices, as well as enhancements to its Alexa voice assistant. This move aims to make Alexa more appealing to users and generate more engagement with the platform. Alexa will sound more natural and be capable of answering questions about various topics, including sports events and recipes, as well as composing and reciting poems. Amazon has been working to improve Alexa's capabilities, especially in the face of competition from chatbots like Google's Bard.
Klaviyo Inc., a marketing and data automation provider, had a successful IPO debut yesterday, rising as much as 32%. The company exceeded its IPO target, raising $576 million. The IPO marks the third significant listing in the U.S. in the past week, following Instacart and Arm Holdings. Although Klaviyo is less well-known than Arm or Instacart, it does represents a traditional technology IPO for enterprise-focused companies and may encourage other private enterprise-focused firms to consider going public.
Workers at Ford’s Canadian unit have avoided a strike by reaching a tentative agreement with Unifor, the Canadian autoworkers' union. The negotiations extended by 24 hours resulted in an agreement that addresses various issues, including improved pension benefits, higher wages, and support for workers during the electric-vehicle transition. This agreement is subject to ratification by Ford-Unifor members. Meanwhile, in the US, the UAW continues to face the threat of larger strikes at Ford, General Motors, and Stellantis.
Commodities
Oil prices are lower for a third day as a looming a Fed rate hike weighed on markets. The hawkish pause stance with a rate increase projected by year-end which could dampen economic growth and overall fuel demand, sent oil prices its largest decline in a month yesterday. Data from the U.S. Energy Information Administration showed crude inventories fell in line with expectations last week, with some analysts saying the decline, 2.14 million barrels versus an expected 5.25 million barrels, was smaller than they expected.
Gold edged lower as traders digested Fed hawkish commentary. Bullion erased an earlier gain after the decision, before extending losses earlier today as the U.S. dollar strengthened. The metal has largely remained range-bound since mid-May as traders keep pushing out the timing of when the Fed is expected to start monetary easing. Higher rates are typically negative for non-interest bearing bullion.
Fixed income and economics
In the BoC’s Summary of Deliberations, released yesterday, officials appear prepared to use further interest rate hikes to counter expectations of rate cuts, despite acknowledging that higher borrowing costs are slowing down the economy. In their September 6 decision, policymakers opted to keep the overnight rate at 5% as they assessed the impact of previous policy tightening. While demand has been slowing, monetary policy is still taking effect, and the central bank remains cautious about overtightening. However, policymakers expressed concern about persistent inflation, indicating that the balance between economic supply and demand will be crucial in determining future inflation trends.
The U.S. national debt has surpassed $33 trillion for the first time, a historic milestone, driven by increased federal spending, tax cuts, stimulus programs, and decreased tax revenue due to the pandemic. The debt has become a central issue in a congressional standstill over a spending bill, with Republicans advocating for reduced spending and Democrats supporting Joe Biden's programs, such as the Inflation Reduction Act. The government faces a potential shutdown if a funding bill is not passed by September 30. The debt increase has prompted debates about tax cuts, corporate tax reforms, and subsidies to various industries.
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You can't cross the sea merely by standing and staring at the water. Rabindranath Tagore
