The Week that Was
Bond yields up, markets down was the story of the week. Sticky inflation and the prospect of at least one more rate hike from the Bank of Canada and US Fed have helped bring the markets down to more reasonable levels. The tech sector which led equity markets higher this year are responsible for a large part of the pull back as investors balk at overly rich valuations.
Market Close Aug. 11th 2023 Aug. 17th 2023 S&P500 4,464 4,371 S&P TSX 60 Comp. 20,408 19,812 Canada 10 yr Bond 3.65% 3.77% US 10 yr Treasury 4.17% 4.25% Canadian Dollar $1.34380 $1.35449 Brent Crude Oil $86.81 $83.98 Gold $1,913 $1,892 Bitcoin $29,386 $26,339 Source S&P Capital IQ & Trading Economics
Canada’s inflation rate surprised to the upside in July. The headline 3.3% rise was well above the June rate of 2.8% and expectations of 3%. There was some relief in the core measures followed by the Bank, easing from 3.7% to 3.65%. The 3-month rolling average of the core rate also eased a bit. Contributing to inflation was a 127.8% rise in Alberta’s electricity prices from a year earlier. (Alberta’s energy system is largely privately owned and prices are not regulated). All of this does leave the Bank of Canada in a bit of a quandary as to whether to raise interest rates again in September.
In the US, The Federal Reserve released the minutes of July’s Federal Open Market Committee (FOMC) meeting. Although they are released well after the fact. The minutes are closely scrutinized for insights to the Committee’s thinking. The summary was clear this time that inflation was still too high and the labour market too tight. While there was some discussion of some positive signs, the probability of another US rate hike is higher.
We posted a video on our Insights page featuring BCA Research’s Chief Geo-political strategist Matt Gertken this week. The focus is on China’s faltering economy and what it means for the global economy and the state of geo-politics. China is the world’s second largest economy whose growth for the past 3 decades has changed trading relationships, national economies, and the global power balance. Much of that growth has been fueled by debt that is now in danger of default. Underlying that is an aging demographic and shrinking workforce. Ticking time bomb or tail risk, we need to pay attention.
No sooner had I written the previous paragraph when this story broke. While the bankruptcy of Evergrande should not come as a surprise, it is a stark indicator of the troubles facing China’s property sector and economy overall. The next shoe to drop could well be the country’s largest developer Country Garden who has already missed some interest payments this month.
With forest fires raging around the northern hemisphere, climate change is top of mind. Canada released draft Clean Electricity Regulations intended to guide the country to net zero carbon emissions. As is usually the case, the proposals, which are open for comment until November, were panned by entrenched interests on both sides of the climate debate. (Is it or should it be a debate anymore?) They are principle-based regulations based on outcomes rather than how you get there.
The investment industry and financial press make a big deal about “benchmarks”. These arbitrary yardsticks, such as the S&P500 or TSX60 may be meaningful to a pension fund investment committee, but in our opinion are meaningless to an individual investor. What truly matter is the rate of return required to meet your goals. That benchmark is different for every client and may be different for their discrete goals. To be sure, we measure ourselves against market benchmarks to improve our processes. For individual investors though, the benchmark is achieving your required rate of return with as little risk as possible. That is what we strive to achieve through our goals-based planning and investment processes.
We’ll close with this piece from Sade – reminding us to always be on the look out for those smooth operators… Enjoy
Have a great weekend, stay safe, stay healthy,
Russ Lazaruk, RIAC, CIWM, CIM, FCSI
Managing Director & Portfolio Manager