The Week That Was
It was a short and quiet week for the markets. As is typical for the “Dog Days of Summer”, volumes are light and news sparse. The overarching macro story is still inflation and interest rates.
Market Close Aug. 4th 2023 Latest Aug. 10th 2023S&P500 4,478 4,470S&P TSX 60 Comp. 20,120 20,343Canada 10 yr Bond 3.55% 3.60%US 10 yr Treasury 4.06% 4.11%Canadian Dollar $1.33730 $1.34450Brent Crude Oil $86.24 $86.51Gold $1,942 $1,912Bitcoin $28,937 $29,430Source S&P Capital IQ & Trading Economics
US inflation in July brought some cheer to the markets. Headline CPI was 0.2% month over month, for the 2nd month in a row. The year over year number was 3.2%. Core inflation was a bit higher at 4.7%. Core has declined every month since last September when it stood at 6.6%. Looking under the hood, used car prices have declined (good) while housing costs were responsible for 90% of the overall CPI. Depending on job numbers, the Fed may be able to hit the pause button again on rates.
The devil is always in the details. Housing costs, rents as well as mortgages, have been major contributors to inflation. Bespoke Investment Group published a more detailed look at the pricing trends in the US housing market this week. They argue that there are already disinflationary forces at work in the sector. Amongst other factors they point to a sharp rise in multi-family construction and a rising vacancy rate. They compare the CPI housing index, which tend to lag, with the Zillow observed rent index, which looks at the date in real-time. See the chart below.
Chart Courtesy of Bespoke Investment Group
China is fighting the opposite bate. Its economy fell into deflation in July with the official consumer price index (CPI) falling 0.3% year over year. Both exports (-14.5%) and imports (-12.4%) dropped sharply in July. Adding to the country’s challenges is a moribund real estate sector. Investors have pulled back from the sector which is laden with debt. Potentially more troubling for the central government is a high youth unemployment rate. The official unemployment rate of those between 16-24 was 21.3%. Some observers think the rate could be as high as 46%. Xi Jinping will be mulling the adage, “Idle hands are the devil’s workshop.”
It wasn’t a good week for bankers in the US and Italy this week. Rating agency Moody’s downgraded 10 US regional banks and put 6 banking giants on review for potential downgrades. The rating drops will raise the cost of capital for the affected institutions. Italian bankers would undoubtedly swap their problems for their US colleagues mere downgrades. The Italian government announced a 40% windfall tax on Italian banks. After the banks’ shares plummeted on the Milan exchange the government walked its tax back, a bit. The tax will be capped at 0.1% of a bank’s capital.
Sometimes referred to as the Earth’s lungs, the Amazon Rainforest absorbs 25% of the CO2 absorbed by all the land on earth. This week 8 South American countries met to revive the Amazon Cooperation Treaty Organization (ACTO). Deforestation, which had accelerated under the Bolsonaro government in Brazil, has dropped by 34% in the first 6 months of the new government of Luiz Inacio Lula de Silva. Unfortunately, the new agreement (Belem Declaration) is long on aspiration but short on action or timelines. Nonetheless it is a step in the right direction.
While our time in Montreal was fun it was also really busy between, weddings, grandchildren, and yes, work. We did manage to get away to a friend’s “cottage” in the Laurentians for a weekend at the lake. Here’s the view over Lac Violon and a piece from Otis Redding reminding us to take some time to sit and enjoy the view from the dock on the bay…. Enjoy
Have a great weekend, stay safe, stay healthy,
Russ Lazaruk, RIAC, CIWM, CIM, FCSI
Managing Director & Portfolio Manager
Tel 250.999.3329.
