Proving that volatility is a two-way street, markets have rebounded this week with solid performance from both equities and fixed income. The outlier is Bitcoin which, true to form, ran counter to other markets and sold off for most of the week. Markets were helped by improving inflation in the US and robust retail sales.

 

Index Close Aug 8th 2024 Close Aug 15th 2024
S&P500 5,199 5,546
TSX60 22,226 23,033
Canada 10 yr. Bond Yield 3.18% 3.10%
US 10 yr. Treasury Yield 4.00% 3.92%
USD/CAD $1.37358 $1.37302
Brent Crude $79.16 $80.91
Gold $2,425 $2,455
Bitcoin $61,952 $57,542

Source: Trading Economics & Factset

Inflation in the US continues to come down. The Consumer Price Index (CPI) came in at 2.9% for July, the lowest reading in 3 yrs. and below expectations. Core CPI, which excludes volatile food and energy items was 3.2%, also a 3 year low. Looking a bit deeper into the numbers, 90% of the increase was due to shelter costs. High interest rates are battling a shortage of supply in the housing market. As we have noted before, housing supply is a global issue affecting markets as diverse as Australia, the UK, Canada and the US.

 

Adding a bit to what could be a Goldilocks story, US retail sales for July rose more than expected. While consumers are certainly bargain hunting, they continue to spend. Adding to the Goldilocks scenario is resilience in the job market where the weekly jobless claims came in lower than expected. Prior to Thursday’s economic reports, the debate had begun whether the first rate cut by the Federal Reserve would be 50bps or 25bps. Barring any major downturn in the labour market, consensus is now leaning towards a 25bps cut in September.

 

Looking overseas, Japan’s Q2 GDP growth came in much stronger than expected at 3.1% vs. expectations of 2.1%. It seems the Japanese consumer is returning to the shops as wages start to rise. Investors are starting to price in another rate hike later this fall as inflation rises to reach the Bank of Japan’s 2% target. Talk about counter-cyclical to the rest of the world. Harking back to last week’s edition, the rise in Japanese rates will further diminish the Yen Carry Trade.

 

The UK also posted better than expect GDP growth for Q2 with the economy growing by 0.6% in the 3-month period. This solidifies the gains made in Q1 (0.7%) after a a recession in the second half of 2023. The Bank of England (BoE) has already cut rates once this year and more cuts are expected before year end. The latest inflation reading was 2.2% which is expected to ease some more before the end of the year.

 

Regulators in the US and EU have long been concerned about uncompetitive practices in the Tech Sector. In 2001 Microsoft narrowly avoided being broken up into 2 companies over its monopolistic position in the web browser market. This year Google is in the regulators cross-hairs and has already lost a Federal Court case in the US. Not dissimilar to the earlier MSFT case, Google and its parent company Alphabet are accused of monopolizing the online search engine market. If this proceeds, it will be the biggest breakup of an American company since AT&T was dismantled in the 1980s. The US has a history pursuing anti-trust cases as far back as 1912 when it was the railways that were under the microscope.

 

The Federal Government has tweaked some of the rules around capital gains. The changes made in June of this year still broadly apply but there is a bit more relief for business owners. The changes expand who can qualify for the “Canada Entrepreneurs’ Incentive” (CEI). The ownership requirement has been reduced from 10% to 5% of the business corporation. Also, the active involvement in the business has been reduced from the preceding 5 years to 3 years. The program is expanded to include farmers and the fishing industry. The amount that will be eligible for the CEI will increase from $1.25 MM to $2MM over the next 5 years.

 

It would have been Oscar Peterson’s 99th birthday this week, so we’ll close of with this performance of the C Jam Blues…. Enjoy

Russ Lazaruk, RIAC, CIWM, CIM, FCSI 
Managing Director & Portfolio Manager