Growth Takes Charge Again

Growth Economy

At the close of business last Friday, global equities were modestly higher on the week amid conflicting recession signals. While global growth appears to be slowing, labour markets, particularly in the United States, remain solid. The yield on the US 10-year note dipped as low as 2.75% on Wednesday before rising to nearly 3.09% on Friday after a strong US employment report. The price of a barrel of West Texas Intermediate crude oil fell $3.75 to $104.00 after dipping below $100 earlier in the week. Volatility, as measured by the Cboe Volatility Index (VIX), edged down to 26.3 from 28.4 a week ago.



Easing inflation pressures helps equities
A sharp decline in commodities prices, news that apartment rents have begun to level off, and a surge in the US dollar are just a few of the signs that inflation pressures may have begun to ease. In recent sessions, there has been a greater focus on the rising risk of a recession than on inflation continuing its dizzying ascent. While equity volatility has declined of late, interest rate vol has soared to levels only exceeded by the Treasury market freeze-up in the early days of the pandemic and the global financial crisis. Recession fears are acute in Europe, where worries over the increasing Russian weaponisation of natural gas supplies have risen as Moscow has slowed the flow of gas to Europe, ostensibly due to pipeline maintenance, when countries on the continent are trying to rebuild gas reserves before the winter. Recession fears helped prompt an inversion of the US 2-year/10-year yield curve.

Our view going forward is that we are witnessing the fact that many growth stocks are experiencing a resurgence. We think too many growth stocks got too cheap in a world of slowing economic growth. While many commodity plays have been selling off despite supposedly being big beneficiaries of the inflation trade, the energy sector was the last one standing. Energy stocks which many people rotated into have fallen nearly 20% since the beginning of last month. This past week saw the largest ever outflow from materials and a record three-week outflow from resources funds, while technology funds saw a fourth straight week of inflows. As always, we’ll stick to the discipline and process that has served us well over the past nearly 42 years. Macro and potential for Federal Reserve mistakes are dominating the tape, but we see babies being tossed out with the bathwater. We see tremendous upside in the markets over the next five years.



Canada recorded its first monthly loss of jobs since the start of the year. The unemployment rate fell to 4.9 percent, the lowest level since 1976. The loss of jobs is attributed to fewer people looking for work. The job market still looks very strong and we are also experiencing a faster pace of wage growth.



US payrolls remain robust
Despite ample evidence that the US and global economies are slowing, the US labour market remains tight, with 372,000 people added to payrolls in June. That exceeded estimates by over 100,000. The nation’s unemployment rate was unchanged at a historically low 3.6%, though the labour force participation rate fell to 62.2% from 64.4%. Average hourly earnings held steady at 0.3% month over month. The futures markets are pricing in a 98% probability of a 0.75% increase in the federal funds rate later this month and a doubling of the rate to 3.5% by March, after which markets expect the Fed to pause.



UK’s Johnson resigns
Weeks after surviving a no-confidence vote by the membership of the Conservative Party, British Prime Minister Boris Johnson was forced to resign this past week after about a third of the members of his cabinet quit, with many citing concerns about Johnson’s character and integrity. Johnson will stay in office as a caretaker until a new party leader is chosen, with a timetable for the process expected to be laid out in the next week.



Former Japanese Prime Minister Shinzo Abe was assassinated in Nara, Japan on Friday while speaking at a campaign event days before upper house elections. Abe, 67, was Japan’s longest-serving prime minister and remained the leader of the Liberal Democratic Party’s largest faction after having stepped down as PM because of health issues. Voters have gone to the polls for an upper house election and the Liberal Democratic Party is expecting a huge win.



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