Interest Rates Remain High
At the close of business last Friday, global equities were lower after hawkish comments on Friday from US Federal Reserve Chair Jerome Powell at the annual gathering of global central bankers in Jackson Hole, Wyoming. The yield on the US 10-year Treasury note rose to 3.02% from 2.95% last Friday while the price of a barrel of West Texas Intermediate crude oil increased to $92.25 from $88. Volatility, as measured by the Cboe Volatility Index (VIX), increased to 23.5 from 20.7 a week ago.
Many of us are old enough to remember the 1980s when inflation was soaring out of control and the actions governments had to take back then crippled economies globally. Central bankers have not forgotten this period and are taking necessary actions today to ensure we do not end up back in that same scenario. We believe our central bank and the US Federal Reserve are doing and saying exactly what they need to in order to tame inflation and engineer a soft landing. Short-term pain for long-term gain
CANADIAN ECONOMIC NEWS
Stats Can announced that the number of job vacancies in Canada climbed 3.2 percent in June to reach a new high as employers were looking to fill over one million positions for a third consecutive month. Healthcare and social assistance sectors were looking to fill 149,700 vacant jobs. The accommodation and food services sectors were looking to fill 171,700 jobs in June and the retail sector saw vacancies rise 15.3 percent. We have never seen a recession happen in an environment where employers can’t fill available jobs.
US ECONOMIC NEWS
The Fed’s favorite inflation measure—the core personal consumption expenditures price index—eased to 4.6% in July from 4.8% in June.
Powell warns against premature loosening
Fed Chair Powell spoke for a little over nine minutes on Friday morning and kept his message simple: Restoring price stability will probably require maintaining a restrictive policy stance for some time and the historical record cautions strongly against prematurely loosening policy. In recent months, markets anticipated sharp rate hikes but also expected rates to fall back from their peak quickly as the economy slowed. Powell pushed back hard on that notion on Friday. He welcomed improvement in the July inflation figures but noted that one month’s improvement falls far short of what the FOMC needs to see before it is confident that inflation is moving lower. Powell acknowledged that while higher interest rates, slower growth, and softer labour market conditions will bring pain to some households and businesses, they are the unfortunate costs of reducing inflation.
Our view has not changed in that we are expecting a fifty-basis point increase in September and if inflation continues to cool, we think the future rate increases after September may be put on hold. Regarding rates coming down: we do not expect to see any relief in this area until mid-2023.
EUROPEAN ECONOMIC NEWS
The euro and European bond yields rose Friday morning after a Reuters report suggested that policymakers at the European Central Bank will discuss a 0.75% rate hike at their September meeting.
Europe’s energy crisis is growing more serious, with reporting that German energy prices have risen tenfold over the past year. On Friday, the United Kingdom’s energy regulator raised the price cap on annual household energy and gas bills to more than £3,500 from just under £2,000. The Financial Times reported that industry forecasts suggest the cap could rise to more than £6,000 by spring.
JAPAN, CHINA and EMERGING MARKETS ECONOMIC NEWS
China announces new stimulus
China’s State Council this week announced new stimulus measures aimed at shoring up economic confidence. Among the measures in the 19-point plan is additional credit support for state banks and allocations of special bonds for local governments, though the government continues to insist it will not flood the economy with excessive stimulus.
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