Markets Take a Breather

Businessman's hand holding magnifying glass to market outlook

Please Note:

I will be away from the office from August 9th, returning August 28th.  We will resume our weekly commentary on the markets upon my return.

At the close of business last Friday, global equities were lower on the week amid a spike in long-term interest rates. The yield on the US 10-year note approached its highest levels since 2007, reaching 4.20% from 3.99% a week ago before softer payrolls cushioned the slide in bonds. A sharp rise in oil prices contributed to the rise in yields as a barrel of West Texas Intermediate crude oil firmed $2 to $81.85. Volatility, as measured by the Cboe Volatility Index (VIX), rose to 16 from 13.9 last Friday.


Canadian Economic News

Canada lost 6,400 jobs in July while the unemployment rate rose to 5.5%, up 0.1% from the prior month. Wage gains advanced 5% from a year ago.

A comment at our weekly partners’ meeting was, “Why is Canada allowing so much immigration?” The answer is that our government will not lower its immigration targets and it may raise them from 500,000 annually because of the diminishing number of working-age people compared to the number of retirees. For our federal and provincial governments, it poses an enormous challenge for them to continue to provide services to Canadians.


US Economic News

With about 85% of the constituents of the S&P 500 Index having reported for Q2 2023, blended earnings per share shows that earnings declined 5.25% compared to the same quarter a year ago. The energy and health care sectors have shown the sharpest earnings declines while consumer discretionary recorded the best growth. Sales gains were minimal, up just 0.6%.

Ratings agency Fitch downgraded the US sovereign credit rating one notch to AA+ from AAA citing expected fiscal deterioration over the next three years, a high and growing government debt burden, and an erosion of governance manifested in repeated debt limit standoffs and last-minute budget resolutions over the last two decades. Tuesday’s move came a day after the US Treasury Department announced that it will borrow about $1.85 trillion in the second half of 2023, $1 trillion in the third quarter alone. While inflation has been slowing of late, investors are mindful of rising energy costs and US economic growth that has proven to be more resilient than expected.

While July non-farm payrolls rose less than expected at 187,000 and the prior two months’ gains were revised lower by 49,000. The unemployment rate fell a tick to 3.5% and average hourly earnings rose a stronger-than expected 4.4% year over year. Overall, the data are a mixed bag, suggesting that the pace of hiring continues to slow but wage gains remain sticky. We have noted that unionized workers are demanding that their executives bargain for higher wages, as the persistent level of high inflation is taking a toll on their disposable income.


European Economic News

Consumer prices in the euro zone rose 5.3% from a year earlier in July, a slight deceleration from the month before, though core inflation remained stuck at 5.5%. CPI topped out at 10.6% in October of last year amid soaring energy prices. Meanwhile, the unemployment rate fell to a record low of 6.4%.

Italian defense minister Guido Crosetto said this week joining China’s Belt and Road Initiative was an “atrocious” decision.

The Bank of England raised its policy rate 0.25% on Thursday, to 5.25%. The market was leaning toward a quarter-point hike but had partially priced in the risk of a larger 0.5% increase. Policy is now restrictive, the BOE said, while warning it will stay tight. Markets expect two additional quarter-point hikes before the cycle ends.

In a sure sign of slowing economic growth globally, South Korean exports dropped sharply in July amid a slump in China’s demand for semiconductors. Overall, exports fell 16.5% year over year, the largest drop since early in the pandemic.

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