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Investors fretted from halfway through last week until the Wednesday 5:30 am release of the monthly US inflation stat. You could almost feel the pent-up fear through the computer screens as they awaited the most important stat of the month and perhaps the summer. A hot number could have sent the inflation hawks ripping through both bond and stock markets with fears of an inter period rate hike by Jay Powell. So, when the CPI data came in unchanged and the core rose only up 0.3%, an almost audible sigh of relief swept through the markets. Investors also rejoiced when the Weekly crude oil inventory rose by 5.45 million barrels. And when the July Producer Prices number actually fell 0.5% on Thursday, the short sellers had no choice but to step back in and buy to cover their losses. Yes, they pressed again towards the end of the day on Thursday, but Friday’s reports of rising consumer sentiment coupled with a -1.4% drop in import prices seemed to be another nail in the coffin. Short sellers were also on the defensive as seemingly bored day traders jumped on the “meme stocks” again.

Don’t use logic to assess the activities in the market, the rally in my opinion, was a knee jerk reaction and sigh of relief from inflation worried investors. But make no mistake, in my opinion, inflation is far from dead and central bankers have stated their intensions in no uncertain terms, they will apply a measured approach to raising rates until the number gets much closer to their target range. Having said that, it seems irrational to assume a 2% inflation number is a healthy long run target level. Currency movements, supply delivery times and a mobile labor market are only three factors that in my opinion justify a higher long run inflation rate. So, continue to expect further rate hikes but perhaps at less than the aggressive levels experienced so far (1% by the Bank of Canada and 0.75% by the Federal Reserve.)

And of course, using interest rates to change the direction of an economy is akin to steering an oil super tanker. Their sheer size means that turning the rudder will not cause the ship to turn until it has traveled several miles. The same thing happens with the economy. When a central bank announces a rate hike, commercial banks react very quickly with a similar move. Business owners and consumer’s however, cannot change that quickly. If I am developer and have 20 houses only half built, I must eat the rate hikes and raw material costs and will likely have to sell the finished homes at lower prices. Being dogmatic and raising rates at each of the upcoming meetings until Christmas makes no sense to me and runs the risk of crashing the economy in the process.

Fortunately, on Thursday, investors will get to read the minutes of last month’s Fed meeting, hopefully allaying the fears of rate conscious investors. We also get US Housing Starts on Tuesday and Retail Sales on Wednesday. Its also another busy week for corporate earnings with apx 272 companies reporting including Walmart, Target, Home Depot, Cisco, and Lowes. There are also 50 odd Canadian names next week, but the real excitement starts on the 23^rd when our Banks report Third quarter numbers in the billions.

Speaking of billions, with crude oil still above $90 a barrel, expect Canadian energy companies to report higher profits into the Fall. If we look at the year-to-date performance of the various TSX sub indices, energy stocks are up 42% and consumer staples (grocery stores like Empire and Loblaw) are up 6.3% and utilities are up 4.8%.  All the other sub sectors are still negative which tells me we have a wedged shaped rally. Call me crazy but last time I checked, Canadian banks make more money when interest rates go up.

Happy trading and stay safe.

Cheers Steve and Michele.

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