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I am not sure I would call it the dog days of summer, given the strong rally in July, but it looks like the buyers went on strike as sellers took profits ahead of more inflation data coming out next week. Either that or investors are worried central bankers will continue to raise interest rates even as global economies slip into recession.  Yes, inflation is coming down but one of the key components, wage costs, remain sticky due in part to demographic shifts in labor supply. Boomers are retiring in record numbers, and it will not likely peak for another five years. Meanwhile, Millennials and GenZ’s prefer a more equal work/life balance. And it’s not just a North American phenomenon, Europe will likely see a steady reduction in labor supply too. (Mind you, the unemployment rate for 16–24-year olds in China hit 19.99% the highest number ever reported forcing the Chinese Central bank to actually cut short term rates.) Back in North America, The fear is that central bankers will put more emphasis on wage costs to the detriment of economic growth with their interest rate policy.

If the Fed decides to take additional chapters out of the Paul Volker playbook, it means short term rates will increase more than Wall Street is counting on. 10-year bond yields have risen to 2.97% while the 2 year is 3.28%. It’s known as an inverted yield curve and something Wall Street does not like to see and probably explains a lot of the selling this week. The picture is not much different North of the border. June Retail sales unexpectedly rose which points to excess demand from consumers. Mind you gasoline prices have abated somewhat so perhaps by September, Mr. Macklem will take that into account when he raises interest rates again.

On the other hand, a statement from the new OPEC Secretary General warning Western nations not to expect a significant drop in prices. He believes that there has been a prolonged period of under investment in energy production coupled with alternative energy policies will lead to higher prices as global economies rebound from covid shutdowns. Intuitively that makes sense to us when you consider the world population will hit 8 Billion this year up from 7 Billion in 2010. According to a recent United Nations study, that number will hit 8.5 Billion by 2030. They also go on to report that India will surpass China as the most populous country in 2023. And guess what? Even with those two countries forging ahead with solar and wind, if you look at the latest IEA study,  https://www.iea.org/reports/world-energy-investment-2022 only the middle East has expanded its investments in oil and gas which means to me that shrinking supply and rising demand will only lead to higher prices. The report also identifies a second Achilles heel for clean energy technologies including both lithium and silicon metal which means the decades long trend of lower prices for alternative energy may change course and start to rise.

On the other hand, this week the US Administration signed a new Bill that will incentivize the adoption of not just zero emission vehicles but also credits for energy saving devices like heat pumps and double paned windows. I am hoping our Prime Minister takes note and provides more incentives for Canadians instead of trying to get farmers to reduce their fertilizer consumption. And perhaps he could do it from Ottawa instead of flying around the country burning massive quantities of jet fuel in the process. (And who goes to Costa Rica in August on the taxpayer’s dime, when he and his family could spend time in our great country?)

Bottom line, expect North American energy companies to rake in the dough as Summer turns to Fall and Winter.

Turning to next week, I think the manufacturing and inflation data will play a back seat to addresses by various bank and government officials at the Jackson Hole Symposium where remarks will likely clarify the outlook for interest rates. On the earnings front, some of the bigger names include Nvidia, Salesforce.com, Dollar General and Medtronics will likely top the headlines. However, seeing as it is virtually the end of the month, reactions might be muted as we close out the dog days of summer.

Happy trading and stay safe.

Cheers Steve

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