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Forget the US Fed, Canada’s tiff Macklem set the tone and carved the path for other central bank leaders to follow if they plan to curtail inflation. We have not seen such a bold move since 1998 When Governor Thiessen jacked rates by 1% to protect the falling Looney. For those interested I have included a link to the Bank of Canada showing interest rate polices back to 1977. For those of old enough to remember, in October 1979 the BOC also raised rates by 1% to 14%, but it did not stop there and by April 1980 it hit 16.20%. That was painful. And in fairness, by July 1980, the rate had fallen to 10.18% so if you think interest rates are volatile right now, it does not hold a candle to either the 1980’s or 1990’s, we just hope history does not repeat itself. https://www.bankofcanada.ca/rates/interest-rates/key-interest-rates/?lookupPage=lookup_key_interest.php&startRange=1935-01-01&searchDiff=&searchValue=&searchType=dates&dFrom=1977-01-01&dTo=2022-07-15&submit=Submit

Unfortunately, the same day the Bank of Canada cranked rates by 1%, the US Consumer Price Index for June came in hot at 1.3% and the core rate which removes food and energy, it still jumped 0.7% However, I need to emphasize, CPI data is backward looking and if you have been tracking gasoline prices over the last six weeks, you only need to take out a small bank loan to fill your car at the pump, down from June’s crushing prices. (Did anyone not explain to governments that the carbon taxes on July 1^st are inflationary and poorly timed?) Yes, food prices are still high, but other items may start to decline assuming supply lines and inventories restock as China reopens later this year. We also note house prices in Canada have slid over the Spring and will likely continue into the Fall.

As for stocks, we took comfort with Pepsi’s beat on Tuesday, but the mood crashed when Delta missed on Wednesday followed by whiffs by JP Morgan and Morgan Stanley on Thursday. The only saving grace was trading action on those two days. Markets fell hard as they opened on those two days, but by the close, most of the losses were recouped. In fact, the Nasdaq actually closed higher on Thursday and again today. Not enough to eliminate the losses from the first half of the week but, still encouraging if you track sentiment. Speaking of sentiment, I take solace watching analyst after analyst unleash a tidal wave of downgrades. In my opinion, that means we are one step closer to the bottom.

If I were to make a forecast, I would say we will see some choppy activity this month with potential short-term rallies followed by apathy and lower volumes in August and September. By that time, investors in both bonds and stocks will have adjusted to revisions to corporate earnings, inflation, and interest rates. Falling house prices will also serve to curb consumer spending due to the negative wealth effect (remember global investors have also collectively lost over a Trillion dollars in cryptocurrencies), so maybe the Fed will moderate their interest rate policy.  We know central bankers are committed to bringing down inflation, and its all but certain the US will hike by 75bp on the 27^th of this month, so the September hike may be reduced to 50bp. That would imply a moderating view and not aggressive raising in the face of moderating economic data.

In the meantime, fasten your seatbelt as 278 US companies report earnings next week with both bond and stock investors closely watching housing starts on Tuesday, and the Philadelphia Fed index and the Leading Economic Index on Thursday. Last month, both stats turned negative and if that trend continues, the Fed just might engineer a soft landing. I should point out that I believe the US is already in a recession (two quarters of negative GDP) but it won’t be severe and will not last that long. For interested parties, the rate decision is on the 27^th and Q2 GDP comes out on the 28^th. Btw its calendars like this that have me thinking “who picks these dates?” Surely, the Fed would want to know how the US economy is doing before they set interest rate policy, not the day after. Either that or perhaps, they get the information ahead of the rest of us.

Meanwhile in Canada, investors should take some solace in rising energy prices. I don’t know what some investors were thinking when they heard President Biden was heading to Saudi Arabia to beg for more oil, I am pretty sure they do not have a lot of spare capacity, and even if they did, I am also pretty sure they like prices at these levels. Not quite high enough to bankrupt most Western nations but more than enough to garner excess profits. I note the August contract closed this week at $97.79, but the December price is $87.43. I think as the summer progresses the short contract may slip a little but the longer dated contracts could go up as winter sets in and demand for heating oil goes up. But even if they don’t Canadian energy companies will be rolling in dough which implies more dividends and stock buybacks. Kaching!

Speaking of kaching, Wells Fargo reported an earnings miss but announced net interest income will rise 20% over 2021 levels. Hello, banks make more money as interest rates go up. BNS and CIBC now yield over 5%...just saying.

Happy trading and Stay Safe.

Cheers Steve and Michele.

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