The Big Apple Just Got Bigger - Your Money July 16th 2021

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This week the topic of transitory inflation versus secular trend is getting closer to a crescendo. Jay Powell spent two long, long, long days explaining the difference between monetary policy and fiscal policy to US politicians. He of course has no control over fiscal policy and spent much of his time repeating himself at least that is the way it seemed to me. I caught the beginning of his presentation on Wednesday and part of the end on Thursday and you could not tell the difference.

What may be different is his assumption of the current state of economic growth and the rising inflation stats hitting the street. On Tuesday US CPI for June was 0.9% versus 0.6% in May. More importantly, the core rate (ex food and energy) it was also up 0.9% Versus 0.7%. Producer Prices ( an indication of inflation at the manufacturing level) were released on Wednesday and came in at 1% versus 0.8% in May. While there are many logical reasons to assume the current inflation figures are short term in nature and will ease once bottlenecks are opened permitting increased goods to customers, I am skeptical. Right now business has for the most part been able to pass on their input costs to consumers in the form of higher prices. If those prices continue to rise, middle America will once again strike for higher wages.

Some would argue that labour will face an uphill battle once Stimulus cheques end forcing many to get back to work and many will be happy to have a job to feed their family. We note those States and counties that have prematurely ended covid benefits have seen a significant drop in unemployment rates. Those states that have kept the wage ATM open see much higher unemployment and it will take even higher wages to attract people off the couch. In my opinion, historically, wage prices remain sticky, so even after we reach full employment, we are not likely to see a reduction in wages. That in my opinion, makes me believe we could see a return to cost push inflation.

Turning to capital markets, bond yields have broken their 200 day support level. Ten year Treasuries now yield 1.30% which clearly indicates the debt markets are willing to believe Jay Powell’s zero interest rate policy will stay at zero for the foreseeable future. The mega cap stocks responded in kind at the beginning of the week with many of them hitting yet more record highs which in turn moved the S&P and Nasdaq to records before settling back today.

For Canadian investors, the Governor of the Bank of Canada carried through with a reduction in its monthly bond buying program which effectively reduced our money supply and is the first step to raising short term interest rates. Unfortunately the announcement was overshadowed by an agreement between the UAE and OPEC leader Saudi Arabia. They successfully argued for a larger slice of exports but opened the door for other members to make the same argument. Trouble is, if one gets it the other ones will too and that could result in another price war. Crude oil fell $3 dollars this week leading to a small sell off in energy stocks. To add insult to injury, the price of gold which started the week moving up on those blow out inflation stats, rolled over as the US Dollar continued to rally. So our stock market fell 1.3% this week as Energy stocks fell 7.8% and healthcare aka pot stocks dropped 8.3%. It’s not all bad news, defensive stocks like utilities, telecom and consumer staples held up well.

Granted the primary reason for profit taking is directly tied to rising cases of Covid cases particularly the Delta variant. Travel and entertainment stocks were hardest hit. Think casinos and cruise ships (Disney was one of the top Dow losers today.)

Last but not least, its corporate earnings season. It kicked off on Tuesday with the mega banks and they made mega profits. Most are up on the week but it should be noted part of the earnings came from massaging their loan loss provisions. Last year you may recall banks from here to Florida took huge write offs in anticipation of defaults and bankruptcies. However thanks to the unprecedented bail out, many of those losses never materialized. Banks therefore credited back the losses leading to billions in profits this year. Our banks started doing that last quarter.

Next week earnings season kicks into high gear with 379 companies reporting including bell weathers like Netflix, Coke, Verizon and American Express.

Also, on Tuesday, Jeff Bezos is set to fly into outer space and joining Richard Branson’s company as the second to offer space flights to non NASA employees. I should point out Boeing did not have a good week after announcing additional troubles to its 787 Dreamliners. Its off nearly 6% this week beating out and Chevron. On the plus side, Apple became the first company to reach a $2.5 TRILLION dollar market cap this week. And in other news, vaccine maker Moderna will be added to the S&P500 next week. Stock up 10% today. Meanwhile Pfizer is set to receive a full FDA approval for its vaccine for patients over 16. Stock up 1.8% this week. Go figure.

Stay Safe and Happy trading.

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Steve Bokor

Steve Bokor

Portfolio Manager