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We closed out June with a bang as AI related stocks helped pushed the tech sector back to lofty levels, so it should not be too surprising to see July drift lower for the holiday shortened week. Of course, the big elephant in the room should be the dawning realization that interest rates will stay higher for longer especially when employment and wage growth remain strong. Plus, we are in the calm before the earnings storm that unofficially kicks off next Friday with the US Big Banks. We also note US monthly Inflation stats hits the street on Wednesday morning at 5:30 am Pacific time and a Bank of Canada rate decision around 7am.

We note on both sides of the border, falling oil prices that began in Mid April could be coming to an end with yet another round of supply cuts hitting this month courtesy of OPEC. The summer driving season is also upon us and this week marks the third consecutive week of US inventory drawdowns. Probably explains why oil stocks have finally caught a bid. Mind you it’s the energy services stocks that generated the best weekly returns south of the border. Top three names in the US are Schlumberger, Halliburton, and Baker Hughes. In Canada, half a dozen energy companies bounced 4% to 6% this week led by Meg Energy, Athabasca Oil, Prairie Sky, Tamarack and Precision Drilling. Crude oil finished up $3 to $73.67 per barrel.

On the economic front, the US added a mediocre 209,000 jobs last month, but wage growth remained hot at 0.4%. Furthermore, on Thursday, ADP Private employment registered a stunning 497,000 jobs nearly double the May additions of 267,000 jobs. That send bond yields soaring back above 4% for the 10 year and 5% for the two years. Historically, these inverted yield curves generate recessions but given the strong jobs numbers, maybe, just maybe, the US Fed can engineer a soft landing in 2024 or 2025. That by the way is the target date estimated by Jay Powell for inflation to reach their 2% target.

In Canada, we added 59,000 jobs nearly triple the 20,000 guestimates. Fortunately, UI edged up to 5.4% as more Canadians looked for work, but it still does not look like it will halt a rate hike on Wednesday. The problem is, as we see it, the Bank of Canada is fighting an inflation war using old weapons. Economics 101 tells us that as interest rates go up, consumption should go down. It forces businesses to become more efficient and cost sensitive and one of the fastest methods of reducing costs is by reducing headcounts. So far that does not appear to be working for one simple reason. In a word, demographics. We have more boomers retiring than Gen Z and Millennials replacing them.

On the other hand, we could also talk about taxes. Consumers continue to get hit with rising taxes at every turn. It is pinching them and could be causing a lower standard of living and their only weapon is to argue for higher wages. Right now businesses seem to have some pricing power and have been able to pass on costs on to consumers which only reinforces the desire for more income. Take a look at Pepsi and Coke. Both continue to push their product prices upwards offsetting any drop off in demand. We will have more on that next week after they report earnings next week.

In the US UPS workers continue to strike for higher wages and in Canada, port workers are doing the same thing. Both could have a negative effect on prices which could push inflation up even more. On the other hand we note Tesla has been cutting the price of its EV’s in order to maintain market share and with more and more auto makers switching to EV production, prices should continue to fall. So maybe there is some hope on the horizon.

Stay safe and happy trading.

Steve Bokor and the Ocean Wealth Team

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