Author: Consultant

Signs that inflation pressures in the United States are steadily easing emerged Friday in reports that consumer prices rose in June at their slowest pace in more than two years and that wage growth cooled last quarter.

Together, the figures provided the latest signs that the Federal Reserve’s drive to tame inflation may succeed without triggering a recession, an outcome known as a “soft landing.”

A price gauge closely monitored by the Fed rose just 3 per cent in June from a year earlier. That was down from a 3.8 per cent annual increase in May, though still above the Fed’s 2 per cent inflation target. On a monthly basis, prices rose 0.2 per cent from May to June, up slightly from 0.1 per cent the previous month.

Last month’s sharp slowdown in year-over-year inflation largely reflected falling gas prices, as well as milder increases in grocery costs. With supply chains having largely healed from post-pandemic disruptions, the costs of new and used cars, furniture and appliances also fell in June.

The cost of some services, though, continued to surge. Average prices of movie tickets rose 0.5 per cent from May to June, and are up 6.2 per cent from a year earlier. Veterinary services, up 0.5 per cent last month, are 10.5 per cent higher than a year ago. And restaurant meal prices increased 0.4 per cent in June; they’re up 7.1 per cent from 12 months earlier.

A measure of “core” prices, which excludes volatile food and energy costs, did remain elevated even though it also eased last month. Economists track core prices because they are considered a better signal of where inflation is headed. Those still-high underlying inflation pressures are a key reason why the Fed raised its short-term interest rate Wednesday to a 22-year high.

Core prices were still 4.1 per cent higher than they were a year ago, well above the Fed’s target, though down from 4.6 per cent in May. From May to June, core inflation was just 0.2 per cent, down from 0.3 per cent the previous month, an encouraging sign.

A separate report Friday from the Labor Department showed that a gauge of wages and salaries grew more slowly in the April-June quarter, suggesting that employers were feeling less pressure to boost pay as the job market cools.

Employee pay, excluding government workers, rose 1 per cent, down from 1.2 per cent in the first three months of 2023. Compared with a year earlier, wages and salaries grew 4.6 per cent, down from 5.1 per cent in the first quarter.

The Fed is closely watching the pay gauge, known as the employment cost index. Smaller wage increases should slow inflation over time, because companies are less likely to need to raise prices to cover their higher labour costs.

Taken together, Friday’s data “will provide further support to the view that the economy is in the midst of a soft landing,” said Kathy Bostjancic, chief economist at Nationwide. The softer wage data, she suggested, “will be welcomed by Fed officials.”

Americans’ average paychecks are still growing briskly, boosting their ability to spend and underscoring the economy’s resiliency. The inflation report that the Commerce Department issued Friday showed that consumer spending jumped in June, despite two years of high inflation and 11 Fed rate hikes over 17 months. From May to June, consumer spending rose 0.5 per cent, up from 0.2 per cent the previous month.

“Better push out those recession forecasts by another quarter,” Stephen Stanley, chief U.S. economist at investment bank Santander, wrote in a research note.

The inflation gauge that was issued Friday, called the personal consumption expenditures price index, is separate from the better-known consumer price index. Earlier this month, the government reported that the CPI rose 3 per cent in June from 12 months earlier.

The Fed prefers the PCE index because it accounts for changes in how people shop when inflation jumps – when, for example, consumers shift away from pricey national brands in favour of cheaper store brands. And housing costs, which are among the biggest inflation drivers but many economists think aren’t well-measured, carry about half the weight in the PCE than the CPI.

With inflation now steadily cooling, consumers are becoming more optimistic about the economy, a trend that could lead them to keep spending and driving growth.

On Friday, the University of Michigan reported that its consumer sentiment index rose in June to its highest level since October 2021, though it has still recovered only about half of the drop caused by the pandemic. And earlier this week, the Conference Board, a business research group, said its consumer confidence index rose this month to its highest point in two years.

The U.S. economy is in a hopeful but precarious place: A solid job market is bolstering hiring, lifting wages and keeping unemployment near a half-century low. Yet inflation is weakening rather than rising, as it typically does when unemployment is low. That suggests that the Fed may be able to achieve a soft landing.

The Fed’s policy-makers, though, are concerned that the steadily growing economy could help perpetuate inflation. This can occur as persistent consumer demand enables more companies to raise prices, thereby keeping inflation above the Fed’s target and potentially causing the central bank to raise rates even higher.

The latest evidence of the economy’s resilience came Thursday, when the government reported that it grew at a 2.4 per cent annual rate in the April-June quarter – faster than analysts had forecast and an acceleration from a 2 per cent growth rate in the first three months of the year.

At a news conference Wednesday, Chair Jerome Powell suggested that the Fed’s benchmark short-term rate, now at about 5.3 per cent, was high enough to restrain the overall economy and likely tame inflation over time. But Powell added that the Fed would need to see more evidence that inflation has been sustainably subdued before it would consider ending its rate hikes.

Powell declined to offer any signal of the central bank’s likely next moves. In June, Fed officials had forecast two more rate hikes this year, including Wednesday’s.

“I would say it is certainly possible that we would raise (rates) again at the September meeting, if the data warranted,” Powell said Wednesday, “and I would also say it’s possible that we would choose to hold steady at that meeting.”

Canada’s Imperial Oil IMO-T +5.26%increase reported a 72 per cent drop in second-quarter profit on Friday as maintenance activity hit its production while a slump in energy prices further dented earnings.

Global oil prices dropped in the second quarter from a year earlier, pressured by a banking crisis that saw several large lenders fail and fears of a looming recession that crimped demand.

Imperial said its average realized prices for Western Canada Select, the benchmark Canadian crude, fell 39 per cent to $58.49.

The company, majority-owned by Exxon Mobil XOM-N -1.93%decrease, said its second-quarter upstream production declined 12 per cent to 363,000 barrels of oil equivalent per day (boepd), hurt by maintenance-related stoppages.

The company’s crude utilization stood at 90 per cent in the reported quarter, lower than last year’s 96 per cent due to the impact of the planned turnaround at its Strathcona refinery.

This pushed its quarterly total downstream throughput lower by 6 per cent to 388,000 barrels per day (bpd).

“With substantial turnaround activity now behind us, we anticipate strong production in the second half of 2023,” CEO Brad Corson said.

The company reported a net income of $675-million, or $1.15 per share, for the quarter ended June 30, down from $2.4-billion or $3.63 per share, a year earlier.

Imperial added that it has completed construction work for expanding the existing seepage interception system at its Kearl oil sands mine in northern Alberta.

In May, Canada’s federal environment ministry had opened a formal investigation into a months-long leak at Kearl of tailing, a toxic mining by-product containing water, silt, residual bitumen and metals.

Imperial also said it had started construction at Strathcona renewable diesel project.

The Canadian economy grew by 0.3 per cent in May despite downward pressure from wildfire-hit oil and gas production but it looks to have slowed in June, Statistics Canada said Friday.

In its latest report on economic growth, the federal agency’s preliminary estimate suggests real gross domestic product grew at an annualized rate of one per cent in the second quarter.

The May figure came in slightly lower than was expected by Statistics Canada as mining and oil and gas companies reduced their operations in Alberta at the outset of the record-breaking wildfire season.

The energy sector was down 2.1 per cent in May, the release shows.

“This was the sector’s first decline in five months and its largest since August 2020,” the agency said.

The modest GDP increase in May was driven in part by a rebound in the public administration sector as most federal public servants on strike returned to work by the end of April. However, 35,000 Canada Revenue Agency workers remained on strike for three days in May, which dampened the rebound.

The economy remained resilient in the second quarter, but growth started to look weaker by the end of the period, with wholesale sales posting one of their largest declines in history in June, said RBC economist Claire Fan in a note.

“The resilience in consumer demand we’ve seen to date is not to be overlooked, adding to sticky inflation pressures. But momentum in services spending also appears to be waning – gross sales at food services and drinking places have been trending at levels below this January for months,” she wrote.

That modest growth is unlikely to hold, as the federal agency’s preliminary estimate for June suggests the economy contracted by 0.2 per cent.

Statistics Canada says the estimated decrease in June is mainly owing to the wholesale trade and manufacturing sectors.

Both sectors saw growth in May as supply chain issues related to semiconductor chips eased, but the downward trend in June is expected to “more than offset the increases recorded in May,” the agency said.

The slowdown comes as the Bank of Canada’s key interest rate sits at five per cent, the highest it’s been since 2001. The interest rate spike is expected to slow the economy down, though it has generally performed better than expected this year.

The real estate sector, for example, is expected to continue to grow in June despite high interest rates.

In May, home resales in most of Canada’s largest markets led to an industry increase of 7.6 per cent.

A series of transitory shocks since April, such as the wildfires, has made the data more difficult to interpret, wrote TD economist Marc Ercolao in a note.

“Looking ahead, headline GDP figures may continue to be skewed by the government’s grocery rebate and the effects of the B.C. port strike in July,” he said.

But the the pullback in June will likely help support a hold on the Bank of Canada’s key policy rate in September after announcing a hike this month, said Ercolao.

“Slowing growth appears to be in the cards for the Canadian economy, and we believe this will be enough for the (central bank) to remain on hold at its next meeting,” he said.

The Bank of Canada won’t hesitate to hike rates further if necessary, said Fan, but she added that “the worst is yet to come” for households dealing with rising debt service costs.

“We expect that will soften spending, push inflation lower and keep the (central bank) to the sideline over the second half of this year,” she said.

Shares of TC Energy TRP-T -5.12%decrease fell nearly 5 per cent on Friday after the Keystone pipeline operator said it would spin off its liquids business to focus on transporting natural gas.

The spinoff, combined with TC’s announcement on Monday that it will sell a 40 per cent stake in its Columbia Gas Transmission and Columbia Gulf Transmission pipelines, will help TC reduce its high debt levels.

But TD Securities downgraded TC to “hold” from “buy,” saying it was skeptical the spinoff would create value.

“We see execution risk introducing uncertainty and potentially distracting (TC) from its existing strategic priorities,” TD analyst Linda Ezergailis said in a note.

Shares in Toronto plunged 4.4 per cent to C$45.21, touching a seven-year low.

“There’s blood in the water, the stock has already been going down on the back of the Columbia transaction, so I think there’s some (selling) piling on,” said Ryan Bushell, president of Newhaven Asset Management, a TC shareholder.

Bushell said TC’s new focus after the spinoff on natural gas and power is attractive to him, however, given the expansion of liquefied natural gas export capacity in the United States and increasing electrification.

Once the liquids business has spun off by late 2024, subject to a shareholder vote, it will raise C$8-billion in debt to repay debt at TC.

TC CEO Francois Poirier said TC needed to sell another C$3-billion in assets during the next 18 months to reach its 4.75 times debt to EBITDA target. TC had 5.4 times debt to EBITDA last year and is aiming to reduce that to 5 times this year.

The TC share sell-off reflects a re-rating after the company made the Columbia deal at a lower price than some expected, and now plans a spinoff carrying more debt compared to EBITDA than some U.S. peers, said Brandon Thimer, equity analyst at First Avenue Investment Counsel, a TC shareholder.

Poirier said the breakup into two listed companies allows them to pursue more opportunities for growth that exceed the ability of one company to do.

“It’s been a busy week but an extremely transformative one,” Poirier said.

National Bank of Canada upgraded its rating of TC to “outperform” from “sector perform.”

TC’s Keystone pipeline in December spilled more than 14,000 barrels of oil in Kansas. The liquids business spans over 3,000 miles of infrastructure, which transports Canadian crude to U.S. refineries.

Morningstar analyst Stephen Ellis said that the 2021 cancellation of TC’s proposed Keystone expansion, following U.S. President Joe Biden revoking a key permit, may have played a role in the company deciding to spin off its oil business.

The European Central Bank raised interest rates for the ninth consecutive time on Thursday and kept the door open to further tightening as stubborn inflation and a growing risk of a recession pull policy-makers in opposing directions.

Fighting off a historic surge in prices, the ECB has now lifted borrowing costs by a combined 425 basis points since last July, worried that excessive price growth could be perpetuated via wage rises as the jobs market remains exceptionally tight.

With Thursday’s 25 basis point move, the ECB’s deposit rate stands at 3.75 per cent, its highest level since a similar level set in 2000, before euro banknotes and coins had even been put into circulation. The main refinancing rate was set at 4.25 per cent.

“Future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary to achieve a timely return of inflation to the 2 per cent medium-term target,” the ECB said in a statement.

But the ECB’s statement dropped a reference to rates having to be “brought” to a level that cuts inflation quickly enough, a nuanced change that could be seen as a signal that further increases are not a given.

This will leave investors guessing whether another rate hike is coming or if July marks the end of the ECB’s fastest-ever tightening spree.

It is nevertheless increasingly clear that an end to rate increases is fast approaching, with policy-makers debating whether one more small move is needed before rates are kept steady for what some of them think will be a long time.

“The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction,” the ECB added.

The ECB’s problem is that inflation is coming down too slowly and could take until 2025 to fall back to 2 per cent, as a price surge initially driven by energy has seeped into the broader economy via large markups and is fuelling the cost of services.

While overall inflation is now just half its October peak, harder-to-break underlying price growth is hovering near historic highs and may have even accelerated this month.

The labour market is also exceptionally tight, with record-low unemployment raising the risk that wages will rise quickly in the years ahead as unions use their increased bargaining power to recoup real incomes lost to inflation.

That is why many investors and analysts are looking for the ECB to pull the trigger again in September and stop only if autumn wage data delivers relief.

But the mood is clearly changing as the economy of the 20-country euro zone slows. While markets had fully priced in another rate hike just a few weeks ago, a growing number of investors are betting that Thursday’s move will be the last.

More tightening would however be consistent with comments from a host of policy-makers, including ECB board member Isabel Schnabel, that raising rates too far would still be less costly than not lifting them high enough.

On Wednesday, the U.S. Federal Reserve raised borrowing costs and kept the door open to further tightening, though Fed Chair Jerome Powell gave few hints about September, a stance the ECB is likely to copy.

But rapidly fading economic prospects should temper any hawkishness and ECB President Christine Lagarde is likely to take a cautious tone in her 1245 GMT news conference after a string of data in recent days suggesting that higher rates are already weighing on growth.

Indicators of business, investor and consumer sentiment and bank lending surveys point to a continued deterioration after the euro zone skirted a recession last winter.

And with manufacturing in a deep recession and a previously resilient services sector showing signs of softening despite what is likely to be a superb summer holiday season, it is hard to see where any rebound would come from.

Such weakness, exacerbated by a loss of purchasing power after inflation eroded real incomes, could push down price pressures faster than some expect, leaving less work for the central bank to do.

This is a key reason why the balance of expectations has started to shift away from another rate hike, with economists increasingly focusing on how long rates will stay high.

The U.S. economy grew faster than expected in the second quarter as labour market resilience underpinned consumer spending, while businesses boosted investment in equipment, potentially keeping a much-feared recession at bay.

Gross domestic product increased at a 2.4 per cent annualized rate last quarter, the Commerce Department in its advance estimate of second-quarter GDP on Thursday. The economy grew at a 2.0 per cent pace in the January-March quarter. Economists polled by Reuters had forecast GDP rising at a 1.8 per cent rate.

Outside the housing market and manufacturing, the economy has largely weathered the 525 basis points in interest rate hikes from the Federal Reserve since March 2022 as the U.S. central bank battled inflation.

Economists have since late 2022 been forecasting a downturn, but with price pressures retreating, some now believe that the soft-landing scenario for the economy envisaged by the Fed is feasible. The central bank on Wednesday raised its policy rate by 25 basis points to a 5.25 per cent-5.50 per cent range.

The economy is being anchored by the labour market, whose continued tightness was underscored by a separate report from the Labor Department on Thursday showing initial claims for state unemployment benefits fell 7,000 to a seasonally adjusted 221,000 for the week ended July 22.

Companies are hoarding workers after struggling to find labour during the COVID-19 pandemic. Employment in the leisure and hospitality sector remains below pre-pandemic levels.

The number of people receiving benefits after an initial week of aid, a proxy for hiring, dropped 59,000 to 1.690 million during the week ending July 15. Despite high profile layoffs in technology and finance sectors in 2022 and early this year, the so-called continuing claims remain low by historical standards.

This suggests that some laid off workers are quickly finding employment. The continuing claims data covered the week that the government surveyed households for July’s unemployment rate. Continuing claims fell between the June and July survey periods.

At 3.6 per cent in June, the jobless rate was not too far from multi-decade lows.

But some economists remain convinced that a recession is on the horizon, arguing that higher borrowing costs will eventually make it harder for consumers to fund their spending with debt.

They also noted that banks were tightening credit and excess savings accumulated during the pandemic continued to be run down. Slowing job growth was seen curbing wage gains.

Canadian miner Teck Resources Ltd TECK-B-T -3.22%decrease missed profit estimates for second-quarter profit on Thursday and lowered its annual copper production outlook due to delays at a project in Chile.

The Quebrada Blanca Phase 2 project (QB2) in the South American country is one of the largest undeveloped copper resources in the world, and Teck had previously said it expected to achieve full production rates by the end of 2023.

Teck, the target of a takeover bid by Swiss commodity giant Glencore, also reported the death of an employee at QB2 during the second-quarter.

The company said it now expects annual copper production of 330,000 tonnes to 375,000 tonnes, down from its previous estimate of 390,000 tonnes to 445,000 tonnes.

For the reported quarter, realized prices for steelmaking coal and copper fell 41 per cent and 11 per cent respectively, denting profit.

Fears of slowing growth, particularly in top consumer China, has hurt copper prices. The average copper price fell about 11 per cent to $3.85 per pound in the April-June quarter, according to CFRA Research.

Quarterly copper production fell about 11 per cent to 64,000 tonnes, while production of steelmaking coal rose 9.4 per cent to 5.8 million tonnes.

Glencore in June offered to buy Teck’s steelmaking coal business as a stand-alone unit, after the Canadian miner twice rebuffed its $22.5-billion offer to combine the two.

Teck’s coal mines are among the few left in the world, which makes the company attractive to Glencore as it seeks to combine them with its own thermal coal business.

Teck said last month that it had received several proposals for its coal business.

On an adjusted basis, Vancouver-based Teck posted a profit of C$1.22 per share for the three months ended June 30, missing analysts’ average estimate of C$1.25 per share, according to Refinitiv IBES data.

The U.S. Federal Reserve raised interest rates by a quarter of a percentage point on Wednesday, citing still elevated inflation as a rationale for what is now the highest U.S. central bank policy rate since 2007.

The hike, the Fed’s 11th in its last 12 meetings, set the benchmark overnight interest rate in the 5.25%-5.50% range, a level last seen just prior to the 2007 housing market crash and which has not been consistently exceeded on an effective basis for about 22 years.

“The (Federal Open Market) Committee will continue to assess additional information and its implications for monetary policy,” the Fed said in language that was little changed from its June statement and left the central bank’s policy options open as it searches for a stopping point to the current tightening cycle.

As it stated in June, the Fed said it would watch incoming data and study the impact of its rate hikes on the economy “in determining the extent of additional policy firming that may be appropriate” to reach its 2% inflation target.

Though inflation data since the Fed’s June 13-14 meeting has been weaker than expected, policy-makers have been reluctant to alter their hawkish stance until there is more progress in reducing price pressures.

Fed Chair Jerome Powell said any future policy decisions would be made on a meeting-by-meeting basis and that in the current environment, officials can only provide limited guidance about what’s next for monetary policy.

But he didn’t rule out action if it was deemed necessary.

“It is certainly possible that we would raise the (federal) funds rate again at the September meeting if the data warranted, and I would also say it’s possible that we would choose to hold steady at that meeting” if that was the right policy call, Powell said in a press conference after the release of the policy statement.

But Powell cautioned against expecting any near-term easing in rates. “We’ll be comfortable cutting rates when we’re comfortable cutting rates and that won’t be this year,” Powell said.

Yields on both the two- and 10-year Treasury notes moved down modestly from levels right before the release of the Fed’s policy statement, while U.S. stocks ended mixed. Futures markets showed bets on the path of Fed rate increases over the remainder of the year were little changed, seeing small odds of a rise in September.

“The forward guidance remains unchanged as the committee leaves the door open to further rate hikes if inflation does not continue to trend lower,” said Kathy Bostjancic, chief economist at Nationwide. “Our view is the Fed is likely done with rate hikes for this cycle since continued easing of inflation will passively lead to tighter policy as the Fed holds the nominal fed funds rate steady into 2024.”

‘Moderate growth’

Key measures of inflation remain more than double the Fed’s target, and the economy by many measures, including a low 3.6% unemployment rate, continues to outperform expectations given the rapid increase in interest rates.

Job gains remain “robust,” the Fed said, while it described the economy as growing at a “moderate” pace, a slight upgrade from the “modest” pace seen as of the June meeting. The U.S. government on Thursday is expected to report the economy grew at a 1.8% annual pace in the second quarter, according to economists polled by Reuters.

Powell said he’s still holding out hope the economy can achieve a ‘soft landing,’ a scenario in which inflation falls, unemployment remains relatively low and a recession is avoided.

“My base case is we’ll be able to achieve inflation moving back down to our target without the kind of really significant downturn that results in high levels of job losses,” he said, while noting that outlook is “a long way from assured.” He also noted that Fed staff economists are no longer predicting a recession as they have at recent meetings.

With about eight weeks until the next Fed meeting, a longer-than-usual interlude, continued moderation in the pace of price increases could make this the last rate hike in a process that began with a cautious quarter-percentage-point increase in March of 2022 before accelerating into the most rapid monetary tightening since the 1980s.

In the most recent economic projections from Fed policy-makers, 12 of 18 officials expected at least one more quarter-percentage-point increase would be needed by the end of this year.

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