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European Central Bank raises rates by 50 basis points, its first hike in 11 years
Canada’s inflation rate hits 8.1% but early signs suggest peak near
Canadian inflation jumped to the highest rate in nearly four decades in June, although there are tentative signs that consumer price growth is close to topping out, offering relief to families.
The consumer price index (CPI) rose 8.1 per cent in June from a year earlier, up from 7.7 per cent in May, Statistics Canada said on Wednesday. It was the highest inflation rate since January, 1983. Financial analysts were expecting worse, with inflation climbing to 8.4 per cent.
The acceleration was mainly because of gasoline, Statscan said. Consumers paid 6.2 per cent more at the pump in June than May, and 55 per cent more on an annual basis.
However, crude oil has tumbled in recent weeks, which has started to reflect in retail pricing. The national average price for regular unleaded gas was $1.87 a litre on Tuesday, down from a peak of $2.15 in early June, according to data from Kalibrate Technologies.
Shelter and grocery costs grew at slightly slower annual rates in June, a potential sign of progress for cash-strapped household budgets. And excluding food and energy, core inflation rose 0.4 per cent in June, a slower pace than in recent months.
“The slightly weaker than anticipated inflation readings will come as good news for central bankers trying to control price pressures,” Royce Mendes, head of macro strategy at Desjardins Securities, said in a note to clients. “Moreover, the more recent fall in global commodity prices is seeing Canadian energy prices declining in July.”
Central bankers are raising interest rates at the quickest pace in decades in their attempt to tamp down inflation. In less than five months, the Bank of Canada has raised its policy rate to 2.5 per cent from 0.25 per cent. More hikes are coming, bank officials have indicated.
Consumer prices are rising for many reasons, including supply-chain disruptions that have led to product shortages; much higher commodity prices, which is partly because of Russia’s invasion of Ukraine; and cheap borrowing rates that fuelled a boom in home purchases.
The Bank of Canada, along with other central banks, has consistently underestimated the path of inflation for more than a year. For example, in April of 2021, the bank projected CPI growth of just 1.9 per cent in 2022. As inflation was picking up last year, central bankers in Canada and elsewhere said the situation would prove “transitory,” or short-lived.
Instead, consumer prices have continued to escalate, and those increases have broadened to more products and services. The Bank of Canada expects inflation of 7.2 per cent this year and 4.6 per cent in 2023, having revised its CPI forecast higher several times.
The errors in forecasting inflation are problematic. Because it takes a while for changes in interest rates to trickle through the economy, it’s important that central bankers have a somewhat accurate view of future inflation when setting their monetary policy.
Now, central bank officials are playing catch-up and raising rates aggressively to tame inflation that is significantly worse than expected. The Bank of Canada raised its policy rate by a full percentage point last week – its largest hike since 1998.
The bank attributes a large portion of its forecasting error to high commodity prices, such as crude oil, that it didn’t anticipate. It also underestimated supply-chain disruptions and the extent to which consumers would buy goods with many services shuttered by the pandemic.
While some prices are starting to ease, many financial analysts say it’s too early to call a turning point for inflation. For one, high inflation is broadening more products and services.
Furthermore, inflation is picking up speed in some areas. The cost of passenger vehicles rose 8.2 per cent in June from a year earlier, up from 6.8 per cent in May. Hotel rates were up 50 per cent as the travel industry rebounded from pandemic shutdowns.
Another area of concern is that inflation expectations – a key determinant in setting prices and wages – are continuing to rise among businesses and consumers. And even if inflation eases, it could still be a lengthy journey back to desirable levels.
In its latest Monetary Policy Report, published last week, the Bank of Canada said annual CPI growth wouldn’t return to its 2-per-cent target until the end of 2024.
Senate advances more than $50 billion bill to boost U.S. semiconductor production
https://www.cnbc.com/2022/07/20/chips-act-vote-senate-advances-semiconductor-bill.html
Global chip shortage is not over and the slowdown is ‘going to bite,’ analyst says
Before the Bell: July 20
Equities
Wall Street futures wavered early Wednesday as traders await more earnings from corporate America. Major European markets turned lower after a positive start. TSX futures were weaker with fresh inflation figures due before the start of trading.
Futures tied to the three key U.S. indexes all traded around break even in the premarket period, paring gains seen earlier in the day. On Tuesday, all three managed strong gains with the Nasdaq jumping more than 3 per cent while the S&P 500 and Dow both added more than 2 per cent. The S&P/TSX Composite Index finished the session up 1.84 per cent.
“Earnings have been coming in mixed but nothing too terrible that is unnerving investors,” OANDA senior analyst Ed Moya said.
“Stocks are already down significantly this year and disastrous outlooks are what was needed to send the major indexes to fresh lows,” he said.
Shares of Netflix Inc. were up nearly 7 per cent in premarket trading after the streaming giant said it lost about 970,000 subscribers in the second quarter, averting the worst-case scenario laid out by the company in an early forecast. Netflix had warned earlier in the year that it could lose as many as 2 million subscribers in the quarter.
In releasing its latest results, the company also outlined plans for a less expensive, ad-supported tier next year and said it expects to add 1 million new subscribers in the third quarter.
After Wednesday’s close, markets will get results from Tesla Inc.
In Canada, investors are awaiting a fresh reading on price pressures with the release of June inflation figures by Statistics Canada. Many economists are expecting to see the annual rate of inflation top 8 per cent after hitting 7.7 per cent in May. The numbers are due just before markets open.
“Our economists anticipate Canada’s inflation rate will edge up to 8.0 per cent year-over-year in June (in line with consensus),” RBC chief currency strategist Adam Cole said.
“That would be the highest since 1982. This continued acceleration was likely largely driven by higher food and energy prices – both of which have been boosted by global pressures.”
He said roughly half of inflation recently has been driven by forces outside Canada’s borders.
“Some of those global price pressures have shown clear signs of easing, and we are cautiously optimistic that price growth will slow in the near-term,” he said.
Mr. Cole noted the biggest domestic driver of inflation to-date has been higher housing prices, which have now started to reverse in the wake of sharp rate hikes by the Bank of Canada. Earlier this month, the Bank of Canada surprised markets by hiking rates by a full percentage point, citing the need to temper spiking price pressures.
Overseas, the pan-European STOXX 600 slid 0.6 per cent after a positive start to the day. Germany’s DAX lost 0.33 per cent while France’s CAC 40 shed 0.21 per cent. Britain’s FTSE 100 slid 0.23 per cent.
In Asia, Japan’s Nikkei closed up 2.67 per cent after a strong handoff from Wall Street. Hong Kong’s Hang Seng gained 1.11 per cent.
3,928.00-9.50 (-0.24%)
31,706.00-85.00 (-0.27%)
1,140.50-3.50 (-0.31%)
-0.24%-0.27%-0.31%3:04 A.M., JULY 20
SOURCE: BARCHART
Commodities
Crude prices pulled back as traders kept an eye on the COVID-19 situation in China and await U.S. inventory figures later in the session.
The day range on Brent is US$105.44 to US$107.42. The range on West Texas Intermediate is US$102.40 to US$103.91.
“The growing COVID concern in China has capped oil prices, and the near-term contract action has veered south despite a weaker USD and supported risk,” Stephen Innes, managing partner with SPI Asset Management, said.
China’s tough zero-COVID policy along with fresh outbreaks have raised concerns about the potential for new restrictions that could temper demand in one of the world’s top oil consumers.
Meanwhile, traders will get U.S. government inventory figures shortly after the start of trading on Wednesday.
On Tuesday, the American Petroleum Institute said crude stocks rose by 1.9 million barrels last week, close to market forecasts. Figures due later Wednesday from the U.S. Energy Information Administration will offer a more official count.
Energy markets have also been buoyed by reports that Russian gas flows via the Nord Stream 1 pipeline are likely to restart on time tomorrow following maintenance. The pipeline accounts for more than a third of Russian natural exports to the European Union. It was closed for maintenance on July 11 and European governments had feared Moscow would extend the closure as a tactic in its war in Ukraine.
In other commodities, gold prices slid in early going.
Spot gold was down 0.2 per cent at US$1,707.95 per ounce by early Wednesday morning. U.S. gold futures fell 0.3 per cent to US$1,705.50.
“Gold’s inability to hold onto even modest rallies in prices, even as the U.S. dollar falls and U.S. bonds trade sideways, is a major concern,” OANDA senior analyst Jeffrey Halley said.
“Risk remains heavily skewed towards the downside.”
US$3.35+0.06 (1.82%)
US$1,706.50-4.40 (-0.26%)
US$99.32-1.49 (-1.48%)
1.82%-0.25%-1.41%
SOURCE: BARCHART
Currencies
The Canadian dollar was modestly firmer, trading in a narrow range, while its U.S. counterpart held steady against a group of currencies.
The day range on the loonie is 77.62 US cents to 77.79 US cents.
Canadian markets get June inflation figures ahead of the opening bell.
On world markets, the U.S. dollar index, which weighs the greenback against a group of currencies, was flat on the day around 106.6, according to figures from Reuters. Markets are now only expecting a 23-per-cent chance that the Federal Reserve will hike rates by a full percentage point at its policy meeting late this month.
The euro, meanwhile was near a two-week high against the U.S. dollar ahead of Thursday’s rate decision by the European Central Bank. Reports have suggested the central bank is weighing a rate hike of between 25 basis points and 50 basis points. It would be the first hike by the ECB in a decade.
Early Wednesday, the euro rose as much as 0.5 per cent to US$1.02730, the highest since early June, before pulling back.
Elsewhere, the Australian dollar hit a three-week high at US$0.6927 after that country’s central bank struck a hawkish tone on future rate hikes.
In bonds, the yield on the benchmark U.S. 10-year note was down at 2.989 per cent.
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SOURCE: BARCHART
More company news
Merck & Co Inc said on Wednesday its cancer therapy Keytruda failed to meet the main goal of a late-stage trial testing it in patients with head and neck cancer.
Economic news
(830 am ET) Canada consumer price index for June.
(830 am ET) Canada industrial product price index for June and raw materials price index.
(10 am ET) U.S. existing home sales for June.
With Reuters and The Canadian Press
West Fraser Timber shares roiled after takeover speculation
West Fraser Timber Co. Ltd.’s WFG-T +14.72%increase share price went on a roller-coaster ride on Tuesday as investors speculated about a potential takeover of the producer of lumber and wood-based panels.
West Fraser’s stock price jumped as much as 23 per cent on the Toronto Stock Exchange in the morning, shortly after Reuters reported that two European-based firms are interested in acquiring the Vancouver-based forestry company.
The takeover fever later subsided as shares in West Fraser closed at $123.83, up $15.89 on the day, or a 15-per-cent gain. In a statement issued four hours after the TSX opened, West Fraser said it “is aware of recent market and media speculation,” and added that it previously met with Kronospan, an existing shareholder, and CVC Capital Partners, a private equity firm.
Wales-based Kronospan is a major manufacturer of wood-based panels in Europe. Kronospan, through Banasino Investments Ltd., recently owned 8.2 million West Fraser common shares, or a 9.4-per-cent stake.
West Fraser, Canada’s largest lumber producer, said it “has not received a proposal and there are no ongoing discussions regarding the terms of any transaction. The company is focused on executing on its business strategy to create shareholder value.”
In late 2020, West Fraser announced a friendly deal to buy Norbord Inc. in a $4-billion transaction that added Norbord’s global manufacturing of panels used for construction sheathing and flooring. Norbord is the world’s largest producer of oriented strand board (OSB), an engineered panel product.
B.C. billionaire Jim Pattison owns more than 8.9 million West Fraser common shares, or a 10.2-per-cent interest. Mr. Pattison, who supported West Fraser’s purchase of Norbord, also owns 52 per cent of Canada’s second-largest lumber producer, Canfor Corp.
“Lumber is a commodity and it goes up and it goes down, and they’ve had big swings in the lumber business,” Mr. Pattison said in a phone interview on Tuesday from his Vancouver office. “Over all, we are happy with our investment in Canfor and with West Fraser.”
Two-by-fours made from Western spruce, pine and fir sold for an average of US$625 for 1,000 board feet last month, compared with US$1,617.50 in May, 2021, when record highs were set, according to Vancouver-based industry newsletter Madison’s Lumber Reporter.
After completing a buyback of 11.9 million shares last month, West Fraser now has 87.5 million common shares and there are also 2.3 million class B shares. Based on Tuesday’s close on the TSX, the forestry company now boasts a market capitalization of more than $11-billion.
A major shareholder in West Fraser is Seattle-based Ketcham Investments Inc., controlled by the family of Hank Ketcham, West Fraser’s chairman and former chief executive officer.
Ketcham Investments recently owned 3.9 million West Fraser common shares and 1.7 million class B shares.
The Ketcham family would have the ability to vote separately to approve or reject any major transaction. “Certain circumstances or corporate transactions may require the approval of the holders of our common shares and class B Shares on a separate class-by-class basis,” according to West Fraser’s management information circular issued in April.
Potential buyers such as CVC Capital and Kronospan view West Fraser as three distinct units – the B.C. lumber operations, the U.S. lumber facilities and the Engineered Wood Products or EWP business in North America and Europe, according to three investment banking and legal sources. The Globe and Mail is not naming these sources because they are not authorized to speak about potential clients.
The lumber operations generated a total of US$796-million of adjusted earnings before interest, taxes depreciation and amortization (EBITDA) in the first three months of this year, while the North American and European EWP divisions posted US$808-million of adjusted EBITDA.
West Fraser’s B.C. operations, founded by three Ketcham brothers in 1955 in Quesnel, B.C., face the greatest challenges as a result of Indigenous land claims and potential government regulation, according to three investment industry sources. In contrast, the other divisions have strong growth prospects.
If successful, CVC and Kronospan or another bidder might subsequently focus on expansion in the U.S. and Europe and sell lumber operations on the West Coast to a Canadian player, such as a pension fund, to pay down debt and streamline operations, according to the investment industry sources.
Kronospan and CVC are both based in Europe, and as foreign companies, they would need federal government approval to acquire West Fraser. The investment industry sources said if West Fraser’s board made it clear the company is up for sale, a number of Canadian buyers would likely emerge, including pension plans.
Two of B.C.’s largest forest product companies – TimberWest Forest Corp. and Island Timberlands LP – are owned by a pair of pension plans: the British Columbia Investment Management Corp. and the Public Sector Pension Investment Board, which is based in Ottawa.
A successful bid for West Fraser will likely require support from two long-time shareholders: Mr. Pattison and heirs to the founding Ketcham family. Three sourceswho know the Ketcham family say they remain close knit and would vote as a block on any takeover offer. Mr. Pattison is known for buying and holding investments.
Luxembourg-based CVC Capital is one of the world’s largest private equity fund managers, with more than €125-billion inclient assets under management, and has done a number of acquisitions in the past with domestic partners that include the Canada Pension Plan Investment Board.
Cole Smead, president and portfolio manager at Smead Capital Management based in Arizona, said West Fraser has hundreds of millions of dollars in lumber duty deposits sitting in the United States that could eventually be mostly recovered, assuming a resolution to the Canada-U.S. softwood dispute.
“There’s money sitting outside of book value out there,” said Mr. Smead, who oversees a fund holding 70,000 West Fraser shares.
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Oil rises 1% as tight supply outweighs economic worries
Oil prices edged up about 1% to a two-week high in volatile trade on Tuesday as the market focused more on tight supplies and a weaker dollar than fears an economic slowdown will hit oil demand.
Brent futures rose $1.08, or 1.0%, to $107.35 a barrel by 1:22 p.m. EDT (1722 GMT). U.S. West Texas Intermediate (WTI) crude rose $1.53, or 1.55%, to $104.13.
Brent was on track for its highest close since July 4 and WTI for its highest close since July 8.
Oil prices have whipsawed, supported by supply fears due to Western sanctions on Russia, but pressured by global central bank efforts to tame inflation which stoked fears that a potential recession could cut energy demand.
The U.S. dollar slid to a two-week low against a basket of other currencies, bolstering oil demand by making it less expensive for buyers using other currencies.
In a move that could pose a problem for supplies, Libya’s new National Oil Corp (NOC) chief Farhat Bengdara rejected challenges to his appointment and as work resumed at some shuttered fields and ports.
Last week, U.S. President Joe Biden visited top oil exporter Saudi Arabia, de facto leader of the Organization of the Petroleum Exporting Countries (OPEC), whose crude exports slipped in May to a four-month low at 7.050 million barrels per day (bpd).
Biden hoped to strike a deal on an oil production boost to tame fuel prices, but got no clear assurances from Saudi officials. The kingdom’s foreign minister said he saw no shortage of crude in the market, just a lack of refining capacity.
In the United States, expectations for an increase in crude inventories weighed on prices. Analysts polled by Reuters forecast crude inventories rose by 1.4 million barrels last week. [EIA/S] [API/S]
The American Petroleum Institute (API), an industry group, will issue its inventory report at 4:30 p.m. EDT (2030 GMT) on Tuesday. The U.S. Energy Information Administration (EIA) reports at 10:30 a.m. EDT (1430 GMT) on Wednesday.
The U.S. 3:2:1 and gasoline crack spreads – measures of refining profit margins – both fell to their lowest since April.
“Crack spreads continuing plunge of past four weeks to narrowest level since late April … suggesting weakening product demand,” said analysts at Ritterbusch and Associates, a consultancy.
Early in the session, oil prices fell on weak economic data from around the world.
New U.S. home-building activity fell in June to a nine-month low. In China, stocks closed lower with foreign investors dumping the most shares in more than a month. The International Monetary Fund warned that any Russian action to stop supplying Europe with natural gas would trigger economic contractions in several countries.
Yet flows of gas through the Nord Stream 1 pipeline from Russia to Germany spiked ahead of the end of annual maintenance as the operator carried out pressure tests.
Dow rallies more than 700 points in rebound as traders bet that the bottom is in
Stocks rallied Tuesday, with the market resuming a bounce from last month’s lows, as traders bet on strong corporate earnings reports, and wagered that markets have found a bottom.
The Dow Jones Industrial Average jumped 754.44 points, or 2.43%, to 31,827.05 — closing near the highs of the session as gains accelerated in the final hour of trading. The S&P 500 gained 2.76% to 3,936.69. The Nasdaq Composite rose 3.11% to 11,713.15.
All three major averages are above their 50-day moving averages for the first time since April. The broader market index is now 8% off its June lows.
Investors are betting that stocks have reached a bottom after their steep declines this year, and as the latest round of earnings reports showed businesses are working through economic pressures better than feared in the second quarter.
“Both investors and the companies were expecting hot inflation, so companies talking about hot inflation having happened in that second quarter was not a surprise at all,” said Kim Forrest, founder and chief investment officer at Bokeh Capital Partners. “What was a surprise was that they were able to manage through it well.”
Netflix only loses 970,000 subscribers in second quarter after warning of loss of 2 million
Netflix reported earnings after the bell. Here are the results:
Analysts are split on whether subscriber losses will be better or worse than Netflix predicted. Some expect the company to lose as many as 4 million subscribers, while others foresee a loss of 1.5 million.
Those who expect smaller subscriber losses have pointed to the streaming service’s popular series “Stranger Things.” The fourth season of the show was released in two parts, one at the end of the second quarter and one at the beginning of the third. Some analysts expect that the split may have limited churn or even driven subscribers to sign up or return.
The company’s guidance for subscriber numbers in the third and fourth quarters will likely be more important than second-quarter figures. Another forecast of subscriber losses could send the company’s stock spiraling.
According to StreetAccouont estimates, analysts expect around 1.8 million net subscriber adds in the third quarter, as Netflix’s slate of content increases and concerns about price increases ebb.
There is also the hotly anticipated ad-supported plan, which is in the works and could lure back lapsed customers or encourage new sign-ups with a lower price point. No date has been set for the roll-out of the option, but more information about its development Tuesday could improve investor confidence in the company.
