Author: Consultant

Before the Bell: What every Canadian investor needs to know today

Equities

Wall Street futures fell early Wednesday after the previous session’s bounce as traders await fresh comments from Federal Reserve chair Jerome Powell. Major European markets were down, giving up gains from the previous day. TSX futures were also weaker.

In the early premarket period, futures linked to all three main U.S. indexes were underwater, with Nasdaq futures off by roughly 2 per cent. On Tuesday, the Nasdaq ended up 2.51 per cent while the S&P 500 added 2.45 per cent and the Dow gained more than 600 points. The S&P/TSX Composite Index finished up 0.38 per cent extending the rebound from Friday’s rout on gains in energy shares.

On Wednesday, markets will have a close eye on an appearance by Mr. Powell on Capitol Hill, looking for indications of how aggressive the Fed will be in hiking rates as it looks to temper high inflation.

“Jerome Powell’s semiannual testimony could turn the market mood sour again as the Fed chief is expected to reiterate his strong commitment to fighting inflation even if it means slower economy and a softer jobs market,” Swissquote senior analyst Ipek Ozkardeskaya said in an early note.

“Yesterday’s rally in stocks could be another dead cat bounce, and we may see the market painted in red in the following sessions,” she said.

In this country, inflation is front and centre with the release of the May consumer price index figures from Statistics Canada ahead of the start of trading.

In April, the annual rate of inflation hit a decades high of 6.8 per cent and economists are expecting to see a further spike in this morning’s report. Forecasts suggest the annual rate could touch 7.4 per cent in May. Economists are increasingly expecting the Bank of Canada to hike rates at its next policy meeting by 75 basis points following a similar move recently by the Fed.

“Our economists expect Canadian CPI to have jumped yet again, to 7.4 per cent from 6.8 per cent in April, driven mainly by surging prices at the pump and grocery bills,” RBC chief currency strategist Adam Cole said.

“Pressure on energy and food prices in particular will persist. But prices are rising across the board. Almost 60 per cent of the CPI basket is growing faster than the top end of the Bank of Canada’s 1-per-cent to 3-per-cent target range.”

Inflationary pressures along with the Fed’s latest outsized move on rates raise the odds that the Bank of Canada will follow suit in July, he said.

“The pace and magnitude of future rate hikes still depends heavily on inflation going forward,” Mr. Cole said. “And roughly half of Canada’s current headline rate is driven by global rather than domestic cost pressures.”

On the corporate side, Canadian investors will get results early Wednesday from Sobeys-parent Empire Co. Ltd.

Overseas, the pan-European STOXX 600 fell 1.67 per cent morning trading. Britain’s FTSE 100 was down 1.31 per cent. Germany’s DAX and France’s CAC 40 were off 2.27 per cent and 1.78 per cent, respectively.

In Asia, Japan’s Nikkei finished down 0.37 per cent. Hong Kong’s Hang Seng dropped 2.56 per cent on weakness in tech stocks.

TSX 60 FUTURES

1,149.70-13.00 (-1.12%)

DOW FUTURES

30,173.00-352.00 (-1.15%)

S&P 500 FUTURES

3,716.75-51.00 (-1.35%)

PAST DAY

-1.12%-1.15%-1.35%4:28 A.M., JUNE 22

CLOSE, JUNE 21

5:26 A.M., JUNE 22

SOURCE: BARCHART

Commodities

Crude prices fell in early going with an expected move by U.S. President Joe Biden to ease costs for drivers tempering sentiment.

The day range on Brent is US$108.62 to US$114.45. The range on West Texas Intermediate is US$103.20 to US$109.76. Both benchmarks were down more than 4 per cent in the predawn period.

“There is a distinct lack of drivers behind this move, and certainly no headlines to justify it,” OANDA senior analyst Jeffrey Halley said.

“I surmise that President Biden’s expected announcement of a temporary suspension of Federal fuel taxes [on Wednesday] has prompted the selling, and I do note the U.S.-centric WTI contract is leading the charge lower.”

Later in the day, Mr. Biden is expected to call for a temporary suspension of the U.S. federal tax on gasoline, according to a report by Reuters. The move is aimed at addressing high costs for consumers and soaring inflationary pressures.

Later Wednesday, traders will also got the first of two weekly U.S. inventory reports, with new figures from the American Petroleum Institute. More official government figures will follow on Thursday morning.

In other commodities, gold prices slid alongside a firmer U.S. dollar.

Spot gold fell 0.3 per cent to US$1,826.41 per ounce by early Wednesday morning, extending losses to a fourth straight session. U.S. gold futures dropped 0.6 per cent to US$1,827.40.

“Although gold’s interminable range-trading continued overnight, the falls of the past three sessions hint that any upward momentum for the yellow metal is doing an Elvis and is leaving the building,” Mr. Halley said.

“Gold has been grinding lower, even as U.S. yields and the U.S. dollar trade sideways,” Mr. Halley said.

SPOT GOLD

US$1,831.30-8.50 (-0.46%)

HIGH GRADE COPPER

US$3.90-0.14 (-3.55%)

WTI

US$104.04-5.42 (-4.95%)

PAST DAY

-0.41%-3.32%-5.00%

CLOSE, JUNE 21

5:05 A.M., JUNE 22

SOURCE: BARCHART

Currencies

The Canadian dollar was weaker, hit by uncertain risk sentiment and lower commodities prices, while its U.S. counterpart advanced against a basket of world currencies.

The day range on the loonie is 76.94 US cents to 77.43 US cents.

Canadian investors will get inflation figures ahead of the start of trading with economists expecting to see another spike in price pressures.

On world markets, the U.S. dollar index, which weighs the greenback against a group of currencies, was up 0.33 per cent at 104.8, according to figures from Reuters.

The euro fell 0.4 per cent to US$1.0497.

The yen slid 0.3 per cent to 136.3 per U.S. dollar, having hit 136.71 in early trade, its lowest since October 1998, Reuters reports.

Other commodities-linked currencies were also lower. The Norwegian krone fell 1.3 per cent against the U.S. dollar. The Australian dollar slid 1.1 per cent to US$0.6898 by early Wednesday.

In bonds, the yield on the U.S. 10-year note was lower at 3.222 per cent.

CANADIAN DOLLAR/U.S. DOLLAR

US$0.7708-0.0032 (-0.4122%)

PAST DAY

PREV. CLOSE

0:00 A.M., JUNE 22

US$0.7711

5:05 A.M., JUNE 22

US$0.7708

SOURCE: BARCHART

More company news

Boeing expects supply chain problems to persist almost until the end of 2023, led by labour shortages at mid-tier and smaller suppliers, partly due to the faster-than-expected return of demand, its chief executive said on Wednesday. Boeing said last month that production of its 737 aircraft had been slowed by shortages of a single type of wiring connector, while some of its airline customers had been forced to cancel flights due to a lack of staff in the post-pandemic recovery. “The shift from demand to now supply issues … is remarkable, the speed with which it happened,” Boeing Chief Executive David Calhoun said at Bloomberg’s Qatar Economic Forum in Doha.

Economic news

(8:30 a.m. ET) Canada’s CPI for May.

(9:30 a.m. ET) U.S. Fed Chair Jerome Powell testifies to the Senate Banking Committee.

With Reuters and The Canadian Press

PUBLISHED TUE, JUN 21 20226:07 PM EDTUPDATED 23 MIN AGO

U.S. stock index futures fell early Wednesday after the major averages jumped in regular trading hours, attempting to claw back some losses following weeks of selling.

Futures contracts tied to the Dow Jones Industrial Average fell 420 points or 1.4%, while S&P 500 futures declined 1.6%. Nasdaq 100 futures fell 1.8%.

The Dow on Tuesday surged 641 points, or 2.15%. The S&P 500 added 2.45%, turning in its best day since May 4. The jump comes after the benchmark index slumped 5.79% last week in its worst weekly performance since March 2020.

The Nasdaq Composite advanced 2.51% on Tuesday, following its tenth week of losses in the last 11 weeks.

Growing fears that the economy will tip into a recession have recently weighed on stocks. The Federal Reserve last week hiked interest rates by three-quarters of a percentage point, the central bank’s largest rate increase since 1994.

The move came as the Fed tries to cool inflation, which has surged to a 40-year high.

“We don’t see a U.S. or global recession in ’22 or ’23 in our base case, but it’s clear that the risks of a hard landing are rising,” UBS said Tuesday in a note to clients.

“Even if the economy does slip into a recession, however, it should be a shallow one given the strength of consumer and bank balance sheets,” the firm added.

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Goldman Sachs, meantime, believes a recession is becoming increasingly likely for the U.S. economy, saying that the risks of a recession are “higher and more front-loaded.”

“The main reasons are that our baseline growth path is now lower and that we are increasingly concerned that the Fed will feel compelled to respond forcefully to high headline inflation and consumer inflation expectations if energy prices rise further, even if activity slows sharply,” the firm said in a note to clients.

Tuesday’s rally begs the question of whether the action is short-term relief after weeks of selling, or a meaningful change in sentiment. Tuesday’s strength was broad-based. All 11 S&P sectors registered gains on the day, with energy leading the way, climbing 5.8%.

“Our expectations are that market volatility will likely persist near term until the actions taken by the Federal Reserve thus far … and the actions it takes going forward have had time to work through the system,” Oppenheimer said Tuesday in a note to clients.

Fed Chair Jerome Powell will appear before Congress on Wednesday, kicking off two days of testimony. On the earnings front, KB Home will post results after the market closes on Wednesday.

Retirement accounts lose trillions in stock rut

https://www.foxbusiness.com/markets/retirement-accounts-lose-trillions-stock-rut

UK inflation hits new 40-year high of 9.1% as food and energy price surge persists

• The 9.1% rise in the consumer price index was in line with expectations from economists in a Reuters poll and slightly higher than the 9% increase recorded in April.
• Consumer prices rose by 0.7% month-on-month in May, slightly above expectations for a 0.6% rise but well short of the 2.5% monthly increase in April, indicating that inflation is slowing somewhat.

https://www.cnbc.com/2022/06/22/uk-inflation-hits-new-40-year-high-of-9point1percent-as-food-and-energy-price-surge-persists.html

Oil prices climb $2 on strong demand, tight supply (June 21)

Oil prices rose almost $2 on Tuesday on high summer fuel demand while supplies remain tight because of sanctions on Russian oil after its invasion of Ukraine.

Brent crude rose $1.80, or 1.6%, to $115.93 a barrel.

The U.S. West Texas Intermediate (WTI) crude contract for July, which expires later on Tuesday, rose $2.26, or 2.1%, to $111.82. The more active WTI contract for August was up $2.37 at $110.36.

UBS analyst Giovanni Staunovo said that despite concerns over economic growth, latest data on flight activity and mobility on U.S. roads continues to show solid oil demand.

“We expect oil demand to improve further, benefiting from the reopening of China, summer travel in the northern hemisphere and the weather getting warmer in the Middle East. With supply growth lagging demand growth over the coming months, we continue to expect higher oil prices,” he said.

Prices have been supported by supply anxiety after sanctions on oil shipments from Russia, the world’s second-largest oil exporter, and questions over how Russian output might fall due to sanctions on equipment needed for production.

European Union leaders aim to maintain pressure on Russia at their summit this week by committing to further work on sanctions, a draft document showed.

“Supply concerns are unlikely to subside unless there is a resolution to the Russia-Ukraine war, or unless we see a sharp rise in supply from either the U.S. or OPEC,” said Madhavi Mehta, commodity research analyst at Kotak Securities.

Prospects are receding for successful negotiation of a nuclear deal with Iran and a lifting of U.S. sanctions on the Iranian energy sector.

Iran is escalating its uranium enrichment further by preparing to use advanced centrifuges at its underground Fordow site, a United Nations nuclear watchdog report seen by Reuters showed.

“Iran’s measures, if correct, likely mean we won’t be seeing a return of Iranian crude to greater world markets any time soon,” said OANDA analyst Jeffrey Halley.

Weekly U.S. petroleum inventory data will be delayed by a day this week because of a U.S. public holiday on Monday, with the American Petroleum Institute industry data for the week ending June 17 due on Wednesday and U.S. Energy Information Administration data scheduled for Thursday.

‘Perfect storm’ for airlines facing strong U.S. dollar and high oil prices

Global airlines are grappling with a double whammy from the rare combination of a strong U.S. dollar and high oil prices at a time when broad inflationary pressures and worker shortages are also placing pressure on the pandemic-hit industry’s recovery.

The oil price and the U.S. dollar typically have an inverse relationship so that when one is high, the other is low, helping to even out the financial impact on airlines that operate in other currencies.

That correlation, however, has broken down in recent months with the war in Ukraine causing a spike in oil prices at a time when the United States is a net oil exporter and the U.S. dollar receiving a boost from interest rate rises designed to temper inflation.

Airlines gathering at the International Air Transport Association annual meeting in Doha this week expressed concern about the oil price and U.S. dollar rising in tandem.

“For airlines, it is not good at all. It is the perfect storm,” Tony Webber, a former chief economist at Australia’s Qantas Airways.

The U.S. trade-weighted real exchange rate index, established in 2006, is at a record high and the benchmark Brent oil price is around $115 a barrel.

Non-U.S. airlines have dollar exposure in the form of oil prices, aircraft purchase and leasing charges, maintenance costs and sometimes debt, all of which become higher in their local currency when the dollar is stronger.

“It’s painful, buying fuel, buying everything,” Korean Air Lines Co Ltd Chief Executive Walter Cho said of the strong U.S. dollar, trading at the highest level against the won in more than a decade.

“We have a lot of U.S. dollar debt and we have to pay interest on that. Interest is low but at this exchange rate it might as well be 10%,” he said on the sidelines of an airline industry gathering in Doha.

For most non-U.S. airlines, the hit from rising costs far exceeds the benefit from ticket sales to U.S.-based customers converting to more local currency.

Indian low-cost carrier SpiceJet last week warned it would need to push up fares by 10% to 15% due to an increase in fuel prices and rupee depreciation.

Malaysia Airlines Chief Executive Izham Ismail said fuel had typically accounted for 20% of its costs, but that had risen to 45% due in part to the weak ringgit.

U.S. airlines are mostly unhedged and want a low oil price but prefer a weaker dollar because they benefit from a higher conversion rate when they sell tickets in euros and other currencies to foreign customers, Webber said.

Hawaiian Airlines Chief Executive Peter Ingram said the airline was watching the yen, trading at 20-year-lows, as it ramped up flights to Japan, traditionally the biggest foreign tourism market for Hawaii.

“It’s not the binding constraint on demand at this point, but it is something that we’re certainly mindful of since the vast majority of the traffic on our flights, plus or minus 90% is Japanese originating traffic,” he said of the yen. “And so the cost of travelling to the United States is going to be inflated by the exchange rate.”

Airline failures have historically risen at times when an index that combines the oil price and U.S. dollar strength has been high, according to data from aviation consultancy IBA.

IBA Chief Economist Stuart Hatcher said in a webinar last month that strong pent-up demand means there have been few failures this year, but the situation could change once the peak summer season is over.

Chinese manufacturing orders decline by 20-30%, according to shippers, as consumers pull back on buying goods

• Chinese manufacturing orders are down by as much as 30% for some logistics companies as consumers shift spending to services.
• A DHL executive described it as a tipping point for the “ship at any cost” economy that has recently dominated in the U.S. amid high consumer demand.
• Vessel volumes continue to grow at U.S. East Coast and Gulf Coast ports including Savannah and Houston, according to the CNBC Supply Chain Heat Map, as labor talks on the West Coast threaten to cause more supply chain issues.

https://www.cnbc.com/2022/06/21/chinese-manufacturing-orders-drop-as-consumers-pull-back-on-goods.html

‘The situation is serious’: Germany plans to fire up coal plants as Russia throttles gas supplies

• Economy Minister Robert Habeck on Sunday warned that the situation is going to be “really tight in winter” without precautionary measures to prevent a supply shortage.
• In light of that, Germany will seek to compensate for a cut in Russian gas supplies by increasing the burning of coal.
• Coal is the most carbon-intensive fossil fuel in terms of emissions and therefore the most important target for replacement in the transition to renewable alternatives.

https://www.cnbc.com/2022/06/20/ukraine-war-germany-turns-to-coal-as-russia-throttles-gas-supplies.html

Blown off course again, Fed policymakers see near-record uncertainty

Federal Reserve policymakers are less confident than at any time since the height of the pandemic about what will happen with the economy, data published alongside their forecasts and the Fed’s hefty three-quarters-of-a-point rate hike this week show.

The last time they were this worried they could be underestimating the coming deterioration in the labor market was in the depths of the Great Recession. But they are even more worried they are overestimating a hoped-for decline in inflation, documents charting confidence and risks seen in their forecasts show.

The data helps underscore why policymakers are so focused on raising interest rates fast even if doing so causes a bigger dent to growth and unemployment than previously hoped, and why it is clarity on the inflation outlook that will drive policy.

“It is clear that path of inflation continues to be the key consideration in how quickly the Fed gets to, and how far it moves past, the range of neutral in order to bring inflation down ‘clearly and convincingly,’” wrote Morgan Stanley economists, referring to the standard Fed Chair Jerome Powell has set for declaring victory on price pressures and slowing up on rate hikes.

All 18 Fed policymakers are more-than-usually uncertain about their inflation and economic growth forecasts, and all but one note the same about their unemployment rate projections, the data shows. The same documents also show that no policymaker believes their forecasts are too pessimistic, and most believe they could be underestimating the risks.

Graphic: Fed uncertainty on the rise- https://graphics.reuters.com/USA-FED/zdpxoedzjvx/chart.png

That means that though Fed forecasts embody the “softish” landing to which they aspire – inflation dropping to 2.2% by 2024, with the economy motoring along at 1.9% and unemployment rising just half a point to 4.1% – they are worried things could be worse, particularly for inflation.

It also means, as with this week’s last-minute decision to deliver a hefty 75 basis point move after worse-than-expected inflation readings, that what Powell calls this “extraordinarily challenging and uncertain time” is sure to leave investors hanging.

RAPID PACE OF RATE INCREASES

Unquestionably, interest rates will rise, and rise fast: 17 of the 18 Fed policymakers see the target rate at least at 3.6% by next year, two full percentage points higher than today, and five see it above 4%.

But is that where they will end up? Not even Fed Chair Powell knows. “I think we’ll know when we get there,” Powell told reporters Wednesday.

“With the FOMC looking to remain nimble amid heightened uncertainty, guidance set out by communications should not be regarded as written in stone,” Barclays economists said in a note to clients following the this week’s Federal Open Market Committee meeting.

It’s a warning that investors may need to keep in mind as Powell’s colleagues start Friday to make their first public statements after this week’s policy meeting, and when Powell gives testimony next week before lawmakers on Capitol Hill.