Believer

To the tune of Believer by Imagine Dragons:

?First things first, inflation hit us hard and it felt like we were cursed. Prices soaring high, and our wallets feeling worse. Ooohh, our wallets feeling worse. Oooh!

?Second things second, the pandemic made us learn, how stimulus can burn. Injecting cash too freely, caused prices to churn. Oooh, prices to churn! Oooh!

?Pain, we felt it deep within our veins, rates went high, but now their shifting lanes. Finally, they’re easing the squeeze, it’s the time, it’s the sign for banks to bring us peace.?

?Hey! you made us a believer (believer!). Hey! the pressure’s off, the cost of debt is getting cheaper (cheaper!).

Third things third, inflation’s coming down, the Fed’s now leaning towards ease. Balancing the risk of weakness, they’re aiming to appease.? Oooh, their aiming to appease. Oooh!

Strain, the Fed’s been worried, risks are on the rise. Rates are high, but a cut might save us from demise.? Finally, they’re weighing every move to make. It’s the shift, it’s the call. Hoping to dodge the downturn quake.?

Hey! with rates coming down, we’re hoping to avoid the economy getting weaker (weaker!). Hey! Hopefully they start cutting now, to stop the slide, you’ve made a believer (believer!).???

Last things last, the market’s poised to react with a hopeful cheer. As rates ease, investors might find new frontiers. Optimism grows, though caution still persists.? The future’s on the rise, with investment opportunities to enlist. Oooh! Believer!

Economic data

This week US markets were focused on the Jackson Hole US Federal Reserve (Fed) Symposium, which included a dovish speech from Chairman Powell. We also saw the leading economic index for July, which came in softer than expected at a 0.6% drop. This was likely partially attributed to several weaker data points including the average work week, ISM new orders and building permits. Additionally, the BLS published its annual payroll revisions for the period of April 2023 to March 2024, which showed payrolls were overestimated by 818,000. This represents the largest revision since 2009. Although job creation remained strong over this period, it brings the average monthly number of jobs created from 242,000 to 174,000. The reason for the revisions appears to be issues with the BLS accounting for bankruptcies, which soared by more than 50% Year-over-Year (Y/Y) to a 10-year high. At the same time, new business formations fell by 11.5% Y/Y, representing the lowest level in 2 years. Overall, these revisions reinforce conviction that the labour market is cooling, further supporting the Fed’s likeliness to cut policy rates in the coming months.?

In Canada this week two key pieces of data stood out. The first is the Consumer Price Index (CPI), which came in line with expectations at 2.5% Y/Y and core levels came in modestly softer than expected. Excluding mortgage interest costs, CPI stood at 1.8% Y/Y, providing further support for the Bank of Canada (BoC) to cut the overnight rate for the third time at the next meeting on September 4, 2024. The second reason is retail sales for June, which matched expectations at -0.3% and showed that real second quarter volumes were down 1% on an annualized basis. Overall, the decline in sales for the quarter shows that consumers continue to struggle as the labour market weakens.

Stock market reaction

If you take away one lesson from the stunning market reversal over the last three weeks, it’s the foolishness of market timing. Following the CBOE Volatility Index (VIX) hitting its high for the year on August 5, 2024 and a bout of panic selling, the S&P500 began a 9% march higher—including eight consecutive days of positive returns. Overall, equities delivered a rather lackluster weekly return, but the week was filled with many market moving storylines.

The fireworks began with “Merger Monday” and Alimentation Couche Tarde’s announced interest in Japanese company Seven & i Holdings, the owner of the 7-Eleven convenience store chain. While it would be fantastic to see a Canadian company emerge as a global champion in a specific vertical like convenience stores, the hurdles from regulators and the Japanese company may be too great to overcome. TD Bank kicked off third quarter bank reporting with decent results. However, it was completely overshadowed by the US$2.6 billion reserve charge over anti-money laundering lapses in the US as well as a similar dollar amount partial sale of its ownership in Charles Schwab. The reserve, now totaling US$3 billion is expected to cover the majority of financial charges, but it’s unclear what non-monetary penalties remain. Next week, market liquidity should slow down ahead of the final summer long weekend.

What to watch in markets next week

Next week in the US, we’ll see durable good orders, consumer confidence data, retail sales, wholesale inventories, PCE and the first revision to Q2 GDP. In Canada, we’ll see the CFIB Business Barometer, SEPH payroll data for June and Q2 GDP. The remaining five Canadian banks will also report third quarter earnings.

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Authors: Adam Ditkofsky, Pablo Martinez, Sandor Polgar, Steven Lampert, Craig Jerusalim, Rahul Bhambhani and Diana Li

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