Wake me up in September

This week welcomed more optimistic data out of the US. Producer price index (PPI) data continued to cool for the month of July, with headline? advancing 0.1% Month-over-Month (M/M) vs. the expected 0.2%.Core printing was flat M/M vs. the 0.2% expectation. The softer July data appears to be driven by final demand trade services—which is down 1.3% M/M compared to the 1.9% growth seen in June. Similarly in July, consumer price index (CPI) data continued the trend of cooling. Headline CPI for July printed at 2.9% Year-over-Year (Y/Y) vs. the 3% expectation.

The core inflation rate excluding volatile food and energy items printed at 3.2%—the lowest level in three years. This decline was largely driven by used car prices (-2.3%) and new car prices (-0.2%). With CPI stabilizing below 3% for the first time since early 2021, all eyes will be on potential rate cuts. The debate for the US Federal Reserve’s (Fed) September meeting will center on how much to cut rates as opposed to debating whether to cut at all. The market is waiting to see if the Fed will cut rates by 25 basis points (bps) or go for a larger 50 bps cut.

Finally, the last highlight of the week is retail sales for June. Total sales showed a robust 1.0% increase M/M vs. the expected 0.4%. This was likely driven by Amazon Prime day sale which happened in July. While the June data was revised down, slightly weakening the impact, last month's ex-auto sales were actually slightly revised up. Meanwhile, the number of initial jobless claims also came in lower than expected, at 227,000—slightly below the print from the previous week at 235,000.

Overall, investors are encouraged by the upbeat data this week as it confirms the state of the US economy remains strong. Current evidence suggests? concerns of an imminent recession are misplaced. The presence of cooling inflation and the absence of signs of a collapse in demand support more likelihood of a 25 bps rate cut by the Fed in September.

Canada economic data

Canada had a relatively quieter data calendar this week. Wholesale sales excluding petroleum decreased by 0.6% M/M in June, in line with expectations. Sales declined in five of the seven subsectors, with the largest decline coming from the motor vehicle sector. Similarly, manufacturing sales decreased by 2.1% in June, with declines in 17 of 21 subsectors. This was led by the transportation equipment (-2.9%), chemical product (-5.8%) and primary metal (-2.7%) subsectors.

This ongoing softness in data reveals weaknesses in the Canadian economy as the lagged impact of high interest rates and excess labour supply continue to materialize. This provides grounds for the Bank of Canada to continue cutting interest rates. Currently, the? market is pricing in three more 25 bps cuts for the next three meetings in 2024 and one more cut in the first quarter of 2025. It’s reasonable to expect that growth will continue to soften in the quarters ahead, but a fuller rebound should come closer in 2025 once more cuts are made.

Bond market reaction

The general theme this week was the continued unwind of stretched positions that sparked from US recession fears and exacerbated by thin trading activity. Because US inflation continued to decline, bond market investors have increased their pricing on the Fed cutting interest rates by 25 bps in September. Currently, the market is pricing the Fed to cut interest rates by 32 bps, down from the last week’s pricing of 45 bps. Also, credit spreads continued to tighten this week, reflecting strong investor demand for risk.

There’s substantial oversubscription of recent deals, demonstrating the market’s robust appetite for new issuance. The market is in a phase of transitioning away from pricing in the prospects for US exceptionalism in favor of a more subdued economic outlook. This is characterized by more benign inflation, a balanced labour market and sustained growth. Should the Fed deliver its first cut in September and restore more confidence in growth, it’s reasonable to expect the fiscal deficit narrative to return, particularly into the US election in November. In the near term, markets will likely continue unwinding the hard landing view Pricing of excessive rate cuts will have more to correct, but moves are likely to be volatile depending on evolving data. The Fed’s preferred inflation gauge, the Personal Consumption Expenditures Price Index (PCE), is coming out at the end of the month.

Stock market reaction

Investors who took a two-week vacation would probably not notice anything different when checking their investment accounts. Yet, we witnessed a fair amount of market volatility over this time period. Markets like Japan which led the correction earlier in August, are almost back to pre-correction levels whereas the S&P500 recovered all losses. A kind reminder for investors to think long-term and take advantage of volatility to buy high-quality companies at lower prices.

The US is mostly done with quarterly reporting and marked yet another healthy earnings season in aggregate. On the company front, management changes in the world of quick-service restaurants took investors by surprise after Brian Niccol, CEO of Chipotle, decided to leave the company to take the helm at Starbucks. Over the past year, Starbucks lacked strategic focus and disappointed with results—so the change was welcomed by investors. In fact, the change resulted in a 20% rise in Starbucks’s stock price on the announcement. It remains to be seen what changes new management can bring to the company.

What to watch in markets next week

Next week, the market will focus on the Jackson Hole global central bankers meeting on August 22. This is when Fed Chairman Powell will give his views on monetary policy. For Canada, we’ll receive the latest reading of CPI for the month of July and retail sales for the month of June.

CIBC Asset Management is committed to providing market insights and research to help you find the right investment solutions. If you'd like to discuss this market and economic update in more detail or have questions about your investments, please get in touch with your advisor or CIBC representative anytime.

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

?The views expressed in this document are the views of CIBC Asset Management Inc. and are subject to change at any time. CIBC Asset Management Inc. does not undertake any obligation or responsibility to update such opinions. Certain information that we have provided to you may constitute “forward-looking” statements. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or achievements to be materially different than the results, performance or achievements expressed or implied in the forward-looking statements.

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