Week of August 5, 2024

Dec Mullarkey, CFA , Managing Director, Investment Strategy and Asset Allocation

Japan caught most of the headlines this week as its equity market corrected. When the Bank of Japan (BoJ) unexpectedly increased rates from near zero levels, the yen also abruptly appreciated as the sudden rate shift surprised markets.

Data from America’s Commodity Futures Trading Commission (CFTC) showed some investors had indeed been shorting the yen. Which is another way of saying that they were betting it was going to weaken or at least stay low for longer as interest rates were expected to remain on hold. The stronger yen also brought into question how profitable Japan’s domestic exporters could be.?

Japan’s equity market sold off and that volatility spread to other regions. Many global investors shed risk, and some who had borrowed in yen, to fund higher yielding opportunities elsewhere, rushed to sell assets and repay those loans as rates moved up.

Markets have since calmed as the BoJ’s deputy governor sought to assure investors that the bank was on hold for now and was aware of the volatility its surprise move had caused. Most central banks strive to communicate their moves well in advance. And as is evident in this episode of volatility, markets do not like any central bank surprises.

Source: Bloomberg, Financial Times, 2024.????????

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Kevin Quinlan, MBA , Senior Director, Climate & Client Strategy

Monday, July 22 was the hottest day ever recorded on Earth, and June was the hottest month on record – the 13th month in a row to set a temperature record.

Increases in average global temperatures are making extreme weather events, like heat waves, more intense and last longer. There are plenty of studies on the costs of hurricanes and floods. But what about extreme heat?

Following last summer’s record-breaking heat waves, the Federal Reserve Bank of Dallas looked at how extreme heat combined with the Federal Open Market Committee’s tightening cycle to affect the Texas economy.

The Dallas Fed found that from 2000–2022, a 1°F degree increase in the average summer temperature slows annual nominal GDP growth by 0.4%. Last summer was 2.5°F degrees hotter on average, meaning summer heat could have reduced annual nominal GDP growth by US$24 billion. A quarter of companies responding to a Dallas Fed survey reported lower revenue or lower production due to the heat. Impacts on job growth were subdued but varied widely across sectors.

The summer forecast from the National Oceanic and Atmospheric Administration projects August temperatures to be above average; other projections report an approximately 95% chance that 2024 will be the hottest year on record globally.?

Sources: New York Times, Associated Press, European Union Copernicus Climate Change Service (C3S), Federal Reserve Bank of Dallas, National Oceanic and Atmospheric Administration, 2024.

Randall Malcolm, CFA , Senior Managing Director and Portfolio Manager, Public Fixed Income

It seems like every time the economy sneezes, financial markets seem to think it’s in critical condition. Look no further than the July U.S. employment report, in which that economy actually generated a positive number of jobs and the unemployment rate moved all the way to 4.3% (still not far off record lows). Cue the market expectations – that rate relief needs to come very quickly and significantly.

The trend of the economy is indeed important, but the swing in sentiment was amplified by the lack of liquidity that is the norm in financial markets in the middle of summer. In contrast to the U.S. Federal Reserve, the Bank of Canada (BoC) has a relatively easier path to travel. With higher unemployment, lower inflation and lower growth in Canada than the U.S., the BoC has more scope to cut rates and has already cut rates twice.

We may see the BoC cut rates again in early September, two weeks ahead of the next Fed meeting, but markets will be keying in on the weak Canadian dollar to see how far the BoC can cut rates before the Fed also starts cutting.

Sources: Bloomberg, Bank of Canada, 2024.

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