Global markets traded slightly higher this week, with the volatility seen in recent weeks virtually non-existent. The VIX Index, a popular measure of equity volatility, dropped from 22 to 17.80 this week, very close to it’s pandemic low. Equity markets are getting back into "half full" mode, shaking off the “taper tantrum” of the past week. The announcement of the $1 trillion infrastructure plan is no doubt helping markets refocus. There are few that would quibble with a US infrastructure plan, particularly those focused on the economy and the sad state of infrastructure.
The tug-of-war between growth and value has shifted back in favour of growth after several months in which value stocks had outperformed. Growth stocks tend to outperform value stocks in lower U.S. GDP growth environments, which have prevailed for the better part of the last decade, whereas value tends to outperform when U.S. growth exceeds ~2.5%. Of course, while these general forces are true, the stock market will often zig when one expects it to zag, and despite what looks to be strong GDP growth into next year, growth has re-exerted its leadership.
Data from across the global economy continued to beat expectations handily as business surveys in South Korea, Italy, and the UK beat estimates dramatically. Japanese inflation perked up in June per Tokyo CPI. UK retail activity came in stronger than expected, while German consumer confidence also came in stronger than expected. Even Italy, which has long been a major underperformer within the Eurozone, is reporting parabolic economic confidence. In China, the explosion in global demand for manufactured goods over the course of the pandemic has led to a record goods trade surplus. The overall current account is not at a record size in nominal dollar terms, but remains very large.
US daily cases were not really showing much improvement over the past few days when looking at the 7 day change in cases. This is hardly the upturn in cases seen in UK, but this is a slowing in the "rate of improvement". 16 of 50 states are showing a rise in cases vs 7 days ago. This can be a noisy trend because states can have "true-ups" and other adjustments when they clean up their data, but the fact that some states are seeing a pronounced rise in cases bears watching. States with rising virus cases per capita have generally lower vaccine penetration, often less than 40%, the exceptions are Washington and Delaware that have rising cases and higher than US average vaccine penetration.
Canada had another great week with the 7 day average of cases dropping from 1078 to below 700. Vaccination rates also progressed with second doses now making up the majority of daily jabs. Most provinces are now well on their way to reopening with the notable exception of Ontario. Canada’s largest province continues to have public health restrictions that are near as stringent as most provinces tightest lockdowns during the pandemic, and their reopening plan doesn’t even acknowledge a point where restrictions may cease to exist.
Markets and Inflation:
Canadian equities rose 1.2% this week with the TSX recovering after last week's pullback snapped a streak of four weekly gains. Energy was the best performer as crude prices continued their push higher. Oil rose 3.2% as WTI posted its fifth consecutive week of gains (the longest streak since Nov-Dec 2020) and its eighth time higher in the past nine weeks. While the market continued to evaluate rising global demand, ongoing US-Iran talks, and lower US inventories, by the end of the week focus shifted ahead to next week's OPEC+ meeting.
We have seen a fairly sharp reversal in many “real-time” inflation indicators over the past couple weeks. While we might spend more time in the coming weeks on inflation and whether we are in a new paradigm or not as it relates to inflation, we will focus today on the performance of a few commodities over recent sessions and what it might say about inflation.
Anyone who has tried to buy lumber over the past few months is probably aware that prices had gone haywire. Lumber prices had rocketed higher, because of a supply/demand imbalance and some speculation, prices by May of this year were up more than six-fold. Since then, prices have dropped ~55% on no real news other than that prices got way too high relative to fundamentals.
There is an old expression that copper has a PHD in economics. This comes from the idea that copper is so central to so many things in the economy – infrastructure, housing, technology, etc. – that rising prices usually correspond to a strengthening economy, while falling prices say the opposite. Now, this is not necessarily always true (price changes can have other drivers), but it holds most times. Prices of copper roughly doubled year-over-year, but over the past few weeks have come off approximately 10%. While we don’t think this says much about the economy, it has important inflation implications and does not fit the narrative that higher inflation is here to stay.
We wrap up this week with another link to an RBC online safety article:
Andy, Sacha and Mike
What we were reading this week: