The earnings season has been good enough to propel markets higher of late, but it has also highlighted how real the shortages are with respect to materials and labour. We discuss this further in our economic update below.
We've also included two other economic update resources in this week’s blog post. An online article on the interest rate forecast in the U.S., Could inflation force the Fed to raise interest rates sooner?, and a podcast that looks at the earnings report for the financial sector on both sides of the boarder, The Download: The tale of two financial sectors. Your links to both are below.
In addition to our economic updates, we are also excited to share a link to the Art Toronto Virtual Experience. This virtual exhibit is running from October 28 – November 7. We’re also sharing the final video in the At home with RBC series. This week we’re taking you inside your kitchen to teach you how to make a specialty sushi roll. Enjoy!
And if you’re looking to add something to your playlist, we’ve included the link to a recent podcast that shares the stories of three companies redefining resilience in 2021, From Recovery to Resilience: Stories from Three Canadian Business Leaders.
As always, we end our weekly blog post with a few good news stories from in and around our community, including a few fun Halloween articles!
Your economic update
Global equity markets have staged a bit of a comeback in recent weeks, with a few having made new highs. Some of the concerns that troubled investors a month ago: Chinese property sector, fading global economic momentum, sharply rising bond yields, and inflation, continue to linger, but they have largely taken a back seat to the third quarter earnings being reported by hundreds of companies around the world. We discuss key takeaways from the results, and address the logistical bottlenecks and shortages of materials and labour that are plaguing many companies these days.
Third quarter earnings results
Corporate earnings have been on the rise ever since economies began to reopen over a year ago. Since then, research analysts that track companies very closely have largely been raising their quarterly earnings estimates for most stocks, driven by broadening economic momentum. That trend started to change a few months ago with the pace of upward revisions to earnings estimates slowing markedly. In other words, expectations heading into this quarter’s earnings season were relatively low.
Nearly half of the earnings season is now complete and results reported thus far have been good enough and have served to reassure investors. More specifically, many companies have indicated that demand has been strong and that backlogs (indicative of future sales) are also healthy. However, many companies made it abundantly clear that the availability of materials and the logistical infrastructure required to move supplies and product is facing significant strain. Moreover, many of them are finding it increasingly more difficult to attract and retain workers.
Supply chain issues
Some management teams have suggested that the supply chain situation may deteriorate in the near-term, and that the deterioration may persist through the first half of the year. These teams are hard at work finding ways to manage their situations by sourcing materials and components from new suppliers, offsetting cost increases with price increases of their own, and, in some cases, going as far as reengineering their products. These measures have helped many companies protect their profit margins this past quarter, despite the challenges.
At the very least, some of these supply issues should get resolved over time. Factories forced to shut down are still in the process of reopening. Meanwhile, capital expenditures are ramping up in areas like the semiconductor industry, which should eventually alleviate the stress on chip supply. Also, transportation bottlenecks may eventually improve as the trucking, rail, aviation, and shipping industries are working on a host of measures to hopefully ease the high levels of congestion at ports and railyards. It will undoubtedly take time, but these supply chain issues are not insurmountable.
Labour shortage conundrum
The labour shortage is another conundrum. In essence, the pool of available workers in various regions seems to have shrunk and this has led to a high number of job postings that have yet to be filled. For example, in the U.S. there are just over 10 million job openings currently, well above the 7 million seen just a few years ago. It’s a similar issue in Canada, and it’s not clear how easy it will be to rectify the situation.
The pandemic likely caused some people to leave the work force for a variety of reasons, whether it was early retirement, child care, concern for personal safety, or simply because the government assistance they received provided little incentive to look for work. Low immigration levels are also somewhat responsible for the elevated level of job vacancies. Some of this may reverse over time as life increasingly returns to normal, but there is some risk that a labour shortage could result in sustained wage pressure as the market for workers becomes increasingly competitive. This would add to the inflation narrative that already exists in the marketplace today and present a potential headwind to company profit margins.
Overall, the third quarter earnings reports have been met with a sigh of relief from most investors. However, the earnings reports have also confirmed that the well documented supply-related pressures are meaningful and are likely to persist to varying degrees next year. This is something we will continue to watch closely given the implications for central bank policy and corporate earnings, both of which underpin our positive bias towards equities.
Could inflation force the Fed to raise interest rates sooner?
Read the article online: Could inflation force the Fed to raise interest rates sooner? |
Though the Federal Reserve has yet to formally announce its plans for curtailing monthly asset purchases, an announcement we expect at its November 3 meeting, the market is already looking beyond the tapering process to what the next rate hike cycle might look like—and, more importantly, when it might start.
The Download: The tale of two financial sectors
Many U.S. banks are reporting impressive earnings in the third quarter. How will Canadian banks compare? This episode, Stu Kedwell, Co-Head of North American Equities at RBC Global Asset Management, looks at what is driving U.S. banks’ performance and what it tells us about Canada’s financial sector. Stu also discusses what a proposed raise in taxes for Canada’s big banks could mean for markets.
Listen to the podcast online: The tale of two financial sectors
You’re invited to Art Toronto’s Virtual Experience!
You are invited to Art Toronto’s complimentary virtual experience, open from October 28 – November 7. The augmented reality exhibitions and show rooms will feature artwork from local and international artists. View the exhibit online: Art Toronto's Virtual Experience |
The importance of art and culture is unquestionable. Art has the ability to shape both how we see ourselves, and how we engage with others. We have this opportunity to further our understanding of how we see the world. And we can ask ourselves – what might the person next to me see, and what were the artists’ perspectives when these works were being made?
From Recovery to Resilience: Stories from Three Canadian Business Leaders
Over the last year and a half, stories of resiliency have emerged all around us. Entire industries were transformed overnight…for better or for worse. Absence of in-person interactions, supply chain disruptions, and changing consumer behaviour were just a few “make or break” challenges faced by many in this country and beyond. But when we think about the organizations most affected by the pandemic, resilience describes not only the way many “bounced back,” but the ability to push forward and see what’s next.
Listen to the profile of three resilient Canadian business leaders from very different industries on a special compilation episode of the Disruptors podcast: From Recovery to Resilience: Stories from Three Canadian Business Leaders
At home with RBCThis is the final week that we’ll be sharing the At home with RBC series videos in our weekly update. We hope that you’ve enjoyed the videos and learned a few things along the way. Making a specialty sushi roll
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Community Corner
Each week, we like to share a few good news stories from in and around the community. We hope that they brighten your day!
- Guelph TikTok creator dispels myths about dwarfism
- Hooves for Hospice raises $9,500 for Hospice Wellington
- 124 banners honour veterans in Downtown Guelph
- First live performance in 585 days rocks the Fergus Grand Theatre
- Guelph resident opens her driveway to help battle food insecurity
And just in time for Halloween…
- Centre Wellington residents get in the Halloween spirit with the scarecrow challenge (14 photos)
- Salem man bringing the haunt to Halloween
- Giant spiders weave massive webs in Exhibition Park for Halloween (15 photos)
- Spooky outdoor Halloween exhibit happening now in Milton
- How to carve a pumpkin that will look incredible the entire Halloween season
As always, we are available to connect with you personally. Please don’t hesitate to contact us at 519-822-2024 or elineskyschuett@rbc.com.