"Necessity is the mother of invention" Proverb
Good morning,
It was another beautiful week here in Ontario, a perfect week to take my daughters Dilynn & Presley-Mae to the golf course for the first time. Of course, it wasn’t until we got to the track with one set of right handed junior clubs that I realized that my daughter Dilynn swings left. Ha, way to go dad!
Teaching moment
After explaining to her that Jimmy Hendrix and Dick Dale played a right handed guitar by playing it upside down because they were innovative, Dilynn spent the next 20 minutes mastering her drive with what her situation and environment provided. Although she managed to figure out her swing, it looks like I’m still on the hook for some left handed clubs.
Over the past year, we’ve all been faced with a dynamic and challenging environment. All of us have had to adapt, improvise and invent new routines and new ways of working. Necessity has forced us to think differently, to take new approaches in our lives and our business. As we make progress towards re-opening, I suggest we keep looking for ways that we can improve and keep searching for ways that we can innovate and invent. It will be through innovation that we can continue to evolve, build, and drive further.
“The secret of change is to focus all of your energy, not on fighting the old, but building on the new.“ Socrates
And now, to the markets
It's a busy summer week, with three central bank meetings and a ton of crucial data. The spotlight will be on the Fed, which is unlikely to signal that it's considering an exit strategy from cheap money. This morning, world stocks climbed another peak on Monday, while U.S. bond yields were near three-month lows as worries of rising inflation abated and investors anticipated the U.S. Federal Reserve sticking to its dovish course this week. We will be watching closely to see how the market and rates react.
US & Rates
Bonds rallied this week with yields on the 10-year Treasury declining below 1.5%, the lowest closing yield since early March. Markets held on to these gains despite the release of May Consumer Price Index (CPI) data showing a 5% y/y increase in overall prices and a 3.8% pickup after removing food and energy prices. Similar to last month, the CPI increase was heavily influenced by used car prices—which spiked over 7% on the month—and comparisons to 2020’s pandemic shutdowns. Nothing in the report looks significant enough to shift the Federal Reserve’s view that inflation is transitory—a conclusion that was likely reinforced by May’s 2.2% y/y decline in average weekly earnings. With higher labor income a likely prerequisite for sustained upward inflation, we believe this week’s data is unlikely to lead to monetary policy shifts.
Fixed income demand was also helped by last week’s lackluster jobs report and a continuing lack of progress on infrastructure legislation. The relatively slow pace of job creation in May— only 559,000 jobs were added compared to a nearly 8 million job deficit from pre-pandemic levels—added to the likelihood of continued Fed support, given the central bank’s mandate to maximize employment consistent with stable prices. Increased government spending in the form of infrastructure could add upward price pressures and employment gains—potentially driving interest rates higher—but recent Bloomberg news reports have highlighted the large differences between the Biden administration and Senate Republicans on the spending plan.
Canada
The Bank of Canada’s (BOC’s) latest monetary policy announcement came and went largely as expected—uneventful. There were no changes to policy or forward guidance with the overnight rate remaining at 0.25% and the pace of quantitative easing (QE) purchases at CA$3 billion per week. The central bank still believes that sharply rising inflation will prove transitory in nature, expected to hover near 3% throughout the summer and then ease later in the year as “base-year effects diminish and excess capacity continues to exert downward pressure.” The BoC became one of the first developed central banks to dial up optimism, at its April policy meeting, by accelerating the potential timeline for rate hikes to H2 2022 (sooner than expected) and tapering QE purchases, citing improving economic conditions. However, the BoC again acknowledged the labour market remains below pre-pandemic levels. The BoC has previously stated that it’s looking for jobs to not only return to pre-pandemic levels, but to exceed those levels meaningfully before a complete recovery can be achieved.
The Canadian labour market slid for a second consecutive month in May, shedding 68,000 jobs, as reported by Statistics Canada. Although a decline was anticipated given the mounting COVID-19 containment measures nationally, the losses were nearly three times greater than consensus estimates. From an industry perspective, manufacturing was hit especially hard as it continues to grapple with ongoing supply-chain disruptions. Accommodation and food services, along with retail trade, continued to give up the gains made during the hiring spree between the second and third waves of the virus. As lockdown restrictions begin to ease, spurred by declining case counts and increased vaccination rates, RBC Economics expects these latter industries could begin recovering in June of this year. In all, the Canadian labour market remains approximately 571,000 jobs short of its pre-pandemic levels
Enjoy the week and remember to focus on innovation, it can not only enable us to overcome, but empower us to improve & evolve.
“When the winds of change blow, some people build walls and others build windmills.“ Chinese proverb
Be well & enjoy the moments
Derek