To my clients:
It was a mixed week for North American stock markets with the Canadian TSX finishing up 0.5%; the U.S. Dow Jones Index finishing up 0.6%; and the U.S> S&P 500 finishing down 0.1%.
Another short update this week as we head into a holiday weekend. The main take-aways:
The ISM Manufacturing Index at 46.3 slipped further into contraction territory (remember that 50.0 is the separation between expansion and contraction)
The ISM Services Index decelerated sharply to a reading just barely in expansion territory at 51.2
The weekly jobless claims increased significantly to 228,00, with an even larger revision higher to the previous week’s claims
Collectively, the above three indicators indicate the economy is slowing quickly. Tomorrow’s employment report (on a holiday Friday when the markets are closed) will be more closely scrutinized than usual. My conviction grows that a mild recession looms (if its not already here). That said, with a slowing economy comes lower inflation thereby providing the U.S. Federal Reserve with “line of sight” (an apt description offered to me by a client today) to more sustainable inflation levels in the 2 to 3% range. Given the slowing economy and commensurately cooling inflation, I’d be shocked if the Fed raises rates another 0.25% next month. Clients will know I think it has already pushed rates too far. In fact, I suspect the next rate move by the Fed will be a cut later in the year when recession becomes evident. I also believe markets have already largely priced-in recession and will chop higher – albeit with volatility - as the Fed ultimately shifts course in the second half of the year.
That’s it for this week. All the best,
Nick
Nick Scholte, CIM, FCSI
Senior Portfolio Manager
Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
3200-1055 West Georgia │ Vancouver, BC │ V6E 3P3
Toll Free: 1.844.665.9900 │Email: nick.scholte@rbc.com
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