To my clients:
It was an up week for North American stock markets with the Canadian TSX finishing up 2.8%; the U.S. Dow Jones Index up 1.6%; and the U.S. S&P 500 up 0.9%.
There is lots to cover this week and I think its best to do in point form:
- Economic data is cooling (more in bullet points to follow)
- Inflation is likewise cooling (more in bullet points to follow)
- Aware of slowing economic data, Fed Chair Jerome Powell more forcefully than at any time since perhaps last Autumn 2023, hinted that rate cuts are coming – and possibly soon. He stated in his testimony before Congress this week that “Elevated inflation is not the only risk we face. The latest data show that labor-market conditions have now cooled considerably from where they were two years ago.”
- Regarding employment, in data released last week while I was on holiday, it was shown that in spite of adding 206,000 new jobs in June, the unemployment rate ticked up for the third consecutive month to 4.1%. Concurrently, the rise in unemployment has been confirmed by an identifiable 3 month uptrend in weekly jobless claims.
- Also in data released last week, BOTH of the ISM Indices printed in contractionary territory: unsurprisingly Manufacturing remained contractionary as it has for all but 1 of the past 18 months; meanwhile, Services did surprise economists by badly missing estimates and contracting for the second time in 3 months
- On the inflation front, Consumer Price data was released yesterday and on a month-over-month basis was actually negative for the first time since the depths of the 2020 Covid lockdowns. Moreover, the 3-month annualized rate of “core inflation” (ex food and energy) at 2.1% is now essentially at the Fed’s 2.0% target, and the “super core” inflation rate (same as core except also stripping out shelter costs) is now below the Fed target at just 1.3%.
- While much of the preceding would normally be worrisome, as this week’s positive market results attest, the outlook might not be as gloomy as the economic data suggests. Why? Because the Fed has lots of room to cut rates, and can cut rates aggressively if need be. And as noted above, Fed Chair Powell seems to be prepping markets for imminent cuts (likely in September). Cuts will support the economy.
- Importantly the expectation of looming cuts has finally given a boost to stocks outside of the so-called “Magnificent Seven” (Amazon, Apple, Alphabet/Google, Microsoft, Meta/Facebook, Nvidia and Tesla), particularly the long down-trodden higher dividend stocks on the Canadian side of client portfolios (see the weekly returns I traditionally cite in my opening sentences). Owing to economic divergences between Canada and the U.S., I’d still expect outperformance from the U.S portion of client portfolios, but it will be nice to see Canadian holdings start contributing more meaningfully to returns.
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
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