To my clients:
It was an up week for North American stock markets with the Canadian TSX finishing up 0.8%; the U.S. Dow Jones Index up 1.0%; and the U.S.S&P 500 up 1.6%.
Two noteworthy developments this week:
1) Producer prices declined by 0.1% for the month of August, while consumer prices rose 0.4%. Moreover, the annual inflation rate in consumer prices rose to 2.9%. This somewhat murky data (i.e. inflation declining on the one hand while rising on the other) seems to indicate a slow creep through from tariffs into higher consumer costs. HOWEVER, the data was seen as insufficient to prevent the Fed from cutting rates next week. While the odds suggest the near certainty of at least a 0.25% cut, the prospects of a 0.50% cut are rising.
2) And a 0.50% cut is in play because of a deteriorating labor environment. Last week I noted that a more timely measure of labor conditions is not the widely followed monthly Employment Report, but the more granular weekly jobless claims data. This data set has been rising steadily the past two months, and this week jumped notably higher to 263,000 weekly claims from 236,000 claims the week prior. This is a serious concern. A jump higher of this magnitude should not be ignored. That said, the data set has offered numerous head fakes over the years, and this may be yet another. However, should there be a jump of similar magnitude next week then it MAY warrant a more defensive portfolio stance moving forward. But this impulse is tempered, perhaps significantly, by looming Fed actions and, importantly, the forward guidance it offers. The Fed has the room to cut rates significantly if needed thereby providing support for the labor market.
Markets are always tricky, and this particular juncture seems trickier than most. However, I reiterate the default position of maintaining meaningful exposure to equities (i.e. stocks) unless there is a credible and imminent threat of significant recession. To my lens this latter condition has yet to be met. Meanwhile the U.S. corporate engine continues to grow profits. Bottom line: status quo for now, but heightened vigilance is required.
That’s it for this week. All the best,
Nick
Nick Scholte, CIM, FCSI
Senior Portfolio Manager
RBC Dominion Securities Inc. │ Tel: 604.257.7569
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