Below is a summary of some of the relevant news items from the Capital Markets and the Economy from the past week extracted from RBC Global Insights and FactSet Research.

You can view the past four weeks’ Weekly Update in the link to my Blog.

Read my latest Smart Investor newsletter on my website. The Q3 2023 edition covers Market Review, Concentration of Returns in U.S. equities and Estate Planning Basics.

 

Markets

Market scorecard as of close on Friday September 8, 2023.

Country	Equity Indices	Level	1 week	YTD
Canada	S&P/TSX Composite	20,075	-2.3%	3.6%
U.S.	S&P 500	4,457	-1.3%	16.1%
U.S.	NASDAQ	13,762	-1.9%	31.5%
Europe/Asia	MSCI EAFE	2,077	-1.3%	6.9%

Source: FactSet

• Canadian equities finished lower Friday, near worst levels. Most sectors lower. TSX closed lower for a fourth straight session, posting a 2.3% weekly decline after rallying 3.6% last week.

• US equities mostly higher in very quiet Friday trading as S&P broke a streak of three-straight declines and Nasdaq broke four-straight losses. As U.S. equities dropped last week, Treasury yields have moved markedly higher—with the 10-year yield back to 4.26% near its highest levels since 2007.

 

Economy

Canada

• The Bank of Canada (BoC) held its benchmark rate steady at 5.0%, as widely expected given mounting evidence the economy has begun to soften in recent months. With inflation risk remaining the main source of concern, BoC policymakers reiterated their willingness to raise interest rates further if necessary to bring underlying price pressures under control.

• Canadian GDP declined by an annualized rate of 0.2% in Q2, meaningfully worse than last month’s early estimate of a 1% increase, according to RBC Economics. Consumer spending continued to decelerate, with the 0.2% rise in Q2 being the smallest increase since the pandemic lockdowns in Q2 2021.

• This GDP data, released before the BoC’s meeting this week, had reinforced expectations that the central bank would pause rate hikes; as RBC Economics noted, headwinds to economic growth from higher interest rates have been building under the surface and the lagged effects of earlier rate hikes are beginning to be felt.

U.S.

• Given our belief that oil prices are likely to remain elevated in the near term due, in part, to Saudi Arabia’s production decision, there is likely to be upward pressure on headline inflation in the months ahead—which could embolden the Fed to continue its hiking cycle for longer than the market anticipates.

• The U.S. Labor Department reported initial jobless claims fell for the fourth consecutive week to 216,000 during the week ending Sept. 2, the lowest level since February and well below the Bloomberg consensus expectation of 234,000. We think these reports highlight the continued strength of labor in the face of what has been an unprecedented Fed tightening cycle.

Further Afield

• German macroeconomic data continues to disappoint. Industrial production declined 0.8% month over month (m/m) in July, the third monthly drop in a row, and is now 7% below the pre-pandemic level. Exports were similarly weak in July, declining 0.9% m/m.

• In addition to growing worries about regional stagflation, companies with China exposure came under pressure due to a weaker-than-expected August reading from the Caixin China General Services PMI. Luxury goods stocks were impacted, with the large publicly listed European players down between 5% and 7% during the week, as worries grew that the combination of a slowdown in China and the prospect of stagflation in Europe would increasingly impact consumer demand for high-end luxury items.

 

Notes About Companies in Model Portfolio

Canadian Banks – Excerpt from letter to clients from RBC Wealth Management, Friday September 8, 2023:

• The bank results for this past quarter (ending in July) largely underwhelmed, reflecting a challenging operating and macroeconomic environment. Not surprisingly, most of the banks expect the backdrop to remain difficult, with projections pointing to weak economic growth and a modest uptick in unemployment this year.

• The narrowing profit margins reported by most banks can be attributed to two key forces. First, net interest margin – the difference between interest revenue and interest expense – is showing signs of strain, suggesting that banks’ lending activities are less profitable. Coupled with this, higher interest rates have tempered the demand for loans, creating a general drag on bank revenues.

• Nearly all banks continue to prudently add to their provisions for credit losses — a sign that they’re preparing for more of their customers to have difficulty repaying their loans. Delinquencies remain well below pre-pandemic levels; the uptick to date reflects more of a return to normalcy rather than a major shift in trend.

• A big headwind facing Canadian households is on the mortgage front. With the prospect of a prolonged period of elevated interest rates, households may have to grapple with rising mortgage-related payments in the months and years to come. Data from the Bank of Canada reveals that since the onset of rate hikes in early 2022, only about a third of mortgage holders have seen their monthly payments increase – a number that will continue to rise. By the end of 2026, nearly all mortgage holders will have refinanced at potentially higher rates.

• This, in turn, has implications for consumer spending. First, homeowners with higher payments have less disposable income to support other areas of the economy. Second, those who stretched to buy a home at peak prices could run into broader credit issues, given limited flexibility in leveraging existing equity or extending amortization periods.

• Even though this poses a risk for banks, we believe it is a manageable one given the banks’ mounting reserves that continue to build for such a scenario. As a result, we see these pressures as posing a bigger hindrance to the overall economy than for the banks themselves. We continue to manage portfolios with this expectation in mind.

 

Feel free to contact me with any questions and/or to discuss investment ideas.

I appreciate the opportunity to serve you and look forward to continuing to help you accomplish your long-term financial goals.

 

Regards,

Shiuman