DIARY OF A PORTFOLIO MANAGER

“Sometimes I just can't take it

Sometimes I just can't take it and it isn't alright
I'm not going to make it
And I think my shoe's untied (oh oh)”

Coldplay, Higher Power

My youngest daughter is a huge Coldplay fan. Actually, huge doesn’t do it justice. She has every album (of course). Has playlists on all her devices. We have streaming music in the house and when asked, the answer is always Coldplay. She plays their music when she is going to sleep, waking up, doing homework, walking around the house. So, it was a great pleasure to bring her to see them live this past weekend and see her reaction. She couldn’t believe it was actually happening when the show started. The rumor is that they are doing a massive tour before stopping for good in 2025. 2025 isn’t that far away so we figured we should take advantage as see them before it’s too late. Only 1 Canadian date meant for relatively easy travel.

She was overwhelmed and loved the concert. Probably still buzzing after it. A lot of their message is about peace and kindness and being good to each other. The final message as we left the arena was “Believe in Love” displayed on the big screen. Imagine the irony when we saw two guys fighting as soon as the show ended perhaps 30 feet from our seats. I guess that some people don’t get the message.

So that brings me to today’s thought – is there a message that we aren’t we getting?

Global equity markets have given back some of their year-to-date gains so far this month. Government bond yields have moved noticeably higher in recent weeks. The market action can be attributed to mixed economic signals and messaging from central banks. On the latter, the Bank of Canada and U.S. Federal Reserve both decided to hold rates steady at recent policy meetings, while the European Central Bank raised rates yet again. All three emphasized the need to tread carefully as they try to ensure interest rates stay high enough for long enough to stem inflationary pressures. Recent inflation readings in Canada and the US suggest pricing pressures have begun to perk up, driven in part by oil prices.

Crude oil and refined products like gasoline, diesel, and jet fuel have all been on a sharp upward trajectory since June and are trading near highs for the year. Global demand and supply have both been responsible for the price gains in recent months. I was on two full capacity planes this past week so can attest that travel is busy.

Demand has been stronger than expected, driven by a more resilient economy, particularly in the U.S. where the summer travel season was notably strong. Demand in other parts of the world, like Latin America and Africa has also been stronger than expected. And, while China’s economic recovery following its reopening earlier this year has underwhelmed, its crude oil imports through the first half of the year have set a record pace, with much of it being deployed into the country’s oil inventories for future use. The International Energy Agency (IEA) estimates that roughly three quarters of the increase in world energy demand this year is expected to be driven by China.

RBC expects global oil demand to moderate over time as higher prices and slowing economic activity eventually take their toll. We have less conviction on the supply side where there has been a notable shift in recent years with oil companies demonstrating more discipline and patience. They have been less willing to raise production at higher prices and have clearly prioritized profitability over revenue growth. Moreover, major producers like Saudi Arabia and Russia appear intent on maintaining elevated prices for the foreseeable future, although predicting their approach from one year to the next has been fraught with challenges.

High oil prices present a headwind to inflation, which had been on a downward trajectory for most of the year until recently. This is yet another challenge for central banks, who remain steadfast in their focus on ensuring inflation can move lower and back to their long-term targets. We expect global markets will remain hyper focused on inflation through the rest of the year.

Should you have any questions, please feel free to reach out.

Have yourself a great week

J. Todd Kennedy, CIM, FCSI

Senior Portfolio Manager

613-566-4582

toddkennedy.ca