Volume 27, Issue 22
May 29, 2023.

May 26

May 19


Net Weekly
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Source: Globe & Mail


The “R Word” is Resilience, not Recession

Douglas Porter, CFA

BMO Chief Economist


Bond yields forged higher again this week, partly in anticipation of a debt ceiling deal, but also partly in the face of still-high inflation and still-sturdy growth. In fact, one could make the argument that if the big forecasting mistake almost everyone made in 2022 was to underestimate inflation—present company excluded, of course—the big mistake 40% of the way into this year appears to be that almost everyone has underestimated the resiliency of the economy—present company included. And this reality is dawning on markets, which are now fully priced for an additional 25 bp rate hike by both the Fed and the Bank of Canada in the summer. Two-year Treasuries jumped 30 bps this week alone, after a similarly sharp rise last week, taking them above 4.6%, a level not seen since SVB failed. It’s a broadly similar picture in Canada, where 2s surged above 4.3%, up 75 bps in a mere three weeks and nearing the cyclical highs hit in early March.

The big and broad rise in yields in recent weeks and the increasing odds of further central bank rate hikes reflects three forces: a resilient economy, sticky inflation, and a challenging fiscal backdrop. On the first point, the latest batch of U.S. data landed almost completely on the strong side of the ledger. Consumers are still doing their thing, as personal spending thrashed expectations with a 0.8% rise in April, and even 0.5% when adjusted for inflation. This sets consumer spending on course for another positive quarter, after the strong 3.8% advance in Q1. Along with the Chicago Fed’s National Activity Index printing positive last month (signaling above average growth), and it looks like the long-awaited recession has been delayed by another quarter.

Next week’s key payrolls report may have a different opinion on recession risks, but given the downward revision in jobless claims to modest levels and underlying momentum, we are expecting a solid 200,000 rise in jobs. And the jobless rate is flagging precisely zero weakness, matching 70-year lows. While no one would mistake the current situation for a strong economy—after all, real GDP was up just 1.3% in Q1—for every sour note, a positive signal pops up somewhere else.  The blow-out quarterly report from Nvidia, driven by AI demand, is but one example of pockets of real strength.  Even the housing market is showing a pulse, with new home sales grinding higher from last summer’s lows. That fledgling recovery may yet reverse on the renewed back-up in borrowing costs, but the bigger picture is that the economy is holding up surprisingly well.

The second major factor driving yields back up again is the stickiness of inflation.  April’s core PCE deflator topped expectations with a 0.4% m/m rise, nudging up the annual pace in this key metric a tick to 4.7%. Even the Fed’s supercore measure was up by a similar amount last month and is showing no signs of breaking lower. Meantime, the tailwind of lower energy prices may be coming to an end: oil and gasoline prices are still well below the lofty levels of a year ago, but have been drifting higher more recently. With underlying trends in inflation settling into the mid-4s range, the Fed may well become impatient, particularly if the job market doesn’t buckle.

The third and final factor putting some upward pressure on yields is the ugly fiscal picture. The reality is that even with a quasi-bipartisan debt limit deal, and the obligatory Kumbaya moment, the U.S. fiscal situation is troubling. Early reports suggest the deal will include a two-year freeze on program spending. That is a welcome drop in the bucket to be sure, but Washington’s deficit is currently running at a cool $1.9 trillion over the past 12 months, or more than 7% of GDP. The debt held by the public has taken a giant $7 trillion step up in the three years since the pandemic began, an increase of more than 40%. Combined with the rise in borrowing costs, and public interest payments are already up by more than 50% from 2020 levels. As we have opined before, while one can decry the tactics of using the debt ceiling as a fiscal bargaining chip, one can still agree with the goals.

It’s been a long time since the so-called bond vigilantes rode into town on fiscal concerns. But note that the bulk of the recent back-up in Treasury yields has been in real yields, not in the implied inflation premium. This rise in real yields to close to levels not seen in more than a decade suggests that private Treasury buyers are a little more demanding amid fiscal risks, especially since the Fed is busily offloading its holdings. And, there’s the small matter that as soon as we do have a debt deal, there will be flood of issuance (albeit mostly T-bills). The bottom line is that above and beyond the short-term factors of a surprisingly resilient economy and sticky inflation, the tough fiscal picture is alone a solid argument for a higher-for-longer rate outlook.

Frank & Mark.

Source: Globe & Mail, BMO Capital Markets, Bank of Canada, Bloomberg.



TSX finished higher Friday, just off best levels. Most sectors higher led by tech, consumer discretionary and financial, real estate, utilities, staples, energy, materials, industrials and communication services the other gainers. Health care the lone decliner, down over 4% with cannabis names a drag. Canadian equities posted fifth straight weekly decline with the TSX down 2.1% for the week (its worst weekly performance since 10-Mar), as banks lagged -- Canadian banks rolled out their results last week— missed expectations, and the sector was down on the week.

YTD, the TSX is up 2.76%, and the benchmark 10-year yield ended the week to yield 3.33%.


U.S. & Global

Equity markets were mixed last week, with some big moves in the tech sector helping the broad U.S. indices, but an unresolved debt limit standoff still weighing on sentiment. The S&P 500 added 0.3%, powered by a 5% surge in tech.  Indeed, Nvidia’s AI-fueled surge caught attention this week, but a handful of big tech and communication services names have been doing almost all the work in propping up equities this year.

Meantime, the Q1 earnings season is winding down in the U.S., South of the border, results have been solid, with year-over-year growth in S&P 500 earnings tracking about flat from year-ago levels. Roughly 77% of companies have topped expectations, which is no worse than historical norms. Outside of financials and communications services, surprise rates were strong across the board, with more than 85% topping the mark in a number of sectors. Notably, Refinitiv’s bottom-up tally of the consensus outlook suggests that analysts think this is the low for this mini earnings downtown.

YTD, the DJIA is down 0.16%, the NASDAQ is up 23.97%, and the S&P 500 is up 9.53%.  The 10-year Treasury yield ended the week to yield 3.81%.


Source: BMO Capital Markets


The Good: Industrial Product Prices -0.2% (Apr.); Wholesale Trade +1.6% (Apr. A); Conference Board’s Consumer Confidence Index +0.6 pts to 77.3 (May)—3rd increase in a row.


The Bad: SEPH Employment -9,921 (Mar.); Manufacturing Sales -0.2% (Apr. A); Raw Materials Prices +2.9% (Apr.); Ottawa posted a $41.3 bln budget deficit (Apr.-to- Mar.)—vs. $95.6 bln deficit in the same period last year.


The Good: Real Personal Spending +0.5% (Apr.); Personal Income +0.4% (Apr.); Core Durable Goods Orders +1.4% (Apr.); Real GDP revised up to +1.3% a.r. (Q1 S); New Home Sales +4.1% to 683,000 a.r. (Apr.); Chicago Fed National Activity Index 0.07 (Apr.); Retail Inventories +0.2% (Apr. A); U of M Consumer Sentiment revised up to 59.2 (May F)—and 1-yr inflation expectations revised down to 4.2%.


The Bad: Core PCE Deflator ticked up to +0.4% (Apr.)—and supercore +0.4%; Goods Trade Deficit widened to $96.8 bln (Apr. A); Wholesale Inventories -0.2% (Apr. A); Initial Claims +4k to 229k (May 20 week); Pre-Tax Corporate Profits -2.8% y/y (Q1 P); Pending Home Sales unch (Apr.)—disappointing.



Killer whales ram boats in Spanish, Portuguese waters in puzzling behavior

BARCELONA, Spain — A pod of killer whales repeatedly rammed a yacht in the Strait of Gibraltar this week, damaging it enough to require Spanish rescuers to come to the aid of its four crew members.

It was the latest episode in a perplexing trend in the behavior of orcas populating the Atlantic coast of the Iberian Peninsula that has left researchers searching for a cause.

Spain’s Maritime Rescue service said that killer whales repeatedly ran into the Mustique, a 20-metre (65-foot) vessel sailing under a U.K. flag, late on Wednesday, rendering its rudder inoperative and cracking its hull. Spanish rescuers needed to pump out seawater before towing her to safety.

The alert reached the Spanish service via their British counterparts, who had relayed on the distress call, the Spanish service said. A helicopter and a rescue boat were deployed to help the damaged boat to dock in Barbate.

This was the 24th such incident registered by the service this year. The service didn’t provide data from last year.

But the Atlantic Orca Working Group, a team of Spanish and Portuguese marine life researchers who study killer whales near the Iberia Peninsula, says that these incidents were first reported three years ago. In 2020, the group registered 52 such events, some of which resulted in damaged rudders. That increased to 197 in 2021 and to 207 in 2022.

The killer whales seem to be targeting boats in a wide arc covering the western coast of the Iberia Peninsula, from the waters near the Strait of Gibraltar to Spain’s northwestern Galicia.

According to the group, these killer whales are a small group of about 35 whales that spend most of the year near the Iberian coast in pursuit of red tuna. The so-called Iberian orcas average from five to 6 1/2 metres (16-21 feet) in length, compared to the orcas of Antarctica which can reach nine metres (29 1/2 feet).

There have been no reports of attacks against swimmers. The interactions on boats seem to stop once the vessel becomes immobilized.

Biologist Alfredo Lopez, of the University of Aveiro and member of the research group, said that the incidents are rare — and enticingly odd.

“In none of the cases that we have been able to see on video have we witnessed any behavior that could be considered aggressive,” Lopez told The Associated Press by phone on Friday. “They appear calm, nothing at all like when they are on the hunt.”

Lopez said that while the cause of the behavioral turn is unknown, his group has identified 15 individual whales that are involved in the incidents. He said that 13 are young whales, which could support the hypothesis that they are playing, while two are adults, which could support a competing theory that the behavior is the result of some traumatic event with a boat.

In either case, he said the whales are showing once again that they are social animals.

“Orcas are animals with their own culture,” he said. “They transmit information to one another.”