Volume 25, Issue 48
November 29, 2021.
Source: Globe & Mail
Risks Get Back…
Douglas Porter, CFA
BMO Chief Economist
…to where they once belonged? Giving a whole new meaning to Black Friday, financial markets took a big step back at the end of the week on concerns over the Nu variant from South Africa. While it is far too early to draw any strong conclusions on the significance of this development, thin holiday markets and earlier big gains meant investors were in little mood for details. Yields, equities, commodity currencies, and especially oil, all were sold heavily on Friday, after mostly pushing higher earlier in the week. Prior to the Nu news—which slashed rate hike expectations—global central bank tightening was more firmly in focus as inflation pressures continued to bubble. Since nearly everyone is looking at the inflation of the 1970s as a guide, let’s harken back to that time. In honour of the new Get Back movie about some little, transitory band out of Liverpool, here’s a recap of the key developments of the week using the songs from the album:
The Long and Winding Road: COVID had seemingly been put in the rear-view mirror by financial markets until recently. However, a surge in Delta cases in Europe and the emergence of the Nu variant have suddenly sent shivers through risk assets, and travel-related stocks and oil in particular. While the immediate market move may be an overreaction, the point is that the pandemic remains with us nearly two years after beginning. At the least, it is likely to continue throwing sand in the gears of the global economy in 2022, restraining the recovery, keeping kinks in the supply chain, and possibly cooling the most hawkish central banks.
Let it Be: Another big story this week was the reappointment of Jay Powell as Fed Chair for another four-year term. While far from shocking, there was some suspense, as the decision had been drawn out for weeks. Lael Brainard was the main contender, and she was instead given the Vice-Chair role; some had thought she would instead be named Vice-Chair of Supervision, but that position was held open for a yet-to-benamed candidate. Given that there will soon be three (count ‘em!) openings on the Board, President Biden still has lots of opportunity to put his stamp on the Fed.
I’ve Got a Feeling: The initial market response to the Powell news (as opposed to the dovish alternative) was to bake in more Fed rate hikes. Prior to Friday’s set-back, markets had fully priced in three rate hikes in 2022, beginning as early as June. In turn, this would imply that the pace of QE tapering would likely need to ratchet up early next year. Even with a late-week pullback, traders are still looking for two moves in the second half of next year, which we are largely in agreement with at this point.
One After 909: Did you say 199k? Initial jobless claims fell to that low, low level last week—the last time they were below 200k was 1969, or around the time Get Back was shot. Amid the cornucopia of mid-level U.S. data releases this week, this one jumped off the page as an indication of a rapid improvement in the job market. It may well overstate the strength of employment, but it hints that one of the Fed’s main goals may be at hand. Meantime, the other goal has long been hit, with the core PCE deflator punching up to 4.1% y/y last month. Quashing any doubt about the ‘sustainability’ of the rise, this metric has now averaged a 2.2% pace over the past five years.
Two of Us: The two factors of President Biden’s drive to tap petroleum reserves and Nu jitters combined to hammer oil prices this week. WTI sagged 11% on Friday alone to below $70, after starting last week closer to $80. In fact, crude had initially held up reasonably well on the SPR news. After all, the proposed 50 million barrel draw represents total global consumption for about half a day. However, a prolonged dent in global travel from the newest variant could land a much more serious blow on oil demand. Notably, natural gas went the other way this week, strengthening to around $5.10, largely unaffected by either the prospect of less travel and/or the SPR draw.
Get Back: Canada was not left out of the gyrations on central bank expectations. Prior to the Friday back-up, markets had fully priced in 150 bps of BoC tightening in 2022. To put that in perspective, one would need to go back to 1994 to find a time that the Bank hiked that much in a single calendar year. It is true that, in each of the past four tightening cycles, the BoC tended to start fast with hikes at back-to-back meetings. But, not 150 bps fast. Even with some backing off late in the week, traders still have roughly 125 bps of rate hikes built in for 2022, with the first move fully priced in for April. We still believe 125 bps looks aggressive, given both the ongoing uncertainty around the pandemic as well as the vulnerability of the household sector to fast rate hikes (especially with variable mortgages so favoured by borrowers in the past year).
Across the Universe: It’s not just North America where central banks are turning to tightening. This week saw the both New Zealand and Korea hike by 25 bps (to 0.75% and 1.0%, respectively), the second such move by each this cycle. No doubt, the new variant at the very least put a temporary chill into rate hike prospects for those central banks sitting on the fence. One central bank going the other way has been in Turkey, where rates have been cut despite flaring inflation. In turn, this has sent the lira skidding; it has dropped 33% just since the end of August and has now lost half its value over the course of the pandemic.
I Dig a Pony …or really any beast, as employers need help! Having already vaulted above the 10 million mark stateside, job vacancies have surged in recent months to above 1 million in Canada. This has pushed the job vacancy rate to 6%, doubling just since the start of the year. Unsurprisingly, the hospitality sector is leading the way with a towering 14.4% rate (versus barely 4% a year ago). This week’s Focus Feature digs further into the implications for wages—higher, in the near term. The wage metrics will be one of the key areas of focus for next Friday’s dual November jobs reports. Canada’s release will be dealing with a variety of cross currents, including the cessation of CEWS and CRB, as well as the B.C. floods and a more complete reopening in Ontario. On balance, we expect the job market to tighten further, possibly markedly so.
For You Blue: Prior to the big risk-off move on Friday, the Japanese yen had been particularly blue, weakening to the 115/US$ level. That represented its softest point in five years, with the currency depreciating more than 10% just since the start of 2021. The BoJ just can’t join in the tightening moves by all of the other central banks, with inflation in Japan still pinned at near zero. However, along with gold, the yen was one of the few winners on Friday in a classic risk-off fashion. On the flip side, the Canadian dollar fell more than 1% to around 78 cents ($1.278/US$). Notably, the supposed great new hedge—crypto—was hammered across the board on the new variant.
I Me Mine: Sorry, I’ve got nothing to give on this one about selfishness. With that, I’d like to say thank you on behalf of the group and ourselves, and I hope we passed the audition.
Frank & Mark.
Source: Globe & Mail, BMO Capital Markets, Bank of Canada
Equity markets slid last week, including a deep Friday selloff in thin holiday trading that will dampen spirits. It was not a good combination of events, with the spreading Nu (Omicron) variant, more containment measures in Europe, and another hefty upside surprise in U.S. inflation. The TSX was down 1.9% by late Friday, with all sectors in the red, and European markets were down more than 5%.
YTD, the TSX is up 21.1% and the benchmark 10-year yield ended the week to yield 1.76%.
The S&P 500 fell 2.2% on the week, finished off with a 2.3% decline in shortened Friday trading. Consumer discretionary, telecom and technology were all down more than 3%, while energy was the lone sector to hang on to a gain despite a slide in oil price to end the week. It was mostly mid-tier indicators on the data front this week, with U.S. new and existing home sales rising in October and jobless claims falling to the lowest level since 1969. But the PCE report was the big one, showing still-robust spending and accelerating inflation. Real personal spending jumped 0.7% in October as demand continues to be fanned by low interest rates, past fiscal support and strong labour demand. Note that, in dollar terms, spending on services is now about 4% above pre-COVID levels, while outlays on goods are 25% above that mark (lest you still think this is just a supply issue). Even in volume terms, services spending is almost all the way back (1.4% short), while goods spending is towering 17% higher.
YTD, the S&P 500 is up 22.3%, the Dow Jones Industrials are up 14.0%, and the Nasdaq is up 20.2%. The yield on the 10 year Treasury closed at 1.54%.
Source: BMO Capital Markets
The Good: Wholesale Trade +1.4% (Oct. A); Manufacturing Sales +4.1% (Oct. A) SEPH Employment +91,125 (Sep.); CFIB Business Barometer +1.7 pts to 62.2 (Nov.); Ottawa’s budget deficit narrowed to $68.6 bln (Apr.-to-Sep.)—from $198.1 bln a year ago; Province of Quebec projects a $3.6 bln deficit (FY21/22)—improved from 2021 budget; Province of B.C. cuts deficit to $1.7 bln (FY21/22).
The Bad: No news is good news.
Real GDP revised up to +2.1% a.r. (Q3); Real Personal Spending +0.7% (Oct.); Personal Income +0.5% (Oct.); Core Durable Goods Orders +0.6% (Oct.); Existing Home Sales +0.8% to 6.34 mln a.r.; New Home Sales +0.4% to 745,000 a.r. (Oct.); Goods Trade Deficit narrowed to $82.9 bln (Oct. A); Wholesale Inventories +2.2%; Retail Inventories +0.1% (Oct. A); Initial Claims -71k to 199k (Nov. 20 week) —lowest since 1969; Chicago Fed National Activity Index 0.76 (Oct.) Pre-Tax Corporate Profits +20.7% y/y (Q3).
The Bad: Core PCE Deflator +4.1% y/y (Oct.)—fastest since 1991 U of M Consumer Sentiment revised lower to 67.4 (Nov. F).
Tourist attacked in Philippines after mistaking crocodile for fake one
A man in the Philippines was savagely attacked by a crocodile at a theme park after he mistook the reptile for a plastic model.
Nehemias Chipada, who was visiting the Amaya View theme park in Cagayan de Oro for his birthday, thought it would be fun to jump into a pool to pose with what he believed was a plastic crocodile.
Instead, he was left to fend off the beast, which did not appreciate being used as a photo prop and clamped on to the man’s left arm.
Chipada’s family watched in horror as the croc dragged him into the water, but he was able to escape the predator and scream for help, reported the Daily Mail.
Staff at the park treated him before he was sent to a local hospital.
The croc left him with fractured bones, that required multiple surgeries, and eight wounds to his left arm and thigh.
A 7.6-centimetre crocodile fang was also left behind from the force of the bite, according to the Mail.
Following the near-death experience, Chipada and his family blamed the theme park for not putting up warning signs around the crocodile’s exhibit.
“There were no advisories warning us not to enter the enclosure,” said the man’s daughter. “Because if there were, we would never have gone there.”
The park agreed to cover the costs of Chipada’s medical treatment, but denied any negligence.