Stock futures are relatively muted this morning, with both TSX and S&P 500 futures edging higher, while global bond markets have stabilized following the recent selloff. Yesterday, the Nasdaq and S&P 500 fell -1.3% and -0.7%, respectively, while the TSX declined -0.8%. The equity weakness coincided with another leg higher in global bond yields, with the U.S. 30-year Treasury yield reaching its highest level since 2007 and long-term yields in several other developed markets approaching multi-year, and in some cases multi-decade, highs. A confluence of factors has been driving yields higher, including renewed inflation concerns as energy prices rise, heavy government borrowing and massive corporate debt issuance to fund the AI infrastructure buildout. Adding to the unease, the U.S.-Iran truce expired Monday with no permanent agreement, or even talks, in place, keeping upward pressure on oil prices and inflation expectations.
Closer to home, a new 50% U.S. tariff on roughly $20 billion of Canadian goods that was supposed to take effect at midnight has been put on ice for three whole days. Trump announced the reprieve on social media last night, saying the two sides have a deal, subject to finalizing discussion and docs. Details remain limited, although previous reporting suggested negotiations had been moving at a frenzied pace, with Canada looking for reductions in existing tariffs on aluminum, autos, lumber and steel, while also trying to prevent the latest round of tariffs from taking effect. PM Mark Carney struck a more cautious tone, saying “substantial progress” has been made while emphasizing that work remains and that Canada continues to focus on building a “stronger, more independent and more competitive economy at home.” With only a three-day reprieve, we shouldn’t have to wait long to find out whether a deal really is a deal. Stay tuned.
Canadian home prices rose 0.1% in July to a benchmark $658,000, the first monthly increase in 20 months and a possible sign that the housing market is stabilizing after nearly two years of declines. Sales increased 0.5% while new listings fell 1.6%, tightening the balance between supply and demand and reducing some of the negotiating leverage buyers have enjoyed. Improving economic conditions appear to be raising confidence, with unemployment recently falling to a two-year low and preliminary data pointing to annualized GDP growth of 3.4% in Q2. Still, the recovery remains modest, with benchmark prices 3.2% below levels seen last year and 10.5% lower than three years ago.
U.S. industrial production rose 0.2% in July, marking a second consecutive monthly gain and adding to evidence of resilience in the manufacturing sector. Factory output also increased 0.2%, with strength concentrated in business investment as business-equipment production climbed 0.8%, defense and space equipment jumped 1.8%, and computer and electronic products rose 1.9%. Manufacturing has benefitted from capital spending associated with the AI infrastructure buildout, despite higher input costs and supply disruptions linked to the Iran war. Auto production was a weak spot, falling -2.1%, but manufacturing output excluding vehicles advanced a stronger 0.4%. The report suggests U.S. industrial activity still has some momentum even as other recent indicators, including employment and retail sales, have pointed to some softening in the broader economy.
Inflation in the UK accelerated to a four-month high of 2.9% in July from 2.6% in June, mainly due to rising energy costs. The increase matched economists’ expectations but exceeded the Bank of England’s 2.8% forecast, with the central bank expecting inflation to peak at 3.2% later this year. Underlying pressures were tamer, with core inflation holding at 2.6%, services inflation easing to 3.4% from 3.6%, and food inflation falling to a nearly two-year low of 1.3%, while wage growth has also moderated. Factory-gate inflation slowed to 3.1% and manufacturers’ input-cost growth dropped to 4.9%, although the recent rebound in oil prices could make some of that relief only temporary. The numbers suggest the energy shock is lifting headline inflation without broadening to other areas of the economy, reducing any immediate need for the Bank of England to tighten monetary policy.
Fund managers have become more bullish, with Bank of America’s August survey showing equity allocations at a five-year high and cash holdings down to 3.5%, a level rarely seen since 2000. Optimism reflects confidence in the economic and earnings outlook, with a record 56% of respondents expecting no meaningful slowdown and expectations for double-digit earnings growth at their highest level since 2021. Most managers also doubt the Fed will raise rates before the November midterms. U.S. and EM equities remain favoured, while semiconductors are still viewed as the most crowded trade and hyperscaler AI spending is seen as a potential source of credit-market disruption. The positioning leaves investors relatively unconcerned about growth, monetary tightening, AI capital spending, or U.S. politics despite elevated geopolitical and market risks.
El Niño would like a word. As if the weather hasn’t given us enough to talk about lately, a potentially record-breaking El Niño is developing, raising the risk of even more disruption. The U.S. Climate Prediction Center sees a 69% chance that conditions late this year will be the strongest in records dating to 1950. El Niño typically brings hotter, drier weather to Australia, Southeast Asia, the northern U.S. and Canada, while increasing rainfall and flood risks in the southern U.S., parts of South America and East Africa. The resulting droughts, floods, and heat can disrupt crops, power generation, mining and shipping, potentially raising food and energy prices and straining electricity grids. Historically, the economic costs have been significant, with researchers estimating that the 1997-98 El Niño ultimately caused about $5.7 trillion in lost global GDP over five years. Turns out, talking about the weather isn’t such small talk after all.
Diversion: Man vs. Machine
