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June 12, 2024
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Equities are rising and bond yields are plunging as signs that inflation in the U.S. is cooling raises bets the Fed will cut rates this year. CPI data for May was released this morning which showed core CPI climbing 0.2% from April, while the year-over-year measure rose 3.4%, the slowest pace in more than three years. But that’s not the only thing investors will be focused on today, with the FOMC set to announce their latest interest rate decision at 2 pm ET. Policymakers are widely expected to hold the benchmark rate steady for a seventh consecutive meeting and the Fed’s dot plot will be released as well.

China’s consumer prices rose by only 0.3% y/y in May, below expectations, while factory prices continued to drop for the 20th consecutive month, indicating weak demand. Core inflation, excluding food and energy, increased by 0.6%. Despite recent measures to boost the economy, including a real estate rescue package and subsidies for machinery upgrades, the prolonged deflationary trend highlights the need for more fiscal, monetary, and property sector policies to stimulate domestic demand effectively. The People’s Bank of China is expected to begin rate cuts on June 17 to support this effort, however, the economic outlook remains uncertain due to persistent real estate issues and overcapacity in manufacturing. Further structural reforms and stimulus measures are anticipated to be discussed at the Third Plenum in July. 

UK unemployment rose to 4.4%, a 2.5-year high, with private sector wage growth slowing to 5.8%, suggesting easing inflationary pressures that could prompt the Bank of England to cut interest rates this year. Job vacancies and total employment have declined, while real wages grew by 2.9%, the highest since summer 2021, improving living standards. Traders are now pricing in a rate cut by November given a cooling labour market, a relief to many, given the BOE has left borrowing costs at a 16 year high. Despite these positive signs, significant challenges remain, including high economic inactivity and ongoing strikes. 

Build, build, build. Canadian building permits rose 20.5% in April compared to the previous month, marking the fastest increase since May 2020 and (excluding the pandemic) the quickest since March 2009. On a y/y basis, building permits rose 27.9% in April. This rise significantly exceeding economists’ expectations and offers hope for increased construction amidst Canada’s severe housing shortage. Residential permits saw a 19.6% jump, driven by a 32.6% increase in multi-family permits, while single-family permits rose by 2.4%. Non-residential permits also grew by 19.6%, with industrial, commercial, and institutional sectors all showing substantial gains. BC recorded an all-time high for total building permits at $3.1 billion, with Vancouver and Toronto seeing significant increases of 139.7% and 34.3%, respectively. 

The European Union announced additional tariffs on electric vehicles shipped from China as of next month. The tariffs will be as much as 38.1% in an escalating global trade war and increasing the cost of selling cars in Europe for companies ranging from China’s BYD Co. to Tesla Inc. The move follows a nine-month investigation into alleged unfair state subsidies into Chinese battery electric vehicles (BEVs) including top brands such as BYD and Geely, which part owns the Swedish brand Polestar, and Shanghai’s SAIC, which owns the British brand MG. China’s EV manufacturers have been pushing more aggressively into Europe amid a domestic price war and years of building a lead in the technology. 

The Eurozone Sentix Economic Index improved significantly in June, rising from -3.6 to 0.3, beating expectations. This positive shift, reflected in both the ‘Expectation’ and ‘Current Situation’ subindices reaching multi-month highs, marks the first time in 27 months that investor sentiment has turned positive. This improvement suggests that the Eurozone economy is gaining momentum, with accelerated growth in the service sector and easing inflationary pressures. Although the ECB remains careful about how much to cut interest rates this year (economists were calling last week’s move a hawkish cut), the change in the index supports the prospect of lowering rates further. 

Don’t you hate it when money gets in the way of professional sports? Joey Chestnut, the dominant champion of the annual Nathan’s Hot Dog Eating Competition, will not compete this year after signing a deal with Impossible Foods to promote their vegan hot dogs. Chestnut, who has won the Nathan’s contest 16 times, including every year since 2016, was offered a lucrative $1.2 million, four-year contract by Nathan’s but chose the new partnership instead. Major League Eating (MLE), which oversees the event, expressed disappointment but acknowledged that they had tried to accommodate Chestnut’s other requests, including allowing him to participate in a different, unbranded hot dog eating contest on Labor Day. MLE hopes Chestnut will return to the Nathan’s contest in the future when he is not tied to a competing brand. 

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Company news

National Bank of Canada has agreed to buy Canadian Western Bank for about $5 billion in stock as National looks to diversify its presence outside of Quebec. The deal still requires the approval of two-thirds of CWB’s shareholders and the Canadian government and is expected to close by the end of 2025. Canadian Western has 39 branches and 65,000 clients, mostly in the provinces of Alberta and British Columbia. The bank has worked to diversify from its home province of Alberta, which is prone to the volatile cycles of the energy business. National plans to issue $1 billion in new equity. Quebec’s largest pension fund, the Caisse de Depot et Placement du Quebec, said it will help finance the deal by investing $500 million in National Bank via subscription receipts, which will make it the bank’s second largest shareholder.   

Oracle shares are hitting a record high after beating earnings expectations. Oracle also reported better-than-expected bookings and announced partnership deals with tech rivals. The company, known for its database software, is focused on expanding its cloud infrastructure unit to compete with Inc., Microsoft Corp. and Alphabet Inc.’s Google. While this division produces a small portion of total sales, investors view it as Oracle’s major future growth bet. Oracle also announced a new agreement to make its namesake database available on Google’s cloud infrastructure. A similar deal with Microsoft, which was announced in late 2023. 

Dollarama reported weaker-than-expected sales growth for the fiscal first quarter, with same-store sales increasing by 5.6%, slightly below the analyst estimate of 5.7%. The company’s revenue for the quarter was $1.4 billion, and earnings per share were $0.77, surpassing the forecast of $0.74. Executives noted a normalization in sales growth driven by sustained demand for core consumables and everyday essentials, despite improving inflation outlooks. Dollarama plans to open up to 70 new stores this year, having already added 18 in the first quarter. Executives also noted that the company aims to retain its customer base amidst changing economic conditions by focusing on value and convenience. 


Oil prices are extending gains after industry data showed shrinking U.S. crude inventories ahead of the U.S. government report. The American Petroleum Institute reported that US crude inventories dropped by 2.4 million barrels last week. Official weekly inventory figures from the U.S. Energy Information Administration are due later this afternoon. Prices have rallied from last week’s selloff, even as the International Energy Agency (IEA) warned of a lasting oil surplus for the rest of this decade. According to the report, world consumption will “level off” at 105.6 million bpd in 2029, about 4% higher than last year’s level, amid surging sales of electric vehicles and improved fuel efficiency. The IEA also downgraded its oil demand growth forecast for this year to below 1 million bpd. Energy markets have been struggling with bumpy price moves recently as a weak market for real-world barrels is up against hopes that consumption will improve over the summer.  

Fixed income and economics

Demand surprised to the upside at June’s 10-year Treasury auction with non-dealer demand jumping to the highest level at a reopening since October 2021. Indirect bidders took down 74.6% of the sale, their highest reopening award on record, and well above the average of 64.1% for the past three reopenings. The bid-to-cover ratio of 2.67x was the highest at a 10-year reopening since January 2018, signaling a spike in aggregate demand for the issue, though this is offset somewhat by a smaller reopening auction size. Dealer takedown was just 11.6%, their lowest take at a reopening since October 2021. The $39 billion auction, the same as the prior reopening sale, stopped at a yield of 4.438%, 2 bps below the market expectation of 4.458% at 1 p.m. in New York.  

Flows into actively managed fixed income funds in the U.S. exceeded flows into funds that are passively managed for the first time since 2021. Year-to-date, $105 billion flowed into active bond funds, vs. $74 billion that flowed into index following funds, according to Morningstar. After a string of years of disappointing returns (think 2022), bonds have stabilized, however this year has been marked by several hotter-than forecast inflation which has weighed on the asset class. As investors look for help to navigate the uncertainty, some are turning to professionals, opting for bond managers that have the flexibility to make investment calls ranging from a portfolio’s duration posture, sector mix, credit risk, all the way down to selecting individual names. As bond funds now offer a healthy yield (thanks to decades high interest rates), the fee on active funds that used to deter some investors don’t feel like as much of a hurdle to overcome, especially if the manager makes the right calls and outperforms the broader market. 

Chart of the day


Quote of the day

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Contributors: A. Innis, A. Nguyen, P. Kwon

Charts are sourced to Bloomberg unless otherwise noted.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson Wealth Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. Richardson Wealth Limited, Member Canadian Investor Protection Fund. Richardson Wealth is a trademark of James Richardson & Sons, Limited used under license.


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