Big Picture
Markets Volatile As Trade and Growth Concerns
U.S. stocks flipped between small gains and losses on Thursday, ending slightly up for the day, while it was a third straight losing session for the TSX, which was weighed down by declining energy shares.
Oil prices fell Thursday nearly 4%–reaching their lowest level in over two months, as U.S. crude inventories surprised to the upside.
Investor pessimism seems to be taking hold–and not just in North America. On Wednesday, fears that an escalating trade war will stunt global growth pulled world equity markets down to near two-and-a-half-month lows and continued the rally in safe haven government bonds.
In Europe, German bond yields fell deeper into negative territory, while 10-year U.S. Treasurys yields dropped to 20-month lows at 2.23%. The 10-year yields on Wednesday were about 10 basis points below three-month rates, an inversion typically seen as a leading indicator of a recession.
Meanwhile, the Bank of Canada kept its key interest rate unchanged on Wednesday at 1.75%. While the economy is improving domestically—with strong job growth, consumer spending and higher exports in Q2–mounting trade tensions present significant headwinds to future growth.
Wednesday’s decision marks the fifth straight time the bank has held its key rate unchanged following a series of rate hikes in 2017 and 2018. Barring a dramatic improvement in economic conditions, most economists don’t foresee any hikes for the rest of 2019.
The BoC’s lukewarm assessment weighed on the loonie, which weakened to a near five-month low against the greenback on Wednesday.
In Europe, the possibility that Italy could violate the EU’s fiscal limits sent Italian yields higher on Tuesday and rattled European markets, already on edge as the Brexit chaos shows no sign of abating.
Britain’s opposition Labour Party leader, Jeremy Corbyn, said Wednesday that any Brexit deal should be put to a referendum, the strongest signal yet that the U.K.’s exit from the EU is far from being resolved.
N.A. Markets Continue to Struggle
For the four days covered in this report (which included just three trading sessions in the U.S.), the Dow declined 416 points to close at 25,170, the S&P 500 lost 37 points to settle at 2,789, while the tech-heavy Nasdaq fell 69 points to close at 7,568.
In Canada, the TSX was off 141 points to end at 16,089.
Equities/Strategy
Strategy
Inflation averaging gaining traction with U.S. Federal Open Market Committee (FOMC) members
In speeches earlier this week, the presidents of the Federal Reserve Banks of Chicago and Boston addressed the topic of “inflation averaging”.
Though such a strategy is not supported unanimously by FOMC members, the idea of targeting average inflation of 2% over some period of time appears to be gaining traction. Currently, the FOMC targets 2% inflation at all times.
At the moment, the discussion remains conceptual in nature, and the FOMC has yet to comprehensively explore ways of implementing an inflation averaging strategy. Ultimately, any shift in policy would not change the U.S. Federal Reserve’s (Fed’s) inflation target over the course of a business cycle.
Former Fed chairman Ben Bernanke had also proposed a monetary policy framework that did not rely on a static inflation target. In that case, the focus of monetary policy would switch from the rate of change of prices (inflation) to price levels themselves the moment the Fed’s policy interest rate reached zero.
For the time being, the Fed remains focused on its symmetric 2% inflation target.
(Bill Curry)
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