Market Watch: July 22

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Statistics Canada reported Wednesday that the headline consumer price index rose 8.1 per cent in June, year over year, the highest inflation rate since 1983. U.S. and Canadian stocks closed higher on Wednesday, with the technology-heavy Nasdaq gaining 184 points on more positive earnings reports, while the S&P 500 and Dow added 23 and 48 points, respectively. Shopify closed up 12.2 per cent in Canada, helping the TSX index to an 83-point gain.

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In Europe, the European Central Bank on Thursday raised interest rates by a larger-than-expected 50 basis points, the first rate rise in eleven years. It was another strong session for North American indexes on Thursday, as key earnings reports kept investor sentiment positive. By Thursday’s close, the Dow and Nasdaq each added 162 points, the S&P 500 rose 39, while the TSX climbed 42.

North American Indexes Gain Ground

For the four trading days covered in this report, the Dow rose 749 points to close at 32,037, the S&P 500 added 136 points to settle at 3,999, while the tech-heavy Nasdaq jumped 607 points to close at 12,059. In Canada, the TSX climbed 669 points to end at 19,063.

Strategy

Inflation continues to edge higher, maintaining pressure on the Bank of Canada to continue hiking

Inflation continues its upward momentum, hitting a new multi-decade high. Consumer prices in Canada rose 8.1 per cent YoY in June following a 7.7 per cent gain in May – the highest in nearly 40 years – and up 0.7 per cent compared to last month, according to data released by Statistics Canada. Much of the gain was driven by gasoline which surged 54.6 per cent YoY and 6.2 per cent MoM, but seven of the eight major CPI components rose by at least 3 per cent, indicating broad-based inflation pressures.

On an annual basis, goods inflation rose 11.2 per cent compared to 10.4 per cent in May, while services were unchanged at 5.2 per cent. Still, some signs of softening were evident compared to the previous month. Goods inflation moderated to 0.8 per cent MoM from 2.1 per cent, with the price of food decelerating to 0.1 per cent from 0.8 per cent previously and clothing declining by 1.3 per cent from a 2.2 per cent gain in May. Services meanwhile eased to 0.4 per cent MoM from 0.7 per cent previously as the increase in shelter costs was the softest since November, reflecting lower real estate commissions amid a slowing housing market.

The average of the three core measures, regarded as a better gauge for price increases, rose to 5 per cent, a record going back to 1990. While still elevated, headline inflation on both an annual and monthly basis came in below consensus expectations of 8.4 per cent and 0.9 per cent, respectively, which is welcome news for the Bank of Canada but is unlikely to alter the path of monetary tightening. Markets are pricing in a 75bps rate increase at the next meeting in September, which would take the target rate up to 3.25 per cent.

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