Market Watch: Aug. 11, 2023

• U.S. markets closed -0.27%1 lower after whipsawing following CPI and then PPI readings. With both consumer and wholesale inflation inching higher for July, it shows that inflation is still a concern. Expectations for no rate hike in September slid to 88.5% from 90% following the release of inflation data.

• In Canada, markets dipped early in the week – particularly rate-sensitive names – following U.S. CPI data, but strong earnings brought the main index back into positive territory, up 1.44%2, led by Consumer Staples and Energy.

• European markets traded -0.69%3 lower for the week after positive returns in both Germany and France’s main indices were tempered by pessimistic growth forecasts for the U.K.

• Emerging markets fell -0.31%4 as troubles in China continued to simmer, with cracks re-emerging in the country’s real estate market on news of the potential default of Country Garden.

LONGER-DATED SOVEREIGN YIELDS FALL AS INVESTORS ASSESS FED’S INTEREST RATE PATH

U.S. and Canadian sovereign bond yields were broadly lower for the week following a hotter-than-expected July PPI reading. The inflation measure ticked up across all readings, headline and core, month-over-month, and year-over-year. Credit spreads remained steady after moving wider since the beginning of the month.

Highlights:

• The 2-year U.S. Treasury yield was down 4 basis points (bps), while the 10-year yield fell 12 bps. In Canada, the 2-year yield was down 9 bps while the 10-year fell 12 bps.

• According to the latest report from Bloomberg, credit rating agency sentiment remains negative, with credit at both ends of the spectrum facing predominantly downgrade actions.

• Bonds rated single A and above that face a reduction in rating are about $228bn USD in size, with Pfizer and Bank of New York Mellon comprising just over one-third of that. Banks remain weak, as evidenced by Moody’s recent actions, with State Street and HSBC making up an additional $14.3bn USD in downgrade potential.

ECONOMIC SNAPSHOT

CANADIAN ECONOMIC ACTIVITY CONTRACTED IN JULY FOR FIRST TIME IN SEVEN MONTHS

Canadian economic activity contracted in July for the first time in seven months as a measure of employment fell, Ivey Purchasing Managers Index (PMI) data showed. The Ivey PMI measures the month-to-month variation in economic activity as indicated by a panel of purchasing managers from across Canada.

Highlights:

• The seasonally adjusted PMI fell to 48.6 in July from 50.2 in June. It was the first reading below the 50 level that indicates a decrease in activity since December.

• The gauge of employment fell to an adjusted 54.2 from 57.6 in June, while the supplier deliveries measure was at 47.9, down from 53.4.

• The unadjusted PMI fell to 45.2 from 53.4.

U.S. CONSUMER PRICES RISE MODERATELY IN JULY

U.S. consumer prices increased moderately in July amid lower costs for goods, including used motor vehicles, a trend that could persuade the U.S. Federal Reserve to leave interest rates unchanged next month. The U.S. Labor Department reported that the CPI rose 0.2% last month, matching the gain in June. Though the increase in the annual CPI rate picked up for the first time in 13 months, that was because it was calculated from a lower base after prices subsided last July following a jump that had boosted inflation to a pace not seen in more than 40 years.

Highlights:

• The CPI advanced 3.2% in the 12 months through July. That followed a 3.0% rise in June, which was the smallest year-on-year gain since March 2021.

• Annual consumer prices have come down from a peak of 9.1% in June 2022. The Fed has a 2% inflation target.

• Excluding the volatile food and energy categories, the CPI gained 0.2% in July, matching the rise in June. In the 12 months through July, the core CPI increased 4.7% after rising 4.8% in June.

CHINESE EXPORTS FALL AT STEEPEST PACE SINCE FEBRUARY 2020

China’s exports to the rest of the world tumbled in July, adding to the challenges for the world’s second-largest economy and offering fresh evidence that a drying up of Western demand is hurting Beijing’s attempts to rekindle growth. Worsening geopolitical tensions between Beijing and the U.S.-led West have also prompted some Western manufacturers to reduce their reliance on China’s supply chain, which in turn is expected to erode trade ties between the two sides.

Highlights:

• According to China’s General Administration of Customs, overseas shipments from China slumped 14.5% in July from a year earlier, the steepest year-over-year decline since February 2020.

• Chinese goods shipments to the U.S. fell 23% in July compared with a year earlier. Shipments to the European Union and to the Association of Southeast Asian Nations, a group of 10 countries that includes Singapore and Indonesia, each dropped by about 21%.

• Shipments to Russia, a country under Western sanctions over its invasion of Ukraine, rose 52% in July from a year earlier, helped by sales of high-value goods including automobiles. For the first seven months of this year, Chinese exports to Russia soared 73% from a year earlier, even as China’s total exports have fallen 5%.

IN THE NEWS

CHINA’S LAST MAJOR REAL ESTATE GIANT TEETERS ON BRINK OF DEFAULT

Country Garden, China’s largest developer by sales and once considered the gold standard in real estate, warned in a report to investors that it is expecting a loss of $7.6bn USD in the first half of the year. The report coincided with two other events: On August 1, the company abandoned a plan to inject capital into the business, and last week missed two bond payments, placing it at risk of default. The figures, reported in a filing on Thursday, lay bare the financial woes facing the embattled company and are a flashing warning sign for China’s economy. That Country Garden is on the brink of collapse is particularly concerning given it had largely benefitted from measures to bolster China’s flagging real estate market last year.

Behind the headline:

• Much of Country Garden’s financial problems stem from a drop in sales of apartments as fewer people are interested in – or able to – purchase a home.

• Country Garden shares, which trade in Hong Kong, were down ~29% over the past week alone, and ~64% year-to date.

• The situation is reminiscent of previous troubles with China Evergrande, another real estate giant that landed in default two years ago, setting off a wave of real estate defaults and sending global markets spiralling

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by Scotia Wealth Management - The Zukiwsky Group

Market Watch: Aug. 11, 2023

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