Morning Minutes

Stagflation in Focus With US on Holiday and Canada Returning to Trading




With US markets closed today, Canadian markets have an opportunity to catch up from Friday’s holiday. US markets rallied on Friday with their three main indices all gaining about 1.0%, although US index futures have given some of that back this morning with Dow futures down 0.25% and NASDAQ futures down 0.50%. European markets are climbing this morning with the Dax up 0.4% and the FTSE up 1.1%. In commodity action today, WTI crude oil is up 0.3% while copper is down 0.1%. In currency trading, Gold is up 0.3%, while Bitcoin is up 1.1%.

The US 10-year treasury note yield slipped back under 3.0% late last week and it has dropped below 2.90% this morning amid increasing signs of recession in the US. On Friday, the Atlanta Fed slashed its GDPNow forecast for Q2 down to -2.1% from its previous -1.0% estimate. The US ISM manufacturing PMI report showed a slower expansion, inflation levelling off and new orders dropping under 50 into contraction territory.

It would appear that a period of Stagflation has fully arrived (high inflation and a weak economy) and the implications of this many continue to impact sentiment through July. On the one hand, falling treasury yields suggest that central bank tightening could slow in the future but with inflation still at a high level, when and how aggressively central banks could bring rates back down remains an open question. In previous cycles, deflation was a big fear whereas this time it’s inflation so the dynamic could be different.

This week brings a number of key economic reports that could shed more light on the current economic environment. Canadian Manufacturing PMI  is due at 9:30 am EDT (street 56.6). Australia’s central bank meets tonight with the street expecting a 0.50% interest rate increase. Tomorrow brings Service PMI reports from around the world. Later in the week focus turns to employment, particularly Friday’s US nonfarm payrolls and Canadian employment and wage inflation numbers.

The other big question surrounding stagflation is what it could mean for corporate earnings. The only notable earnings report this week is clothier Levi Strauss who reports on Thursday. We are in confession season though, the time of each quarter when companies are most likely to release profit warnings. Heading into earnings season the biggest questions include: how much have sales slowed, is inflation squeezing profit margins, and have the first half equity market declines already priced in the prospect for weaker earnings?   

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Colin Cieszynski, Chief Market Strategist

Colin Cieszynski, CFA, CMT
Chief Market Strategist
+1 (647) 282-4428

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