Futures climbed this morning after the U.S. Senate passed the debt-limit deal with a 63-36 majority, ending the threat of a default. The rise comes despite data that showed the U.S. continuing to add jobs in May, after NFP rose more than expected. Payrolls in the public and private sector increased by 339,000 for the month, much higher than the 190,000 estimate, marking the 29th straight month of positive job growth. Investors are now left to wonder if the Fed will shift from their recently dovish tone and hike rates at their next meeting. Despite these concerns, it appears that the market is choosing to focus less on the jobs numbers and concentrating on wage increases that showed lighter-than-expected inflation and an unemployment rate that ticked higher.
China announced a new round of measures to help the ailing property market after existing policies failed to sustain a rebound in the sector - including reducing the down payment in some non-core neighborhoods of major cities; lowering agent commissions on transactions, and further relaxing restrictions for residential purchases under the guidance of the State Council. The government may also be looking to enhance some earlier policies laid out in the sweeping 16-point rescue package it rolled out last year.
With a tight labour market and higher borrowing costs, Canada's residential construction activity continues to slow, with housing starts expected to decline to 212,000 units this year from 262,000 in 2022. Earlier this week, the Canadian Home Builders' Association said 64% of builders expect to have fewer starts this year than last. Adding to this, investment in residential building construction, after adjusting for inflation, fell in March to its lowest level since June 2020. All these signs spell bad news for the BoC who is seeking to lower inflation and the federal government who has vowed to improve housing affordability.
A new survey found that a shortage of skilled workers and funding is hurting manufacturers' ability to take up new technology. The poll found that 40% have yet to start or are just beginning a digital transformation, with one-third pointing to a lack of skilled workers as a key hurdle to adopting fresh tech. The positive news is that help may be on the way. In the federal government’s spring budget, officials zeroed in on more immigration by skilled workers as well as green technology, rolling out a clean tech manufacturing investment tax credit pegged at $4.5 billion over five years.
The federal government is backing up to $3 billion in loans for Trans Mountain Corp, the crown corporation building the long-delayed oil pipeline expansion to Canada's Pacific Coast. The Trans Mountain Expansion will nearly triple the flow of crude from Alberta's oil sands to BC, to 890,000 bpd and is intended to boost access to Asian refining markets. The federal government bought the Trans Mountain pipeline in 2018 to ensure the expansion project got built and provided a $10 billion loan guarantee to TMC, however, the project has been hit with roadblocks including regulatory hurdles, environmental opposition, and construction delays. In total, the project is expected to cost $30.9 billion, quadrupling from the $7.4 billion budgeted in 2017.
Wealthy countries have pledged $100 billion a year to help reduce the effects of global warming, but you may be surprised where that money actually going. A new report found that countries have been funding projects that that have nothing to do with climate change and reporting that funding to the UN as part of their giving total. So where did the money go? Well, Italy helped a retailer open chocolate and gelato stores across Asia (although I guess gelato would be helpful given the world in warming), the U.S. offered a loan for a coastal hotel expansion in Haiti, and Belgium used money for a film. The worst culprit was Japan who used the funds to finance a new coal plant in Bangladesh and an airport expansion in Egypt. Funding for these projects totaled $2.6 billion, and all four countries counted their backing as so-called “climate finance” – grants, loans, bonds, equity investments and other contributions meant to help developing nations reduce emissions and adapt to a warming world. Although this seems dishonest, these countries did not (technically) break any rules as the pledges came with no official guidelines for what activities count as climate finance, highlighting that the lack of a uniform system of accountability has allowed countries to make up their own rules.
Lululemon shares are looking to open higher after posting better-than-expected profit and sales in Q1and projecting full-year results that outpaced estimates. The company’s results were a sign demand for stretchy pants is persisting despite emerging weakness among consumers. For the full year, Lululemon now expects revenue to be as high as $9.5 billion, compared with a prior estimate of as much as $9.4 billion, pointing to ongoing strength for the brand, which appears to be sidestepping the softness that has hit other retailers.
Dell Technologies Inc. reported revenue that beat analysts’ estimates after sales of computers to businesses didn’t fall as sharply as anticipated amid the slumping PC market. The results reflect a continued struggle to sell personal computers, particularly to consumers. The market saw historic declines in shipments from October through March after a surge in purchases during the pandemic. Dell also delivered a lukewarm sales outlook that suggests a recovery may take a bit longer than expected. Revenue will be $20.2 billion to $21.2 billion in the current period ending in August.
Amazon.com Inc. has been talking with wireless carriers about offering low-cost or possibly free nationwide mobile phone service to Prime subscribers. The company is negotiating with Verizon Communications Inc., T-Mobile US Inc. and Dish Network Corp. to get the lowest possible wholesale prices. That would let it offer Prime members wireless plans for $10 a month or possibly for free and bolster loyalty among its biggest spending customers. Currently, Amazon’s US Prime subscribers pay $139 a year for privileges like speedy free delivery, video streaming and access to 100 million songs.
Oil prices are higher with the risk trade back on and the U.S. dollar slipping. All eyes will be looking ahead to the weekend’s OPEC+ meeting in Vienna, with the coalition expected to keep output levels unchanged. Keep in mind that the group did unveil surprise cuts in April and Saudi Arabia’s energy minister recently warned speculators to “watch out.” Crude is down more than 10% this year, in part due to resilient exports from Russia despite sanctions. There are two sides - on one side, global oil inventories are shrinking as the alliance’s latest production cuts take effect. On the other is disappointing Chinese economic indicators and fears of a US recession have emboldened bearish speculators.
Global food costs are falling to the lowest level in two years in May, reviving hopes that sticky inflation on supermarket shelves will start to ease. A UN index of food-commodity prices fell 2.6% in May, as declines in grains, vegetable oil and dairy offset higher sugar and meat costs. The gauge of prices for internationally-traded agricultural commodities has fallen 22% from the peak it reached in March last year following Russia’s invasion of Ukraine. Wheat prices are trading near the lowest in more than two years as bumper supplies from Russia weigh on the market, and European crops are in good condition. Still, declining commodities prices are taking time to feed through to consumers, with transportation, labour and energy costs remaining high.
Fixed income and economics
Companies in the U.S. flooded the market with new debt offerings last month, with nearly $150 billion of fresh high-grade debt sold. May marked the second busiest month for debt offerings so far this year and was the most active May since 2020. Still, the surge is not expected to continue, with bond sales from corporate grade companies poised to dip in the summer. The reason? Well it appears that there may have been a jump in activity to get ahead of the debt ceiling volatility or recession, which could potentially take away from the activity investors would normally see over the summer. Higher interest rates could also pose as a deterrent for companies to come to the market, especially if the Fed has another hike left in them.
U.S. junk bonds across the ratings spectrum are rebounding from four straight weeks of losses, driving the securities toward the biggest weekly gain since mid-April after the Congress agreed to raise the debt limit, ending weeks of uncertainty that cast a pall over financial markets. US investors pulled $2.2 billion out of junk-bond funds during the week ended May 31, pushing the net outflows for May to $4.7 billion.
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Contributors: A. Innis, A. Nguyen, P. Kwon, M. Letchumanan