Equity futures are looking to kick off the final week of September lower. Historically, September is one of the worst months of the year for equities and it is living up to its reputation so far. Markets are seeing big losses this month after central banks signaled higher interest rates for longer, sending bond yields rising. Still, where indexes will finish the month remains up in the air as it will be a busy week for economic data in the U.S. and Canada. The release of various data, including new home sales, consumer sentiment, durable goods orders, and GDP data for Canada in July will be front of mind for investors this week. Fed Chair Jerome Powell will host a town hall with educators, and other officials will speak at separate events. On the inflation front this week, consumer-price growth data in both the U.S. and the eurozone are expected to provide some reassurance to central bankers at the Fed and ECB. In the US, the PCE annual core inflation rate (PCE is the Fed’s preferred inflation measure), which excludes food and energy, is estimated to have fallen below 4% in August for the first time in nearly two years, while in the eurozone, the annual gauge of underlying price growth is expected to have slowed to 4.8% in September, a 12-month low. Still, the surge in crude oil prices heading towards $100 per barrel could impact price growth.
While on the topic of higher oil, the outlook for emerging-market assets has declined in recent months, a shift from when signs of easing inflation and expected interest rate cuts boosted sentiment towards the asset class. The rise in oil prices, which have increased by approximately 30% from this year's low, has caused price pressures to resurface, impacting the hopes for lower interest rates, particularly in countries dependent on oil imports. Economies heavily dependent on oil imports are particularly at risk, including India, the Philippines, Pakistan, Jordan, Kenya, and Morocco. Economists are warning that while the impact of surging oil prices varies, some countries may see their easing cycles postponed or slowed, and currencies may come under pressure.
Stats Canada early estimates suggests retail sales in Canada declined by 0.3% in August, which would mark the first drop since March, highlighting that Canadian consumers may be curbing their spending as the BoC's higher interest rates impact household budgets. Sales in the motor vehicle and parts dealer sector saw the largest decrease, falling for the first time in four months. Excluding automobiles, retail sales actually rose by 1%. The decline is likely due to more households facing mortgage payment renewals and higher fuel prices. This is welcome news to the BoC who decided to keep borrowing costs steady in early September, stating that higher rates are working to slow down the economy and consumption.
On Friday, the federal government pledged $650 million in new assistance for, affirming Canada’s support for the country during President Volodymyr Zelenskiy’s visit to Canada. Canada will supply Ukraine with 50 armored vehicles, including medical evacuation vehicles, to be built in Ontario and will also launch a working group to advise on Russian asset seizures. In total, the Canada has promised some $9 billion in financial and military help for Ukraine and have welcomed 175,000 Ukrainian migrants since the war began.
The Canadian manufacturing and construction industries are grappling with labour shortages, resulting in significant economic losses. To address this, the adoption of AI and automation is being promoted, not to replace jobs but to streamline operations and free up human capital and resources for growth in other areas. This topic is expected to be the focus at this year's Canadian Manufacturing Technology Show, which is taking place this week. The annual event is put on by SME, which represents various players in North America's manufacturing industry. Although some in the industry are resistant to change due to misconceptions, industry leaders aim to educate their peers on the positive role of AI, which could ultimately help combat labour shortages in these sectors and drive productivity.
Tentative deal. Hollywood screenwriters have reached a tentative new labour agreement with major studios, including Disney and Netflix, potentially ending a strike that began on May 2. The agreement is subject to approval by the Writers Guild of America members, and final details will be announced in the coming days. This strike, the first since 2007, was primarily focused on securing higher pay from streaming services, reflecting the changing landscape of the entertainment industry. The strike has disrupted the production of numerous films and TV shows, impacting various sectors of the industry, and led to growing concerns about artificial intelligence's role in content creation. If your favourite show has been delayed because of the strike, don’t celebrate yet, as a deal with the striking actors' union remains to be reached.
No mercy. The Miami Dolphins scored a record-breaking 70 points in a game against the Denver Broncos yesterday, setting a franchise record and coming within two points of the NFL’s regular-season scoring record set in 1966 when Washington scored 72 points against the Giants. The Dolphins’ performance makes them the fourth team in NFL history to score at least 70 points in a regular-season or playoff game. Despite now being 3-0, their winning streak is set to come to an end when they visit Buffalo in week 4 for an AFC East showdown with the Bills (hopefully).
The United Auto Workers expanded its strike against major automakers, including General Motors and Stellantis, by walking out of 38 parts distribution centers in 20 states. An additional 5,600 workers joined the strike, bringing the total to 13,000 of the UAW's 146,000 members who began striking a week ago. Ford was spared additional strikes because the company made some progress in negotiations last week. The UAW is seeking pay raises of 36% over four years, an end to lower pay scales for new workers, a 32-hour work week for 40 hours of pay, and other demands. The car companies argue they can't meet these demands due to the need to invest in the transition to EVs.
Amazon will invest as much as $4 billion in Anthropic in an effort to become a major player in generative AI and offering a vote of confidence in the hot startup. As part of the deal, Anthropic will move most of its software to Amazon Web Services data centers, and use the cloud computing company’s homegrown chips to train the models it uses to power chatbots and other applications. Besides getting access to Amazon’s computing power, Anthropic will gain a financial infusion that will help it pay the huge costs required to train and run massive AI models. Amazon will have a minority position in Anthropic.
Canadian steelmaker Stelco Holdings Inc. is considering a bid for United States Steel Corp. (US Steel), its larger former owner. Stelco aims to boost its steelmaking assets and its share of the automotive metal supply market through this move. The company is in talks with a potential partner for its bid. Stelco could be the latest suitor for US Steel, which began a strategic review in August after rejecting a $7.25 billion bid from rival Cleveland-Cliffs Inc. US Steel was once the world’s largest company, and it has attracted interest from various parties as it undergoes these changes.
Cameco shares have seen a significant increase, climbing towards a new all-time high due to a rally in nuclear fuel prices. The stock is up more than 70% YTD as uranium prices reached their highest levels since the Fukushima plant disaster in 2011. The demand for cleaner energy sources and increased demand from nuclear reactors have contributed to a more favourable outlook for uranium prices. Analysts are optimistic about Cameco's potential in this shifting market, which is putting upward pressure on uranium prices and benefiting producers like Cameco.
West Fraser Timber is selling two pulp mills in Western Canada, along with related woodlands operations and timber holdings in Alberta, to Atlas Holdings for $120 million. The Quesnel River Pulp mill in Quesnel, British Columbia, and the Slave Lake Pulp mill in Slave Lake, Alberta, are part of this deal. These mills will be operated by Millar Western Forest Products, which is part of the Atlas family of businesses. The transaction is subject to customary regulatory reviews and closing conditions.
Commodities
Oil prices are little changed after a volatile week ended with slight losses as traders weighed a balancing act between Russia's fuel export ban and concerns about future rate hikes. Concerns over future interest rate hikes and potential slack in oil demand as refineries go into maintenance were factors affecting market sentiment. However, Russia's temporary ban on gasoline and diesel exports added a supply squeeze, with uncertainty in the global refined product supply landscape. Data is also showing speculators have boosted their bullish positions on WTI to the highest since February 2022. China is also gearing up for the Golden Week holiday (Oct 1-7), with the longer-than-usual break set to boost demand for jet fuel in the biggest oil importer. More than 21 million people are expected to fly during the eight days, following record air-passenger traffic in July and August.
Canadian crude exports from U.S. Gulf Coast terminals are set to surge in October. Shipments are expected to reach 11 million barrels, the second-highest on record, marking a nearly sixfold jump from September's exports. This rise in exports is attributed to a combination of factors, including the seasonal maintenance of U.S. refineries, freeing more barrels of Canadian oil for export. The ongoing maintenance season in Alberta's oil fields is also concluding, bringing back production that was reduced during the summer. At the same time, global supply constraints from production cuts by Saudi Arabia and Russia are boosting the demand for Canadian crude.
Fixed income and economics
With U.S. 10-year yield at their highest in over 15 years, bond investors are grappling with the question of how much risk to take on. Treasuries are down 1.2% this year and are on track for an unprecedented third straight annual loss. Yields rose across the curve last week after the Fed kept rates unchanged, while signaling that there will likely be one more hike this year. The central bank also indicated that it anticipates keeping borrowing costs elevated well into 2024 to tame inflation (which would mean even short maturities may not be out of the woods just yet). And while individuals are increasingly favouring cash, many portfolio managers are considering various strategies. For some, the sweet spot is in shorter-dated notes, which could perform well if the Fed shifts to rate cuts in the coming years. Others are sticking with longer maturities in anticipation of better future returns, given the current levels.
Despite investors demanding the highest yields in nearly 14 years to participate in debt offerings, several corporate bond issuers, including Dollarama, Alimentation Couche-Tard, Honda Canada Finance, and Daimler Truck Finance Canada, have raised cash in the Canadian-dollar bond market. While it remains to be seen if issuers will continue finding it attractive enough to raise debt at current yields, roadshows have been held with Canadian bond investors, suggesting potential bond issuance in the pipeline.
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There cannot be a crisis next week. My schedule is already full. Henry Kissinger
