Weekly Market Wrap-Up: Wicked Fed!
In a very directive form at the Jackson Hole Symposium, Fed Chair Yellen said this morning that the case for another interest rate hike has increased. But as we have seen so many times over the past year, investors initially took Yellen’s words with a grain of salt, with stocks and bonds rallying after the statement. This was until vice-chair Stanley Fischer took the stage and said that Yellen's speech was consistent with a rate hike as soon as September, not December as most pundits expect. In our view, key remarks from the economic forum came from the Fed Dallas president. In a Bloomberg interview, Robert Kaplan said that FOMC members are very concerned about the US$ impact and the de-facto tightening in financial conditions. He re-affirmed the Fed’s core narrative of being patient and gradual in lifting interest rates. This means that, in terms of global monetary policy-setting, world central banks will complete their easing cycle before the Fed means business and bites for real. Overall, equities and commodities are down slightly for the week, negatively reacting to a Fed-induced US$ rebound.
Gold and gold equities were hit particularly hard this week as investors decided to pocket strong YTD gains ahead of possibly hawkish comments from Fed governors at the Jackson Hole retreat. As we said in previous wires, profit-taking activities had become unavoidable and the ongoing correction looks like a replay of the 1993 experience when, after a doubling in YTD performance, gold equities plunged 25% before resuming their uptrend. As our Chart of the Week shows, if this roadmap is any guide, the 150-day average on the S&P/TSX gold index should hold. This means another 8-10% downside risk. That being said, the sharp recovery following the 1993 rout shows that one should not be too cute. The risk-reward shifts positively following another leg down. We would remove our caution flag around the 150-day ma and start accumulating golds again for what we believe will be the inflation-leg of the gold equity cycle. Remember: usually golds inversely track real bond yields (using US headline CPI) very closely. These yields will likely turn negative in late Q4 or early Q1/17. More details next week when we publish the September edition of the Quantitative Strategist.
Regarding economic statistics this week, in Canada, wholesale trade advanced for a third consecutive month in June (+0.7% MoM), fueled by the motor vehicle industry (+3.8%). In the US, durable goods orders increased 4.4% MoM owing to a jump in nondefense aircraft and parts: (+89.9%). Excluding transportation, the results were more modest but still positive with a 1.5% increase. A bright spot is that non-defense capital goods orders (excl. transportation) posted a healthy gain of 1.6%. Q2 GDP growth was revised down from +1.2% to +1.1%. Housing statistics were mixed, with new home sales surging 12.4% but existing home sales dropping 3.2%. Summing the two, total new and existing home sales declined ~1.7% MoM. Elsewhere, in Europe, the manufacturing PMI for the Eurozone slipped to 51.8 from 52.0 (52 exp.) while the services PMI rose to 53.1 from 52.9 (52.8 exp.). Meanwhile, the German IFO business confidence index fell to 106.2 in August from 108.3. In all, economic statistics did not materially deteriorate following the Brexit vote. Finally, in Japan, it seems BoJ Governor Kuroda will have to do more to stimulate inflation. Indeed, headline and core inflation in August (Tokyo index) settled at -0.5% and -0.4% respectively (from -0.4% and -0.4%).
Next week, we await PMI releases globally, US nonfarm payrolls, personal income, spending and PCE inflation. Otherwise, we will focus on the trade balance and Q2/16 GDP growth in Canada. Finally, inflation in Europe and household spending in Japan should help gauge the ECB and the BoJ.
The Canaccord Genuity research included in the Legacy Wealth Weekly is solely for Canadian residents. To subscribe to our weekly newsletter, click here.
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