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Featured in This Report Market Drivers the Day Ahead Spotlight GLOBAL PORTFOLIO ADVISORY GROUP Morning Strategy Update August 17, 2021 Featured in this report Market snapshot: Spotlight: Index performance Chairman Powell hosts town hall today before the minutes Overnight market action from July’s FOMC meeting are published Wednesday Market drivers: Hybrids corner: U.S. retail sales fell in July by more than forecast Top/bottom performing Canadian preferred share and convertible debenture securities Production at U.S. factories strengthened in July by the most in four months Today's economic data releases and events U.K. wage growth hit a record Notable earnings releases The day ahead Market drivers Spotlight U.S. Chairman Powell hosts town hall today before the minutes from July’s FOMC meeting are published Wednesday U.S. retail sales fell in July by more than forecast reflecting a steady shift in spending toward services, and indicating Chairman Powell’s town hall meeting today could characterize consumers may be growing more price conscious as developments from July’s FOMC meeting minutes and inflation picks up while supply issues persist. provide clues for the upcoming Jackson Hole symposium– Investors are eagerly anticipating the Jackson Hole Production at U.S. factories strengthened in July by the Symposium, scheduled for August 26th-28th, looking for most in four months, rebounding above pre-pandemic updates on policy and whether the impressive July levels and indicating manufacturers are coping with employment report will bring forward the likelihood of bond snarled supply chains and shortages. tapering. U.K. The path to “substantial further progress” for the U.S. Federal U.K. wage growth hit a record as companies posted more Reserve rests with the labour market – Several Fed officials, than 1 million new job vacancies for the first time in an including regional branch presidents James Bullard of St. unparalleled scramble for staff following the loosening of Louis, Robert Kaplan of Dallas, and Esther George of Kansas lockdown rules. City, have pushed for the central bank to begin removing stimulus as soon as the September meeting. The day ahead Chart of the day: Notwithstanding recent increases, average Chairman Jerome Powell hosts a town hall this afternoon inflation readings are fallen short of the Fed’s target in the last with students and educators that could be used as an decade opportunity to prime the market for what’s coming. 4.5% Investors are also looking to next week’s Jackson Hole symposium for an update on Federal Reserve policy. 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 5 Yr. Average YoY Inflation YoY Average 5 Yr. 1.0% 0.5% 0.0% 1985 1990 1995 2000 2005 2010 2015 2020 Source: Scotia Wealth Management, Bloomberg GLOBAL PORTFOLIO ADVISORY GROUP Market snapshot YTD Equity Indices Level %Δ 1D %Δ YTD Overnight market action: Tot. Ret. Equities: U.S. equities dropped from a record amid S&P/TSX Composite 20,395 -0.4 17.0 19.0 mixed economic reports and growing concern that S&P 500 4,454 -0.6 18.6 19.6 more shutdowns are becoming necessary to contain a S&P 500 (CAD) 5,619 -0.3 17.5 18.5 fast-spreading pandemic. MSCI All-Country ex-U.S. 349 -0.7 7.0 8.9 U.S. bond yields: The yield on the 10-year U.S. Treasury note is lower by 1bps, trading at 1.25%. The spread MSCI Emerging Markets 1,272 -0.7 -1.5 0.0 between the 2-year and 10-year bond yields has YTD Fixed Income Indices Level %Δ 1D %Δ YTD narrowed to ~104bps. Tot. Ret. Commodities: The price of WTI crude oil is lower by ICE BofAML Global Corp 361 0.2 -0.8 -0.8 0.1%, trading at US$67.20. The price of copper is ICE BofAML Global HY 459 0.0 2.4 2.4 trading lower this morning while the price of gold edges ICE BofAML Global Sov 347 0.3 -3.3 -3.3 higher. S&P/TSX Preferred Share 688 0.0 11.6 11.6 Fixed income update: This morning, U.S. Treasury yields are flat-to-down Currencies Spot %Δ 1D %Δ YTD %Δ 1 Year small across the curve. Credit spreads are little soft with CAD 0.79 -0.3 0.9 4.5 High Yield (HY) at 344bps and Investment Grade (IG) 94bps. Four IG issuers priced US$3.2bn of new debt EUR 1.17 -0.3 -3.9 -1.1 yesterday. Borrowers paid little to no concessions due JPY 109.43 -0.2 -5.6 -3.1 to relatively strong demand despite an elevated volatility. Three companies are looking to tap the USD 90.82 -0.3 -1.1 -1.1 market this morning, according to Bloomberg. In HY, Commodities Spot %Δ 1D %Δ YTD %Δ 1 Year three borrowers priced about US$2.0bn yesterday amid softer market tone. There are another US$2.0bn Copper 4.24 -2.1 20.4 46.0 of deals that are expected to price next few days. Gold 1,789.10 0.1 -5.6 -9.9 WTI Crude Oil 67.20 -0.1 38.5 56.7 WCS-WTI Price Diff. -12.75 0.8 16.4 -37.8 Current Policy 5 Yr. 10 Yr. Macro Inflation Rate Yield Yield Canada 3.1% 0.25% 0.81% 1.15% U.S. 5.4% 0.25% 0.76% 1.25% Europe 2.2% -0.50% -0.73% -0.47% Japan -0.1% -0.10% -0.13% 0.02% 3-mo performance summary 7.0% 4.7% 1.8% 1.0% 0.6% 1.4% 1.3% 1.4% -3.0% -4.2% -10.3% S&P/TSX S&P 500 MSCI All- MSCI BofAML BofAML BofAML S&P/TSX Gold WTI Crude Copper Composite Country ex- Emerging Global Corp Global HY Global Sov Preferred Oil U.S. Markets Share 2 GLOBAL PORTFOLIO ADVISORY GROUP Market drivers U.S. U.S. retail sales fell in July by more than forecast reflecting a steady shift in spending toward services, and indicating consumers may be growing more price conscious as inflation picks up while supply issues persist. The value of overall retail purchases dropped 1.1% last month, falling more than the 0.3% decline predicted by consensus and reversing last month’s upwardly revised 0.7% increase. Total receipts trailed estimates by a wide margin as declines in motor vehicle and e- commerce sales weighed on the figure. Restaurant spending increased, though at a more moderate pace than in previous months. Motor vehicle and parts dealer sales slumped 3.9% in July after a 2.2% slide a month earlier, likely in response to limited inventory and higher prices as automakers face supply chain constraints. Sales at non-store retailers, which include e- commerce, fell 3.1% in July, a sharp slowdown from the prior month. Overall, 8 of 13 categories registered decreases in July. Delta variant concerns likely did not affect today’s numbers as cases picked up later in the month and restaurants, which typically hardest hit by contagion concerns, were one of only a handful of segments to see higher sales volumes. Indeed, we think supply issues are playing a large part in holding back sales. U.S. retailers' inventory-to-sales ratio is at a record low, and we will get a fuller picture when July inventory data is published next week but supply shortfalls stemming from container shortages, port congestion, and difficulty getting orders into the country are evident across the economy. Production at U.S. factories strengthened in July by the most in four months, rebounding above pre-pandemic levels and indicating manufacturers are coping with snarled supply chains and shortages. The 1.4% increase in manufacturing production followed a revised 0.3% drop in June, while total industrial production, which also includes mining and utility output, rose 0.9% in July. Resilient business spending, steady consumer demand and lean inventories have fueled output growth but also driven up order backlogs as producers grapple with difficulties sourcing materials and parts. The mismatch of supply and demand highlights room for further growth in factory output, especially if producers have more success filling open positions. Input costs were up 23% from a year ago, according to recent data, while job openings in the space stood at a record 826,000 last month. U.K. U.K. wage growth hit a record as companies posted more than 1 million new job vacancies for the first time in an unparalleled scramble for staff following the loosening of lockdown rules. The jobless rate fell to 4.7% in the three months to June from 4.8% in May while employment rose by 95,000, each roughly in-line with consensus expectations. The rise in vacancies in the face of an elevated unemployment rate with about two million people still on furlough suggests some friction in the labour market, preventing a smooth reallocation of workers. That is one reason why wage growth has picked up in recent months, accelerating again in the three months to June to 7.4%. We think is it is likely that the unemployment rate remains steady in the near-term, while outlook risks are fairly evenly balanced. The revival in demand could drive unemployed persons back to work or he winding down of the furlough scheme, which became less generous from the start of July and will expire at the end of September, could put upward pressure on the unemployment rate. The Bank of England (BoE) is unlikely to alter its policy mix until it sees how the labour market responds to the ending of wage support.
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