Making sense of the markets this week: September 20, 2021
[ad_1] Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and offers context for Canadian investors. New inflation data: transitory signs? The week ending Sept. 17 delivered a very generous data dump in Canada, the U.S. and Europe, with updates on inflation data, economic activity numbers, housing figures and more. Portfolio managers, professional economists—and armchair economists such as yours truly—are digging through trying to make sense of it all. Canadian inflation Let’s start with inflation data here at home. On Wednesday, Statistics Canada released its consumer price index for August 2021. The annual pace of inflation rose to 3.7% in July, marking the biggest increase since May 2011. August said “hold my beer,” and came up with an annual inflation increase of 4.1%, the highest since 2003. Now, keep in mind that inflation, or any stat, can appear more meaningful or dire due to base effects. Today’s inflation rate is based on a comparison of where we were one year ago, when numbers were more suppressed due to the pandemic and ongoing restrictions. That said, the base effect argument might not quite cut the (increasing price of) mustard when you look at the historical CPI on Trading Economics. Hit that 5-year or 10-year tab for charts in which that base effect argument seems to disappear. As well, many will argue that the inflation numbers are “massaged,” and that the rules change constantly. Like, let’s remove most of the expensive stuff from the CPI number. To get a sense of true inflation, you can start by going shopping and filling up the car on the way. Keep in mind, too, that inflation will hit you differently than your neighbour or your best friend, based on your personal lifestyle and spending patterns. From that CBC post… “Some of the biggest contributors to the jump were the sectors that Bank of Montreal economist Doug Porter noted were in full-on ‘reopening’ mode from COVID-19 shutdowns including air travel, where the price of tickets soared 37.5% and hotel charges increased by 12%. Gasoline prices, meanwhile, were up by 32% compared to last year.” I think we can agree that inflation is heating up—but is it transitory, or is it looking to stick around a while, and do some damage to our savings accounts and real (inflation-adjusted) investment returns? The Bank of Canada insists they see this inflation spike as transitory. Many of the issues creating inflation, such as supply chain woes, are temporary, and they will work their way out of the process. Not everyone agrees, however. As we discussed last week, the world runs on semiconductors/chips, and many feel that the current shortage will last years, not months. Increased wages also contribute to inflation, and that is a more sticky contributor as it’s difficult to cut wages after they have been increased. Still, the Bank of Canada has company with many economists in the transitory camp. From that same CBC post… “‘Much of the increases over the past year are just making up for weakness early in the pandemic,’ [CIBC economist Royce] Mendes said. ‘With the latest readings still suggesting that much of the recent acceleration is transitory and due to base effects, supply chain shortages and surging reopening demand, central bankers will stick to the script of keeping rates on hold until late next year’.” At the same time, Bank of Montreal economist Brian Porter acknowledged the potential for inflation to be more sticky and “transitory for longer.” “…‘rising wage pressures, robust home prices and firm energy costs all suggest that inflation is not about to quickly roll over as these other short-term factors fade,’ he added.” And, never mind firm energy prices, in an article that is perhaps shocking for many (but not for me), Eric Nuttall, portfolio manager at NinePoint Partners, suggests there is the potential for an energy crisis. We will have increasing demand for oil combined with decreased production in too many areas. That is the energy reality. Readers will know I am hedged with exposure to the energy producers’ index ETF—ticker XEG. In the Financial Times, finance prof and advisor Mohamed El-Erian sees the possibility of stagflationary winds as some reversible factors are accompanied by supply side troubles that could last for one to two years, if not more. For example, transportation costs for goods have risen seven to 10 times in the past year. U.S. inflation South of the border, CPI data showed a slowing rate of inflation and numbers that came in below expectations. What? From the CNBC post… “Prices for an array of consumer goods rose less than expected in August in a sign that inflation may be starting to cool, the Labor Department reported Tuesday. “The consumer price index, which measures a basket of common products as well as various energy goods, increased 5.3% from a year earlier and 0.3% from July. A month ago, prices rose 0.5% from June. “Economists surveyed by Dow Jones had been expecting a 5.4% annual rise and 0.4% on the month.” The U.S. recently offered some soft job numbers, as well. In last week’s post we wondered if the bad news (or soft news) might be good news. The Fed might hold off on tapering (bond-buying to suppress rates) and ease off on any rate increases that are known to cool the economy and even cause recessions. This Reuters post discusses U.S. inflation coming off the boil… “‘Inflation remains troublingly strong, even if it is not exploding like it did earlier in the year,’ said James McCann, deputy chief economist at Aberdeen Standard Investments in Boston. ‘If we continue to see further step-downs in inflation over the next six months, that should ease the pressure on the Fed to quickly follow tapering with interest rate rises’.” The Bank of Canada is likely to lead on increasing overnight rates. Stepping back, let’s keep in mind that no one knows the future. We don’t know if inflation will be lasting or if it will inflict damage.
Making sense of the markets this week: September 20, 2021 Read More »
