David Raymond Amos@DavidRayAmos Replying to @DavidRayAmos @alllibertynews and 49 others Methinks anyone can Google Fundy Royal Debate to view what I say is true and to help them understand why my political foes within the federally supported SANB are on the attack N'esy Pas?
Last week's gloom and doom has not seized Canadian economy yet
486 Comments
David R. Amos Methinks its a hard rain gonna fall N'esy Pas?
Steven Arsenault
Reply to @David R. Amos:
I'm voting you down just for that N'esy Pas.....it needs to go.
David R. Amos
Reply to @Steven Arsenault: Methinks you forgot to ask if I cared that you find my Chiac offensive. Need I say that I bet Premier Higgs and his Deputy Gauvin would agree that last week was a rather telling thing about who can use that lingo and who cannot N'esy Pas?
Steven Arsenault
Reply to @David R. Amos:
Me thinks you also forgot to ask if I care..... N'esy Pas?
David R. Amos
Reply to @Steven Arsenault: Methinks I should bring your concerns up as I debate in Fundy Royal again during the upcoming election of the 43rd Parliament N'esy Pas?
David Lugli
Reply to @Steven Arsenault: i think you do ---you responded with instructions
David R. Amos
Reply to @Steven Arsenault: Methinks a lot of folks know I predicted this recession long before the brand new Potash Mine closed in Sussex N'esy Pas?
David R. Amos
Reply to @david lugli: Instruction or not methinks anyone can Google the following to view what I say is true and to help them understand why my political foes within the federally supported SANB are on the attack N'esy Pas?
Fundy Royal Debate
Last week's gloom and doom has not seized Canadian economy yet: Don Pittis
Can the economy withstand the latest barrage of gloomy economic news?
A flood of domestic fruit and veg will likely help push headline inflation down. (Don Pittis/CBC)
A glance at the business headlines over the past week might have left you thinking the world was on a fast track to economic Armageddon.
Markets crashed. There were renewed warnings about the inverted yield curve, which, almost bizarrely, has moved from economic arcana to bar chatter. Banks in Denmark offered to pay interest to mortgage seekers to encourage them to borrow money. The world seemed to have turned upside down.
For Canadians trying to comprehend our place amid reports of chaos, this week offers two more beads on the thread of Canada's ever-evolving economic story, inflation on Wednesday and retail sales on Friday.
And whether we are whistling past the graveyard, or somehow strangely sheltered from the global economic turmoil, there are plenty of indications Canada is not following a path insinuated by the past week's gnashing of teeth. At least not yet.
"We are currently at a time of a lot of uncertainty," said economist Farah Omran last week.
"Domestically the Canadian economy is doing fine. Housing seems to be rebounding while employment is good."
Out of sync?
Omran, a policy analyst with the C.D. Howe Institute, a Canadian economic think-tank, was co-author of a report last month examining why Canadian inflation was out of sync with the wider economy.
One factor, the research concluded, was that economic improvements for those with lower income tended to spur higher inflation, because people strapped for cash are more likely to spend everything. That spending helps to bid up prices.
When the economy instead is rewarding people at the high end, they are more likely to invest than spend, and inflation stays lower.
And while the latest employment numbers showed Canada lost jobs, employers are still crying out for workers to fill some 400,000 empty positions if only they could find the right people.
Canadian employment remains strong, and despite some recent job losses wage growth remains at the highest level since 2009. (Don Pittis/CBC)
"Employment is still strong and wage growth actually went up really well," said Omran. "It was the strongest increase in wages since 2009."
According to the rationale of the Phillips Curve, recently given pop status when U.S. Rep Alexandria Ocasio-Cortez earned kudos for her question on the subject to Federal Reserve chair Jerome Powell, rising wages should help push up inflation.
But as Omran said, in a complicated world, no single cause shapes the inflation figure.
In general, higher inflation is a sign of a strong economy, showing that consumers and businesses are using up spare capacity, including labour.
But when food prices fall because the Canadian harvest comes in, that makes people better off while recirculating money in the domestic economy. Energy costs, which have been falling in spite of fear mongering over carbon pricing, have a dual effect, making consumers better off but starving the oil-producing regions of income and jobs.
Americans still shopping
On Friday a poll of bank economists by the business wire service Bloomberg showed a consensus that inflation would fall from two per cent to 1.6 per cent, with retail sales declining by 0.3 per cent, as falling auto sales weighed on dealers.
However, gloomy prognostications south of the border did not pan out. Last week U.S. core inflation, a figure that leaves out volatile food and energy prices, rose sharply for the second month running.
On Thursday, sharply higher retail sales surprised U.S. markets, seemingly indicating that consumers have not been put off by global signs of distress.
The U.S. and Canadian economies are heavily dependent on consumers, and there are signs that gloomy headlines may be having an effect. (Carlo Allegri/Reuters)
As to the wider machinations of the global economy, Omran says they will have an effect in Canada.
New economic stimulus abroad in the form of low or negative interest rates will make Canadian imports cheaper, pushing inflation lower. But by pumping up the economy they may also stimulate foreign demand, including for Canadian products.
A general weakening in global manufacturing, notably in Germany and China, damaged by the U.S.-China trade battle, may hit Canadian exports of raw materials, though there will still likely be demand for products such as food and gold.
A general fall in demand for oil is likely to hit expensive producers first, one possible reason why the Koch brothers sold out of Canadian oilsands investments earlier this month.
Relatively isolated from oddities
So far the Canadian and the North American economy, based on services and on trade within the NAFTA area and most of all dependent on consumer spending, has been relatively isolated from oddities such as negative mortgage rates.
But with consumers so crucial to the economy, negative headlines and global gloom may already be having an effect.
New data from the U.S. released on Friday showed that consumer sentiment fell to its lowest level in seven months, partly motivated by interest rate cuts by the Federal Reserve, said Richard Curtin, the economist in charge of the survey conducted by the University of Michigan.
"Consumers concluded, following the Fed's lead, that they may need to reduce spending in anticipation of a potential recession," said Curtin.
Ironically, the rate cuts that U.S. President Donald Trump championed as a means of stimulating the economy may actually be having the opposite effect.
Don Pittis was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London. He is currently senior producer at CBC's business unit.
A share trader reacts as he sits behind his trading terminal at the Frankfurt Stock Exchange. More than one quarter of all the government debt in the world is currently paying out a negative yield, including all of Germany's. (Kai Pfaffenbach/Reuters)
Sure, maybe if you were the captain of a ship full of sorghum, changing direction on the high seas with each new presidential tweet, you might sense the tides were shifting. And anyone trying to buy a Harley Davidson in Hungary was likely also keenly aware that there was some funny business afoot. But unless you happened to be a Canadian exporter of steel and aluminum or a Mexican avocado farmer, it was perhaps easy to think the world of international trade was largely business as usual.
Not anymore. Markets were whipsawed this week by the slow realization that the outlook for the world's economy isn't getting better — it's getting worse. And while 800-point drops for the Dow Jones index tend to generate a lot of headlines, it's what's happening in some far more under-the-radar indicators that are the best signs of just how wacky the economy is getting.
Negative rates
Bond yields don't tend to get a lot of attention outside of the financial press, but their behaviour in recent weeks is perhaps the surest sign of just how topsy-turvy the global economy has gotten. Bonds are debt, issued by governments and companies, that come with an interest rate attached so that the people loaning out the money get a return over time.
Generally speaking, bonds are seen as safe investments, which is why investors only expect a few percentage points of return from holding them at the best of times. But the fog over the economic outlook is so thick at the moment that many borrowers are getting away with selling bonds offering a negative yield.
Interest rates have gotten so low that Danish bank Jyske has started offering a negative-rate mortgage that actually pays the borrower. (John McConnico/Bloomberg News)
Anyone buying that bond is willingly buying an investment that's guaranteed to lose money, but investors are more than happy to buy it up — because the fear is that alternative investments will fare even worse.
That may sound great for anyone looking to buy a home in Copenhagen, but it's very bad news for the world's economy, says Paul Gardner, partner and portfolio manager of Avenue Investment Management.
"There's something around $16 trillion of bonds around the world dealing with negative interest rates," he said in an interview with CBC News this week. "That's very unhealthy ... just because it has a feel of instability."
Gold is perceived to be a safe haven, which is why investors flock to it during times of uncertainty. (Michaela Handrek-Rehle/Bloomberg)
"You always want to have positive interest rates," he said. "You want low, but you don't want negative."
Those negative yields are filtering down into the economy in some truly jaw-dropping ways. A Danish bank this week started offering a negative yielding mortgage— meaning anyone who signs up will get money to buy a home, and then get a tiny interest payment in their account every month to help pay down the principal.
Yield curve has flipped too
As much as one-quarter of all the government debt in the world is currently upside down. And even the bonds that still eke out a tiny return are flashing red warning signs of their own.
Under normal circumstances, long-term bonds tend to pay out more than short-term ones simply because it's a lot easier to forecast the short term than the long, so a bond buyer demands a higher rate for a long term to offset the risk of that uncertainty.
But a funny thing has happened of late, in that yields have flipped — long-term rates are even lower than short-term ones, — which suggests investors have more confidence in the short term than they do over the long term.
It may be rare, but to Bruce Bittles, chief investment strategist for R.W. Baird & Co., the yield curve inverting makes perfect sense.
"I don't think there's any mystery," he said in an interview. "It's because interest rates all over the world are plummeting."
"The Federal Reserve is going to have to come in and lower rates again, so the bond market is anticipating that."
Gold is suddenly soaring
If investors think the world's economy is lurching towards recession, it makes perfect sense that interest rate predictions are following suit. And so, too, does what's happening in the investment that investors often run to in times of fear: gold.
The glittering metal touched a six-year high this week above $1,500 US as fearful buyers poured money into what's perceived as a safe haven.
"When investors are looking for somewhere to run, many view gold as an attractive option, particularly when the world's central banks also seem to believe the same," the analysts at RBC Capital Markets wrote this week. "Rate cuts are back in style and ... global monetary policy is indeed gold positive."
It would be ironic if central bankers' desire to stimulate the economy caused investors to park their money in an asset like gold that does nothing for the economy. But that's just par for the course in today's uncertain times, according to author and portfolio adviser Hilliard MacBeth.
"Moving into cash and gold is not what central bankers were anticipating when they pushed for zero rates," he said in a note to clients on Friday. "But in the strange world we live in today, expect the unexpected."
Stock markets sell off as inverted yield curve in bond market prompts recession fears
Dow Jones loses 800 points, TSX down almost 300
Thomson Reuters·
The yield on 2-year U.S. debt was briefly higher than the yield on 10-year debt on Wednesday, a rare situation that suggests a lack of confidence in the economy. (Alex Grimm/Reuters)
Bond markets are showing this week that they vehemently disagree.
Sliding bond yields and the inversion of a key part of the U.S. yield curve on Wednesday for the first time in 12 years show that bond investors have a far gloomier outlook for the U.S. and global economies than the U.S. central bank.
"The rates market rarely lies and globally it looks like it's expecting a day of reckoning," said Tom di Galoma, a managing director at Seaport Global Holdings in New York.
Investors are certainly feeling fearful about the development. The Dow Jones Industrial Average plunged 800 points to close at 25,478 or almost three per cent on Wednesday, as recession fears settled in for stock investors. The Toronto Stock Exchange fared slightly better, down 300 points or almost two per cent to 16,335 on the same fears.
"With the yield curve inverting it certainly raises that [recession] prospect," Bruce Bittles, chief investment strategist for R.W. Baird & Co., told CBC News. "I don't think there's any kind of mystery as to why we're seeing this kind of weakness."
Part of the fear that investors have is that central banks may be running out of ammunition to stimulate growth as countries offset each other's attempts to boost growth with looser fiscal policy.
Worsening economic data, weak inflationary pressures, the escalating U.S.-China trade war and intensifying tensions between protesters in Hong Kong and the Chinese government have boosted demand for safe-haven debt, sending many European government bond yields deeper into negative territory while the longest-dated U.S. Treasury yields have fallen to record lows.
The inversion of key parts of the Treasury yield curve, in which investors in short-term holdings get paid more than those in long-term ones, has historically been a reliable indicator of a coming recession. Typically longer term debt pays out more than short term debt, so when the outlook for the short term looks better than the long term one, it's taken as a sign of trouble ahead.
On Wednesday, the yield on the U.S. 10-year Treasury note tipped 2.1 basis points below two-year Treasury yields, the first time this spread has been negative since 2007, according to Refinitiv data.
The inversion rattled investors already worried that a U.S.-China trade war might trigger a global recession and kill off a decade-long bull market on Wall Street. Major U.S. stock indexes were down about two per cent as a result.
"People are becoming more convinced that global growth is weakening and people are starting to see some signs of transmission into U.S. sentiment," said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.
"That longer-end rates are rallying does suggest some lack of confidence that the central banks will actually be able to do anything about the slowing global growth momentum," he added.
Fading optimism
At the start of the year, markets and central banks were more optimistic on the global economic outlook. The European Central Bank had just ended its stimulative bond purchase program while the Fed was seen as likely to continue hiking rates after raising borrowing costs four times in 2018. That shifted in March, however, when the Fed abruptly brought an end to its hiking cycle.
In conjunction with disappointing U.S. manufacturing data, the move sparked broad repositioning that led the three-month/10-year yield curve to invert for the first time since 2007. That was followed in July by the Fed's first rate cut since 2008.
The U.S. central bank looks better placed to ease conditions than many of its counterparts as it still has room to cut rates. Bond markets are priced for two additional U.S. rate cuts this year and a third in the first half of next year.
An inverted yield curve is usually a precursor to a downturn in the real economy. (Michelle Nichols/Reuters)
The ECB, meanwhile, is evaluating cutting rates further into negative territory and undertaking another bond purchase program.
The Bank of Japan is similarly looking at lowering its negative interest rates and expanding asset purchases.
The Bank of Canada, meanwhile, isn't immune from the sudden movement toward rate cuts, with investors pricing in about a one in four chance of a rate cut next month, and odds that jump to better than 90 per cent by next year.
By easing financial conditions, a central bank can stimulate an economy by making business and consumer loans cheaper, while the depreciation of the local currency that results from lower interest rates can boost exports.
As central banks compete for more dovish policies, however, they threaten to cancel each other out, making each move less effective.
"The reality is that central banks around the world are responding to a diminished outlook, looking to cut rates and ease financial conditions, so basically it means the Fed's not cutting rates in a vacuum," said Jon Hill, an interest rate strategist at BMO Capital Markets in New York.
Last week, the New Zealand central bank sent investors scurrying to safe-haven currencies by cutting rates more than expected and indicating that it may take rates below zero if needed.
A chorus of other central banks including those in India, Thailand and the Philippines also cut rates during the week.
"Overburdening of monetary policy in recent years has made it almost ineffective, or even harmful in some cases, as central banks are trying to address problems beyond their control, with limited and often experimental policy tools," Bank of America Merrill Lynch FX strategist Athanasios Vamvakidis said in a recent report.
"We see signs that this is not a sustainable situation and may not end up well," he said.
Governments have printed unimaginable amounts of money, inflating the money supply, since 2008. A bank in Denmark just offered the first negative-yield mortgage. Another recession is inevitable. What will we do this time? (Mark Blinch/Reuters)
Some economists seem to think that only a credentialed economist has the right to be utterly wrong about an issue of economics. Their contempt for amateurs — columnists with broad audiences, for example — would sear the lungs if inhaled.
So, because criticism just makes me feel so terrible, let me phrase a whole set of nagging worries as questions. Can we agree there are no stupid questions? Probably not. But let's try anyway.
Question No. 1: How in heaven's name did we arrive in a world where you must pay someone to borrow your money, and what does that mean to the punters? Like, um, me?
At the moment, there is more than $14 trillion US in negative-yielding debt extant in the world, meaning money is not just cheap, it's on sale at a loss.
Let's put that sum in perspective: Canada's GDP in 2018 – the entire economic output of a G7 country – was about $1.7 trillion US. Fourteen trill is a huge chunk of global wealth.
Governments, many of them European, are actually offering — and investors are buying — bonds that are worth less at the end of five or 10 or even 30 years than their purchase price.
Negative-yield mortgage
And a bank in Denmark is now offering a negative-yield mortgage. Jyske Bank will lend customers a ten-year fixed-rate mortgage with an interest rate of -0.5%, which means those borrowers will actually pay back less than they borrowed.
As for the punters, some have pensions, private and public, which, if this trend continues, will be forced to severely reduce their payouts. Some have RRSPs and other savings, which are subject to the same market forces. The expectation my generation was raised on was that prudence and parsimony would result in a nest egg later in life, which someone would pay to borrow, which would help fund your retirement. Now, apparently, we will have to pay someone to "hold" our money for us. Bloomberg, the financial news agency, moved an explainer piece on all this last week, which suggested that this is all perfectly normal.
Relatively flat economic growth in the developed world, explained the explainer, combined with ever-increasing concentration of wealth, has left rich people and companies sitting on vast piles of cash for which there is weak demand.
The rules of economics being what they are, theorized the author, it only makes sense that financial institutions would begin charging to store this surplus money. After all, if you own something really expensive, don't you have to pay to store it safely? A safety deposit box costs money, doesn't it?
What the explainer avoided was where a lot of this money came from in the first place. Which brings us to Question No. 2: Governments have printed unimaginable amounts of money, inflating the money supply, since 2008. That must have consequences for the punters, right?
In early 2008, before the criminal greed of America's mortgage and investment bank industry nearly destroyed the world's economy, the balance sheet of the U.S. Federal Reserve stood at about $870 billion.
(Speaking of 2008, there is no better example of economists being wrong. Larry Summers and Alan Greenspan, two economists who rose to manage much of the American economy, not only didn't see the subprime crisis coming, they both fought successfully against regulation of derivatives, which are essentially bets on the rise and fall of asset values. Wall Street's creation of ever more insane derivatives basically caused the meltdown while regulators looked the other way.)
Then-Fed chair Ben Bernanke and his fellow governors, desperate to avert complete disaster, plugged in the money-printing machine (actually, money printing is done electronically, with a few computer keystrokes).
The Fed balance sheet is now at nearly $4 trillion.
The European Central Bank began printing money in 2015: $2.6 trillion Euros over four years, or about 7,600 Euros for every person in the currency bloc. Japan, the UK and Switzerland have all done the same in differing amounts. The technical term for it is "quantitative easing."
The central banks have used the oceans of new money to buy bonds from their own debt-addicted governments, with the intended result of lowering the cost of borrowing and encouraging risk-taking, which is at least one explanation for the nosebleed stock market levels nowadays, and the staggering levels of household debt here and in the U.S.
But there is serious pressure to do even more. Which brings us to Question Number Three: Winter is coming, and so is another recession. It is inevitable; 10 years have passed since the last one. What will we do this time? And…the punters.
One thing central banks won't be able to do this time is lower interest rates significantly. As negative rates are already here. U.S. President Donald Trump, judging by his weekly rants about the incompetence of Federal Reserve Chairman Jerome Powell, whom Trump appointed, seems to think monetary policy should be in the hands of politicians like him. (Now that would be a confidence-inspiring move, wouldn't it?). Trump thinks cutting U.S. interest rates even further is just the ticket.
“Three more Central Banks cut rates.” Our problem is not China - We are stronger than ever, money is pouring into the U.S. while China is losing companies by the thousands to other countries, and their currency is under siege - Our problem is a Federal Reserve that is too.....
....proud to admit their mistake of acting too fast and tightening too much (and that I was right!). They must Cut Rates bigger and faster, and stop their ridiculous quantitative tightening NOW. Yield curve is at too wide a margin, and no inflation! Incompetence is a.....
Other politicians, on the left, are promoting Modern Monetary Theory, which posits that governments can print unlimited amounts of money without inflationary consequences. Some even want central banks to just start sending cheques to every household.
(Actually, Trump is right over there with the leftists, if you think about it: pro-spending, pro-debt, and pushing for even looser monetary policy).
And of course the central banks are increasingly shackled by the fact that citizens and governments owe so very much; at this point, having helped create this mess to save us all from the earlier mess, they haven't much choice but to leave interest rates where they are for many years to come.
This much is absolutely true: we are in unknown territory, out past the "here be monsters" sign. None of us has any idea how this will turn out, economists included. As we saw in 2008, the collateral damage when things start to go badly can be devastating. Personally, I have a bad feeling about it all, but then I'm not an economist.
I'm with Bruce Springsteen, also a non-economist, who once put it this way: "Blind faith in your leaders … will get you killed."
By "you," he did not mean the top .5 per cent, with their insider information and high-speed trading algorithms and political influence and vast, expanding piles of cash. They'll be fine. When Donald Trump, a member of that cohort, said in 2015 that the system is rigged, he was right, just not in the way he meant.
This column is part of CBC's Opinion section. For more information about this section, please read our FAQ.
Clarifications
A previous version of this column suggested that Jyske Bank was the first bank to offer a negative-yield mortgage. In fact, similar types of mortgages have been offered before.
Neil Macdonald is an opinion columnist for CBC News, based in Ottawa. Prior to that he was the CBC's Washington correspondent for 12 years, and before that he spent five years reporting from the Middle East. He also had a previous career in newspapers, and speaks English and French fluently, and some Arabic.
A screen above the floor of the New York Stock Exchange shows the closing number of the Dow Jones Industrial Average on Wednesday, Oct. 10, 2018. (Richard Drew/Associated Press)
The Dow Jones Industrial Average, one of the main stock indexes in the U.S., experienced its worst day of the year on Monday dropping by 760 points or 2.9 per cent. After such a dramatic drop, many investors wonder: is is a recession or bear market coming?
Before answering this question, I thought I would explain what caused the 760-point drop. Last week, U.S. President Donald Trump announced a new 10 per cent tariff on certain goods that the U.S. buys from China. In response China has allowed its currency, the yuan, to depreciate against the dollar.
When the US imposes a new 10 per cent tariff against China, it essentially raises the costs of Chinese goods by 10 per cent. However, by China allowing its currency to devalue by 10 per cent, it negates the impact of the U.S. tariffs.
Historically, China has pegged its currency to the U.S. dollar. Now, that is no longer the case so global markets reacted negatively. This is why the Dow experienced the dramatic price drop on Monday.
Since then, the Dow has rebounded and much of Monday's losses have been erased.
Recessions and bear markets are inevitable (as are recoveries and bull markets) so there is always one on the way. (Graeme Roy/The Canadian Press)
Is a recession or a bear market coming?
Recessions and bear markets are inevitable (as are recoveries and bull markets) so there is always one on the way.
A better question might be: what conditions cause a recession and are those conditions present in the current economic environment?
The last 11 recessions were caused by one of three events: a spike in commodity prices, the U.S. Federal Reserve (Fed) aggressively raising interest rates or excessively high stock prices. Currently, commodity prices are range bound which means they are not spiking. The Fed is lowering, not raising interest rates.
The stock market valuation of the S&P 500, Wall Street's benchmark stock index, is trading at a 25-year average of 16 times price/earnings; this indicates that the market is neither cheap nor expensive. So that's the good news, based on historical data, a recession in North America doesn't appear to be imminent.
But then there is the inverted yield curve, while not a perfect predictor of a recession, it has a solid predictive track record. Inverted yield curve occurs when long term interest rates are lower than short term interest rates. This usually only happens if investors believe that economic growth is likely to slow.
Over the past six decades, whenever the yield curve inverted and stayed inverted for at least 3 months, the economy entered a recession a year or two later.
The yield curve is currently inverted and has been since March.
Currently, commodity prices are range bound which means they are not spiking. The Fed is lowering, not raising interest rates. (Getty Images/STOCK4B-RF)
While recessions are inevitable as they are part of a normal market cycle, I do not believe we will experience one until after the U.S. presidential race.
Elections bolster economy
Historically, elections years are favourable for the stock market. Over the past 21 elections, there has only been three years where the S&P 500 had negative returns.
The last thing Trump wants during an election year is a struggling economy. As such, his government will be quick to implement strategies to stimulate the economy and stave off a recession.
It is also in his interest to get a trade deal done with China as he will want to bolster his image as a "great deal maker" and take credit for growing the global economy.
My "crystal ball" prediction is that we won't see a recession until 2021 or later.
It is a guess and I reserve the right the change my prediction as new information comes to light. For now I'm basing my decision on the current economic data and the predictive power of the inverted yield curve.
This column is part of CBC's Opinion section. For more information about this section, please read this editor's blog and our FAQ.
Mark Ting is a partner with Foundation Wealth, where he helps clients reach their financial goals. He can also be heard every Thursday at 4:50 p.m. on CBC radio as On the Coast’s guide to personal finance. @MarkTingCFP mark.ting@foundationwealth.ca
Dow at record above 27,000 as U.S. rate cuts look likely
Powell's testimony to Congress indicates key rate could be cut in July
CBC News·
A trader works at the New York Stock Exchange, which moved above 27,000 Thursday. (Associated Press)
The Dow Jones industrial stock index hit record territory above 27,000 points Thursday, as U.S. Federal Reserve chair Jerome Powell reiterated the central bank is prepared to cut interest rates to support the economy.
In testimony before the Senate banking committee on Thursday, Powell pointed to the U.S.-China trade war and signs of a global slowdown as reasons the Fed might have to cut rates at the end of July.
The Dow closed at 27,088, up 227 points, mainly on the strength of tech stocks.
The broader Standard & Poor also flirted with record territory above 3,000, before closing at 2,999, up from 2,993 at the end of Wednesday.
The tech-heavy Nasdaq closed down 6.48 points after sinking from near its technical high. Stock indexes around the world rose Wednesday on Powell's remarks to the House of Representatives, hinting at lower rates, and he repeated the message Thursday.
Stocks were briefly knocked lower by a tweet from U.S. President Donald Trump, accusing China of "letting us down" by not promptly buying more U.S. farm products.
"They have not been buying the agricultural products from our great Farmers that they said they would," Trump said on Twitter. "Hopefully, they will start soon."
The U.S. consumer price index, released by the Labour Department on Thursday, increased 1.6 per cent in June from a year earlier.
Cheaper gas prices were offset by higher rents and auto costs, but the key core inflation rate was an annualized 2.1 per cent, close to the Fed target.
Federal Reserve policymakers have cited low inflation readings as a justification for potentially lowering short-term interest rates, but the relatively strong core inflation number may mean slower rate cuts than the market is anticipating, analysts say.
"With the markets at 27,000 on the Dow and 3,000 on the S&P, they're baking in that a deal gets done with China, that the Fed cuts rates and remains dovish, and then earnings and guidance come in better than expected," said Sean Lynch, managing director of equities at Wells Fargo Private Bank. "We get a hiccup in any one of those, you'll see a little bit of a pullback in the market."
The Bank of Canada announced its decision Wednesday to maintain its benchmark rate unchanged at 1.75 per cent. That could mean the Fed rate, currently 2.5 per cent, could move closer to Canada's key rate.
TSX falls
In Toronto, stock prices slid 35 points to close at 16,529, mainly because of lower gold prices triggered by the U.S. inflation news.
The energy sector climbed after oil prices hit a six-week high because oil rigs in the Gulf of Mexico were evacuated ahead of a storm.
An incident with a British tanker in the Middle East highlighted tensions in the region, moving the price for West Texas Intermediate crude to $60.39 US a barrel.
The TSX has been a laggard compared to U.S. markets, says Barry Schwartz, portfolio manager for Baskin Wealth.
"The U.S. market has outperformed most every single other index over the last 12 years coming out of the financial crisis," he told CBC News.
"Like them or hate them, they have some of the greatest companies in technology and that's what's driving their markets higher. And for good reason — the profits are enormous."
U.S. stock markets set records as they roar back from brink of bear territory
Comments by Trump, rising interest rates had threatened to end Wall Street's bull run
CBC News·
The major U.S. stock markets have been on a roller-coaster ride of late, and on Wednesday set their biggest single-day point increases ever after a few days of gloom. (Richard Drew/Associated Press)
The major U.S. stock markets shot upward in record fashion Wednesday after a few days of gloom that dragged them to what had been shaping up to be their worst December performance ever.
Instead of pushing into bear-market territory, the Dow Jones Industrial Average and the Standard & Poor's 500 index marked their biggest single-day point increases ever.
The Dow closed at 22,878.45, up 1,086.25 points, or five per cent, on the day. The broader-based S&P 500 finished at 2,467.70 points, up 116.6 points, or five per cent.
The Dow's biggest previous one-day point gain was on Oct. 13, 2008, during the turmoil of the global financial crisis, when the index climbed 936 points. The S&P 500 set its previous point record on the same day, at closing up 104 points.
Stocks had been falling sharply in recent days, since U.S. President Donald Trump lashed out at his own central bank, which has hiked its key interest rate four times this year, most recently last week. There was a risk Wednesday's trading would mark the end of the longest so-called bull run in Wall Street history.
Heading into the day's session, the S&P 500 was on the verge of entering a bear market, defined as a 20 per cent drop from its peak value.
The S&P 500 hit a peak of 2930.75 on Sept. 20, but before Wednesday, it was off 19.8 per cent from that high point, and needed to close down just seven more points to be in bear territory.
The current U.S. bull market — a run-up in stocks free without any declines of 20 per cent or more — began in March 9, 2009, and became the longest ever as of Aug. 22.
In that time, the S&P 500 quadrupled, the Dow did almost as well, and the tech-laden Nasdaq index climbed 500 per cent, before starting their current declines.
Abysmal December
Canada's TSX index, closed for trading Wednesday due to the Boxing Day holiday, was down 16.8 per cent from its all-time high, set in July. It hasn't soared nearly as much as the major U.S. indexes during the current bull market because it was held back by the oil price collapse in 2015.
Global stock markets had been suffering an abysmal December. Markets in Hong Kong, Japan, France, Britain, Brazil and Mexico are all down for the month.
Markets have been jittery in recent days since reports that U.S. President Donald Trump, left, was discussing firing U.S. Federal Reserve chair Jerome Powell, right. (Carlos Barria/Reuters)
If pre-Wednesday levels had held, it could have led to the worst December on record for the major U.S. markets, despite generally strong economic fundamentals.
"The outsized moves are not reflective of the current U.S. economic landscape, but that seems to matter little so far as fear mongering continues to permeate every pocket of global capital markets,"
Stephen Innes of OANDA, a currency trading platform, said in a market commentary.
Trump administration officials spent the weekend trying to assure jittery financial markets that U.S. Federal Reserve chair Jerome Powell's job was safe. On Tuesday, Trump reiterated his view that the Federal Reserve is raising interest rates too fast, but called the independent agency's rate hikes a "form of safety" for an economy doing well.
Trump has also reportedly been upset over the last week with his treasury secretary, Steven Mnuchin, who advised him to appoint Powell to the Fed job.
I'm voting you down just for that N'esy Pas.....it needs to go.