Without much fanfare, the S&P 500 reached another milestone this week when it closed above 2,000 Tuesday. This level also represents a 200% price return since March 2009 lows. So much for the death of equities, as many pundits predicted back then.
Another striking observation is the uninterrupted decline in US 30-year Treasury bond yields to a 16-month low. We wonder what will prevent these bonds from breaking below the 3% handle. If bond yields are falling in the face of one of the strongest months for US economic data in August, where will yields settle when the next growth relapse develops? Obviously, there seems to be a bond conundrum at play owing to the US dollar craze. In essence, the stronger the US economic stats, the stronger the US dollar, which then begets more foreign buying of US bonds. When will this conundrum break? Who knows but when long-term bond yields trade below real GDP growth, one knows that the conundrum is not sustainable beyond the near term, thus we are cautious.
The US economy has finally renormalized; after five years of subpar growth, key business-cycle indicators such as US employment, consumer confidence and capacity utilization have recovered to historical averages. That being said, this is usually when mid-cycle inflationary pressures start to build and the Fed begins tightening rates. As many of you may recall we have been writing for a while now that investors need to be prepared for this, prompting our recent calls to increase our ownership of gold / gold equities over the last quarter.
Durable goods orders soared by 22.6% in July, driven mostly by a jump in aircraft orders. Excluding transportation, however, new orders fell 0.8%. Durable orders continue to follow a lumpy trajectory. Also, July personal spending decreased by 0.1%, a first drop in six months. On the bright side, income grew 0.2% over the same period. Otherwise, PCE inflation, the Fed-preferred gauge of price increases, came in unchanged in July (+1.6% Year over Year). Obviously, moderate inflation pressures would give the Fed some breathing room but, as we said above, the re-normalization of the US economy should bring higher inflation down the road.
Regarding Canadian statistics released this week, Canada’s economic growth rebounded to the fastest in nearly three years in the second quarter, with Q2 GDP growth of 3.1% annualized. TD senior economist Randall Bartlett sees this as encouraging news, stating “There was a lot of good news in today’s GDP release, as the Canadian economy looks to be firing on more cylinders after a particularly tough winter.’’ While one could think that this number may explain the Canadian dollar strength this week, it appears that the Tim Hortons and Burger King deal could be the catalyst, since a lot of Canadian dollars ($12.5 billion to be exact) will be needed to close the deal. For those of you who did not hear, Tim Hortons has agreed to be purchased by the company that owns Burger King in a deal that would result in the third largest quick serve restaurant company in the world. The two restaurants plan to maintain their operations independent of one another but the company will be subject to drastically reduced corporate taxes as a result of the acquisition and resulting Canadian status.
Other Canadian economic indicators were also positive. Exports rose 17.8 percent on gains in automobiles, farm and forest products, while household spending climbed 3.8 percent. Exporters continue to regain orders lost during the last recession in 2009, helping to balance a recovery led by debt-fueled consumer spending. Bank of Canada Governor Stephen Poloz has said it will take another two years to use up slack that built up in the world’s 11th-largest economy. Mark Chandler, head of fixed-income strategy at RBC Capital Markets in Toronto says “I see some encouraging trends…The good things in the report certainly were the trade contribution, the household is strong,” adding that Poloz will probably remain “cautious’ at next week’s benchmark interest-rate announcement, which is predicted to remain at 1 percent.
Taking a look at Europe, NATO has accused Russia of a “blatant violation” of Ukraine’s sovereignty in sending troops and equipment over their border, while Ukraine announced they would be stating mandatory conscriptions. The situation remains extremely volatile and part of trading in the last month of Q3 will be assessing what NATO’s response should, or could, be and how the potential for additional economic sanctions could further jeopardize the recovery in Europe. Euro zone inflation dropped as expected to a fresh five year low in August, data showed, something likely to concern the European Central Bank but not force it into immediate policy intervention. As of right now we see the greatest risk for investors to be owning Russian equities, which we at the Dekker Hewett Group do not, but we remain cautious towards owning European assets as well and remain very underweight those assets.
It’s the last long weekend of the summer, so enjoy it. For those who are staying in the city, the fair at the PNE runs from 11:00am until late with concerts at 8:00pm each night free with gate admission.
The annual “end of summer” block party is happening on Sunday at Victoria Square Park (Cambie and Hastings) from 2pm to 9pm and is a great chance to check out some of Vancouver’s local talent.
If you haven’t had a chance to experience the Food Cart Fest yet, it will be taking place on Sunday from 12:00pm – 5:00pm (between Cambie St Bridge & Olympic Village) with over 20 food trucks to choose from. A personal favorite in our office is Holy Perogy!
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As always, we welcome any feedback. Have a great long weekend.
The Dekker Hewett Group