Market Insights - Leading Indicators Suggest Economic Growth Dialing Back Modestly

Milestone Wealth Management Ltd. - Aug 06, 2021
Macroeconomic and Market Developments: North American markets were up this week. In Canada, the S&P/TSX Composite Index increased by 0.96%. In the US, the Dow Jones Industrial Average was up 0.71% and the S&P 500 Index increased 0.86%. The Canadian

Macroeconomic and Market Developments:

  • North American markets were up this week. In Canada, the S&P/TSX Composite Index increased by 0.96%. In the US, the Dow Jones Industrial Average was up 0.71% and the S&P 500 Index increased 0.86%.
  • The Canadian dollar finished down this week, closing at 79.62 cents vs 80.17 cents USD last Friday.
  • Oil prices were down this week. US West Texas crude was down, closing at $68.12 from $73.78 USD last week, and the Western Canadian Select price was down, closing at $54.49 vs $59.37 last week.
  • Gold prices were also down this week, closing at $1,763 vs $1,813 USD last Friday.
  • On Tuesday, Canadian real estate trust H&R REIT announced that it has entered agreements to sell the iconic 2.0M sq ft. Bow Tower office building in Calgary and the 1.1M sq ft Bell office campus in Mississauga. Total combined proceeds of the two transactions is approximately $1.47 billion.
  • In Canadian economy news this week, Statistics Canada released June building permits, which rose 6.9% in June to $10.3 billion, following a 14.8% drop in May. Seven provinces contributed to the increase, led by Ontario with an increase of 22.7%. Also, Canada's trade balance returned to a surplus of $3.2 billion in June vs estimates for a $0.5 billion deficit. This follows a $1.6 billion deficit in May. Statistics Canada noted the surplus was driven by a sharp increase in exports, up 8.7%, while imports fell 1.0%.
  • On Thursday, Penn National Gaming (PENN) announced it is to acquire Score Media and Gaming for ~US$2.0 billion in cash and stock. Under the terms of the agreement, Score shareholders will receive $17.00 in cash and 0.2398 shares of Penn National common stock for each Score share.
  • Also on Thursday, US tech giant Qualcomm (QCOM) announced it has submitted an offer to acquire Canadian company Veoneer for $37.00 per share, in an all-cash transaction. This offer represents an 18% premium to Magna’s current deal to acquire Veoneer at $31.25/share, a deal that was announced on July 22, 2021.
  • In US economic news, the US ISM Non-Manufacturing (services) index increased to 64.1 in July which is a 14-year high, beating expectations for a 60.5 reading (levels above 50 signal expansion; levels below signal contraction). The major measures of activity all moved higher in July and now all stand above 50. The business activity index rose to 67.0 from 60.4, while the new orders index increased to 63.7 from 62.1, the supplier deliveries index rose to 72.0 from 68.5 in July, and the employment index increased to 53.8 from 49.3.
  • July employment numbers were released on Friday for Canada and the US. In Canada, the economy added 94,000 jobs, lower than the expected 150,000, and the unemployment rate dropped from 7.8% to 7.5%, slightly higher than estimates looking for a rate of 7.4%. And for the US, nonfarm payrolls rose by 943,000 in July, better than the 845,000 Dow Jones estimate and the unemployment rate slid to 5.4%, compared with the 5.7% expectations.
  • Here is a link to a short video from Canaccord’s chief U.S. Strategist Tony Dwyer entitled Not So Unique: DWYER VLOG

Weekly Diversion:

Check out this video of boy unsuccessfully trying to free a butterfly.

Chart of the Week:

Adjusting to the New Normal. What we are referring to here is a deceleration of the peak levels of year-over-year growth we have seen one year post-COVID back to a more, but likely still higher than, normal growth level. Recently, we are seeing the Organization for Economic Co-Operation and Development’s (OECD) global leading economic indicator (LEI) rollover from very elevated levels. In addition, the OECD’s global LEI diffusion index (green dotted line), which typically leads the LEI by six months, has declined sharply of late which usually means the LEI has further to fall. Overall, this indicates that the LEI’s deterioration is broad-based, reflecting dynamics across most countries (38 members) included in the index.

Given this environment of fearing a global growth slowdown, it is not overly surprising then that long-term interest rates have corrected back down the last quarter after an extremely rapid rise in the first quarter. However, what is very important to keep in mind is that rather than revealing the economic conditions are deteriorating significantly, these indicators are suggesting that momentum is slowing from an extremely elevated pace. In other words, the pace of growth is simply easing from historically high levels. You can see this high level of growth in many countries’ manufacturing and service sectors still showing strong growth levels.

Therefore, it is our view that we may be exiting a peak growth/inflation period and entering a new phase of slower, but still above trend growth. In last week’s commentary we discussed growth rates potentially peaking, and if so, markets could begin a period of ‘digestion’. That may be the case right now, and as such, we remain a bit cautious/defensive but only in the very near-term as it takes markets a bit of time to re-assess the landscape, adjust their expectations, and position portfolios accordingly, potentially with some profit-taking in some of the leading sectors. This period of time may alleviate some of the downward pressure on the economic surprise indices of major developed countries.

In aggregate, the reflationary environment of the last year may be challenged in the near-term. However, It is our view that this period could ultimately give way to higher long-term bond yields as above-trend growth will eventually tighten labor markets and justify monetary policy normalization.

Source: BCA Research

Sources:, Globe and Mail, Financial Post, BNN Bloomberg, Tony Dwyer, Canaccord Genuity, First Trust Advisors, Connected Wealth, BCA Research