Market Insights: Inflation Highest Since 1982

Macroeconomic and Market Developments:

• North American markets were up this week, with the U.S. markets especially strong. In Canada, the S& P/TSX Composite Index increased 1.25%. In the U.S., the Dow Jones Industrial Average was up 4.02% and the S& P 500 Index was up 3.82%.
• The Canadian dollar was also positive this week, closing at 78.60 vs 77.82 cents last Friday.
• Oil prices were up strongly this week. U.S. West Texas crude closed at $72.00 vs $66.37 and the Western Canadian Select price closed at $54.49 vs $47.69 last Friday.
• The gold price was flat this week, closing at $1, 782 vs $1, 784 last Friday.
• Markets posted a recovery this week from the selloff triggered by the emergence of the Omicron COVID variant. As information becomes available, investors seem to be breathing a sigh of relief that even though the variant does appear to spread more easily, the symptoms and hospitalizations don’t seem to be as severe. This led to a sharp rally on Monday and Tuesday of this week that saw the S& P500 in the U.S. rally by 3.59% in just two days. Along with the increased risk appetite, oil recovered by $6.10/barrel and the Loonie increased by 1.25 cents in just those two days.
• Whitecap Resources (WCP) announced three separate transactions that will consolidate core assets within its Central Alberta, Eastern Saskatchewan, and Western Saskatchewan business units. The combined purchase price of the acquisitions is $342.5 million, consisting of approximately 15.2 million Whitecap shares at a weighted average price of $7.20/share and approximately $240 million of cash. The news helped the stock gain almost 9% this week.
• Dye & Durham (DND), a Canadian cloud-based software company serving the legal and business professional market, is buying a payments business from Telus (T) for C$500 million. Telus Financial Solutions handles about 140 million bill and tax payments each year and connects Canadian banks and other lenders to law firms when a new mortgage is being arranged or an existing one is discharged.
• Canadian mining company Kinross Gold (K) has entered into a agreement to acquire Great Bear Resources (GBR) for upfront consideration of C$1.80 billion, representing C$29.00/Great Bear/share. The deal represents a~28% premium to the previous day’s closing price.
• China property giant Evergrande has been narrowly avoiding default on its massive~US$300 billion debt. However, this week it was labelled as officially in default by bond rating service Fitch Ratings. Evergrande has not confirmed payment of its latest debt obligation, triggering Fitch to call a default.
• U.S. inflation data was released on Friday. The Consumer Price Index (CPI) rose 6.8% from a year ago in November, slightly higher than estimates. Excluding food and energy, the ‘core’ CPI increased 4.9%, in line with expectations. Surging prices for food, energy and shelter accounted for much of the gains.
• Here is a link to a short video from Canaccord’s chief U.S. Strategist Tony Dwyer entitled Sticking With History: DWYER VLOG

Weekly Diversion:

Check out this video of Westjet’s Christmas video this year.

Chart of the Week:

Inflation has been a hot topic in 2021. With the highly anticipated release of the November Consumer Price Index on Friday, coming in at 6.8% year over year, inflation seems to be running even hotter as the year progresses. In fact, as illustrated in  this chart, inflation in the U.S. is running at its highest pace since the early 1980s. 

The causes of the recent spike in inflation fall into two main groups: ongoing supply chain disruptions and a massive increase in the money supply. Supply chain disruptions are reported almost daily now, due in part to events such as COVID outbreaks shutting down factories in Asia, the week-long blockage of the Suez Canal earlier this year, and a bottleneck of almost 100 container ships parked offshore at ports in California that can’t unload. The increase in money supply isn’t specifically discussed as often in mainstream media, but this increase is a result of massive Quantitative Easing by the central bank, the U.S. Federal Reserve. With the creation of literally trillions of new dollars, that money finds its way into the financial system. The presence of more dollars chasing the same (or less) amount of goods, the unsurprising result is an increase in prices.

The ongoing question of course is: will this last? Some experts believe inflation is here to stay while others argue this inflation is temporary. Only time will tell, but the world should know the answer in the next year or two. If inflation doesn’t come down to the Fed’s 2% long-term target rate in that time, it will be apparent that inflation has been much more persistent. In that case, the U.S. Fed, along with other central banks including the Bank of Canada, will have to act decisively to reduce or eliminate the excess stimulus that was brought in after the onset of the pandemic, including the end of Quantitative Easing and the end of ultra-low interest rates.

Sources: CNBC.com, Globe and Mail, Financial Post, Connected Wealth, BNN Bloomberg, Tony Dwyer, Canaccord Genuity, First Trust, Bureau of Labor Statistics