That escalated quickly. Signs the U.S. economy is on the precipice of recession are spurring market selloffs around the word. Economists are wondering if the Federal Reserve should move earlier than September to cut its key lending rate. Enthusiasm for artificial intelligence has turned into very real concern.
It brings to mind a kinder, more gentle time – a time marked by optimism as consumer spending and inflation pressures were both heading in positive directions. Oh, the halcyon days of two weeks ago. Today, we look at what’s changed, and what key measurements we can use to look ahead.
Up top
Housing: Real estate giant Hines Interests LP is looking to invest up to $2-billion in Canada, and high on its shopping list is land for rental-housing developments, Rachelle Younglai reports. The Houston-headquartered company views apartment-building developments as a top investment in Canada given the country’s shortage of affordable homes.
Search: Alphabet’s Google broke the law with monopolistic behaviour over online search and related advertising, a federal judge ruled on Monday, the first victory for U.S. antitrust authorities who have filed numerous lawsuits challenging Big Tech’s market dominance. The decision is a significant win for the Justice Department, which had sued the search engine giant over its control of about 90 per cent of the online search market, and 95 per cent on smartphones.
Software: PureFacts Financial Solutions Inc., a Toronto software company that helps wealth managers track and process their revenues, has been sold to a New York private equity company. The deal values the company at $250-million, Sean Silcoff reports.
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Sizing up the selloff
A Wall Street trader works at his post amid yesterday's meltdown.Richard Drew/The Associated Press
First, a moment of Zen: It’s not all fire and brimstone. There are plenty of analysts who say the selloff, though steep, was due – variously calling it a correction or normalization after so much gain was attributed to so few companies.
- Goldman Sachs economist David Mericle, for one, told Reuters that he sees only a 25-per-cent probability of a recession, in part “because the data look fine overall” and he does not “see major financial imbalances.”
- Michael Arone, chief investment strategist at State Street Global Advisors, said cooler heads will prevail. “Corrections are normal, and this is a garden-variety correction.”
Three ways to look into the future
But key measures of investor sentiment are painting a grim picture. Consider the “fear gauge,” the “Sahm rule” and the inverted yield curve:
The fear gauge
The most-watched measure of investor sentiment is the CBOE Volatility Index, or VIX. The “fear gauge” reflects the implied volatility of the S&P 500 by tracking demand from investors for financial instruments that protect them against market losses. When growing fears of recession and stocks sell off, the VIX goes up. The index jumped more than 30 points yesterday to 53.55 – the highest level since March 31, 2020.
The Sahm rule
The rule, named after former Federal Reserve economist Claudia Sahm, was triggered on Friday by a weaker-than-expected July jobs report.
- The rule has observed without fail that the first phase of a recession has started when the three-month moving average of the U.S. unemployment rate is at least a half-percentage point higher than the 12-month low.
- Sahm told Bloomberg that while the U.S. isn’t yet in a recession, it’s “uncomfortably close.”
The yield curve
An inversion in the yield curve comparing two- and 10-year Treasury yields typically shows a recession is likely in the next two years, if not sooner.
- The yield curve inverts when shorter-dated Treasuries have higher returns than longer-term ones.
- In the past four recessions – 2020, 2007-2009, 2001 and 1990-1991 – the 2/10 curve had turned positive by the time a recession occurred, according to a Deutsche Bank analysis.
Geopolitical concerns
Worries beyond the economy are also weighing on the market.
- The Israel-Hamas war could worsen as Iran threatens escalation. Beyond the climbing human toll, tensions could also cause swings in the price of oil.
- That’s adding to broader worries about other potential hot spots around the world.
- The U.S. presidential election could further scramble the picture, with both Donald Trump and Kamala Harris offering divergent views on economic and foreign policy.
And now, a brief look at the bellwether
Earnings from three major companies this week might also add fuel to the fire. (Or, one can hope, buckets of water.)
Today
Super Micro Computer: maker of powerful and relatively affordable computer servers – a necessity in the development of artificial intelligence and its applications.
- Given its clients include Nvidia, Intel and Advanced Micro Dynamics, the company’s earnings could get caught up in the real worry afflicting artificial-intelligence stocks.
Caterpillar: the biggest global construction and mining-equipment manufacturer in the world. Its machines are used across sectors: infrastructure, construction, mining and energy, to name a few. Its results reflect the health of those industries and show us where those sectors are slowing or growing.
- In April, Caterpillar reported weak sales everywhere except North America; an increase in infrastructure spending was legislated in the U.S. in 2021. A slump in demand in Europe and a prolonged weakness in China are prompting a cutback in production of its machines, the company said.
Tomorrow
Walt Disney’s reach extends globally in theme parks, hotels and resorts, cruises, streaming, movies, and retail. So, its earnings will be closely monitored for the entertainment giant’s ability to navigate rapidly changing consumer behaviour, but also for evidence of consumer sentiment. Market volatility and economic uncertainty might be roller coaster enough.
Beyond
Those three companies are far from the only earnings of note this week. (Pharmaceutical rivals Novo Nordisk and Eli Lilly report amid a growing fight in the weight-loss category. And Suncor results today will cast a spotlight on the TMX pipeline extension, which went online in May.) But with key economic reports also coming from China, whose growth underpins all of these companies’ fortunes in different ways, we might get a clearer view into the future by week’s end.
The lookout
On our radar and reading list
In China: Export figures due on Wednesday may show some strengthening in July, underscoring how trade has been a rare bright spot for the country as it navigates a shaky recovery. Inflation figures on Friday are expected to remain soft, with producer prices contracting for the 22nd straight month.
In North America: The Bank of Canada releases its summary of deliberations from its July 24 meeting tomorrow. On Thursday, markets will pay close attention to U.S. weekly initial jobless claims.
On the bridge: Windsor’s Gordie Howe bridge, emblematic of wider rebirth for the regional economy, comes as Canada-U.S. trade faces rising protectionist pressure.
Morning markets
Global markets were mixed, with some surrendering earlier gains, as uncertainty weighed on investor sentiment following yesterday’s rout. Wall Street futures pointed higher while TSX futures were under downward pressure with Canadian markets set to reopen after yesterday’s holiday.
Japan’s Nikkei regained more than 10 per cent, rebounding from a 12.4-per-cent drop in its biggest daily selloff since the 1987 Black Monday crash. Hong Kong’s Hang Seng closed 0.31 per cent lower.
The pan-European STOXX 600 gained 0.12 per cent in morning trading. Britain’s FTSE 100 and Germany’s DAX were flat while France’s CAC 40 fell 0.17 per cent.
The Canadian dollar traded at 72.27 U.S. cents.