A strong employment gain last month makes a Bank of Canada rate cut unlikely in July, analysts say.Justin Tang/The Canadian Press
I was away for work at the Calgary Stampede. While I am barely standing, I was relieved that after a week of dad-only parenting, my husband survived and the kids still have 10 fingers and 10 toes. Each. Not that I checked or anything.
Here are five things to watch for this week:
Bruised elbows: The U.S. unleashed fresh tariff threats that dented markets last week. The S&P 500 INX posted a weekly decline after advancing two weeks in a row. The TSX TXCX was also bruised, flat on the week after two weeks of gains. Prime Minister Mark Carney responded to U.S. President Donald Trump’s 35-per-cent tariff threat by saying Canada will work towards a deal to meet the revised Aug. 1 deadline.
Interestingly, energy was once again spared. “Donald Trump has been consistent for nine years … He wants more Canadian oil,” oil investor Adam Waterous of the Waterous Energy Fund said on my podcast last week. “He wants Keystone XL.” Mr. Waterous believes pipelines will be the key to solving Canada’s trade battle with the U.S. (He also talked about his hostile bid for MEG Energy and why he would issue a $10/share special dividend if he doesn’t win it.)
Tariffs may just be an excuse for a market needing a breather. The S&P 500 hit five record highs in nine sessions. One thing that is troubling bulls: the per cent of stocks participating in the rally has started to shrink. “While the S&P 500 has been rallying back to new highs this month, some measures of breadth have been lacking,” wrote Bespoke Investment Group in a note to clients. It observed that the portion of stocks above its 50-day moving average had started to stall.
Key data: Canada and the U.S. will both release the last bits of key information before the respective central banks make key interest rate decisions.
In Canada, we will get a read of inflation for June on Tuesday. Headline inflation is expected to pick up to 1.9 per cent while core inflation is forecast to remain elevated at 3 per cent. It will give us a sense of how much tariffs have increased prices or if it remains too early to tell.
But after those blockbuster job numbers from last week surprised markets, the market virtually erased the chance of a rate cut at the end of July. “Doves were hanging onto building job-market slack, but a strong 83,000 employment gain in June cleaned up a lot of the damage done by a handful of recent poor reports,” wrote BMO senior economist Robert Kavcic.
In the U.S., there will be a bonanza of tier-one economic data with consumer inflation, producer prices and retail sales all due this week. Concerns about tariffs and inflation in the U.S. is the number one reason Federal Reserve chair Jerome Powell says he is unwilling to cut rates.
Smells like earnings season: It officially gets under way this week with the major U.S. banks reporting, including JPMorgan, Wells Fargo, Citi, Goldman Sachs and Morgan Stanley.
In general, the U.S. bank stocks have had a great run with the index sitting near a record high and outperforming the S&P 500 so far this year. If it weren’t for tariffs, there wouldn’t be much to worry about. Credit losses are continuing to normalize, net interest margins are expected to increase modestly, and capital markets should be healthy enough.
Yet, this is a sector trading at elevated valuations. JPMorgan in particular will be a key focus as always. Not just because it gives us all a chance to receive CEO Jamie Dimon’s paternal wisdoms, but because the stock is trading at a “premium valuation,” according to Citi managing director Keith Horowitz. “We see downside to consensus on a more cautious credit outlook,” he wrote in a note to clients.
Netflix and no chill: The streaming service reports on Thursday after the bell and has trounced the S&P 500 and the Magnificent 7 over the past year (up 90 per cent vs. 13 per cent for S&P 500 and 19 per cent for Mag 7). Having said that, its earnings have been drifting lower. Evercore analyst Mark Mahaney likes the setup here and thinks there is room for Netflix to do well, thanks to the Season 3 release of Squid Game. The show notched a record high 60.1 million views in the first three days of the release and was ranked #1 in TV shows in every one of Netflix’s markets.
Fizzle: Shares of Pepsi have lacked zest this year with the stock trading around the lowest level in four years. A combination of a weak consumer environment, reduced pricing power, soft North American sales, and concerns about weight loss drugs are all affecting Pepsi.
Analysts aren’t all that optimistic this will be a turnaround quarter. Sales are expected to fall 1 per cent from last year, as both the snack and the beverage categories have been challenged. Still, there are some levers that Pepsi could pull and beat lowered expectations. One is cost cutting: it recently closed its 55-year-old Frito Lay plant in California and more initiatives could be announced. The other is international markets, where performance is expected to be better and which makes up 40 per cent of total sales. With the stock trading at a 23-per-cent discount to peers, that might be enough, UBS said in a preview note to clients.
In the Money with Amber Kanwar brings you actionable insights from top portfolio managers and business leaders. New episodes out Tuesdays and Thursdays. Subscribe now! www.inthemoneypod.com