12/11/2021
Huge thanks to my good friend Mr. Elenkov for this Comprehensive Weekly Report!
Weekly Updates Issue # 844
1. Weekly Markets Changes
2. A key inflation measure rose to a 39-year high last month
3. Household wealth and income rise, but debt climbs too
4. Statistics Canada says debt relative to household income was up in Q3
5. Federal banking regulator OSFI holds domestic stability buffer at 2.5%
6. Freeland raises concerns about omicron in push for MPs to quickly pass aid bill
7. Time to budget for higher food costs
8. Bank of Canada stands pat on key interest rate target
9. Statistics Canada says the merchandise trade surplus in October grew to $2.1B
10. American productivity fell by the largest amount since 1960
1. Weekly Markets Changes
[December 10, 2021]
S&P TSX
S&P 500
Dow Jones
NASDAQ
CAD/USD
Gold
WTI Crude
20,890.62
+257.4 +1.25%
4,712.02
+173.6 +3.82%
35,970.99
+1,390.9 +4.02%
15,630.60
+545.1 +3.61%
$0.7865
+0.60c +0.77%
$1,782.84
-1.20 -0.07%
$71.67
+5.21 +7.84%
2. A key inflation measure rose to a 39-year high last month
[December 10, 2021] America's high pandemic-era price hikes were alive and kicking last month, when a key measure of inflation climbed to a level not seen since June 1982.
Consumer price inflation rose by 6.8% without seasonal adjustments over the 12 months ended November, the Bureau of Labor Statistics reported Friday.
Stripping out food and energy, the prices of which tend to be more volatile, inflation rose 4.9% over the same period — the highest level since June 1991.
Looking at November compared to the previous month, prices increased 0.8% on a seasonally adjusted basis, less than the 0.9% increase in October.
Without food and energy costs, prices rose 0.5% in November, also a slight decrease from the 0.6% rise in the prior month.
President Joe Biden acknowledged prices were rising but added "developments in the weeks after these data were collected last month show that price and cost increase are slowing, although not as quickly as we'd like," according to a statement.
That said, "price increases continue to squeeze family budgets," Biden said. "We are making progress on pandemic-related challenges to our supply chain which make it more expensive to get goods on shelves, and I expect more progress on that in the weeks ahead."
Here's what got more expensive
Several categories saw significant price increases. Gas prices jumped 58.1% over the year ending in November, the biggest jump since April 1980.
The price indexes tracking food and energy climbed to at least 13-year highs, having risen 6.1% and 33.3% over the 12-month period.
Meanwhile, groceries cost 6.4% more over the same period, the largest increase since December 2008. Food prices in restaurants jumped 5.8%, the biggest rise since January 1982.
But not everything got more expensive.
Car insurance prices fell 0.8% between October and November, as did the price index for recreational activities and communication, which both declined 0.2%.
Economists expect price pressure to abate next year but have warned this process will be slow, especially when looking at inflation on the 12-month horizon.
"We expect this to continue until early in 2022 where we expect pricing to reach at or near 7.3% before costs start their long descent back towards 2%," said Joe Brusuelas, chief economist at RSM, in a note to clients.
How are Americans feeling
The price spikes of the past months have at times weighed on consumer sentiment as family's budgets were crunched.
But preliminary data for consumer sentiment in December actually found an uptick in optimism, according to a report from the University of Michigan.
Consumer sentiment posted an unexpected, albeit small, increase. At the core of the renewed optimism was the expectation of higher wages in the year ahead. This was particularly true for the lowest third of the income distribution, where a 2.9% increase to incomes is expected — the largest expected gain for that group since 1981.
"This suggests an emerging wage-price spiral that could propel inflation higher in the years ahead," said Richard Curtin, chief economist of the Surveys of Consumers.
Consumers still think inflation is the more serious problem for the nation compared with unemployment.
What this means for the Fed
Friday's data is also lending more credence to the Federal Reserve's apparent plan to speed up the rollback of its pandemic-era stimulus program.
In late November, Fed Chairman Jerome Powell told Congress during a hearing "the economy is very strong and inflationary pressures are high, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases ... perhaps a few months sooner."
And with another spike in prices under the belt, it seems nothing is standing in the way of the central bank announcing a faster rate of tapering during next week's meeting.
"The data add to the case for Fed officials to turn more hawkish at the FOMC meeting next week," said macro strategists at TD Securities.
That said, the strategists expect inflation to slow in the year ahead as the price boosts from the reopening, fiscal stimulus and supply chain challenges begin to fade.
3. Household wealth and income rise, but debt climbs too
[December 10, 2021] Canadian household wealth continued to surge in the third quarter, rising another $290 billion, according to Statistics Canada.
Wages, disposable income and household consumption all rose in the third quarter. With the rise in consumption outpacing the growth in income, the household saving rate fell from 14.0% in Q2 to 11.0% in Q3 — still far above pre-pandemic levels.
Employee compensation was up by 2.9% in the third quarter, which StatsCan said was the main driver behind higher disposable income, as government support programs were curtailed.
Household spending jumped 5.4% “buoyed by additional easing of pandemic restrictions” and inflation, which outpaced the rise in disposable income.
“As a result, the household savings rate declined, yet still remained in the double-digits for the sixth consecutive quarter,” StatsCan noted.
Demand for mortgages remained strong, and households continued to invest in mutual funds. But deposit growth slowed in Q3, the agency reported.
“Over the last four quarters, net purchases of mutual fund shares have totalled $105.5 billion, more than three times the amount over the same period one year prior,” StatsCan said. “Higher than usual mutual fund purchases have marked a clear shift in behaviour by Canadian households, as they seek out investment vehicles other than cash in which to store some of the excess savings they have accumulated over the course of the pandemic.”
Yet, while the value of household financial assets rose by 1.1% in the third quarter, rising real estate values were the main driver of the increase in household net worth — which jumped $292.2 billion to $15.1 trillion in the third quarter.
The rise in household wealth pushed the total gain versus pre-pandemic levels to $2.8 trillion, RBC Economics reported.
“Those gains have not been evenly distributed with increases to-date concentrated among higher-income households. Surging home prices boosted equity in real estate which accounted for more than half of the total increase, but savings in the form of cash and deposits are also up $268 billion from pre-pandemic levels,” RBC said.
Meanwhile, households added $51.6 billion worth of debt in the third quarter, which is the second-highest quarterly total on record, after Q2’s record $62.0 billion.
“Mortgages were the primary contributor to the heightened borrowing, with demand of $45.9 billion,” StatsCan noted. “Demand for non-mortgage loans more than doubled to $5.7 billion, as economic growth resumed in the third quarter.”
Amid the rise in borrowing, the household debt-to-income ratio rose from 176.7% in the second quarter to 177.2% in the third quarter.
RBC noted that, despite the latest increase, the debt-to-income ratio “is still well-below pre-pandemic levels because interest rates have been low and household incomes unusually high thanks to large government pandemic support programs.”
StatsCan also reported that the debt service ratio declined in Q3, but RBC said that will begin to rise as central banks begin raising interest rates.
Indeed, with incomes rising, “households have ample purchasing power,” RBC said. “Notwithstanding risks from new virus variants, their ability to spend is expected to underpin demand and inflation growth and keep central banks on track to start hiking interest rates next year.”
RBC forecast that the Bank of Canada will start raising rates in April.
Overall, the data release confirmed that “household finances remained in good shape ahead of the holiday season,” TD Economics said in a report. “Wealth and income continued to rise, while the relative cost of servicing debt declined for the third consecutive quarter.”
“Next year, however, households could face a trifecta of headwinds: elevated inflation, dwindling savings cushion, and higher interest rates,” TD cautioned.
However, the current “mix of debt is slightly less interest-rate sensitive than pre-pandemic, with more in the form of fixed-rate mortgages that don’t reset right away as market interest rates move,” RBC noted. “But high household debt levels, and sensitivity to interest rate increases, were a key vulnerability for the Canadian economy pre-pandemic and will be after it as well.”
4. Statistics Canada says debt relative to household income was up in Q3
[December 10, 2021] Statistics Canada says the amount Canadians owe relative to how much they are earning rose in the third quarter, pushed higher by growing mortgage debt.
The agency says household credit market debt as a proportion of household disposable income, on a seasonally adjusted basis, rose to 177.2% in the third quarter compared with 176.7% in the second quarter.
The reading translates into $1.77 in credit market debt for every dollar of household disposable income.
The increase came as household credit market debt rose 2%, while household disposable income gained 1.7%.
Statistics Canada says on a seasonally adjusted basis that households added $51.6 billion of debt in the third quarter, including $45.9 billion in mortgages and $5.7 billion in non-mortgage loans.
Despite the increase in debt, Statistics Canada says the household debt service ratio, measured as total obligated payments of principal and interest on credit market debt as a proportion of disposable income, fell to 13.32% in the third quarter compared with 13.47% in the second quarter.
5. Federal banking regulator OSFI holds domestic stability buffer at 2.5%
[December 10, 2021] The federal banking regulator is holding the domestic stability buffer at 2.5% as it says the economy continues its recovery and Canada’s largest banks remain robust.
The Office of the Superintendent of Financial Institutions, which reviews the rate twice a year, announced in June it would increase it to its current level effective Oct. 31.
In making its decision, the regulator says systemic vulnerabilities such as household indebtedness and housing-related asset imbalances remain elevated.
The buffer, which was reduced to 1% at the start of the pandemic, requires Canada’s largest domestic, systemically important banks to build up a reserve when times are good that can be called on when needed.
The decision to keep the rate on hold follows a decision last month by the regulator to lift restrictions that prevented federally regulated banks and insurance companies from increasing dividends, buying back shares and increasing executive compensation.
The prohibitions were put in place at the start of the pandemic in response to fears about the economic turndown and the possibility of large numbers of people defaulting on loans.
6. Freeland raises concerns about omicron in push for MPs to quickly pass aid bill
[December 9, 2021] Finance Minister Chrystia Freeland says the need for MPs to approve a new round of pandemic aid has become more important amid fears related to the omicron variant of Covid-19.
Speaking to the House of Commons finance committee, Freeland says the variant has injected renewed uncertainty into the economy, in arguing for the government’s latest benefits package.
The Liberals are proposing to extend pandemic aid until early May to still-hurting businesses and provide a $300-a-week benefit to workers subject to a lockdown as part of a $7.4 billion aid bill before the House of Commons.
The Liberals want the bill, known as C-2, to get approval before parliamentarians go on their winter break at the end of next week.
Freeland said the lockdown support contained in the bill would act as an economic insurance policy if there is another surge in the virus or new variants of concern.
“I don’t want to give Canadians the impression that I think our work is finished or that I think there are no concerns left with omicron,” she told the committee.
“These are real challenges.”
Cabinet gets to decide what regions are in a lockdown to qualify under the terms of the bill. Freeland said the government would be open regions asking for the help but wasn’t aware of any requests since the measures were announced last month.
Under questioning from NDP finance critic Daniel Blaikie, Freeland said she hoped the lockdown support wouldn’t be needed. She later added that officials were making “some additional calculations” on costs for the benefit in light of the variant, which would be outlined in a budget update next week.
Signals coming out of the Finance Department suggest that Tuesday’s economic and fiscal update won’t contain a bevvy of new spending measures, but will rather be limited in scope.
The Canadian Chamber of Commerce on Thursday called on Freeland to provide more than a cursory update and unveil a plan to boost economic growth above the anemic expectations from economists.
“Unless we can achieve sustained growth at a much higher level than we experienced prior to the pandemic, we won’t be building back better, but failing forward,” chamber president Perrin Beatty said in a statement.
“Without significant growth to pay for our social and climate ambitions, we will find ourselves on a path of ill-timed increased taxes for Canadian families and business owners.”
The parliamentary budget officer has estimated that four measures contained in C-2 combined would cost almost $7.1 billion.
Budget officer Yves Giroux’s office has previously estimated that extending the rent subsidy will cost $676 million and adding extra weeks to the sickness and caregiving benefits would cost $373.8 million and $554 million.
On Thursday, his office estimated a wage subsidy extension would cost over $5.4 billion. The majority, about $4.8 billion, in subsidies flowing to businesses that continue to see a steep, and persistent drop in revenues, and the remaining $666 million going out under a program targeting hard-hit companies in the tourism and hospitality sector.
Thursday’s report said the federal government’s plan to extend its wage subsidy will push the overall price for the program to almost $106.7 billion.
Speaking to a Senate committee in the morning, Giroux noted the government was asking Parliament to approve $8.7 billion in extra spending for this fiscal year. He said total proposed federal spending this fiscal year is just under $400 billion.
“I have concerns, however, with the fact that the government is seeking Parliament’s approval of this additional spending without yet revealing what was spent the year prior,” Giroux told senators, adding he saw no reason for the delay in releasing the accounting documents.
7. Time to budget for higher food costs
[December 9, 2021] Food prices in Canada are expected to surge to record highs next year as ongoing pandemic-fuelled supply chain disruptions, labour market issues and adverse weather events drive up grocery bills, a new report on food prices says.
The 12th edition of Canada’s Food Price Report released Thursday predicts the average Canadian family of four will pay an extra $966 for food in 2022, for a total annual grocery bill of $14,767.
That’s a 7% increase compared with 2021 — the biggest jump ever predicted by the annual food price report.
“The era of cheap food has ended,” said Sylvain Charlebois, lead author and Dalhousie University professor of food distribution and policy.
“Prices have been increasing since 2010 and the pandemic accelerated that trend.”
Soaring food costs are expected to contribute to rising food insecurity in Canada, putting increasing demands on food programs intended to help, the report said.
“What is being challenged right now is food affordability,” Charlebois said. “It’s not going to be easy for families or anyone already struggling to put food on the table.”
Food banks have already seen a rise in demand during the pandemic, and higher food prices will likely add to the pressure, said Marjorie Bencz, executive director of Edmonton’s Food Bank.
“We’re concerned that if the price of food goes up more, that may mean people need the food bank more often, it may mean that more people need the food bank.”
Bencz said she was also concerned how the trend will put pressure on the food industry itself that has been a kind supporter of the food bank, and on average donors.
“It could also have an impact on donors that make individual contributions to us, because again we rely on the average person and their kind support to do our work.”
A growing phenomenon related to rising food insecurity is theft from grocery stores, the report said.
“Grocers are anecdotally reporting an uptick in theft, particularly of items such as meat, cheese, over-the-counter medication and energy drinks,” the report said.
Overall, food prices in Canada will increase 5% to 7% next year, the report said.
But some grocery categories will see even larger jumps in 2022.
Dairy prices are anticipated to increase 6% to 8%, a forecast that comes after the Canadian Dairy Commission recommended an 8.4% increase in farm gate milk prices to offset rising production costs.
Restaurant menu prices are also going up 6% to 8% as the foodservice sector grapples with widespread labour market challenges and rising commercial rents, the report said.
The shortage of workers, especially back-of-house restaurant staff, is expected to drive up wages and costs and lead to higher prices, the report said.
Bakery and vegetables will both increase 5% to 7% while fruit prices will rise 3% to 5%.
The smallest price increases will be in the meat and seafood aisles, with a 0% to 2% increase predicted in both categories.
Mike von Massow, a food economist and associate professor at the University of Guelph, said average consumers, who spend about 10% to 11% of their income on food, could respond by choosing cheaper options of the same foods or cutting from other parts of a household budget, but lower-income households don’t have that flexibility.
“If you are lower-income or even food insecure, then you’re spending a much higher proportion of your income on food, and there’s just less ability to sort of let other things go.”
To help manage through price inflation, he suggested people be more flexible in their buying habits by choosing foods that are in season, that can be stored better like root vegetables or frozen foods, and that don’t have to be trucked as far.
On top of rising food prices, the report said consumers are likely still noticing some empty shelves in grocery stores — an issue that will persist in the new year.
Meanwhile, climate change and adverse weather events that caused price increases in 2021 are expected to continue in the new year.
Severe wildfires in British Columbia and drought conditions in the Prairies impacted bakery and meat prices this year, for example, and may continue to influence food prices in 2022.
Smaller harvests and poor crop yields will continue to raise the price of bakery items, according to the report.
“We can anticipate the ongoing effect of the continuing climate crisis and adverse weather effects on food prices,” the report said. “Wildfires, record-breaking heat and drought, floods and cold fronts are becoming increasingly commonplace and affecting food prices year after year.”
Several provinces are expected to see higher than average food inflation rates in 2022, including Alberta, B.C., Newfoundland and Labrador, Ontario and Saskatchewan, the report said.
8. Bank of Canada stands pat on key interest rate target
[December 8, 2021] The Bank of Canada is keeping its key interest rate target on hold at its rock-bottom level of 0.25%.
In a statement, the central bank also said Wednesday it doesn’t expect to raise the trendsetting rate until sometime between April and September next year, which is unchanged from its previous guidance.
The Bank of Canada also warned that high inflation rates will continue through the first half of next year, noting that it won’t be until the second half of 2022 that inflation falls back toward its comfort zone of between 1% and 3%.
By the end of next year, the bank is forecasting the annual inflation rate to fall to 2.1%.
The bank said it is keeping a close eye on expectations for price and wage growth to make sure they don’t create a spiral of price increases.
“The bank is closely watching inflation expectations and labour costs to ensure that the forces pushing up prices do not become embedded in ongoing inflation,” it said in announcing its interest rate decision.
Jordan Damiani, a senior wealth advisor with Meridian Credit Union in St. Catharines, Ont., said he was looking for information on when rate hikes might start in the new year and how aggressive those might be versus “letting inflation run hot.”
“One of the things that surprised me was even though we’ve seen an acceleration of inflation, [the Bank of Canada] still expects that inflation is going to be elevated,” he said.
For Damiani, the most telling line was where the central bank said it will seek to avoid inflation pressure becoming “embedded.”
The last scheduled rate announcement for 2021 came amid a flurry of strong, recent economic indicators.
Statistics Canada reported last week that the economy grew at an annualized rate of 5.4% in the third quarter of the year, a hair below what the Bank of Canada forecast in October.
The bank noted in its statement that the growth brought total economic activity to within about 1.5% of where it was in the last quarter of 2019 before Covid-19.
Similarly, the labour market had a stronger-than-expected showing in November, pushing the share of core-age workers with a job to an all-time high and leaving the unemployment rate 0.3 percentage points above its pre-pandemic level in February 2020.
All of that suggests the economy had “considerable momentum into the fourth quarter,” the central bank said.
Still, the central bank noted that headwinds from devastating floods in British Columbia and uncertainties from the omicron variant that “could weigh on growth by compounding supply chain disruptions and reducing demand for some services.”
In a research note Wednesday, RBC senior economist Josh Nye said there’s a risk the economy reaches full capacity sooner than the central bank expects.
“The BoC was held back by omicron uncertainty but today’s statement suggests that as long as that risk doesn’t intensify in the next seven weeks, the BoC will sound more hawkish in January,” Nye wrote.
“Markets are now pricing roughly 50/50 odds of a rate hike at that meeting though we think it’s more likely the BoC will signal upcoming rate hikes rather than actually raising rates in January.”
Damiani said he expects that monetary policy will likely remain accommodative in 2022, but added, “It is still likely we will see multiple rate hikes.”
The language from the central bank “really pointed toward oil prices” as one factor, and “I think if oil prices continue to rise, you could probably see rate hikes earlier.”
For clients, Damiani’s messaging is “we’re going to have a year that looks a lot like 2021,” and he expects small businesses to struggle most.
Portfolio diversification and inflation-proofing will remain key, he said, warning against holding too much cash or securities that will have low returns relative to inflation.
If clients are fearful of markets, he said, remind them that there’s no “perfect time” to jump in.
Due to investing being “uncomfortable for the last 18 months, there are going to be a lot of people still sitting on the sidelines,” Damiani said, but “you don’t want [clients] to derail retirement by timing markets and not being properly allocated.”
9. Statistics Canada says the merchandise trade surplus in October grew to $2.1B
[December 7, 2021] Canada’s merchandise trade surplus increased to $2.1 billion in October as exports of motor vehicles and parts and energy products rose higher, Statistics Canada said Tuesday.
The result compared with a revised trade surplus of $1.4 billion for September compared with the initial reading of a $1.9-billion surplus.
TD Bank economist Omar Abdelrahman called it “a solid report.”
“Fundamentals for trade remain on a solid footing, aided by a continued global economic recovery, and importantly, strength in manufacturing sentiment south of the border,” Abdelrahman wrote in a report.
However, he cautioned there are downside risks that should not be ignored.
“In particular, the near-term trade outlook is susceptible to risks emanating from the devastating floods in B.C., which are impacting trade flows through the Port of Vancouver. Indeed, exports and imports could see a meaningful decline in the November data release,” Abdelrahman said.
Statistics Canada noted that the flooding and mudslides resulted in major disruptions to the transportation of goods to and from key points of entry on the West Coast. The agency said the disruptions are expected to impact the trade data for November that is to be released on Jan. 6.
For October, total exports grew 6.4% to a record $56.2 billion.
Exports of motor vehicles and parts rose 30.8% to $6.1 billion as stoppages in the auto sector related to semiconductor chip shortages eased compared with September. Higher prices also helped exports of energy products gain 9.8% to reach a record $13.9 billion.
Total imports rose 5.3% to a record $54.1 billion as imports of motor vehicles and parts added 27.2% in October to reach $8.5 billion.
In volume terms, total exports rose 2.8% in October, while total imports rose 7.0%.
Regionally, Canada’s trade surplus with the United States was $8.3 billion in October compared with a surplus of $8.4 billion in September as exports to the country’s largest trading partner rose 6.9% and imports gained 9.1%.
Canada’s trade deficit with countries other than the United States was $6.2 billion in October compared with $7.0 billion in September.
In a separate report, Statistics Canada said the country’s monthly international trade in services deficit was $562 million in October compared with $758 million in September.
The agency said exports of services increased 2.2% to $11.4 billion, while imports rose 0.4% to $12.0 billion.
Combined, Canada had a trade surplus of $1.5 billion for goods and services for October compared with a surplus of $657 million in September.
10. American productivity fell by the largest amount since 1960
[December 7, 2021] US labor market productivity tanked in the third quarter. Paychecks grew and the number of hours worked jumped, but workers' output increased only at a moderate pace.
Revisions to the data that were initially published a month ago show that the productivity drop was even worse than feared, falling 5.2% on a seasonally adjusted basis. That's the steepest decline in the quarterly rate since the second quarter of 1960 when productivity fell 6.1%.
The initial read on the data had shown the worst drop since 1981.
Unit labor costs, meanwhile, climbed at an annual rate of 9.6% in the third quarter, reflecting a 3% increase in hourly compensation and a 5.2% decrease in productivity.
The rapid jobs recovery is leading to more hours worked, and the competition for workers is pushing up wages. But the output isn't rising as quickly.
Economists warn not to read too much into this one data point. Not only was the third quarter plagued by supply chain issues that are still not fully resolved, it was also when the Delta variant of the coronavirus threw a wrench into the recovery, causing cases to rise and economic activity to slow compared to the second quarter.
But even with the steep decline in the third quarter, productivity for the year is still expected to increase, according to Mike Englund, chief economist at Action Economics, who expects a 1.7% increase in 2021, calling it a "solid gain."
Have a nice and fruitful week!
Always Ask for the Best!
Tchavdar (Charles) Elenkov, MBA, CHS
Insurance & Financial Advisor
Email: [email protected]
Website:
https://www.elenkov.com
