The Week in Review

Weekly Market Recap: U.S. and Canada

In a rare double-holiday-shortened week (Canada Day and Independence Day) the Nasdaq and the S&P 500 pushed their record levels higher again, posting weekly total returns of 3.5% and 2.0%, respectively. For the Nasdaq, it was the tenth positive week out of the past eleven. The Dow gained 0.7% and the TSX started strong following Canada Day, but pulled back to end the week up just shy of 1%.

S&P 500 Returns | Week At-a-Glance

TSX Returns | Week At-a-Glance

COMMENTARY

When we look at the major economic news out this week, it was all about jobs, jobs and more jobs, with reporting coming from both Canada and the U.S.

🏦 Canada Unemployment Rate

Canada's unemployment rate rose to 6.4% in June, the highest since January 2022. This comes in higher than market expectations of 6.3%, and supports the Bank of Canada's view that higher interest rates are having a significant impact on the labor market, which in turn reinforces arguments for potential rate cuts to support the economy.

Key Details:

• Unemployment Rate: Increased to 6.4% from 6.2% in May 2024

• Market Expectations: Surpassed the forecasted 6.3%

• Number of Unemployed People: Rose by 42,000 to a total of 1,400,000

• Youth Unemployment: Increased by 0.9 percentage points to 13.5%

• Net Employment: Decreased by 1,400 to 20,516,400, contrary to expectations of a 22,500 increase

📈 U.S. Unemployment Rate

Also in June, the U.S. unemployment rate rose to 4.1%, now at its highest since November 2021, up from 4% in the previous month and surpassing market expectations that had forecasted the rate to remain unchanged.

Key Statistics:

• Unemployment Rate: Increased to 4.1% from 4% in May 2024

• Market Expectations: Expected to remain unchanged at 4%

• Number of Unemployed Individuals: Increased by 162,000 to a total of 6.811 million

• Employment Levels: Increased by 116,000 to a total of 161.199 million

• Labor Force Participation Rate: Increased to 62.6% from 62.5%

📈 U.S. Jobs

Finally for our June employment numbers, the U.S. economy added 206,000 jobs, slightly below the revised 218,000 in May but above forecasts of 190,000. Revisions for May and April resulted in a combined decrease of 111,000 jobs from previous reports, which shows a strong, yet cooling labour market.

Key Statistics:

• Jobs Added in June 2024: 206,000

Sector Job Gains & Losses:

• Government: 70,000 (local government excluding education: 34,000; state government: 26,000)

• Health Care: 49,000 (ambulatory health care services: 22,000; hospitals: 22,000)

• Social Assistance: 34,000

• Construction: 27,000

• Retail Trade: -9,000

• Manufacturing: -8,000

• Professional and Business Services: -17,000

🌰 Overall Impact, in a Nutshell

The two charts above show that both Canada and the US are seeing rising unemployment rates, but the underlying job market dynamics show different economic trajectories. Canada might need to consider rate cuts to stimulate growth, whereas the US may continue a cautious approach to monetary policy to balance growth with inflation control.

• Inflation Risks: Canada’s potential rate cuts might stimulate the economy but could also reignite inflation if not managed carefully. The US faces similar risks, with the need to balance job growth and inflation control.

• Business Confidence: Higher unemployment rates may dampen business investment in both countries, especially if economic uncertainties persist.

• Housing Markets: Rising unemployment could affect housing markets negatively, most notably in Canada, where affordability is already an issue.

THIS WEEK’S POLL QUESTION
(Results in Next Week’s Newsletter)

Most Overbought Stocks

The Relative Strength Indicator (RSI) can provide a signal that suggest a stock is either overbought or oversold. A stock that has an RSI over 70 is considered to be in “overbought” territory. This might suggest that the stock is due for a pullback, however it is not a recommendation to sell. Always perform your own due diligence.

Most Oversold Stocks

A stock that is trading with an RSI below 30 is considered to be in “oversold” territory. This might suggest that the stock is due for a recovery, however it is not a recommendation to buy. Always perform your own due diligence.

THE ECONOMY
Rising Unemployment Sparks Rate Cut Speculations

As I noted in the economics summary above, the unemployment rate in Canada has jumped to 6.4%, a 29-month high. This has stirred talks of a potential rate cut by the Bank of Canada this July.

Let’s break this down a bit:

🚀 The Unemployment Spike

The most recent data shows that that Canada lost a net 1,400 jobs in June, against expectations of 22,500 job gains. Youth unemployment also hit a near-decade high, excluding pandemic years. This prompted money markets to increase bets on a rate cut from 40% to 56%. These odds are bouncing around from week to week, as investors are digesting each tiny bit of economic news.

Economist Doug Porter from BMO Capital Markets noted the 1.4-percentage-point rise in joblessness since January last year, and pointed out the correlation to economic downturns.

🛑 Recession Fears

As Porter points out, the rising unemployment rate has many questioning if Canada is heading toward a recession. Royce Mendes from Desjardins Group added to the discussion, saying, “Lowering interest rates is the only way to soften the blow from upcoming mortgage renewals and keep any hope of a soft landing alive.” Mendes predicts a 25-basis-point cut this month, with more cuts likely to follow.

📉 Economic Indicators & The Bank of Canada

BoC Governor Tiff Macklem acknowledged last month that while the labour market had cooled, it didn’t necessarily mean a sharp rise in unemployment was required to tame inflation. Despite the rising jobless rate, wage growth remains a concern for the BoC, with the average hourly wage growth of permanent employees accelerating to 5.6% in June.

🔄 Market Reactions

Following the jobs report, the Canadian dollar weakened, and yields on the government’s two-year bonds dropped. Economists suggest that wage growth, currently a thorn in BoC’s inflation control efforts, will soon align with the increasing unemployment.

The BoC lowered its key policy rate for the first time in over four years last month and hinted at more cuts if inflation continues to cool. The next rate announcement on July 24 will be critical, especially with new inflation data coming out just before.

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Disclaimer:
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^{1. As of May 24, 2024
2. Standardized Performance : 1Y -16.65%, 2Y -11.75%, 3Y -5.44%, 5Y 4.45%, 10Y 5.91%, SI 6.06% as of May 29, 2024
3. Annualized Distribution Yield as of May 24, 2024. Standardized Performance: 1Y 3.58%, 2Y 4.47%, 3Y 1.385% 5Y 2.67%, 10Y 3.15%, SI 4.1% as of May 31, 2024
4. As of June 03, 2024}

EARNINGS SEASON
Wall Street Focuses on Corporate Earnings

With the ongoing speculation and uncertainty surrounding rate cuts, investors are turning to corporate earnings to sustain the 2024 stock market rally.

Key Takeaways:

🚀 Earnings Expectations

Analysts expect second-quarter earnings for S&P 500 companies to grow by about 8.7% from last year, which if it happens, would mark the fourth-straight quarter of earnings growth. Strong earnings have already helped the S&P 500 gain more than 16% this year.

Federal Reserve Chair Jerome Powell mentioned that prices are back on a “disinflationary path” but emphasized the need for more data before cutting rates.

🛑 Interest Rate Cuts Delayed

While recent data shows cooling inflation, the Federal Reserve has only penciled in one interest rate cut for 2024. It seems like just the other day that investors who were forecasting six or seven cuts this year are now predicting anywhere from a low of one, up to three.

📉 Earnings Season Kicks Off

The earnings season begins this week and we’ll see big banks like JPMorgan Chase, Wells Fargo, and Citigroup reporting their results. Investors will be looking for insights into consumer health, especially as recent data suggests that lower- and middle-income Americans are tightening their budgets.

🔄 Tech Stocks and Market Gains

Mega-cap tech stocks, which have driven much of the market’s gains this year, will also be closely watched. Nvidia leads the pack with shares up 155% in 2024, reaching a $3 trillion market cap. Microsoft , Meta and Amazon, now a $2 trillion company, are also up strongly for the year.

Although a lot of investors have pretty much turned a blind eye to fundamentals while enjoying the tech ride, Wall Street will be looking for these companies to justify their high valuations.

So ya, the market will be looking to corporate earnings for reassurance that the momentum will continue. I’d be keeping a close eye on how these developments unfold and what potential impact they will have on your investments.

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BANKING
TD’s Chief Compliance Officer Out Amid Anti-Money-Laundering Challenges

It’s been a very rocky time for Canada’s second-largest bank over the past year or so, with most attention being focused on compliance related issues.

In what’s sure to add intrigue to the story, an internal TD Bank memo says that its chief compliance officer, Monica Kowal, has left amidst critical updates to their anti-money-laundering controls.

Let’s Take a Deeper Look:

🚀 Leadership Shake-Up

Kowal, who was instrumental in developing strategies to mitigate regulatory compliance risks, left the bank on July 2. Chief Risk Officer Ajai Bambawale praised her for her significant contributions but didn't elaborate on her departure.

🛑 Stepping In: Erin Morrow

TD has appointed Erin Morrow, previously deputy chief compliance officer, to take over Kowal's role. Morrow, who joined TD in January from Citibank, brings over 20 years of experience in compliance, audit, and risk management.

📉 Ongoing Compliance Challenges

TD has been working to fix deficiencies in its regulatory compliance management (RCM) program after Canada’s banking regulator, OSFI, flagged gaps during a recent assessment. This program is crucial for managing risks and ensuring compliance with laws in Canada, the U.S., and other countries.

The bank is also under investigation by U.S. regulators and the Department of Justice for weaknesses in its anti-money-laundering procedures. I’ve seen reports of analysts estimating potential penalties as high as US$4 billion which could limit TD's expansion in its key growth market.

🔄 The Importance of Compliance

The RCM framework, which includes anti-money-laundering controls, is vital for a financial institution's risk management. Ensuring these controls are robust helps TD comply with various international regulations, safeguarding the bank’s operations and reputation.

With TD Bank being one of my top personal holdings, I’ll be keeping an eye on how these developments unfold, as they will have a huge impact on TD's strategic direction and market operations and, of course, its future performance.

The bank’s success on strengthening its compliance programs will be a critical factor as it works its way through these challenges and tries to maintain its reputation in the financial industry. I believe they’ll be able to pull this off, but only time will tell how well they manage.

CORPORATE M&A
Hudson’s Bay Acquires Neiman Marcus in $2.65B Deal

Hudson’s Bay Co. (HBC) has announced its acquisition of luxury department store Neiman Marcus for $2.65 billion US. This move, which has been circulating in the rumour mill for some time now, will see Neiman Marcus join Saks Fifth Avenue and Bergdorf Goodman under a new umbrella entity called Saks Global.

So What’s Happening, Exactly?

🚀 The Luxury Retail Merger

Hudson’s Bay Co. is grouping Neiman Marcus with other high-end brands into Saks Global, positioning it as a collection of international luxury names.

🛑 Amazon's Interesting Role

In a twist that has caught the eye of industry experts, Amazon and Salesforce are also part of the deal. Retail analyst Doug Stephens noted, "Amazon has been trying to beat down the door of luxury for at least the last six to seven years. They've been making a really concerted effort to try to crack the luxury market but have been unsuccessful."

📉 HBC's Strategic Moves

This acquisition follows other recent strategic shifts at HBC, including the closure of Home Outfitters and the sale of Lord & Taylor. HBC is trying to re-establish its Canadian operations as a stand-alone entity with a focus on reduced debt and increased cash flow.

🔄 Future Market Shifts

Department stores are facing real challenges in the e-commerce era, and this merger could signal a new direction for luxury retail. On a personal note, luxury retail isn’t my thing and I always marvel at how airports around the world are full of high-end retailers. I’d never believe that people would spend their time between flights shopping for expensive clothing and souvenirs, but obviously they are, or those stores wouldn’t be there.

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