The Week in Review

Weekly Market Recap: U.S. and Canada

All it took for the markets to settle down after a couple of rocky weeks was a temporary spike in the VIX, and now we’re right back where we left off.

With the two-week surge in market volatility behind us, the major U.S. stock indexes recorded their strongest weekly gains of 2024. The Nasdaq surged more than 5%, the S&P 500 added 4%, and the Dow rose 3%, lifted by encouraging data on inflation, retail sales, and consumer sentiment. Not to be outdone, our TSX was up over 3.4% as well.

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

TSX Returns | Week At-a-Glance

Major Economic Stories This Week

Canadian Housing Starts Surge 16% in July, Reaching 13-Month High

Housing starts in Canada were up a strong 16% in July, hitting 279,500 units, and now at the highest level since June 2023. This surge beat market expectations, led primarily by a rise in multi-unit urban starts.

• Housing starts rose 16% to 279,500 units in July.

• Urban housing starts increased by 17% to 261,134 units.

• Multi-unit urban starts surged by 21% to 217,306 units.

• Single-detached urban starts grew by 2% to 43,828 units.

US Inflation Drops to 2.9% in July, Lowest Since March 2021

The US annual inflation rate continued to decrease for the fourth consecutive month, reaching 2.9% in July, the lowest since March 2021. The decline was driven by easing prices in shelter, transportation, and apparel, alongside continued drops in vehicle prices. However, energy costs saw a slight uptick, mainly due to higher gasoline prices.

• Annual inflation rate slowed to 2.9% in July from 3% in June.

• Shelter inflation eased to 5.1%, while transportation costs decreased to 8.8%.

• Energy costs rose slightly by 1.1%, with gasoline prices decreasing less sharply.

US Core Inflation Eases to 3.2% in July, Hitting Over Three-Year Low

The US annual core consumer price inflation rate, which excludes food and energy, further decreased to 3.2% in July, marking its lowest level in over three years. This deceleration aligns with market expectations and reflects slower price increases in key areas such as shelter, motor vehicle insurance, and personal care.

• Core inflation rate decreased to 3.2% in July 2024 from 3.3% in June.

• The shelter index rose by 5.1%, down from 5.2% in the previous month.

• Motor vehicle insurance costs increased by 18.6%, compared to 19.5% in June.

• Monthly core consumer prices rose by 0.2%, up from 0.1% in June.

US Consumer Sentiment Rises to 67.8 in August, First Increase in Five Months

The University of Michigan's consumer sentiment index for the US increased to 67.8 in August, marking the first rise in five months and surpassing expectations. The improvement was driven by stronger expectations for personal finances and the five-year economic outlook, while current economic conditions slightly weakened.

• Consumer sentiment index rose to 67.8 in August, up from 66.4 in July.

• Expectations index improved to 72.1, the highest in four months.

• Current economic conditions index decreased to 60.9 from 62.7.

• Year-ahead and five-year inflation expectations remained steady at 2.9% and 3%, respectively

Key Takeaways From this Week’s Economic News

Canadian Housing Market Resilience

The big jump in Canadian housing starts is a strong signal that the housing market is heating up again, especially in urban areas. We’re seeing multi-unit projects leading the charge, and it’s clear there’s strong demand in cities. This could be good news for the economy, showing confidence in growth, but at the same time it might (probably will) also mean higher housing prices down the road, making it even tougher for people trying to buy homes. If this pace keeps up, some regions could see the market getting a bit too hot, furthering concerns about affordability and sustainability.

US Inflation's Steady Decline

The drop in U.S. inflation to 2.9% is definitely good news for consumers and the economy as a whole. With inflation getting closer to the Fed's 2% target, the odds are overwhelming that they will begin a rate cut cycle at its next meeting. Obviously, this will help the economy keep growing. But, with energy costs, especially gas prices, ticking up a bit, it’s a reminder that inflation isn’t completely under control yet and could flare up again if energy prices suddenly spike.

US Consumer Sentiment

The bump in U.S. consumer sentiment, above consensus, shows people are feeling a bit more positive about their finances and the economy over the next few years, which is a nice change after several months of decline. This could be partly because of the buzz around the upcoming elections and a sense that inflation is finally settling down. However, we also saw a slight drop in how Americans see the current economy, and this is a sign that they’re still cautious as a group, so I’m not convinced we’ll see a big surge in spending just yet. With inflation expectations holding steady, people seem to think the worst of price increases might be behind us, which will shape how they plan their spending and saving going forward.

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

✅ Disagree

“Leaders of countries like presidents, prime ministers etc. are often not knowledgeable on economic matters. It is for the best interest of the country to leave the decision making to the experts (governors) with little to no intervention in their decision making.” - fahad_tz

Editors Note: Insert widely-recognized speaking voice here: 😆

““I had the best interest rates ever. MLK never had interest rates like I did.”” - mjwebstuff

REAL ESTATE TROUBLES
Canada's Real Estate Insolvencies Surge Past Global Financial Crisis Levels

Key Takeaways:

• Real estate insolvencies in Canada are on track to surpass levels seen during the global financial crisis.

• Canada could see around 240 real estate insolvencies in 2024, a 57% increase from 2023.

• The real estate sector accounts for 55% of all receiverships in Canada so far this year.

• Developers are struggling with high borrowing and construction costs, compounded by rising interest rates.

Canada's real estate sector is facing an escalating crisis, with insolvencies set to surpass levels seen during the global financial crisis. Developers across the country are battling with rising borrowing and construction costs, which has led to a wave of bankruptcies and receiverships. The trend is alarming, with industry experts warning that the situation could worsen as interest expenses remain high.

The Growing Wave of Insolvencies

From January to May this year, an average of 20 real estate-related insolvencies occurred each month in Canada. If this pace continues, the country could see about 240 real estate insolvencies by the end of 2024, which would be a 57% increase from last year and a 13% rise from 2009, during the financial crisis.

The situation is even more dire when considering receiverships, which are not fully captured in public insolvency statistics. The real estate sector currently accounts for 55% of all receiverships recorded by Insolvency Insider Canada, up from 30% last year.

Developers Struggle Under Pressure

The root of these problems can be traced back to years of escalating costs and market pressures. High-profile projects like Sam Mizrahi’s luxury condo tower in Toronto have defaulted on massive loans, with lenders owed billions. Smaller developers, such as Maplequest Ventures, are also feeling the strain. Maplequest, which aimed to build housing in Brampton, Ontario, defaulted on a $24-million loan after interest rates surged following the Bank of Canada's hikes from 0.25% to 5%.

These financial pressures aren’t new. Construction costs have been rising steadily since 2017, partly due to a rising demand for new condos and a boom in preconstruction sales. The pandemic further complicated matters, causing delays and increasing costs. As interest rates soared, developers found themselves unable to manage their mounting debt, and that led to a wave of defaults and insolvencies.

A Challenging Future Ahead

Sadly, the real estate market's challenges are expected to continue. Even though the Bank of Canada has started to cut its benchmark interest rate, borrowing remains costly, and demand for preconstruction condos has waned. Developers are finding it increasingly difficult to pass on these higher costs to buyers, as condo prices have nearly doubled in regions like Toronto.

Dolin Doran, head of development advisory for commercial real estate firm Altus Group says the current situation has been a long time coming. 

The combination of rising costs, delays, and high interest rates has created a perfect storm, leaving many developers unable to stay afloat.

The current wave of insolvencies isn’t just a temporary blip but a sign of deeper, systemic issues within the Canadian real estate market. As more developers struggle, the industry is likely to see further consolidation and an ongoing wave of bankruptcies and receiverships in the months ahead. This developing story is far from over.

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THE EU ECONOMY
UK Economy Strong Start Faces Slowdown Risks

Key Takeaways:

• The UK led G-7 nations in economic growth during the first half of 2024, with GDP rising 0.7% in Q1 and 0.6% in Q2.

• Inflation slowed to 2.2% in July, while job growth surged.

• The Bank of England is cautious about lowering interest rates, fearing inflation risks if growth continues.

• Analysts expect a slower growth pace in the second half of 2024, with long-term challenges ahead.

The UK economy kicked off 2024 with impressive momentum, leading G-7 nations in growth during the first half of the year. Dubbed a "Goldilocks moment," the country enjoyed a mix of slowing inflation, rising employment, and healthy growth that seemed just right. However, economists are now warning that this sweet spot might not last.

Strong Start, But Will It Continue?

The UK’s economy grew by 0.7% in the first quarter and 0.6% in the second, outperforming the US and other European countries. Inflation also eased to 2.2% in July, while the job market saw its fastest hiring pace since November. This growth has helped the UK put last year’s recession in the rear-view mirror, but experts are cautious about the future.

Ellie Henderson, an economist at Investec, noted that the recent data reflects a "Goldilocks scenario" where growth is strong but not too hot to trigger inflation.

However, she and others like Dan Hanson from Bloomberg Economics believe this might not last. Hanson pointed out that the economy could face challenges in the third quarter and beyond, especially if workforce limitations and low productivity begin to drag down recovery.

BOE’s Delicate Balancing Act

The Bank of England (BOE) is closely monitoring the situation, particularly the risk of inflation making a comeback. While the BOE is expected to cut interest rates later this year, Governor Andrew Bailey and his team remain cautious, knowing that faster-than-expected growth could reignite inflationary pressures.

Analysts are split on the outlook. Some, like Thomas Pugh from RSM UK, are optimistic, seeing the UK’s economy as having exited a period of stagnation and poised for steady growth.

Others, however, warn that the recent gains might be temporary, boosted by base effects rather than sustained improvements.

Long-Term Challenges

Looking ahead, the BOE and economists are wary. Despite the positive start to the year, underlying issues like weak productivity and labor market constraints could slow the UK’s growth. Bloomberg Economics estimates that the UK’s sustainable growth rate without triggering inflation is around 0.3% per quarter—half the pace seen in recent quarters.

Keir Starmer’s government is pushing forward with reforms aimed at boosting long-term growth, including investment and supply-side policies. Sonali Punhani, an economist at Bank of America, believes these efforts could lead to a reassessment of the UK’s growth potential if they materialize as planned.

BANKING
TD Bank's Cultural Shift and Money-Laundering Scandal

Key Takeaways:

• TD Bank's rapid expansion into New York has led to a significant money-laundering scandal.

• A cultural shift at TD is linked to increased bureaucracy and leadership departures.

• TD's stock has underperformed over the past five years, lagging behind competitors like Royal Bank of Canada.

• The bank faces potential $2 billion in fines due to AML (anti-money laundering) issues in the U.S.

It’s a bit of a long read, but if you can spare the time, grab a cup of tea and have a read through the Globe & Mail’s Stephanie Keith’s article about the current troubles TD Bank finds itself in. Here is a summary of her comprehensive article.

In 2012, TD Bank launched an ambitious plan called "Take New York," aiming to break into the highly competitive New York market by building a branch network from the ground up. Surprisingly, the strategy worked, and TD became a major player in the region. (For my fellow Canadians who have been in the New York area over the past number of years, you’ll no doubt have been impressed with how many TD logos you see scattered throughout Manhattan.) But now, more than a decade later, that success has come back to haunt them.

The Money-Laundering Crisis

TD found itself at the center of a massive money-laundering scandal when it was revealed that criminals had laundered $653 million through the bank’s branches in New York, New Jersey, and Pennsylvania. What’s worse, TD employees were bribed with gift cards to help facilitate the illegal activities. Although the bank has been negotiating with U.S. regulators, the fallout has been severe, with the potential for billions in fines still looming.

The real problem, though, isn’t just about a few rogue employees. Interviews with over 30 sources, including current and former TD executives, paint a troubling picture of a bank that’s become bogged down by bureaucracy and risk aversion under CEO Bharat Masrani. Since he took over in 2014, layers of management have slowed decision-making, and TD’s once vibrant culture is eroding.

Cultural and Leadership Shifts

Inside TD, there’s growing frustration. The bank, known for being a magnet for top talent, has seen many of its key leaders leave in recent years, raising questions about its succession planning. With more than one executive saying, "It takes 30 people to say yes to something, and only one person to say no," it's clear that TD's culture of decision-making is causing significant issues.

 Masrani, in a recent interview, acknowledged TD's AML failures.

However, he denied that the bank's culture has shifted or impacted performance. But the numbers tell a different story—TD's stock has underperformed, and its growth rates have lagged behind its rivals.

What's Next for TD?

As TD tries to navigate these challenges, the bank’s future remains uncertain. With U.S. regulators scrutinizing every move and investors losing confidence, TD’s once-rosy outlook has dimmed. The real test for TD will be whether it can truly address its internal issues and restore both its reputation and financial performance. As one long-time observer of the bank put it, "TD faces slower growth for the next little while, but it doesn’t consider it a disaster. It brings them back to an average Canadian bank."

Masrani insists that the bank's culture remains strong, but many within the company feel that change is desperately needed. Whether TD can bounce back from this series of setbacks will depend on how well it can adapt to these new realities and whether its leadership can steer the bank back on course.

OTHER NEWS FROM THE PAST WEEK

Starbucks’ New CEO Sparks Optimism: Can It Last?

Starbucks' stock surged over 26% last week after appointing Brian Niccol, former Chipotle CEO, as its new leader, adding $21 billion in market value. Investors are optimistic about Niccol's potential to revamp the strategy, especially in the struggling U.S. market, but there's caution that the stock's current valuation may already reflect this excitement. Find out what’s next for the coffee giant.

Canadian Home Sales Dip Slightly in July, But Still Up Year-Over-Year

Canadian home sales dipped 0.7% in July but remained 4.8% higher than last year, reflecting a mixed market with regional variations. While some areas saw gains, others faced declines, and the national housing market remains below pre-pandemic levels as buyers await potential interest rate cuts. See the latest trends and what lies ahead for Canada's real estate market.

Former RBC CFO Sues Bank for $50 Million, Alleging Wrongful Termination and Reputational Damage

Former RBC CFO Nadine Ahn is suing the bank for nearly $50 million after being terminated over allegations of an undisclosed relationship with a colleague, Ken Mason. Both deny any wrongdoing and claim RBC's actions were influenced by gender bias, leading to a high-stakes legal battle that could impact corporate governance in Canada's financial sector. Read more about the lawsuit.

Health Benefits Drive Growth in Nonalcoholic Beverages

As Americans cut back on alcohol, the rise of functional beverages, offering health-conscious alternatives with adaptogens, nootropics, and THC, is transforming the drink market. Led by Gen Z and baby boomers, this sector is expected to reach $249.5 billion globally by 2026, despite challenges around health claims and regulation. Read CNBC’s take on how these innovative drinks are reshaping social occasions and the future of the beverage industry.

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The Relative Strength Indicator (RSI) can provide a signal that suggest a stock is either overbought or oversold.
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