Kyle Prevost, editor of Million Dollar Journey and founder of the Canadian Financial Summit, summarizes recent financial headlines and explains what they mean for Canadian investors.
The inflation mountain: What the descent may look like
There are growing signs that the 8.1% annual inflation rate recorded in June 2022 marked the high point of the post-pandemic surge in prices. On Tuesday, Statistics Canada reported that Canada’s inflation rate eased to 7% in August, a sharper drop than many economists expected (consensus estimates were closer to 7.3%, following July’s 7.6% reading). The cooling headline number strengthened the case that the Bank of Canada’s contractionary policy is having the intended effect and reduced the immediate odds of extreme interest-rate hikes.
The August result was particularly notable given last week’s modest 0.1% Consumer Price Index (CPI) increase in the U.S. Here are the key takeaways from Canada’s August CPI report:
- Gasoline prices fell sharply, down 9.6%, and were the main factor behind the overall drop in inflation.
- Costs for shelter and transportation also declined.
- Inflation for durable goods remained elevated at 9%, but that’s a reduction from July’s 11.5%. Lower demand and higher inventories should push this figure down further in the months ahead.
- Core CPI, which excludes more volatile components, eased to 5.2% from 5.4% in July.
- Grocery inflation remains stubbornly high, with food prices up 10.8% year over year.
Average hourly wages in Canada have risen about 5.4% over the past year, but with inflation still well above wage gains, many households are feeling the squeeze—paycheques don’t stretch as far as they did last summer.
For investors, the central question is whether this disinflation will allow the Bank of Canada to pause or moderate future rate hikes. A lower terminal rate and a quicker path to that peak would generally be positive for risk assets like equities, since the burden of higher borrowing costs would be lighter and shorter-lived.
Meanwhile, the U.S. Federal Reserve proceeded with an expected 75-basis-point increase at its September meeting, lifting its target range to 3.00%–3.25%. The Fed move amplified selling pressure in markets, with major U.S. indices sliding after initially trading higher.
Can the loonie remain afloat?
Canada’s improving inflation picture has had a side effect: the Canadian dollar has lost ground against the U.S. dollar. Much of the move reflects expectations about future interest-rate differentials—if investors expect the U.S. central bank to raise rates more aggressively than the Bank of Canada, demand for U.S. dollars rises relative to Canadian dollars.
Source: Google Finance
Although the loonie has underperformed against the U.S. dollar this year, it has held up reasonably well versus several other major currencies. Here are a few implications of the current currency backdrop:
- Travelers to Europe or Japan are finding better value right now as the Canadian dollar buys more foreign currency in those regions.
- A weaker Canadian dollar versus the U.S. can push up prices on imported goods, and about half of Canada’s imports come from the U.S. This may translate to higher costs for high-import categories such as vehicles and machinery.
- Because over 70% of Canada’s exports go to the U.S., a lower loonie can be a tailwind for export-oriented sectors and could benefit Canadian companies that sell heavily to American markets.
- Canada’s reputation as a “petrocurrency” appears less dominant than in prior years. While commodity prices still influence the loonie, the currency’s sensitivity to oil moves is muted compared with the reaction observed seven-plus years ago.
Note to shareholders: Don’t relax, it’s FedEx
Corporate earnings season offered mixed signals. In the U.S., FedEx captured the headlines with a troubling profit outlook: shares plunged roughly 21% after management warned that global demand had weakened and the company would need to take substantial cost actions. CEO comments suggesting recession risk drew heavy attention, especially since peers such as UPS and DHL painted less dire pictures.
FedEx later outlined about USD$2.7 billion in cost cuts. Quarterly revenue rose roughly 5.5% while earnings per share fell about 21.3%, in line with the company’s prior warning. Analysts had already adjusted estimates following the guidance update.
By contrast, General Mills delivered a more positive report, beating expectations with earnings per share of USD$1.11 versus the USD$0.99 consensus. The stock rallied on the news, rewarding investors who have favored defensive consumer-staples names during uncertain times.
Costco also beat revenue and earnings expectations—EPS came in at USD$4.20 versus USD$4.17 expected and revenues were around USD$72.10 billion versus USD$72.04 billion predicted—but the shares slipped in after-hours trading. The retailer is benefiting from bulk shopping as consumers try to manage higher costs, although inventory levels were elevated about 26% higher than in prior years, which could weigh on near-term margins.
Markets may not be as panicked as headlines would indicate
Investor behaviour suggests that, despite alarming headlines, broad panic has been more muted than one might expect. A recent chart comparing the S&P 500’s value to the size of investor drawdowns shows that the current sell-off, while meaningful, hasn’t produced the extreme, prolonged liquidation that historical crashes have.
Part of this restraint likely stems from the growing prevalence of buy-and-hold and automated investing strategies. Passive vehicles—robo-advisors, all-in-one ETFs and broadly diversified index funds—encourage investors to maintain target allocations through volatility rather than attempt short-term market timing. Data from major investment firms has repeatedly shown that trying to time the market typically underperforms staying invested.
As the famous refrain goes: it’s not market timing that matters, it’s time in the market. That long-term perspective remains the most reliable path for many individual investors during periods of uncertainty.
Kyle Prevost is a financial educator, author and speaker. When he’s not on a basketball court or in a boxing ring trying to recapture his youth, you can find him helping Canadians with their finances at MillionDollarJourney.com and through the Canadian Financial Summit.