The week in the markets –
July 21, 2023

Earnings season begins strong

• New inflation numbers in Canada are within the target range.
• Earnings season is under way, and companies are beating expectations.
• A weak outlook from a major semiconductor supplier.

The Canadian Consumer Price Index (CPI) rose 2.8% in June compared to a year ago, which is the lowest watermark for inflation since March 2021. Gasoline prices declined 21.6%, being one of the main drivers. Inflation is now within the Bank of Canada’s (BoC) target range of 1-3%; last week’s increase by the BoC, which took its overnight rate to 5%, could be the peak in rates for this tightening cycle. The futures market, which is an indicator of future interest rate expectations, has priced in only a 30% probability of one more rate increase by the end of the year.

Going forward, patience from the BoC will be required as regards inflation for the remainder of 2023. Our models suggest CPI may hold in the 3-4% range throughout the last half of the year, due to base effects from the much lower month-over-month inflation during the last six months of 2022. Meanwhile, the trend of lower inflation globally continues, with the U.K.’s year-over-year inflation coming in better than expected. U.K. consumer prices rose 7.9% last month, beating the estimate of 8.2%, and lower than May at 8.7%.

Earnings season is now underway for the S&P 500. It’s still early, with only 15% of companies having reported at the time of writing, however of those, 77% have beaten expectations by an average of 6.43%. Historically, the average beat rate is approximately 70%. However, expectations were set quite low for second quarter results, so the current (and early) earnings performances should be taken with a grain of salt. Nonetheless, investors will be paying particular attention to results as a guide to the direction of the economy.

Taiwan Semiconductor Manufacturing Company (TMSC) lowered its forward guidance; it now expects revenue to decline 10% year-over-year for 2023. CEO of TSMC, C.C. Wei said, "While we have recently observed an increase in AI-related demand, it is not enough to offset the overall cyclicality of our business." This highlights some of the potential for economic weakness over the coming 12 months, as global demand for consumer goods wanes.

The Conference Board Leading Economic Index declined 0.7% in June. This marks 15 months of contraction — the longest streak of consecutive decreases since 2007-08. The Conference Board will be closely watching inflation, tighter monetary policy and lending standards heading into the fall.

China, the world’s second-largest economy, expanded by 6.3% in Q2 (on an annualized basis). China’s GDP growth is still in positive territory but growing slower than anticipated, after the lifting of its restrictive COVID-19 policies. This has prompted the government to introduce additional stimulus measures, such as extending tax breaks for electric vehicle purchases and an easing of mortgage rules. For years, China has sought to suppress real estate demand in the biggest cities by treating buyers with previous mortgages as second-time purchasers and raising down payment requirements or increasing borrowing costs. The proposed changes would enable buyers to benefit from lower down payments in China’s urban centres, which is likely to spur demand on a regional basis.

A particular focus for investors next week will be the U.S. Federal Reserve’s meeting to set interest rates. The market is largely expecting another 25-basis-point rate increase. Of greater scrutiny will be the statement by the Federal Open Market Committee and the following press conference for any indication of the direction of interest rates going forward, or the possibility that this will be the last hike of this cycle.