October 15th Market Update

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The Top-Line

In the Macro
  • Congress raises the debt ceiling at the eleventh hour
  • Canadian jobs reach pre-pandemic levels while America’s fall flat, again
In the Micro
  • What does oil’s 7-year high mean for investors?

The Bottom-Line

In the Macro

Congress raises the debt ceiling at the eleventh hour

In our last newsletter, we spoke at length about the debt ceiling, which, as a reminder, is the limit imposed by Congress on the amount that the United States government can borrow. It was expected that, should the limit not be increased, the US Treasury would run out of money by October 18, causing the government to default on its debt.

The Senate was previously unable to raise the debt ceiling, though, on October 7, they voted to extend the limit temporarily. The agreement increased the government’s borrowing ability by $480 billion, which is expected to be enough to last until early December of this year.

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Source: Morning Brew

On October 12, the House of Representatives voted mainly along party lines to pass the bill, and it is expected that President Biden will sign it in the coming days. For now, it appears that the crisis has been averted, even if it was at the eleventh hour.

Canadian jobs reach pre-pandemic levels while America’s fall flat, again

During the initial wave of the pandemic, almost three million Canadians lost their jobs, with employment levels creeping back up ever since. Last Friday, Statistics Canada released the September jobs report, which showed that total employment has returned to pre-pandemic levels. The report beat economist expectations of 60,000 jobs and posted an impressive 157,100 new positions. The unemployment rate continues to fall and is now 6.9%, down another 20 basis points from August. 

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Source: BNN Bloomberg

Given that the jobs market has reached a near recovery, it is widely expected that the Bank of Canada will soon announce a tapering of its bond-buying program. An economist at Laurentian Bank wrote that the report, coupled with the continued reopening, will be “enough in the BoC’s view to taper another $1B per week in October and enter the reinvestment phase of its QE program.” Currently, the central bank is purchasing $2 billion worth of government bonds every week.

On the same day as the Canadian jobs announcement, the American payroll report came out for September, and it did not show the same sentiment. The month saw a gain of only 194,000 jobs, disappointing economists for the second month in a row and posting the smallest increase since December of 2020. 

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Source: Wall Street Journal

With a labor shortage continuing to dominate headlines, we are seeing employers begin to increase wages in hopes of attracting more applicants. Over the last month, average hourly earnings rose 0.6%, marking its most significant increase since April. 

While the Delta variant continues to be blamed for the lack of jobs growth, Covid-19 infections have started to decline across America. Economist Robert Frick explained that “the weak jobs report shouldn’t be a surprise given the survey for it was taken near the peak of the Delta variant wave on September 12.” With a falling level of infection combined with companies offering more incentives, we could see stronger growth in the American labour market over the next few months.

In the Micro

What does oil’s 7-year high mean for investors?

As you’ve probably noticed at the gas pump lately, across the globe stories are emerging about an energy crisis resulting from sky-high prices and supply chain issues. China has a shortage of coal, leading to high prices and factory closures. In the United Kingdom, a lack of drivers caused panic buying at the gas stations, and the military was deployed to help ease the situation. 

North America has not escaped unscathed. Over the past six months, natural gas prices have almost doubled, and oil prices have recently skyrocketed, with crude up 64% year to date. Last week, West Texas Intermediate (WTI) futures broke past USD$80 a barrel, a price not seen since November 2014. It was only a couple of months ago that we saw a low of US$62 per barrel

Prices for Western Canadian Select have also risen, up from USD$49 in August to US$67, as of October 8. At the pump, both gasoline and diesel prices are about USD$1 per gallon higher, on average, than they were a year ago.

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Source: The Globe and Mail

Prices went up even further on October 4 after OPEC announced it would continue to increase oil production gradually rather than ramp up significantly. One analyst at RBC Capital Markets, Helima Croft, expects that this could change in the future should the balance between supply and demand continue to move farther off balance.

Beyond the global supply chain problems, prices are also surging with the push for clean energy sources. As government policies favor a shift to sustainable energy, oil and gas companies have fallen out of favor with financial institutions. Without access to loans from the major banks, companies in the energy sector have been unable to fund exploration and drilling projects. 

Instead, many have turned to Wall Street, borrowing money and issuing equity to fund operations. In years where cash flow is positive, investors expect to receive dividends and have their shares repurchased, leaving little for capital investment. Outside of those in OPEC Plus countries, most companies and producers cannot increase production simply because prices have moved higher. Even if they could, there is little incentive to do so. 

In the end, higher prices lead to larger profit margins, satisfying the most important of their critics: the shareholders.

As always, if you have any questions or would like to discuss further, please do not hesitate to reach out. Feel free to share with your friends and family too, as referrals are the best compliment we can receive.

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The Top-Line In the Macro How did Omicron impact January’s job market? Canada’s real GDP surpasses pre-pandemic levels  In the Micro Will conflict in the Ukraine impact the financial markets and your portfolio? The Bottom-Line In the Macro How did Omicron impact January’s job market? A surge in Covid-19 cases in December and late January

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