Potpourri

What a better way to start off 2024 than some random fire points that truly complement my ADD? While the world celebrated the turning of the calendar, a lot has been going on.

Ahoy Mate!!

As I mentioned in a post a little over a week ago, pirates are back at it. 4 Houthi rebel boats attempted a takeover of the MAERSK Hangzhou container ship on Sunday. This marks the 23rd illegal attack on ships in the Red Sea since November 19, 2023.  In the ultimate game of f*ck around and find out, the USS Gravely happened to be in the area, heard the distress call from MAERSK, and responded. The destroyer, in conjunction with military helicopters from the USS Dwight D. Eisenhower shot down two anti-ship ballistic missiles earlier on Saturday, and then on Sunday, after being fired upon by the pirates, ended up sinking 3 of the 4 pirate boats, and killing everyone onboard the Houthi crafts. After this event, shipping company MAERSK announced it has stopped all shipments through the Red Sea, and will instead re route all ships around the Cape of Good Hope. On the news, shipping companies, primarily listed in Europe, saw their stocks shoot up. In an upgrade earlier today, Goldman Sachs upgraded shipping companies, as the increase in rates charged to end users will be considerably more than the costs of the re routing the ships. With the extra time it will take to re route ships from Asia to North America, it will reduce the supply of ships, as ships will be able to travel less routes now due to taking longer routes. Shipping rates have damn near doubled in a month, and this will filter through to end prices for consumers. This is inflationary.

Oil

Whenever there is global geopolitical tension, oil is usually a benefactor. The fact the US military is shooting things down has a tendency to rattle a few nerves. Oil has remained somewhat subdued, but don’t be surprised if it jumps up $5 to $8 a barrel over the coming weeks. Not saying it will, but it very well could. Of course, we all know gasoline companies will instantly pass these price increases along, and your weekly trip to the filling station could get more expensive. This is inflationary.

PMI

No, this is not PMS, although that may be more fun to deal with. Canada released the December PMI on Tuesday, and it was about as much fun as a proctology exam. There was really nothing good to report. Now, for those of you who do not know what PMI is, it stands for Purchasing Managers’ Index. The Purchasing Managers’ Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and service sectors. We can tell, in part if the economy is contracting or expanding based on the number every month. A reading above 50 indicates the economy is expanding, whereas a number below 50 represents an economy that is contracting. The November reading was 47.7 ( already in contraction ), and the December reading, which the consensus was for a reading of 48, actually came in at 45.4!!! We went in the wrong direct – and fast. This does not bode well for the Canadian economy in 2024. Almost every category surveyed in the December PMI shrank or contracted. The PMI in December was the worst reading since the depths of COVID in May 2020. The PMI will usually lead the employment report, so let’s look towards Friday’s jobs report!! The December number may surprise you.

Rates

Well, the bond market which had been asleep for the last 2 weeks of December awoke to 2024!!. Rates have ticked up in the last few sessions, and while 8 bps isn’t a lot, it is a telling indicator how the beginning of the year goes. The US 10 year note is now yielding back above the magical 4.00% mark, after the US Federal Reserve released their meeting notes, and it appears that further rate hikes in 2024 are not as ‘off the table’ as the market thought. Of course, on that news we have seen the USD rally against the CAD for 3 straight trading sessions, and bond yields have risen a lot more than 8 bps in the US lately.

Santa Claus Rally

Ho, Ho, Ho, Santa came and went on December 25 for most of us, however in the financial markets there is a thing called the Santa Claus rally. The phrase refers to the tendency of the stock market to post gains over the last five trading days of one year and the first two of the next, and it has been an observable fact in every year since 2015/2016…….until this year. With the stock market losses in the first 2 days of the 2024 trading sessions, we have broken the Santa Claus rally. Why should you care? Well, what happens in the first few days of a new year has the tendency to set the stage for the rest of the year. I will let you do your own research on that if you are so inclined, but the link between the first few days, and the rest of the year are pretty attached at the hip. We have started 2024 with declining stocks, increasing interest rates, and a decline in the CAD. Not exactly the best way to ring in the new year.

Stag

While some may think I am referring to a stag and doe, a popular pre wedding routine, I am in fact referring to stagflation. I said back in September that Canada was setting up for a very nice pattern of stagflation. Now, I was told in no uncertain terms that I was getting ahead of myself, and that it was a little early to be calling for that. However, the pattern has become more noticeable every single month. In an economy of stagflation you see high- or higher than comfortable inflation, declining employment , and dropping demand for goods and services. Well, you be the judge, but I believe that we have stubbornly higher than wanted inflation ( even after 450 bps of rate increase from the BOC ) we are not even creating enough jobs a month to keep pace with immigration, and the latest PMI clearly shows declining demand in goods. You be the judge, but it appears that stagflation may be among us. We can dive into what that means in a future blog.

On a positive note, I didn’t gain any weight over the Christmas holidays, so you can’t say it is all bad news…….