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Canadian dollar calm ahead of retail sales

Canada to release retail sales later today Fed’s Powell says inflation still too high, lower growth needed The Canadian dollar has edged higher on Friday….

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  • Canada to release retail sales later today
  • Fed’s Powell says inflation still too high, lower growth needed

The Canadian dollar has edged higher on Friday. In the European session, USD/CAD is trading at 1.3688, down 0.23%. Canada releases retail sales later today, which could result in volatility from the Canadian dollar.

Canada’s retail sales expected to decline

Canada wraps up the week with the August retail sales report. The markets are bracing for a deceleration, with an estimate of -0.3% m/m, compared to a 0.3% gain in July. On a year-to-year basis, retail sales are projected to slow to 0.2%, down sharply from 2.0% in July.

The Bank of Canada is widely expected to hold rates at 5.0% for a second straight time at the October 25th meeting. The BoC has raised rates to high levels but has only hiked on two occasions in 2023, which indicates that on the whole,  interest rates are where the central bank wants them.

I don’t expect to see the BoC trimming rates before mid-2024, but at the same time, the BoC will do its utmost to refrain from further tightening. The takeaway message is that we should expect rates to remain in restrictive territory for some time yet.

Last week’s inflation report showed a decrease of -0.1% for both headline and core CPI in September,  which beat expectations. On a year-to-year basis, headline CPI dropped from 4.0% to 3.8% and the core rate eased to 2.8%, down from 3.3%.

Fed Chair Jerome Powell said on Thursday that inflation remained too high and that the 2% target would be difficult to reach if economic growth did not cool. Powell didn’t provide any hints about future rate policy, saying that rate decisions would be based on data and the economic outlook. The Fed has been sending out a “higher for longer” message, and Powell’s focus on high inflation seemed to reiterate this stance.

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USD/CAD Technical

  • USD/CAD is testing support at 1.3643. Below, there is support at 1.3585
  • There is resistance at 1.3716 and 1.3774

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iPhone Maker Foxconn Investigated By Chinese Authorities

Foxconn, the Taiwanese company that manufactures iPhones on behalf of Apple (AAPL), is being investigated by Chinese authorities, according to multiple…

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October 23, 2023

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Foxconn, the Taiwanese company that manufactures iPhones on behalf of Apple (AAPL), is being investigated by Chinese authorities, according to multiple media reports. Foxconn’s business has been searched by Chinese authorities and China’s main tax authority has conducted inspections of Foxconn’s manufacturing operations in the Chinese provinces of Guangdong and Jiangsu. At the same time, China’s natural-resources department has begun onsite investigations into Foxconn’s land use in Henan and Hubei provinces within China. Foxconn has manufacturing facilities focused on Apple products in three of the Chinese provinces where authorities are carrying out searches. While headquartered in Taiwan, Foxconn has a huge manufacturing presence in China and is a large employer in the nation of 1.4 billion people. The investigations suggest that China is ramping up pressure on the company as Foxconn considers major investments in India, and as presidential elections approach in Taiwan. Foxconn founder Terry Gou said in August of this year that he intends to run for the Taiwanese presidency. He has resigned from the company’s board of directors but continues to hold a 12.5% stake in the company. Gou is currently in fourth place in the polls ahead of the election that is scheduled to be held in January 2024. The potential impact on Apple and its iPhone manufacturing comes amid rising political tensions between politicians in Washington, D.C. and Beijing. Apple’s stock has risen 16% over the last 12 months and currently trades at $172.88 U.S. per share.  

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Tesla stock hits 4-month low as DoJ range probe adds to list of concerns

Tesla said the DoJ is looking into claims about vehicle driving range, add to a growing list of investor concerns for the clean energy carmaker.

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October 23, 2023

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Tesla  (TSLA) - Get Free Report shares moved lower Monday, sending the stock to a fresh four-month low, as a Department of Justice probe into the carmaker's claims over driving range, as well as expanded spending plans, added to a growing list of investor concerns. Tesla said Monday that the DoJ has requested documents related to the group's autopilot system, as well as "certain matters associated with personal benefits, related parties, vehicle range and personnel decisions". The group also said its 2023 capital spending will likely top its previous estimate of between $7 billion and $9 billion, as it ramps-up production of key models, including the Cybertruck, while expanding its new facilities in Germany and Texas. "Our capital expenditures are typically difficult to project beyond the short-term given the number and breadth of our core projects at any given time, and may further be impacted by uncertainties in future global market conditions," Tesla said in a Securities and Exchange Commission filing. "We are simultaneously ramping new products, building or ramping manufacturing facilities on three continents, piloting the development and manufacture of new battery cell technologies, expanding our Supercharger network and investing in autonomy and other artificial intelligence enabled training and product," the filing noted. Tesla shares were last marked 1.4% lower in early Monday trading to change hands at $209.23 each, after hitting a four-month low of $202.51 earlier in the session. Last week, CEO Elon Musk cautioned that its Cybertruck will likely weigh on cash flows over the coming year as it accelerates production of the long-awaited flagship in an unusually cautious update that followed disappointing third quarter earnings. Musk noted that "stormy' economic conditions, rising interest rates and uncertain demand have clouded the group's near-term outlook and appeared to back away from the company's stated goal of growing overall deliveries by 50% each year. Tesla did, however, reiterate its 2023 delivery target of 1.8 million vehicles – which will require a fourth quarter tally of around 477,000 to achieve – following a muted September quarter. Tesla's third quarter profits were down 37% from last year to 66 cents per share, even as revenues jumped 9.1% to $23.4 billion, thanks in part to a series of price cuts in key markets aimed at expanding the group's market share. Adjusted automotive margins were 16.1%, Tesla said, well south of the 18.7% figure recorded over the first quarter and last year's second quarter tally of 23.2% following a series of price cuts in its biggest global markets. Gross margins were 17.9%, down from 25.1% over the same period last year and the 18.2% figure recorded over the second quarter. Wall Street forecasts hovered between 17.8% and 18.2%. Musk also suggested the group could delay plans to launch its latest 'gigafactory' in Mexico, citing both the growing global economic uncertainty and the relentless rise in U.S. interest rates. "I think we want to just get a sense for the global economy is like before we go full tilt on the Mexico factory," Musk told investors last week. "If interest rates remain high or if they go even higher, it's that much harder for people to buy the car. They simply can't afford it."
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A further examination of the state of the economic tailwind

  – by New Deal democratWith no big economic news today, I thought I would pick up where I left off Friday, when I identified three major reasons for…

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October 23, 2023

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- by New Deal democrat   With no big economic news today, I thought I would pick up where I left off Friday, when I identified three major reasons for the economic tailwind that prevented a recession from happening in the past 12 months.
1. Commodity prices generally and gas prices specifically
I am beginning to think that all economic forecasts should come with an open caveat on the order of “subject to the trend in gas prices, which are set by a few geopolitical actors.” Certainly that was the case in 2022, when the War in Ukraine drove prices skyward, and then they fell back to ground as Europe in particular dealt with their reliance on Russian fuel.
This year prices rose as the economy strengthened, but they have fallen again in the past month, and averaged $3.50/gallon when I pulled this graph this morning, which is about -8% lower than 1 year ago:
 
Historically gas prices have a complex relationship with the economy. As shown in the graph below, gas prices averaged quarterly have a broad positive correlation with real GDP for the same quarter:
 
Which is another way of saying that large moves in gas prices affect the economy almost immediately (as in, “the remedy for high prices, is high prices.”)
But note the exceptions of 2006 and 2016. In both cases gas prices retreated sharply, even as an expansion continued (first due to the ebbing effects of Katrina, the second due to the success of fracking production in the US). A similar situation appears to be playing out in the past 12 months, where a big YoY decline in gas prices has been driving a sharp increase in GDP (which is expected to continue in the Q3 report this Thursday).
I also track industrial metals, which exclude the direct inclusion of energy prices. These also declined sharply this year. They appeared to be stabilizing, but in the past month have declined to new 12 month lows:
 
This may be traders’ reaction to the Israel/Gaza situation. But it may also have to do with continued weakness in China. So the commodity tailwind may be starting up again.
2. The slowdown in China
Below is a graph of imports to and exports from China measured YoY:
 
While I take all statistics about China with multiple grains of salt, if I saw this chart coming out of any transparent economy, I would treat it as recessionary. And because China is such a huge consumer of raw materials, I would treat it as placing further deflationary pressure on commodities, which we may be seeing with industrial metals in the past few weeks in the graph above.
3. Pandemic disruptions in the supply chains for houses and motor vehicles
As I have noted many times, mortgage interest rates lead sales. With mortgage rates having hit 8% last week, let’s update the YoY graph of rates (inverted,*10 for scale) vs. housing permits:
One year ago mortgage rates hit 7%. But then they declined to 6% in the spring before rising to new highs more recently. So we cannot project current rates forward. But *IF* this uptrend in rates does not promptly reverse, then it is likely that permits will decline to new cycle lows below 1.350 million annualized, shown in the below graph of absolute mortgage interest rates and permits:
 
In fact, with interest rates about 10% higher (7%*1.10) than they were last year, a decline during winter to 10% below 1.350 million, or about 1.225 million, is possible.
And sooner or later, the big downturn in permits and starts is going to catch up with housing units under construction, which as I noted Friday are only down 2% so far.
The situation is much less clear when it comes to motor vehicles.
This past spring SP Global wrote:
“S&P Global Mobility estimates that in 2021 more than 9.5 million units of global light-vehicle production was lost as a direct result of a lack of necessary semiconductors, with the third quarter of 2021 experiencing the largest impact with an estimated volume loss of 3.5 million units. Another 3 million units were impacted in 2022.
“During the first half of 2023, however, losses identifiable as specifically related to the semiconductor shortage fell to about 524,000 units globally.”
They also supply the following graph comparing backlogs in chip shipments compared with normal (normal=1):
At that time, the backlog was still about 3X the usual pre-pandemic time.
“Car manufacturers are struggling to keep up with the demand for new vehicles, as the shortage of chips has resulted in a shortage of critical components needed for production. It has also led to higher car prices as manufacturers pass on the additional costs to consumers.”
“Overall, the auto industry stocked 60 days’ worth of vehicles at the beginning of October. That’s considered a normal supply of inventory by historical standards, and it’s also the highest since early spring 2021”
But needless to say, it varies considerably with the popularity (or lack thereof) of the vehicles being sold:
“brands like Dodge, Chrysler, Lincoln, Infiniti, Volvo, Ram, Jeep, and Mini offer plenty of new vehicle stock. In contrast, inventory levels still sit well under normal for Honda, Toyota, Kia, Subaru, Lexus, Cadillac, Land Rover, and Hyundai.”
To summarize the situation with motor vehicles, the chip shortage itself may be mainly over, but there is roughly 10,000,000 vehicles worth of pent-up demand that is far from being addressed. The net result for now is that vehicle prices have reached a new, stratospheric equilibrium, that is also constraining sales from satisfying that pent-up demand.

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