Daily Commentary

MarketMinder’s View: “US industrial production rose for a second month in July, driven by continued strength in manufacturing tied to business investment. The 0.2 per cent advance in production at factories, mines and utilities followed an upwardly revised 0.3 per cent rise a month earlier, Federal Reserve data showed Tuesday (Aug 18). Factory output, which accounts for three-fourths of total industrial production, advanced 0.2 per cent following an upwardly revised 0.3 per cent gain a month earlier and despite a drop in auto manufacturing.” The trend is actually a little broader than this notes. After years of sliding sideways and contracting, US industrial output has climbed in four of the last six months, with manufacturing (the largest sub-industry) up in five of six and flat in the other. This looks more and more like a durable trend underpinned by business investment—a key plank supporting US expansion.

MarketMinder’s View: Upward wobbles in oil prices did reaccelerate Canada’s consumer price index (CPI) from 2.8% in June to 3.0% last month, a hair above the 2.9% consensus forecast, which is unwelcome news that likely adds to many consumers’ inflation angst. But the coverage here, especially in the back half, sensibly notes this is chiefly about gasoline: “Excluding gas, the consumer price index rose 2.2 per cent in July for a third consecutive month, Statistics Canada said. CPI-trim and CPI-median — two measures of core inflation that the Bank of Canada looks at — were a touch higher than expected … Despite some of the shorter-term measures of core inflation picking up a bit, those measures were still within the Bank of Canada's target range ….” Look, you can never know what a central bank will do with interest rates beforehand—these human beings aren’t a market function and could act on biases that rational analysis wouldn’t rate heavily. But with CPI excluding gasoline unchanged again, it is fairly apparent oil prices’ war-driven rise isn’t spilling economywide. Absent that, the case for rate hikes is flimsy, unless you think the central bank can somehow hike its way to speeding oil extraction and refining—or boost the Canadian policy rate enough to force Iran and America to reach a peace deal. Supply shocks like this tend to have a limited effect that drives substitution, not inflation, and they aren’t a call for central bank action.

MarketMinder’s View: First, the data: “Government data released this week showed that [the Consumer Price Index] rose 3.4 percent in July from a year earlier, outpacing a 3.2 percent increase in hourly earnings over the same period.” The article suggests the resulting loss in purchasing power could have repercussions at the personal level (through reduced consumer savings) and national level (affecting voters’ choices during November’s midterm elections). The primary mechanism through which weaker wages supposedly affects consumers’ decisions: by knocking sentiment. “But coming on the heels of the earlier decline in pay — and at a time when affordability and the cost of living remain top of mind for many voters — it has sent measures of consumer sentiment tumbling. ‘The real hourly wage is absolutely the fundamental building block of working Americans’ living standards,’ said Jared Bernstein, an economist at the Stanford Institute for Economic Policy Research. ‘When it’s falling in real terms, that’s a huge problem for folks who are already stressed by affordability concerns.’” We feel for those navigating affordability concerns, but the argument here is off base for a number of reasons. First, sentiment doesn’t predict future consumer spending—never has, and we don’t see why this time is different. Second, wages follow inflation. As Nobel laureate economist Milton Friedman taught decades ago, employers compete for new talent with inflation-adjusted wages, so pay rises tend to lag upticks in inflation gauges. See the chart herein, which shows wages’ lagging inflation by a few months following pandemic-era hot inflation. This is always how society overcomes inflation eventually—not with falling prices, but with wages eventually catching up. We won’t try to guess what July’s declining real wage growth means for sentiment or politics ahead, as the former can shift on a dime for any or no reason and the latter still sits more than two months away. Too much can change. But we think the article’s fearful tone here fights the last war, a sign broader sentiment isn’t quite euphoric yet.