Daily Commentary

MarketMinder’s View: We come across many false fears in our coverage of financial headlines, so when a take is more or less sensible, we give credit where it is due. In this case, an inverted yield curve has been a reliable recession predictor, historically speaking. This is because banks borrow at short term rates to fund long-term loans, so the spread between short-term and long-term rates is a rough proxy for banks’ new loan profitability. When the yield curve is positively sloped (long rates top short rates), that suggests lending remains profitable; in contrast, an inverted curve discourages lending, which can slow or outright freeze credit conditions—stunting broader economic growth. Now, this article acknowledges the yield curve is flattening now, so monitoring for inversion is worthwhile—and we would agree with that. But we think the focus on 2- and 10-year Treasury yields detracts from the analysis, as 2-year yields don’t typically represent a big source of banks’ funding. As the piece admits, “While the 2- to 10-year curve is most frequently cited among bond investors, policymakers seeking a recession signal study others tied to three-month lending rates. The gap between 3-month Treasury yields and 10-year rates remains relatively steep.” Yep, 3-month yields more closely reflect what banks pay on deposits, and the 10-year minus 3-month spread is 0.96 percentage point (per St. Louis Federal reserve), steeper than a few months ago. So while hiking that pushes the three-month rate above the 10-year is indeed a risk in theory, there is wiggle room in practice.

MarketMinder’s View: “Funflation,” which has painted headlines in recent years, refers to higher prices in select recreational activities—typically, with a negative connotation. In the interpretation discussed here, spending on leisure activities ranging from gas for weekend road trips to items at sporting goods stores are up because households are dedicating less of their discretionary purchases to travel (which is more expensive due to higher jet fuel costs). As noted here, Americans’ hobby spending (a broad measure including “arts and crafts and hobby shops to retailers selling skiing, hiking, camping or scuba diving gear”) rose 7.9% y/y in August, with overall transactions rising 3.4%. Thus, US consumers continued spending on non-essentials last month despite today’s higher costs—another sign households are more inflation proof than some fear. In our view, this crafty substitution is a major reason why higher prices for certain goods and services needn’t crimp overall activity. Rather than cutting discretionary spending entirely, many across the US are opting to spend their precious dollars elsewhere, including more localized recreation. Now, spending on essentials (i.e., housing, energy, food) remains the majority of overall consumer spending, so we aren’t talking about a major economic needle mover here. But these data extend the bullish trend of America’s healthier-than-feared economy this year, a big reason behind stocks’ rise year to date.

MarketMinder’s View: Will Canada continue increasing its clout in global oil markets? That seems like the plan, as this piece covers, thanks to Prime Minister Mark Carney’s deregulation push. While it is a mistake to presume that past slow growth was all about policy, since low Western Canada Select oil blend prices made profitability of projects difficult, the government’s approach was a factor. Now the premier aims to shorten new project reviews to one year (from two or three years) and is introducing hefty tax breaks for oil and gas companies, allowing them to write off 100% of new project costs. Given today’s rising US-Canada trade tensions and America’s pursuing of Venezuelan heavy, sour crude in lieu of Canada’s, these shifts—alongside Ottawa’s ongoing plans to expand Canadian pipelines to support Asia-bound flows—could help propel production and reduce its reliance on American purchases, an economic positive for the Great White North. As the article explains, though, all of this will take years and is contingent on producers’ willingness to invest. Nothing is guaranteed at this point. But Canada’s growth possibilities are a reminder of non-OPEC producers’ production potential—another reason why the cartel’s influence over global oil prices is limited.