Many US republican states are cutting unemployment benefits with Arizona providing up to $2,000 for unemployed people who find a full time job and stay there for 10 weeks or $1,000 for part time.

Ohio will provide five $1 million prizes to adults who get vaccinated against Covid and five full-ride scholarships to state schools to teens who get vaccinated.

The labour shortage across the world is causing wage inflation. These incentives will help to provide a one-time paycheck and incentive to find employment while keeping wages at a more steady level.

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This desire to get the economy working at full steam again is also being echoed by the US Federal Reserve. They acknowledged that there is likely a need to increase interest rates next year. Canada on the other hand has softened their interest rate increase tone and said that inflation is likely to be softer going forward. 

This is after reducing bond purchases and telegraphing to the market that interest rate increases were on the horizon with inflation being seen as a clear and imminent danger. I’m glad that they’re seeing a more transitory approach that is more in line with the thinking of myself and the US Federal Reserve.

As a result, this has caused the US dollar to rise against the Canadian dollar. I believe the US dollar bottomed against the Canadian dollar around $1.20 in May/June of this year.

With a rebound in re-opening, supply bottlenecks and other short term factors I believe that inflation will rise but eventually settle in to an acceptable level.

Oddly, interest rates are driving lower. Europe and Japan pledging to stay lower for longer with the US acknowledging a need to increase next year. BOC has softened their tone on increases. Canadian 5 year bonds, which drive 5 year mortgage rates, decreased by 17% in July 2021. 

I believe that this will eventually fade with moderately higher interest rates on the way in the next year or so. I expect financials and cyclical stocks to eventually take market leadership.

Not everyone is in the same inflation mindset as me though.

Barrons highlighted the following from corporate earning calls where CEO’s are seeing first hand the effect of inflation. Many believe that inflation is here to stay:

Chipotle Mexican Grill (CMG) CEO Brian R. Niccol, July 20:

There’s so much going on right now with inflation and the question about whether inflation is transitory or permanent. We’ve got labor inflation. We took a big move there. We’ll see how that shakes out….Let’s see how the menu price [increase] continues to be accepted by customers. So far, really, really good, really seeing no resistance whatsoever….We’ve got a lot of upward mobility on our margins. We have pricing power. Now it’s just a matter of how and when we decide to use that pricing power, to either protect margins or to invest in our people like we just did with the wages.

Sherwin-Williams (SHW) SVP Jim Jaye, July 27:

When we look at the basket, what we saw in the second quarter was the inflation being driven by higher costs for monomers, resins, solvents, and packaging materials.…We did guide here that we think the third quarter is going to be the highest year-over-year raw material inflation and only modest relief maybe in the fourth quarter.

Conagra Brands (CAG) CEO Sean Connolly, July 13:

We began implementing pricing actions on some of our products in the [fiscal] fourth quarter related to the initial inflation we experienced.…We expect the negative impact of the cost inflation to hit our financials before the beneficial impact of our responsive actions, including our pricing. This timing mismatch is expected to be particularly impactful in H1 and more specifically in Q1. The resulting pressure on our first half margins impact our full year profit.

Newmont (NEM) CEO Tom Palmer, July 22:

50% of our cost is in labor, and we are seeing both in Canada and Australia quite hot labor markets for mining. There has been an uptick certainly in both those countries over the course of this year, and we expect to see that flow through at least all of next year. And then materials and energy make up the next 40% to 45% [of costs….] And we are seeing, in terms of steel and fuel and oils…the order of about 5%. We’re not seeing it structurally. We are seeing it as cyclical….And, of course, [inflation] does set us up nicely for some pretty positive gold price outlook.

Genuine Parts (GPC) CFO Carol Yancey, July 22:

As we look at our inflation, it is a bit unique and unprecedented as it relates to the U.S. automotive industry. We haven’t seen this kind of [price increase] activity for a decade. It’s sort of similar to tariffs at the pace that they’re coming. It is driven by a combination of raw materials, freight, and labor.”

Until next time,

Trevor Dale

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