Inflation fell, Walmart stumbled, and gamification returned
Canada’s annual inflation rate slowed to 1.7% in July, below most experts’ expectations. The drop was largely driven by a 16% year-over-year decline in gasoline prices following the federal carbon tax removal. However, grocery costs continued to climb, rising 3.4%, with sharp increases in coffee and cocoa prices due to poor weather in key producing regions.
Shelter costs also rose, with rent inflation reaching 5.1% and overall shelter prices climbing 3% from a year ago. Nevertheless, the Bank of Canada’s (BoC) preferred core inflation metrics have improved over the last three months, giving more weight to the case for additional interest rate cuts. But economists are divided; some argue that weakening inflation and job growth justify further cuts this year, while others point to lingering shelter inflation and recent fiscal stimulus as reasons for caution. We believe that inflation will struggle to come down much further in the months ahead, given that last year’s figures are likely to skew this year’s numbers higher. The next Consumer Price Index data is due on September 16, just one day before the BoC’s next rate decision.
Walmart capped the second-quarter earnings season by missing its projected earnings per share, reporting 68 cents versus the expected 74. Even with stronger sales and improved expectations for remainder of the year, it wasn’t enough. Shares dropped, snapping a two-year streak of positive earnings reports. Walmart’s revenue came in higher than expected, at $177.4 billion, and same-store-sales were solid: up 4.6% in the U.S. and 5.9% at Sam’s Club (excluding fuel). Transaction volume and average ticket size both increased, showing steady consumer traffic. However, profits took a hit.
On the call, executives pointed to tariffs as a growing issue. CFO John David Rainey said Walmart is absorbing some of the additional costs but passing others on to the consumer on a category-by-category basis. The big-box giant remains a good read on household health and looks to be holding up, but nevertheless it’s starting to feel the squeeze.
The Commodities Futures Trading Commission (a U.S. government agency that regulates the derivatives markets, including futures, options and swaps) just approved bets in sports-betting apps that are tied to major economic benchmarks. Later this year, gamblers will be able to bet on outcomes like where the S&P 500 ends the day, whether oil rises, or if inflation surprises. These are yes-or-no binary trades. It’s a formal invitation for speculators to bet on large scale economic and market movements.
Gamification is back, and so is speculative investing. Venture capitalist, Chamath Palihapitiya is reviving his SPAC playbook, launching a $250 million blank-cheque company called American Exceptionalism Acquisition A. SPACs (special purpose acquisition companies) are formed to raise money through an initial public offering and then use that money to buy or merge with other companies; they were highly popular in 2021. The theme this time leans on geopolitical language and tighter investor alignment, but the mechanics are straight out of 2021. When you add up yes-or-no binary trades, SPACs and the resurgence of meme stocks, it’s clear that the fast-money crowd has found new outlets. We wouldn't call it concerning, but it's certainly something that’s raising eyebrows.
Looking ahead, the market is still being supported by low volatility and enthusiastic investors. With the current earnings season over, the next market change will likely hinge on macro surprises. Next week, we’ll see how the U.S. Federal Reserve’s annual economic symposium in Jackson Hole affects the markets.
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