The current buzz word on Bay and Wall Streets is inflation, and I believe the fears revolving around it are having an indirect effect on the North American stock markets through places like China.
This past week, China reported a 9.8 per cent growth in GDP, blowing away estimates of 9.2 per cent for the year and clearly showing their economy continues to be red hot as we head into 2011. It also shows that the initiatives the Chinese government have taken to slow down their economy may have worked, but only slightly. Right, China’s inflation rate is hovering just above four per cent, which is higher than what the government is comfortable with.
The Toronto Stock Exchange is made up of many commodities and energy stocks which are clearly influenced by China, whose imports make it the dominant player in these sectors. Thus, if the government should continue to try and slow down their economy, this can have a negative effect on our stock market. The most recent downward movement on the TSX, in my opinion, clearly reflects this relationship. Therefore, inflation is starting to affect North America by affecting the countries that do business with us.
We are also just starting to see signs of inflation in the U.S. and Canada, as well, even though the U.S. Federal Reserve has said there is still not much inflation in the marketplace. Fed chairman Ben Bernanke has said that most of the inflationary pressures individuals are seeing are coming from the rising cost of oil. Normally, the Fed does not consider oil costs as part of a core inflation number. I think that this is a mistake since many of us fill our tanks each week, which means that oil and gas should be part of a fundamental inflationary measurement.
As the year moves forward and we receive more economic data on inflation both here and in the U.S., the central banks on both sides of the border will have to keep a close eye on these numbers. Many investors believe that Canadian interest rates may start to rise by the summer here, and some are actually predicting that rates in the U.S. will rise by year end as well. The good news, in my opinion, is that the equity markets (stock market) should be a lot higher if that scenario were to play out.
If you have any questions regarding the above article or are looking for an investment adviser to help you with your portfolio, please visit my website at www.investmentadvisorgta.com. I will be glad to speak with you!
Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.