CANADA RATE HIKE BOOSTS CURRENCY BUT WEAKENS STOCKS WHICH ARE WEAKEST IN G7 -- HIGHER COMMODITIES PRICES COULD HELP -- LIVESTOCK PRICES ARE RISING -- DROUGHT IN THE MIDWEST AND RAIN IN GERMANY BOOST GLOBAL WHEAT PRICES -- FOOD AND SERVICES BOOST JUNE PPI

CANADA RATE HIKE BOOSTS THE LOONIE... Canada warned that it was about to hike rates, and did it yesterday for the first time in seven years. The Bank of Canada raised its short-term policy rate 25 basis points to 0.75%. That's still below the rate of 1.00% that prevailed between 2010 and 2015. That was before it lowered the rate twice during 2015 in the middle of that year's collapse in oil prices. Apparently, it now feels confident enough in the progress of its economy to start taking some of those 2015 drops back. The rate hike boosted the Canadian Dollar to the highest level in a year (Chart 1). The loonie had already been rising in anticipation of a rate hike. The 10-Year Canadian bond yield has jumped another 7 bps today to 1.94% which is the highest level in more than a year. Canadian stocks ended yesterday modestly lower. Canada iShares (EWC), however, gained on the rising loonie. The green bars in Chart 2 show the EWC jumping to the highest level in five months. Meanwhile, the Toronto Stock Index (red line) continued to underperform the EWC, which it's been doing since May when the Canadian currency turned up. The stronger Canadian dollar gives an added boost to the EWC which is denominated in a weaker U.S. dollar.

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Chart 1

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Chart 2

WEAK COMMODITIES HAVE MADE CANADA WEAKEST G7 MARKET... Canadian stocks are the weakest 2017 G7 performers. The FTSE All World Index ($FAW) has gained 11% this year. Six of the G7 stock markets have contributed to an average 2017 gain of 7.5%. Canada is the only G7 country with a 2017 loss (-1%). That poor performance is reflected in the red line in Chart 3 which is a ratio of the Toronto Stock Index ($TSX) divided by the FTSE All World Stock Index ($FAW). That weak performance is mainly due to Canada's ties to weak commodity markets. That was most notable between 2014 and 2015 when plunging commodity markets took a heavy toll on its exports of natural resources. A commodity rally during 2016 boosted Canada's relative performance, while another commodity slide this year hurt it. Like the Fed, Canada's central bank is hiking in the face of low inflation (1.3%). Its governor, however, expressed some optimism on inflation by referring to energy weakness as temporary, and expressed hope for higher food prices. He may be right on both counts. At the very least, commodity prices appear to have hit bottom. They've gained 11% since their February 2016 bottom which is their strongest performance in seven years. Yesterday's message suggested that energy prices could be forming a bottom. Food prices are looking even stronger.

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Chart 3

LIVESTOCK PRICES ARE RISING ... The next chart may be bad news for meat eaters. It shows the iPath Bloomberg Livestock ETN (COW) in an uptrend after hitting bottom last October. The COW includes futures prices of cattle and hogs. And it's gained 40% since last October and nearly 20% this year. Sooner or later, those higher prices are going to find their way into supermarkets (if they haven't already). Yesterday's message showed grain prices like corn and wheat hitting highs of one and two years respectively. Those prices have weakened after yesterday's USDA report predicting higher than expected crop plantings. Wheat's weather problems, however, aren't limited to lack of rain in the U.S. midwest.

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Chart 4

WEATHER CONDITIONS ARE BOOSTING GLOBAL WHEAT PRICES... Yesterday's message showed the price of wheat rising to the highest level in two years (Chart 5). That's the strongest rally for this commodity in five years. Spring wheat has risen to the highest level in four years. Drought conditions in the midwest are the main reason behing the rally in wheat and other grains. Despite yesterday's report showing a higher than expected wheat crop this year, it will still be 21% lower than the previous year. So I found it more than a little interesting to read on Bloomberg this morning that heavy rains in Germany (Europe's second biggest wheat grower) are threatening that country's wheat crop (and causing delays in other parts of Europe). The article also mentions that Canadian wheat is being hurt by lack of rain. Maybe that's what the head of Canada's central bank was referring to when he predicted higher food prices. That could include more expensive bread, pastry, and pizza. On a broader note, recent rallies in grain prices, combined with rising livestock prices, suggest that some food inflation may be in the pipeline.

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Chart 5

FOOD AND SERVICES BOOST JUNE PRODUCER PRICES ... Bloomberg reported that this morning's Producer Price (PPI) Index for June saw a modest gain in wholesale inflation of 0.1%. That translated into an annual gain of 2% which is down from 2.4%. The two biggest contributors to the PPI boost were higher food and service costs. Food costs gained 0.6% for the month, while energy costs fell -0.5%. Energy prices dropped -2.7% during June, but are 5% off their June bottom in mid-July. That could produce higher numbers for July. Food prices are looking stronger as well. That may be bad news for drivers and shoppers, but good news for the Fed. June's Consumer Price (CPI) Index will be reported tomorrow (Friday). The reason I'm focusing on inflation this week is because, at the moment, low inflation has become a more important part of Fed policy. But unlike the Fed, I happen to believe that commodity prices are an important part of the inflation story.