Good Evening. In this month's newsletter, we dive into the latest developments in the financial world. The Federal Reserve has decided to hold off on hiking interest rates for now, signaling potential increases later this month. Meanwhile, Canada's loonie stands to benefit from the U.S.'s decision, with higher central bank rates driving demand and value. We also explore the current state of inflation, the impact on commodities like oil, gold, and silver, and the rising market of electric vertical take-off and landing (eVOTL) aircraft. Keep reading for more information.

ECONOMIC UPDATE

INTEREST RATES

Fed Officials Hold Off On Hiking Interest Rates

The Federal Reserve came out with a statement this past Wednesday, assuring that interest rates will hit a pause and remain as is, to assess its implications for monetary policy and the next steps to bring inflation closer back down to 2%.

This press conference not only stated this cease, but hinted at projected interest rate increases supposedly around the end of July, when the Fed will host their July 25-26 meeting.

What Does This Mean For Canada?

The U.S.’s decision to hold off the hike of interest rates is a move that in turn, can benefit Canada’s loonie. The Bank of Canada recently had interest rates hiked to 4.75%. If they continue to deliver on forecasted expectations regarding monetary policy actions while the U.S sits in the shadows for a bit, Benjamin Reitzes, BMO’s managing director of Canadian rates and macro strategist, says, “The differential between those two rates will be good news for the loonie — and by extension, Canada’s inflation fight”.

Investors internationally tend to lean towards currencies backed by higher central bank rates, which ultimately drives the demand and value of that currency. What relation does that have with Canada? Well if the Bank of Canada’s policy rate rises parallel to the Fed’s, that gives the Canadian loonie an appealing boost over the U.S dollar, benefiting our economy.

INFLATION

Fun Facts:

Annual inflation in Canada has accelerated for the first time in 10 months to a Consumer Price Index (CPI) of 4.4%
This was a surprise outcome, as experts believed inflation would continue declining after the Bank of Canada’s harsh tightening cycle.
To reduce inflation, the Bank of Canada is considering further interest rate hikes and active quantitative tightening approaches, such as selling off its bond inventory.
The power of interest rates? The pinnacle of Canada’s monetary policy; rising interest rates makes borrowing for the purpose of spending less attractive, increasing nation-wide savings, thus, reducing the demand for consumer goods (deflation).
Experts still remain optimistic of dropping inflation to 3% by the end of summer, and to the target 2% by the year’s end.

Key Insights:

Monetary policies alone may not curb inflation. Experts believe that if used as the sole method, it must be enacted for a longer than necessary period, thereby harming Canada’s economic prospects.
Current government fiscal policy does not align with inflation control. Some policies such as transfer payments to aid families with the cost of inflation, directly contribute to the problem.
However, it’s important to consider that these programs are based on enhancing social equity and protecting families from poverty. As such, if used carefully, it would help steer Canada towards a more equitable and swifter economic recovery in the long run.

Industry focus: Are Canadians Facing Greedflation & Profiteering?

With persistently high inflation, people are struggling to adjust to the higher cost of living. This has brought a lot of public scrutiny to grocery stores like Metro and Sobeys for the rapid and seemingly excessive food inflation, that is not supported by their growing profit margins.
However, a new report from the Retail Council of Canada seems to support retailers. They argue that retailers are not profiteering as evidence of increased margins through “greedflation”, but are instead passing increasing supply chain input costs on the other side to consumers. This point is supported with Canada having the lowest food inflation in the G7 and the second lowest in the world, which illustrate the power of retailers in absorbing and negotiating more favourable prices.
Although grocery stores get a lot of criticism for inflation, it’s important to recognize that there may be deeper issues embedded within the supply chain that exacerbates inflation. Instead of focusing on symptoms, Canada should prioritize addressing core issues to create sustainable action towards economic development and inflation control.
The next time you and your family are appalled by the cost of milk, butter, and other common goods, remember that your retailer is facing the same increase in the costs it takes to deliver those goods.

Significant Question of the Week!

Does the government continue with its programmed inflation aids that supports citizens across the country, or do we let the rise of interest rates run their natural course, reducing purchasing power, and thus dousing the hot demand that is causing domestic inflation?

COMMODITY PRICES

As of June 21st, 8:09 pm EST (https://www.cnn.com/business/markets/commodities/) :

COMMODITY NEWS

OIL

OPEC gave Russia the go ahead to increase their baseline for oil production.
Saudi Arabia has signaled a production cut of 1 million barrels per day starting in July 2023.
China’s central bank cut short term lending rates to stimulate its economy contributing to the BTI and WTI ending in the green on Tuesday at 7:00 pm EST.
Interest rates and commodities have an inverse relationship. Therefore, the price of oil in the short-term looks like it will be relatively stable due to the counterbalancing events:
- OPEC’s permission for Russia to increase production (increased supply) equals a fall in prices.
- China’s lending rate cuts (increased demand) and Saudi Arabia’s production cut (decreased supply) equals a rise in prices.

GOLD

In the past few weeks, gold prices were on a steady rise over the last few weeks considering the last rate hike was in March. Gold is commonly used as a hedge against inflation where the cost of gold rises as the dollar corrodes.
Gold prices dropped on June 14 to a three month low after the Fed announcement.
Although a pause on interest rate hikes indicates increasing commodity prices at face value, prices did the opposite and dropped due to traders’ concerns over the Fed’s interest rate hike potentially next month, but definitely before the end of this year.

SILVER

The continued growth of solar panel production (which uses a lot of silver) signals a future bullish silver market as signs of silver shortages are starting to emerge.
Silver and gold prices move together, so silver alike to gold dipped after the Fed’s pause as the next hike around the corner looms in the air.

MEXICO’S S-CORN-ED CORN?

Let’s Backtrack:

Mexico, the country with the second largest corn market, has officially imposed a GMO corn ban starting in 2024, justifying the decision by stating that the modified corn could present a danger to biodiversity (research proven) and human health (research still pending).
The U.S. filed a trade dispute over these import restrictions Mexico implemented on the grounds that it violates the Canada-US-Mexico Agreement (CUSMA).

Why Does This Matter?

The rising tension between China and the U.S. since 2018 saw falling corn prices due to the worry of China reducing imports of U.S. commodities in the near future.
This CUSMA trade dispute will only exacerbate the decrease in corn prices in the future if Mexico is granted permission to ban GMO corn in 2024.

Where Does Canada Come in?

Canada recently joined the U.S. in the corn dispute which may seem confusing given the fact that Canada is not a major corn exporter.

Canada’s Hidden Agenda?

Although Canada is not a major player in the corn industry, they are a top exporter of Canola, where approximately $1.6 billion of Canola was exported to Mexico.
Therefore, Canada has joined the trade dispute due to its fears of Mexico eventually implementing arbitrary bans on commodities that would severely impact Canada (such as Canola).

MARKET TREND

It’s a bird… no it’s a plane… no it’s an eVOTL aircraft?

One of the most recent innovations in transportation technology comes through a hybrid vehicle mixed between a plane and a helicopter… but get this, they are entirely electric! This newly introduced vehicle is an electric vertical take-off and landing (eVOTL) aircraft, holding a similar take-off and landing composition as a helicopter but behaving like an airplane. These aircrafts cruise at around 4,000 feet and can travel approximately 2,500 KM on a single charge. It’s a new way to travel from city to city, or so they say.

Where is it Headed?

Forecasts expect the eVTOL aircraft market to grow by 5.4 billion USD between 2022 and 2027, with a CAGR of 39.53% during the forecast period. With a growth rate that high, industry professionals are highly optimistic for the future of this market. Several growth drivers constitute this growth in the market, including revolutionizing urban air mobility (UAM), various environmental benefits, and multiple industry-specific applications.

With traffic congestion being a main topic of discussion between urban planners, revolutionizing UAM poses a viable solution to decreasing traffic congestion and enabling a more efficient means of travel.
With leaders of the G7 taking charge of the global climate crisis, eVTOL aircraft provides practical solutions to reaching their goals of net zero emissions and a transition to clean energy all by 2050 at the latest.
The continued advancements in electric batteries, materials, safety mechanisms, and industry specific developments are all key drivers in stabilizing the growth of this market. As technology becomes more progressive, we’ll start to see more efficient batteries, quieter designs, and safer aircraft, all distinct aspects of what makes a transition to eVTOL aircraft a popular and feasible option in various industries.

A Tad Expensive

Though the future holds immense opportunity for these aircraft, the current developments pose a detrimental problem: price. Since this market just beginning to take off, companies are still discovering ways to make this mode of transportation viable enough for public use.

It is estimated to cost between $3 and $11 per mile to fly as a passenger on an eVTOL aircraft. It means that a 25-mile trip could cost upwards of $275, which at that price point, an hour in traffic doesn’t seem all that bad. These costs could attributed to many things including, all financial/expense touchpoints related to production; physical operation of these vehicles may also requre a more significant quantity and quality of human/professional labour; and finally, the energy levels required to sustain such magnificent levels transit power, may also come at quite the fixed cost.

However, as technology progresses, it is warranted that these prices may soon regulate to similar levels with respect to public transit. There is still a long way to go, but we are definitely on track to seeing the first public transit system in the sky.

But Why?

Everyone is looking for the most efficient and convenient way to travel, and eVTOL aircraft provides that. These aircraft allow direct travel between cities without sitting in heavy traffic and dealing with angry drivers. They also allow companies to streamline processes in shipping departments, enabling shorter wait times for deliveries, cleaner transportation, and cheaper shipping costs.

Additionally, several industries would benefit from a transition into eVTOL aircraft, including:

Security and Surveillance
Agriculture
Civil Infrastructure Inspection
Shipping and Transportation

Though there are several uses for eVTOL aircraft, many current companies envision their use as an ‘Uber’ for the sky. With growing concerns for increased traffic congestion, environmental standards, and safety, eVTOL aircraft have become an increasingly popular option for urban planners to modernize their cities and for companies to accelerate supply chains and expand operations.

What Does This Mean For Other Industries?

The emerging market of electric vertical takeoff and landing (eVTOL) vehicles poses a significant threat to the current car and train industries, as it offers a different substitute for traveling that could potentially be less costly and has a positive environmental impact. If eVTOL technology advances to endure longer flights, it will bring intense competition further, challenging the dominance of cars and trains. The high bargaining power of customers in the eVTOL market depends heavily on switching costs and the availability of substitutes between transportation modes. However, the biggest constraint for the widespread adoption of eVTOLs is the costly issue of infrastructure, including building landing zones and charging stations. Despite this constraint, eVTOLs have the potential to act as a substitute for cars and affect the train industry, prompting significant changes in urban transportation and consumer behavior.

eVTOL Future

When movies used to guess how the future would be, they always imagined that there would be flying cars and ultra-modern cities. I mean… no flying cars, but I think eVOTL aircraft are close enough! These innovations are continually expanding how society goes about its daily activities, and I think it is safe to say that we are looking towards a prosperous future!

ONE MEDICAL AND AMAZON MERGER

Amazon (NASDAQ:AMZN) and One Medical (NASDAQ:ONEM) have announced they have finalized their merger on February 22nd, 2023.

Strategic Rationale

One Medical is a technology primary care organization that is centralized on reinventing the healthcare experience.
One Medical shared goal with Amazon of revolutionizing the healthcare industry to make it an efficient and timely experience sparked the interest in merging.
Neil Lindsay, SVP of Amazon Health Services states, “Acquiring One Medical is part of Amazon’s goal to reinvent healthcare.”
Amazon continues to develop their stake in the healthcare industry and the merger with One Medical marks a massive step into being at the full front in the future of healthcare.

Transaction Details:

Amazon acquired One Medical for a total of $4355.76 mm, fully paid in cash. Including $291.2 mm in liabilities and $347.6 mm assumed in cash.
The transaction was a friendly merger and a 100% acquisition that was announced in July last year and completed in February 2023.
Amazon offered to purchase the company at an EV/Revenue multiple of 4.5x, the transaction closed at a multiple of 3.9x.
The acquisition was not financially significant for Amazon, there was no Accretion / Dillution .

Thoughts:

Amazon is trying to penetrate the healthcare industry through their merging with One Medical. Amazon has no expertise within the industry, and has previously failed in launching Amazon CARE; a pilot project that was discontinued in 2021. Healthcare is a mission-critical sector that can be very profitable due to its sticky business nature (everyone gets sick), which attracts investments. We believe that Amazon will not be able to realize a profitable roll-up strategy (acquiring multiple small businesses within a vertical) or synergies given their lack of in-house infrastructure and network within the sector.
Should tech companies ever be allowed within the healthcare industry? The U.S. healthcare system is flawed and dysfunctional – tech companies need structured data to function, and 80% of healthcare data is unstructured, making it extremely difficult for them to improve decision-making and may even stifle innovation within the sector.
Privacy and data-handling is also an issue. There were protests when the merger was announced given Amazon’s bad reputation with data privacy.

INDUSTRY UPDATE

DATA CENTER COLOCATION SERVICES IN THE US

What is Data Center Colocation

Colocation data centers are move-in-ready, physically secure buildings with power, cooling, and networking capabilities to support critical IT enterprise applications. Colocation capacity is offered through cabinets, cages, and private suites. Colocation providers offer secure, reliable, and scalable environments to meet the increasing demand for data storage and processing.

How do they make their Money?

Data center colocation companies generate revenue through various sources related to the services they offer:

Rental Fees: Charging customers rental fees for the physical space they occupy within the data center facility.
Power and Cooling Charges: Charging customers based on their power usage and cooling requirements, either as a fixed fee or based on actual consumption.
Network Connectivity: Data centers charge customers for their network connectivity services, either as a recurring fee or based on data transfer volume.

Key External Drivers

Security and Compliance: Businesses prioritize secure data storage, driving demand for colocation facilities with robust security and compliance capabilities.

Digital Transformation: Increasing adoption of digital technologies fuels demand for scalable data center colocation services.

Percentage of Business Conducted Online: Growing online business leads to increased demand for colocation, while a decline poses a potential threat to the industry.

Customer Overview

Colocation data center space is sold on the basis of individual cabinets or cages, typically on short-term, 1 to 3 year license agreements, as opposed to long-term leases. Customers pay a one time installation fee, colocation service fees and a fixed monthly fee for contractually committed amounts of power per month

Key Players

Equinix (16.3% Market share)

Ntt Data (10.9%)

Digital Realy Trust (7.5%)

Other (65.3%)

Growth Opportunities

The industry is expected to grow at a CAGR of 2.3% YOY from 2022-2027. It previously grew at a rate of 5.4% from 2017-2022, and currently processes 13.5 BN in revenue. Overall, the key factors driving growth over the next few years are; are increasing data storage demands, expansion of edge computing, and the adoption of hybrid and multi-cloud strategies. Additionally, international expansion into growing digital economies and a focus on sustainability and energy efficiency will contribute to industry growth in the coming years.

NEWS UPDATE

What Happened

The Federal Reserve recently paused its interest rate hikes and will assess the impact of its policies on inflation. Two more rate hikes may occur later this year.

The Result of What Happened

There is disagreement among Federal Reserve members regarding future rate hikes. Forecasts suggest a potential rate cut in 2024. Economic growth and unemployment predictions were revised, and inflation projections were adjusted.

Market Reaction and Impact the People

The market initially reacted negatively to the Fed's decision but rebounded. There is a 61.5% chance of a rate hike at the July meeting. Rate hikes have increased borrowing costs, affecting mortgages, auto loans, and credit cards for consumers.