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Briefing highlights

  • Canadians aren’t saving enough
  • Markets, loonie at a glance
  • SNC-Lavalin warns on profit
  • What to expect from the Fed
  • What to watch for on Brexit
  • Apple, Facebook in spotlight
  • What else to watch for this week
  • BlackBerry names president, COO
  • From today’s Globe and Mail

When you lose either way

Canadians aren't saving enough of their money.

And as Douglas Porter points out, there's little incentive to do so.

Mr. Porter, Bank of Montreal's chief economist, recently looked at who's winning and who's losing amid low interest rates.

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People borrowing money are obvious winners, and Canadians just love to borrow money.

Indeed, we borrow so much that we oft forget about the folks in the other side of the ledger, the savers. And they're the ones who are losing.

Mr. Porter noted how bond yields "started moving in reverse" three months ago, and how, for example, the yield on 10-year Government of Canada paper slipped below 2 per cent last week, having hit 2.6 per cent in October.

Source: Bank of Montreal

"Some retreat is understandable given the broader financial market volatility in late 2018, a more subdued outlook for [Federal Reserve and Bank of Canada] tightening, and the pullback in oil prices over that period," he said, referring to the newfound patience of the U.S. and Canadian central banks.

"But, it is remarkable that the level of long-term yields has again careened to sub-2-per-cent terrain."

That's the short-term reasoning. Mr. Porter's longer-term view is that growth in nominal gross domestic product has been slowing.

Mr. Porter believes that Canada’s official savings rate is an imperfect measure, but it is a measure, and he nonetheless cited the fact that it “drooped” to an average 1 per cent in the first three quarters of last year, heading toward what he projected will have been the lowest annual reading in almost six decades of record-keeping.

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"With almost all yields now again negative in real terms, even before taking taxes into account, it’s readily apparent that there’s not much incentive to save," he said.

"And Canadians are clearly responding to that negative incentive."

This is not to suggest, by the way, that borrowers aren't also feeling a pinch.

Interest rates may be low, but, until its recent pause, the Bank of Canada had been raising its benchmark and will resume tightening at some point.

"Interest rates have risen since mid-2017, with the BoC hiking 125 basis points and mortgage rates rising 70 basis points," said Mr. Porter's colleague, BMO senior economist Sal Gautieri.

"There’s no doubt that households have become more sensitive to credit costs due to elevated debt and a near-record debt-service burden, with payments gobbling 14.5 per cent of disposable income in Q3, up 0.4 of a percentage point from mid-2017."

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Credit growth has been slowing, to be sure, as Canadians tame their borrowing habits in the face of higher rates and new mortgage-qualification rules that came into effect about a year ago, designed to head off the pop of a bubble.

This is going to tame consumer spending, Mr. Gautieri and other economists project, just as economic growth is slowing.

Add to that the fact that, as Mr. Porter said later, "the economy could overall be a loser from under-saving."

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Markets at a glance

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SNC hit by project

SNC-Lavalin Group Inc. stock is tumbling as it warns of lower-than-expected fourth-quarter and annual results because of a “serious problem” at a single project.

It also cited previously disclosed “worse-than-expected trading challenges” in Saudi Arabia.

“As a result of all these factors, unavoidably we will take a more cautious view towards our 2019 prospects to reflect these uncertainties,” SNC said.

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The problem in question relates to a mining contract awarded in 2016.

“Its year-end underperformance relative to internal budgets will materially affect our Q4 results,” chief executive officer Neil Bruce said in a statement.

“This incident is unacceptable and I intend to take appropriate actions to mitigate the financial impacts for the company.”

SNC-Lavalin said it can’t reach “the required level of agreement” with its client that would allow it to meet certain revenue recognition standards. Then there are the added costs.

“This unfavourable cost reforecast surfaced as we were closing 2018,” the engineering giant said. “We will be aggressively pursuing our project claims through the contract protocols up to and including engaging in a dispute-resolution process.”

The company is also taking a hit of $1.24-billion, or $7.06 a share, via a goodwill impairment charge on its oil and gas business.

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SNC-Lavalin now projects adjusted earnings per share of $2.15 to $2.20 a share for the year, down markedly from an earlier target of $3.60 to $3.85.

What to watch for this week

It's a busy one, to be sure, on both the economic and corporate fronts, though some U.S. economic readings may be delayed.

There's a Fed rate decision, U.S.-China trade talks, a key look by Statistics Canada at economic growth, and, among other things, a string of quarterly corporate results that will help frame the market's thinking.


We get to have a slow start to the week, with just Caterpillar Inc. earnings on tap.


Okay, here's where it picks up, starting with the S&P Case-Shiller home price index, which economists expect will show U.S. prices rose 4.7 per cent in November from a year earlier.

Earnings: Among the biggies are Allergan PLC, Canadian National Railway Co., Corning Inc., Lockheed Martin Corp., Metro Inc., Pfizer Inc. and Verizon Communications Inc.

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And Apple Inc., which, remember, recently trimmed its outlook.

"Even with the higher price tag there has always been this feeling that Apple has been overreaching with its price points," said CMC Markets chief analyst Michael Hewson.

"We may well be there now given the intense competition in this space, and an asking price of over $1,000 a unit, while acceptable as an expense over a two-year period, starts to become less attractive on an annual basis," he added, referring to the higher-end iPhone.

"It would appear that Apple fatigue may be starting to set in with some of their customers, particularly with the incessant minor upgrades, and lack of innovation elsewhere."

Markets will also be watching as Prime Minister Theresa May's Brexit Plan B goes to a vote.

So watch the pound.

"Hopes that PM May’s Brexit deal will get the backing from MPs that previously opposed it have boosted sterling in recent days," said Liam Peach of Capital Economics.

"We still think that the chances of the deal passing before 29 March are slim, so the currency may give back some of its gains if the deal is rejected again [this] week," he added, referring to the date Brexit is supposed to take effect.

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The Federal Reserve will take centre stage with its afternoon rate decision, followed by chair Jerome Powell's news conference.

Federal Reserve chair Jerome Powell

Jim Young/Reuters

"We will get to hear from chair Powell at a post-meeting press conference, as the Fed moves to holding a press conference at every meeting," said Toronto-Dominion Bank senior economist Leslie Preston.

"The Fed is widely expected to keep rates steady, consistent with recent speeches, which emphasized the ability to be patient to see how the economy fares in the wake of slower global growth and the deterioration in sentiment."

All eyes will be on Washington, too, as American and Chinese trade negotiators get back to the table. And, notably, China's vice premier Liu He is scheduled to join the talks.

"Those talks have taken on an added urgency after the U.S. Commerce Secretary suggested [last] week that the two sides were still 'miles and miles' away from a deal," said Paul Ashworth, chief U.S. economist at Capital Economics.

And, are you ready for this? We'll get the latest quarterly results from AT&T Inc., Alibaba Group Holdings Ltd., Boeing Co., CGI Group Inc., McDonald's Corp., Methanex Corp., Microsoft Corp., United States Steel Corp. and Visa Inc.

And Facebook Inc., which seems to be frequently caught up in controversy.

"This has raised concerns that the brand has become tarnished, a view that isn’t helped by CEO Mark Zuckerberg’s somewhat aloof demeanour when it comes to accounting for the company’s actions," said CMC's Mr. Hewson.

"Its margins have also been shrinking, due to higher costs, which doesn’t help the top line, and the share price plunge since last summer has been painful for shareholders. Profits are expected to come in at US$2.19 a share."

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The euro zone releases its preliminary look at fourth-quarter economic growth, which is "likely to confirm the breadth and depth of the slowdown at the end of last year," Capital Economics said.

"We think the euro zone expanded by 0.2 per cent, quarter over quarter, while we expect Italy’s economy to have officially gone into recession."

That sets the stage for Statistics Canada's look at how the domestic economy fared in November. And it's not expected to be pretty, with a possible contraction of 0.1 to 0.2 per cent.

"If the economy does indeed contract in line with our expectations, we would be tracking roughly 1-per-cent GDP growth for the final quarter of 2018 even after penciling in a rebound in December," said CIBC World Markets senior economist Royce Mendes.

And earnings (galore): Altria Group Inc., Inc., ConocoPhillips, DowDuPont Inc., General Electric Co., MasterCard Inc., Northrop Grumman Corp., Royal Dutch Shell PLC, Unilever PLC and United Parcel Service Inc.


Markets will get a sense of the state of the world's manufacturing sector as purchasing managers index readings pour in from across the globe.

"The manufacturing sector has been struggling for several months now, and recent events have shown that there is little evidence of a pickup in the short term," Mr. Hewson said.

"The end of 2018 saw a number of major economies flirting with stagnation at best, with a number in contraction territory, including Italy and France," he added.

"Investors will be hoping that instead of the January blues we’ll see a pickup in economic activity, or at least some evidence that the slowdown is slowing."

Earnings: Chevron Corp., Exxon Mobil Corp., Honeywell International Inc. and Imperial Oil Ltd.

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