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business briefing

Briefing highlights

  • Recession: When, not if
  • Bank of Canada expectations are changing
  • Stocks, loonie, oil at a glance
  • Unemployment rises to 5.7 per cent
  • Housing starts dip but top expectations
  • British economy unexpectedly shrinks
  • KPMG withdraws CannTrust audit report
  • Hydro One profit tumbles
  • Huawei unveils operating system
  • Required Reading

When, not if

A global recession is now a question of when, not if, David Rosenberg warns.

The chief economist at Gluskin Sheff + Associates was commenting on bond yield curves, which have set investor nerves on edge because they’re deemed a recession warning when inverted, or when short-term interest rates are higher than those at the longer end.

Indeed, yield curves are flagging a “global recession” at this point, Mr. Rosenberg said.

“At this stage, it is a case of ‘when,’ not ‘if,’” he said in a report to clients.

“Fully 30 per cent of the world’s GDP now has their yield curves in an inverted state,” he added.

“Only the classic lags separate where we are now and the eventual downturn. Carry an umbrella and be ready to take it out. This means de-risking and becoming very defensive and well hedged.”

For investors, cash and gold are “kings” as yields decline.

“This meltdown in global market interest rates has happened, not at the bottom of the economic and equity cycle, but at the top!” Mr. Rosenberg added.

“Imagine where they go when the recession comes, unemployment rates rise and equities decline. Even in the USA, a move to negative yields out to the 10-year part of the curve is probable.”

Others, too, are citing this.

“The U.S. yield curve is now partially inverted and – unsurprisingly – recession indicators that run off of the yield curve … are now pointing to the highest probability of a U.S. recession since the global financial crisis,” said Neil Shearing, group chief economist at Capital Economics in London.

Countering the recent “wave of recession chatter” is the fact that claims for jobless benefits in the U.S. are stable, having fallen by 8,000 in the latest reading to 209,000, said Bank of Montreal chief economist Douglas Porter.

“Note that claims have spiked in the very early stages of every U.S. recession in the past 50 years, Mr. Porter said.

“These latest figures, which take us up to last week, show no such pickup,” he added.

“The four-week average basically held steady at 212,000. Aside from a temporary deep dive in April, this is still close to the lows for the cycle (not to mention the lows for 50 years). And claims are still below the 52-week average (218,000), another clear sign of no deterioration yet.

Capital Economics, in turn, wondered aloud if we’re already in the grips of a global recession.

We’re not, Mr. Shearing said, though Capital Economics described itself as among the “most bearish” forecasters of global economic growth.

“At first sight, the gloom in the bond market is easy to justify,” Mr. Shearing said.

“World trade is stagnating. German industry is in recession and the U.S. ISM manufacturing index is close to a three-year low. We don’t agree with the widespread view that the escalating U.S.-China trade war poses a major threat to growth in both countries, but it clearly doesn’t help. And on top of this, we are faced with the increasing likelihood of a no-deal Brexit.”

But there are things to keep in mind here, he added, noting, too, that trading is thin in the summer.

“German industrial production fell in June, but industrial orders for the same month were strong,” Mr. Shearing said.

“Chinese exporters are struggling, but our China activity proxy suggests that strength elsewhere (including the property sector) has helped shore up growth,” he added.

“And at a global level, while investment and jobs growth have weakened, [capital expenditures] and hiring intentions have stabilized. All of this is consistent with our view that global growth is slowing rather than collapsing.”

It’s official: Wonders will never cease

Douglas Porter

And amid all this, here’s a fascinating tidbit, courtesy of BMO’s Mr. Porter: “Borrowing costs in Greece have now dropped below those of Canada from everything from five years and under.”

(Or, as Mr. Porter put it, “wonders will never cease.”)

This first occurred in May. And Greece, remember, was the poster child of a meltdown, and at the centre of the euro zone’s debt crisis.

“The heavy anchor of negative overnight rates from the [European Central Bank], massively negative bond yields across much of core Europe, and – yes – improving fundamentals in Greece have led to this unusual situation,” Mr. Porter said.

“We are often asked: ‘What else can policy makers do to spur growth when interest rates drop to zero or lower when the economy next rolls over?” he added.

“Answer: Lean on fiscal policy much more heavily. With governments borrowing almost for free, and/or getting paid to borrow, the door will be open for fiscal policy to step in come the next downturn. If even Greece can borrow for five years at barely 1 per cent, why not?”

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Bank of Canada expectations are changing

Expectations are mounting that the Bank of Canada will be forced to cut interest rates and join a growing number of central banks that have eased monetary policy as the U.S.-China trade war intensifies and recession signals ripple through financial markets. The Globe and Mail’s Matt Lundy examines the issue.

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Markets at a glance

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Jobless rate rises

Canada’s jobless rate rose to 5.7 per cent in July as more people hunted for work and the country lost a net 24,000 positions.

Breaking that down, the economy lost 11,600 full-time jobs, and 12,600 part-time positions.

Unemployment rose from June’s level of 5.5 per cent, Statistics Canada said.

Employment is now up 1.9 per cent, or 353,000 positions, since July, 2018, boosted largely by full-time work.

“The only upside surprise in the report showed up in wages,” said CIBC World Markets senior economist Royce Mendes, noting the 4.5-per-cent gain from a year earlier and the fact that the rise eclipsed June’s 3.6 per cent.

“We'd caution in taking that at face value though,” Mr. Mendes added.

“The last reading on the Bank of Canada’s wage-common indicator was closer to 2 per cent, and the series in this report is coming off of a very low base in 2018. As a result, the report as a whole will be taken as a negative for Canadian markets.”

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Housing starts dip, but better than expected

Housing starts across Canada slipped in July but still topped the expectations of analysts.

Starts declined to an annual pace of 222,013 units from June’s 245,455, Canada Mortgage and Housing Corp. said. Starts on multiple units in urban areas fell 12 per cent, while those of single-detached homes slipped 4.6 per cent.

“All told, the second half of the year began where the first half left off, on decent footing, but there are still headwinds in place to the housing market,” said CIBC’s Mr. Mendes.

“As a result, following healthy growth in the second quarter, residential construction could cool back down over the final six months of 2019.”

Separately, Statistics Canada reported that the value of building permits declined 3.7 per cent in June.

British economy shrinks

Along with everything else he has to contend with as Brexit plays out, Britain’s new prime minister is inheriting a faltering economy.

Gross domestic product contracted by 0.2 per cent in the second quarter, the Office for National Statistics said, surprising forecasters as the country heads towards its October date to quit the European Union.

The numbers, said BMO’s Priscilla Thiagamoorthy, were skewed by stockpiling in advance of the original deadline for Brexit, but manufacturing also took a hit.

“The U.K. could be heading for recession after the economy contracted by 0.2 per cent in the second quarter, underperforming expectations and coming at a terrible time given the proximity to 31 Oct.,” said Oanda senior market analyst Craig Erlam.

“Heading into a no-deal Brexit in recession would be a nightmare scenario for Boris Johnson’s team and could further drag on the pound at a time when it is already in freefall.”

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KPMG withdraws CannTrust audit report

From Reuters: CannTrust Holdings Inc. said its auditor KPMG LLP has withdrawn its report on the company’s financial statements for full-year 2018 and its interim report for the three month period ended March 31. KPMG’s decision was prompted after CannTrust cautioned against relying on its financial statements and as new information from an investigation by a special committee was shared with the auditor.

Hydro One profit drops

From The Canadian Press: Hydro One Ltd.’s second-quarter profit fell by nearly 23 per cent from last year to $155-million as the electricity utility experienced higher weather-related costs for vegetation control and storm-related power restoration.

Malaysia lays charges

From Reuters: Malaysia filed criminal charges against 17 current and former directors at subsidiaries of Goldman Sachs Group Inc. following an investigation into a multibillion-dollar corruption scandal that led to the demise of state fund 1MDB.

Mattel shares sink

From The Associated Press: Shares in Mattel tumbled in morning trading after the toy maker pulled a debt offering upon learning of a letter from an anonymous whistleblower.

Huawei unveils operating system

From Reuters: Huawei Technologies unveiled its proprietary operating system for smartphones and other devices, as U.S. trade restrictions imposed in May threaten to cut the Chinese firm’s access to U.S. technologies such as Android.

Pace of oil demand slows

From Reuters: Mounting signs of an economic slowdown and a ramping up of the U.S.-China trade war have caused global oil demand to grow at its slowest pace since the financial crisis of 2008, the International Energy Agency said. It said that compared with the same month in 2018, global demand fell by 160,000 barrels a day in May.

Japanese growth faster than expected

From Reuters: Japan’s economy grew much faster than expected in April-June to mark the third straight quarter of expansion, as robust household consumption and business investment offset the hit to exports from cooling global demand. Gross domestic product grew an annualized 1.8% in the second quarter, the Cabinet Office’s preliminary data showed.

Required Reading

Vehicle production tumbling

Canadian vehicle manufacturing is tumbling amid a prolonged slump in sales, with production in the first half of the year dropping below one million units for the first time in a decade. Stefanie Marotta reports.

CI struggles with redemptions

Canadians continue to pull their money from CI Financial Corp.'s mutual funds, extending the company’s troubling streak of net redemptions and sending its share price tumbling, Tim Kiladze writes.

Should you bite?

Banks are offering cash and iPads to people opening new chequing accounts. Personal finance columnist Rob Carrick looks at whether you should bite.

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