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Briefing highlights

  • You’ve got bupkis
  • Stocks, Canadian dollar, oil at a glance
  • Proxy firm recommends Baker’s HBC bid
  • Home Depot forecast below estimates
  • Christmas tree prices rise
  • Aramco climbs on debut
  • What to expect from the Fed
  • What else to watch for today
  • What analysts are saying today
  • Required Reading

Bupkis

Timothy Lane has made an interesting observation that demands attention.

“Starting in 2010, as the recovery appeared to be under way, most major economies began a course of fiscal consolidation,” the Bank of Canada deputy governor said last week.

“In Canada, the government took steps to move the federal budget toward balance,” he added, noting, too, how the U.S. brought in “a policy of automatic spending cuts” under budget law.

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“With the benefit of hindsight, those moves toward balanced budgets proved to be premature. The world was in for several more years of lacklustre growth.”

We’re not facing another financial crisis. Nor are there widespread projections for a recession.

But economic growth is slowing, and economists far and wide are wondering when this historic, long-running expansion ends and the next slump starts.

Add to that the facts that we have a minority government in Ottawa, whose economic agenda will have to be backed by another party, and the fiscal pullback among some provinces, and, like I said, Mr. Lane’s comments take on an added alert.

Spending among our governments is “mixed” now, Mr. Lane also noted.

“While it has been supporting growth recently, this support is expected to wane in 2020 as consolidation in Ontario and Alberta takes hold and the recent strength in Quebec and British Columbia normalizes,” he said.

“These dynamics were built into our October projection. On the federal side, the government’s fiscal plans are pending.”

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Which brings us to the Liberal Throne Speech and tax cut.

First off, that tax cut, while expensive and obviously welcome among the 20 million Canadians who will get it, will have a muted impact, providing “a small and transitory boost to growth at best,” said Rebekah Young, Bank of Nova Scotia’s director of fiscal and provincial economics.

Depending on household finances, she said, this will mean an annual tax saving of $300 to $600 when everything is said and done by 2023, putting about $25-billion into the economy over six years.

“Multipliers – or the ratio by which government spending prompts onward spending – will be small,” Ms. Young said.

“If growth forecasts hold next year, the impact would almost be negligible,” she added in her report.

“Even if growth cools substantially, the multiplier would still be relatively small. Across the 20 million Canadians affected by the measure, there would be some propensity to spend the windfall, particularly in light of prolonged affordability challenges and stretched balance sheets, but its impact will be weakened by the breadth of the cut.”

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The cost and impact of the Liberal tax plan

Per cent of GDP

Incremental stimulus effect as share of GDP

Total cost as share of GDP

0.30

%

0.25

0.20

0.15

0.10

0.05

0

FY20

21

22

23

24

25

SOURCE: SCOTIABANK ECONOMICS

The cost and impact of the Liberal tax plan

Per cent of GDP

Incremental stimulus effect as share of GDP

Total cost as share of GDP

0.30

%

0.25

0.20

0.15

0.10

0.05

0

FY20

21

22

23

24

25

SOURCE: SCOTIABANK ECONOMICS

The cost and impact of the Liberal tax plan

Per cent of GDP

Incremental stimulus effect as share of GDP

Total cost as share of GDP

0.30

%

0.25

0.20

0.15

0.10

0.05

0

FY 2020

2021

2022

2023

2024

2025

SOURCE: SCOTIABANK ECONOMICS

Here’s the other side of that: The federal and provincial governments are going their “separate ways,” noted Bank of Montreal senior economist Robert Kavcic.

“Fundamentally, the big picture at the provincial level is that most jurisdictions have tacked to the political and fiscal right, even as the federal election result will arguably shift policy further to the left,” he said in a recent study.

Among the provinces, deficits could shrink by about $5-billion next year, in turn “acting as a partial offset to any federal stimulus,” Mr. Kavcic said.

When you factor in Alberta’s “restraint-heavy” measures and the planned spending of other provinces, fiscal year 2020-21 could mark “one of the slowest rates of combined provincial program spending growth of the past 20 years at around 1.7 per cent,” he added.

“That said, various tax relief measures (corporate tax rate cuts, a sales-tax reduction and more) have begun trickling out, and will act as a partial offset. But, capital spending plans have been scaled back in some provinces, and have broadly levelled off. All told, a provincial fiscal policy shift toward restraint, in exchange for some early tax relief, will serve to counter some of the shift expected at the federal level.”

The Conference Board of Canada agreed that “weakness in government spending” will mean less oomph for economic growth.

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If the provinces meet their goals, the group said, “it will mark the slowest pace of growth in real government expenditures since the mid-1990s.”

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Markets at a glance

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Back Baker’s HBC bid, Glass Lewis says

Shareholders of Hudson’s Bay Co. should not wait for a higher bid from private equity fund Catalyst Capital Group Inc. and should support HBC executive chairman Richard Baker’s $1.1-billion privatization bid, according to proxy adviser Glass Lewis & Co., The Globe and Mail’s Rachelle Younglai reports.

Catalyst, which is led by financier Newton Glassman, has proposed to pay $11 per share for HBC. That is higher than Mr. Baker’s bid of $10.30 per share.

But the proxy adviser questioned whether Catalyst had “obtained sufficient funding commitments” and said the private equity company had not shown that it would be able to secure support from Mr. Baker’s group of shareholders that control 57 per cent of HBC’s stock.

Read more

Ticker

Home depot forecasts below estimates

From Reuters: Home Depot Inc. forecast fiscal 2020 sales growth below Wall Street expectations, three weeks after the home improvement chain cut its 2019 sales forecast. The company said last month that its One Home Depot strategy, which aims to improve the online and brick-and-mortar businesses, was not yet generating as much revenue as it had expected, prompting it to cut its 2019 sales forecast for the second time. The company forecast preliminary fiscal 2020 sales growth of about 3.5 per cent to 4 per cent ahead of its analyst day on Wednesday, when it would provide more details on the strategy. Analysts on average had expected sales growth of 4.3 per cent, according to IBES data from Refinitiv.

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The root of the problem

From The Canadian Press: Consumers on the hunt for a Christmas tree have little to cheer about this year, as prices are through the roof due to a shortage of trees that can be traced back to the 2008 financial crisis. The Great Recession put thousands of American Christmas tree farmers out of business, resulting in far fewer seedlings being planted. As trees have a maturity cycle of 10 years, the lack of supply is just now beginning to bite, pushing up U.S. demand for Canadian Christmas trees and causing higher prices for consumers across the continent. The average price of a tree rose 123 per cent to US$78 in 2018 from US$35 in 2013, according to the U.S. National Christmas Tree Association. Price growth has also occurred in Canada, said analyst Paul Quinn of RBC Dominion Securities, with sales at Christmas tree farms up by 15 per cent annually for the last five years on average.

Aramco rises on debut

From The Associated Press: Saudi Arabia’s oil company Aramco began trading for the first time on Wednesday, gaining 10 per cent in its first moments on the market in a dramatic debut that pushed its value to US$1.88-trillion, higher than any other listed company in the world. The state-owned oil giant started trading on the Saudi Tadawul stock exchange after a mammoth US$25.6-billion initial public offering that set the record as the biggest ever in history. Aramco, owned by the state, has sold a 1.5-per-cent stake, pricing its shares before trading at 32 Saudi riyals, or what is US$8.53.

IATA revises down profits

From Reuters: Global airlines reduced a forecast for industry-wide profits in 2019 under the weight of trade tensions, but predicted a modest recovery next year on the assumption that tariff wars will recede in the run-up to the U.S. presidential election. Airline net profits are now expected to fall to US$25.9-billion from US$27.3-billion last year, before recovering to US$29.3-billion in 2020, the International Air Transport Association said. The starkest deterioration is being felt in airlines’ cargo businesses - where a 3.3-per-cent drop in freight demand marked the sharpest decline since the 2009 financial crisis, with revenue down 8 per cent year-on-year.

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Also ...

What to watch for today

The biggie is the afternoon Federal Reserve decision and fresh projections from individual central bank officials.

Economists expect no change to interest rates, though.

“The incoming data [last] week were, on balance, positive and certainly wouldn’t prompt the sort of ‘material reassessment’ of the outlook that Fed officials have said would be necessary to cut interest rates again [this week],” said Paul Ashworth, chief North American economist at Capital Economics.

"Markets are still pricing in one final 25-basis-point rate cut some time next year, but our guess is that signs of a pick-up in economic growth early next year will take that possibility off the table," he added.

“The bigger point, however, is that even if that pick-up in GDP growth ends up being more pronounced than many expect, we strongly doubt that the Fed would hike rates. Even though they would never admit to it in public, the chances of Fed officials sanctioning a rate hike next year during a politically charged election campaign are close to zero.”

Watch, too, for quarterly results from Lululemon Athletica Inc.

What analysts are saying today

“There have been a number of conflicting narratives with respect to whether we get an extension to the 15 December deadline on China tariffs, however there does appear to be some money taking a view that the risks to the U.S. not extending the deadline outweigh the risks of not doing so, and thus the deadline is likely to be extended. There is still no expectation that we’ll see any agreement on a phase one trade deal any time soon, however on the plus side there does appear to be progress on the USMCA agreement with the prospect still open that it might get passed by year end.” Michael Hewson, chief analyst, CMC Markets

“Our economists expect very little to emerge from today's [Federal Reserve] meeting. With financial conditions in ‘easy’ terrain and largely unchanged since the October meeting, and a phase one trade deal still seemingly on the table, the Fed is unlikely to make any substantive changes to the forward-looking language in the statement. Fed rhetoric over recent weeks suggests the ‘on-hold’ bias is quite strong - and chairman [Jerome] Powell is unlikely to back off from this position.” Daria Parkhomenko, foreign exchange strategy associate, Royal Bank of Canada

“It is widely expected the [Federal Reserve] will keep rates on hold. The Fed cut rates three time between June and October, and it is fair to say we haven’t seen the impact of the cuts so far, and we are unlikely to do so for a number of months. Last week’s jobs report was stellar as over 260,000 jobs were added in November. The unemployment rate dropped back to a 50-year low. If the jobs market is this strong now, one wonders what it will be like when the recent rate cuts kick in.” David Madden, analyst, CMC Markets

“Aramco has become the world’s biggest listed company. That follows a 10-per-cent rise in the share price on its first day of trading. A listing in Riyadh with mostly domestic investors doesn’t have the prestige of an international listing in New York or London. But there is no denying the numbers. Saudi Arabia has made its mark in public markets. The listing was over four times subscribed so the first day always looked like it was going to be strong. Whether enthusiasm holds up longer term will in part rest upon the host nation’s ability to stay relevant for the world’s future energy needs. The oil industry needs to adapt to higher supply from the United States and call for lower fossil fuel use because of climate change. Given the challengers, it is not impossible that this is the high watermark for Aramco.” Jasper Lawler, head of research, London Capital Group

Read more

Required Reading

U.S. reaches deal with Canada, Mexico

The United States has reached a deal with Canada and Mexico to revise the new North American trade pact and satisfy demands from congressional Democrats, paving the way for ratification of U.S. President Donald Trump’s top legislative priority even as he faces impeachment. The deal for the U.S.-Mexico-Canada Agreement contains some victories for Canada, including strengthening dispute-resolution provisions and weakening protections for big pharmaceutical companies. Adrian Morrow reports.

Chevron to take charge

Chevron Corp. plans to take a fourth-quarter writedown of up to US$11-billion and wants to sell off its stake in a proposed liquefied natural gas project in British Columbia. More than half of the non-cash, after-tax impairment charge stems from California-based Chevron’s Appalachia shale gas assets, notably in Pennsylvania, West Virginia and Ohio. Other assets in the quarterly charge include the Chevron-operated deepwater Big Foot oil project in the Gulf of Mexico. The massive writedown underscores the challenges faced by the energy industry as producers struggle to cope with low oil and gas prices, Brent Jang writes.

Privatize cannabis sales

New Brunswick, and the rest of Canada, should fully privatize cannabis sales, columnist Rita Trichur argues.

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