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Briefing highlights

  • Gauging a recession
  • Stocks, loonie, oil at a glance
  • OMERS buys stake in 407
  • Canada loses 7,200 jobs in March
  • Unemployment steady at 5.8 per cent
  • U.S. creates 196,000 jobs
  • Required Reading

Gauging a recession

Given all the recent chatter over what markets are signalling about the threat of a recession, here’s an interesting look from Société Générale.

And, in short, why we’re not there yet.

Alain Bokobza, head of global asset allocation and equity strategy, and derivatives strategist Jitesh Kumar, looked back at “what has historically distinguished recessions from ‘head fakes.’”

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It all has to do with how markets price the possibility of rate cuts, over the next six months, by the Federal Open Market Committee, or FOMC, the policy-setting panel of the U.S. central bank.

“In the past 30 years, there have been six occasions during an FOMC hiking cycle when the market has switched from pricing hikes to pricing cuts (or ‘pivots’),” Mr. Bokobza and Mr. Kumar said.

“Interestingly, three of these pivots were followed by a recession, while three proved to be mid-cycle slowdowns,” they added in their study.

“Evidently, the pricing of rate cuts is not a certain harbinger of recession. In fact, during the two mid-cycle slowdowns in 1995 and 1998, futures priced almost three rate cuts (of 25 basis points each) before recovering.”

Thus, the head fakes. What about the real thing?

“Prior to each of the past three recessions, the total rate cuts priced into the futures market at some point reached 100-plus basis points,” Mr. Bokobza and Mr. Kumar said.

So, a percentage point or more in what was expected from the U.S. central bank.

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“Incidentally, on each occasion these 100-basis-point pricing changes occurred very close to the date of the first FOMC cut – four days after the cut in 1989, one day before in 2001 and 11 days before in 2007,” the Société Générale analysts said.

Source: Société Générale

“This indicator has thus proved relatively accurate in terms of timing the recession, as well,” they added.

“At the end of the last two cycles, the U.S. economy was ex-post declared to be in a recession within three months of this indicator being triggered. In short, we need to see the Fed futures market pricing in 100 basis points of rate cuts over the subsequent six months to be confident of calling an imminent recession.”

Nikolaos Panigirtzoglou, global market strategist at JPMorgan Chase, noted that, after the most recent Fed meeting, markets priced in a rate cut this year, and more than one in 2020.

“These recent market moves likely reflect perceptions of an increased likelihood of a U.S. recession,” Mr. Panigirtzoglou said.

“Indeed, the Fed loosened policy in three months before the previous three recessions, cutting by 0.25 per cent in 1991, 1.5 per cent in 2001 and 0.5 per cent in 2007 (and significant further easing followed in all three cases).”

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JPMorgan’s “recession risk tracker,” by the way, put the odds of such a slump within a year at about 43 per cent, he added.

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Markets at a glance

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OMERS buys into toll road

One of Canada’s big pension fund managers is buying into the 407 toll road owned by SNC-Lavalin Inc. and other groups.

The Ontario Municipal Employees Retirement System’s infrastructure group said it would take a stake from SNC, of just over 10 per cent, in 407 International Inc., the company that owns the concession.

OMERS said the deal with SNC consists of an up-front payment of $3-billion.

There could be more than just that up-front payment.

“Based on the terms of the agreement, gross proceeds to SNC-Lavalin from the sale could reach $3.25-billion in aggregate, $3-billion payable at the closing date and $250-million over a period of 10 years, conditional to certain financial thresholds related to the ongoing performance of Highway 407 ETR,” SNC said.

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Unemployment steady

Canada lost a handful of jobs in March, with unemployment holding at 5.8 per cent.

The economy lost about 7,200 positions, Statistics Canada said today.

January and February saw solid job creation, which puts the first-quarter rise in employment at 0.6 per cent, or 116,000 positions.

“The party had to end at some point, since Canadian jobs data had outrun other signposts of economic growth so dramatically, making the small retreat in employment in March not much of a surprise,” said CIBC World Markets chief economist Avery Shenfeld.

“There’s nothing great about this report, but first-quarter hiring still looks very brisk, if anything still too brisk for an economy that’s likely chugging along at a 1-per-cent to 1.5-per-cent growth rate,” he added.

The U.S. economy, in turn, churned out 196,000 jobs in March.

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Corus profit slips

Corus Entertainment Inc. reported a 4-per-cent rise in quarterly revenue, lifted by strength in its television business, Reuters reports. Net income attributable to shareholders fell to $6.3-million, or 3 cents a share, in the second quarter from $40-million, or 19 cents a share, a year earlier.

Saudis halted shipments

The fallout from Saudi Arabia’s move to punish Canadian companies was felt within a month of the sudden diplomatic feud last summer, leading to visa rejections, a government ban on food from Canada and a blockage of shipments at the kingdom’s ports, The Canadian Press reports.

Required Reading

Canada won’t reopen talks

Foreign Affairs Minister Chrystia Freeland says Canada will not reopen trade talks to satisfy the demands of congressional Democrats, putting further pressure on the ratification process of the U.S.-Mexico-Canada Agreement, Adrian Morrow reports.

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Pay gap high

Some of Canada’s biggest companies have slightly shrunk the gender pay gap for their employees in Britain, but for most the differences remain significantly higher than the national average. David Milstead looks at their filings.

Horgan considers relief

Premier John Horgan says the B.C. government will consider “some relief” for those who can’t afford record high gas prices. Horgan said his government will monitor prices at the pumps over the summer after they reached a record of almost $1.64 a litre Thursday in Metro Vancouver.

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