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Business Briefing Things could go from bad to far worse, but it wouldn’t be Canada’s ‘Big Short’: BMO

Briefing highlights

  • BMO sees no ‘Big Short’
  • Stocks, loonie, oil at a glance
  • What to watch for on Brexit
  • What else to watch for this week
  • Brookfield invests in TransAlta
  • Newmont unveils special dividend
  • Apple jumps into video streaming
  • From today’s Globe and Mail

No ‘Big Short’

Things could always get far worse for Canada’s economy, but even then it wouldn’t be our version of The Big Short, the Bank of Montreal says.

"Could the soft patch evolve into a more significant downturn?" said BMO senior economist Robert Kavcic.

"It’s not our forecast, but it absolutely could," he added in a report.

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"Residential investment had risen to a record-high share of GDP early last year before starting to retrench, and housing has large tentacles that spread widely across the economy. But, would it be a major financial stability event like the U.S. in 2009? Highly unlikely."

Mr. Kavcic was responding to comments last week from Steve Eisman, a Neuberger Berman portfolio manager and figure in the book The Big Short, who is shorting Canadian banks, though he didn’t say which ones.

"I'm calling for a simple normalization of credit that hasn't happened in 20 years," he told the Financial Times.

BMO wasn't disagreeing with parts of this. Just the opposite, in fact.

"We’ve heard these bearish calls for much of the past decade, and they’ve continually been exaggerated," Mr. Kavcic said.

"While this latest rendition has grabbed a lot of attention on the Street (mainstream feature film, etc.), it actually isn’t that over the top, calling for slower economic growth and normalizing credit conditions," he added.

"We’d actually agree on both counts."

Canada's economy stagnated in the fourth quarter, as consumers cut back, the housing market slowed and business investment lagged.



The pace of consumer borrowing has also slowed markedly, but that’s what policy makers wanted to happen as they brought in mortgage-qualification stress tests at the federal level in early 2018 and measures to cool housing markets at the B.C. and Ontario levels.

Economists aren't holding out much hope for the current quarter, though the economy is forecast to pick up after that.

We'll learn more Friday when Statistics Canada reports on how the economy fared in January.

Analysts expect to see that economic growth was flat, or possibly contracted by up to 0.2 per cent, as the Alberta government’s forced energy production cuts took effect. That, said BMO’s Benjamin Reitzes, Canadian rates and macro strategist, would have trimmed growth by 0.3 to 0.4 of a percentage point.

And remember, that's going to be temporary as the oil cutbacks ease.

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"A flat monthly GDP reading isn’t usually a cause for celebration, but this time is different," said CIBC World Markets senior economist Royce Mendes, who expects Statistics Canada to report no growth.

"A material drag from oil production, as a result of mandated cuts in Alberta, is expected to show up in January," he added.

"So, if the economy was able to avoid a negative reading, it will indeed be a positive sign."

Back to The Big Short: BMO’s Mr. Kavcic noted that Canada has been making making mortgage lending rules stricter for 10 years, something the U.S. didn’t do in the runup to the crisis. And so, while Canadian debt levels swelled, the pace of lending never reached that of the pre-crisis era.

Credit delinquencies, he added, have also been low.

"All that said, if the downturn deepens, housing-levered equities could fall, and home prices could easily correct further and stagnate for a multi-year period. But that’s just about par for the course, and a long way short of a 2009 situation breaking out in Canada."

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Markets at a glance

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What to watch for this week

Brexit and the U.S.-China trade spat will be in the spotlight, along with some other economic indicators, the latest from Apple Inc. and BlackBerry Ltd. results.

On the trade talks, American and Chinese negotiators will meet again in Beijing, trying to settle their tit-for-tat tariff war.

"Although media reports have given conflicting signals, there still seems to be a fair chance of a deal being signed off by Presidents Trump and Xi next month," said Chang Liu of Capital Economics.

Here's what else to watch for:

TUESDAY

Nova Scotians get their budget, while markets get the latest from the U.S. real estate sector, with the release of the S&P Case-Shiller home price index. Economists generally expect that to show prices rose 5 per cent in January from a year earlier.

WEDNESDAY

U.S. trade numbers couldn’t come at a more interesting time given the talks playing out this week.

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Analysts generally expect the report to show the U.S. trade deficit narrowed to about US$57-billion in January from just shy of US$60-billion in December.

"A record trade gap with China will remain a thorn in the side of U.S. trade officials," said BMO senior economist Sal Guatieri.

Statistics Canada releases its January trade report at the same time. Expect to see that shortfall narrowed in January to between $2-billion and $4-billion from December's record $4.6-billion.

"Canada’s trade balance was brought to its knees in December, but things are looking up to begin 2019," said CIBC's Mr. Mendes.

“Crude oil shipments rebounded nicely in January, as did manufacturing shipments, for which data were released last week. That’s a welcome sign for an economy that has been stagnating in recent months.”

On the corporate side, AGF Management Ltd. reports quarterly results.

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THURSDAY

Lyft lists on Nasdaq, its valuation expected at about US$20-billion.

“Management are hoping to raise a total of around US$2-billion and the shares could well get a decent pop higher when they open, given reports that the book was oversubscribed within two days,” said CMC’s Mr. Hewson.

In the U.S., we'll get a revised reading of fourth-quarter economic growth, which BMO's Mr. Guatieri expects will be trimmed to an annual pace of 2 per cent from the earlier reading of 2.6 per cent.

FRIDAY

Besides the Statistics Canada economic report, BlackBerry reports quarterly results.

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