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Briefing highlights

  • A ‘Beetlejuice’ recession?
  • The case for a slump …
  • … and the case against
  • Markets at a glance
  • Bristol-Myers in deal for Celgene
  • From today’s Globe and Mail

You gotta say my name three times

— Betelgeuse

Beata Caranci doesn't fear the economy will die of natural causes this year.

But what does spook Toronto-Dominion Bank’s chief economist is the threat of “Beetlejuice syndrome” haunting it into an early grave, regardless.

She was referring to Betelgeuse, Michael Keaton’s character in Tim Burton’s 1988 film Beetlejuice. For the uninitiated, that’s how the wacky ghost’s name was pronounced, and you had to say it three times to summon him.

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Ms. Caranci is, thus, warning against too much talk of a looming recession that would create a mindset that would make it so, despite what economic indicators suggest.

"Could 2019 be our 'Beetlejuice year?'" Ms. Caranci said.

"Just like the movie, saying a word too many times makes it appear," she added in her report.

"Time will tell, and we’ll keep a close eye on the data. But for now, we suggest hitting the 'pause' button on using the recession word until there’s stronger evidence in the data."

Some observers have warned we’re nearing the end of the post-crisis expansion, and are oft-quoted as saying so, which is Ms. Caranci’s point. But we’re not there yet.

To drive home her point, Ms. Caranci cited Duke University's latest global business outlook survey, which showed almost half of the chief financial officers polled expect a recession by the end of the year.

At the same time, they project U.S. economic growth of 2.7 per cent this year.

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"This is above our own estimations of 2.5 per cent, suggesting that incongruent or lofty expectations may be the problem here, rather than the actual data trends," Ms. Caranci said.

"However, beliefs and sentiment create outcomes," she added.

"Business investment intentions become more cautious, and we risk having a prophecy be fulfilled by behaviour adjustments, particularly if households respond in a similar fashion."

A handful of companies or consumers cutting back or saving more as a "precautionary stance" because of their own situations wouldn't have a big impact.

"But, when it occurs on a large scale, it actually lowers the national output and income, resulting in less savings, which subsequently causes more precautionary behaviour to set in, creating a downward spiral," Ms. Caranci said.

"Take note if there’s a chorus of people saying, 'I’m not buying that house until the recession hits, then I’ll get a better deal.'"

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While some economists have, indeed, speculated on the possibility of a 2019 recession in the United States, which would inevitably ripple into Canada, others don’t see such a slump in the cards.

"The recent tightening of financial conditions does inject downside risk into early-2019 growth," Andrew Hollenhorst and Veronica Clark of Citigroup said in a report.

"However, it is hard to argue the case for pricing a near-term recession from the U.S. activity data, which remain quite strong."

Chief economist Douglas Porter, Ms. Caranci’s counterpart at Bank of Montreal, believes the U.S. economy will reach a milestone this year, marking the longest expansion on record dating back to 1850 and eclipsing the 10-year run that began in 1991.

"This is not as obvious a call as it may have looked just a few short weeks ago, given the sudden spate of recession chatter," he said.

"But, we still believe the economy will manage to keep growing beyond July, setting a new record for cycle longevity."

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BMO's latest forecast calls for U.S. economic growth at an annual pace of 1.9 per cent, 2.4 per cent, 2 per cent and 1.9 per cent through the four quarters.

"Growth in 2019 will need to overcome: a) the financial turbulence that has whipped up since early October; b) less push from fiscal stimulus; c) deeper political drama; and, d) trade tiffs," Mr. Porter said.

Economic growth is expected to slow even in a non-recession scenario, however.

“While we aren’t explicitly forecasting a recession next year, we wouldn’t rule out a mild one,” said John Higgins, chief markets economist at Capital Economics. “At the least, we expect a significant economic slowdown.”

I’m the ghost with the most, babe

— Betelgeuse

The case for a recession: David Rosenberg

"The case for a recession is pretty clear," said the chief economist at Gluskin Sheff + Associates, running through what several indicators suggest.

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"History is on our side."

By that, he was referring to the fact that the U.S. Federal Reserve has tightened monetary policy, as it’s doing now, in 13 cycles since 1950.

"Ten of these landed the economy in recession, and neither the consensus [among economists] nor the Fed staff saw them coming when they actually started," Mr. Rosenberg said.

"So before knowing anything else, the fact that we have been in the midst of a Fed tightening phase sends recession odds north of 80 per cent," he added.

"At this point, after a whopping 325 basis points of a de facto rate-hiking cycle [including the impact of other measures], the only thing separating the recession call from becoming a reality is the inherent lag between monetary policy actions and the peak impacts on the economy."

Mr. Rosenberg sees the slump beginning in the second or third quarter "at the latest," with the U.S. central bank then moving "from restraint to stimulus."

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The case against: TD’s Ms. Caranci

"Financial and economic indicators have yet to breach levels that would signal an impending recession," Ms. Caranci said.

"This needs to be the first pillar to fall into place. Once it does, the historical signals have provided a one- to two-year advance notice of the recession."

Ms. Caranci raised five points:

Stock market volatility: “Sudden stock market swings can cause nausea, but it’s not the most reliable predictor of a recession.… If we took our cue from equity price movements, we would be on our third recession call since 2009. Eventually this indicator will be right when there are parallel or supportive movements occurring within other risk assets.”

Bond yields: "Yields and spreads have edged up, but maintain a healthy margin below other 'stress' periods, such as the European debt crisis (2011), China growth concerns (2015) and even ahead of the 2001 recession."

The yield curve: "We think that when it comes to the bond market, follow the money. Should the inversion broaden out across tenures, alongside dovish signals from other economic or financial indicators, then our bet is on the bond market calling it right. But, that day is not today."

TD’s economic risk indicator: “We’ve constructed an economic risk index to capture turning points in performance.… The current indicator is far off all of the markers that would send up any cautionary flags.”

Confidence: “The last of the data round-up needs to be with confidence measures, which critically lay the foundation for any business cycle. Here too, both business and consumer sentiment are holding at elevated levels, which is even a bit surprising given the rise of ‘recession’ talk within financial market circles.”

BMO senior economist Sal Guatieri also noted now the middle of the yield curve is now “perfectly flat” in both the U.S. and Canada, which means Washington and Ottawa can borrow for five years at the same rate they would pay for two.

“Clearly, investors are worried about growth prospects at this late stage of the cycle,” he said.

“But one silver lining is that the flat mid-section often doesn’t portend a recession for at least another two years. That’s plenty of time for policy makers to shift course if the data indeed confirm the markets’ worst fears.”

Read more

Markets at a glance

Read more

Bristol-Myers to buy Celgene

Bristol-Myers Squibb Co. unveiled a blockbuster deal for Celgene Corp. today, a marriage the companies said would create a leading biopharmaceutical concern focused on cancer, cardiovascular and other diseases.

The announcement sent Celgene shares surging.

Under the deal valued at about US$74-billion, Celgene stockholders would get one Bristol-Myers share and US$50 in cash. Based on Wednesday’s closing price, Bristol-Myers valued the per-share amount at US$102.43 and one tradeable security that would mean a one-time paying of US$9 once health regulators approve certain products.

“Together with Celgene, we are creating an innovative biopharma leader, with leading franchises and a deep and broad pipeline that will drive sustainable growth and deliver new options for patients across a range of serious diseases,” Bristol-Myers chief executive officer Giovanni Caforio said in a statement.

“As a combined entity, we will enhance our leadership positions across our portfolio, including in cancer and immunology and inflammation,” he added.

“:We will also benefit from an expanded early- and late-stage pipeline that includes six expected near-term product launches. Together, our pipeline holds significant promise for patients, allowing us to accelerate new options through a broader range of cutting-edge technologies and discovery platforms.”

Read more

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