Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Lisa Shalett, Morgan Stanley Wealth Management’s chief investment officer, warned clients to remain patient in a report called ‘Beware bear market rallies’:
“Powerful rallies like the one we have seen since the mid-June bear market trough often get mistaken for the beginning of a new bull market. In fact, this summer’s rally looks exactly like the other 23 bear market rallies of the past 95 years. Importantly, other asset markets do not appear bullish. The bond and currency markets are not pricing the extent of the “Fed pivot” that appears embedded in stocks. The two-year US Treasury yield is still within 20 basis points of the cycle high while the 10-year yield has risen in the face of better-than expected inflation data. Consequently, equity valuations look extreme against a backdrop of rising real interest rates, a relatively high US dollar and a below-average equity risk premium. With falling purchasing managers’ indexes, weaker housing data and poor order to- inventory dynamics, earnings achievability seems suspect. Estimates of 2023 earnings have only come down by 3% since the June peak and still imply 8% profit growth atop this year’s 10% consensus estimate. Although we understand investor impatience, we’ll wait for confirming evidence of a new bull market before adding aggressively to risk. Consider remaining patient and using cash opportunistically.”
“MS Wealth management CIO with “Beware Bear Market Rallies”” – (research excerpt) Twitter
BMO’s chief economist Doug Porter notes that Canadians continue to strap on debt despite rising rates.
“The latest monthly overall borrowing data show some slowdown from the recent peak, but still-robust trends. For example, the growth in system-wide mortgage balances has eased to a 9.6% y/y pace in June from the 10.7% high hit in February. The further drop in home sales and slipping home prices point to a further cooling. However ... the shorter-term metrics on borrowing are only slightly below the 12-month trend—the three-month pace is still running at 8.8% annual rate., or above inflation. It’s a similar story for the broadest measure of credit trends, which are still clicking along at roughly a 9% pace. While robust, none of these measures of borrowing quite hit the frenzied pace seen back in 2007. Recall that overnight rates peaked at 4.5% in that cycle, before the Great Recession brought rates tumbling. "
“BMO: “Canadian Borrowing: Cooling but not Cold “” – (research excerpt) Twitter
CIBC credit strategist Ian Pollick thinks the Bank of Canada is set to pause its rate hiking process.
“We suspect that a narrative shift is coming, given that we forecast that the Bank will end its rate hike cycle at its next meeting in September, bringing the overnight rate 75 basis points higher to 3.25%. If we are correct, then the ‘big’ shoe to drop is in effect October, given that the market continues to expect roughly 50 basis points of hikes into Q4. We anticipate that the September statement will lean towards data dependence rather than outright rhetoric suggesting rates will ‘rise further’ as seen in the July statement. For this reason, if we are correct that the Bank is entering a period of inertia in Q4, it is very likely that market sensitivity will shift away from central bank signaling and towards data – predominantly inflation but to a lesser extent growth. However, even as market priorities change, we believe this will have very minimal impact on the curve flattening footprint. We do not expect a market shift in light of a narrative shift: flatteners should continue to remain intact into next year based on macro themes.”
The mention of flatteners means that he believes that bond investors that sell short-term bonds and buy longer term bonds will continue to make money on the trade.
“CIBC’s Pollick: “We suspect that a narrative shift is coming, given that we forecast that the Bank will end its rate hike cycle at its next meeting in September, bringing the overnight rate 75bps higher to 3.25%.” – (research excerpt) Twitter
Diversion: “New Map of Mars Shows Where It Was Once Covered in Water” – Gizmodo
Tweet of the Day: “Baltic Dry Index at new lows. Shows how the freight market is easing, mostly due to lower Chinese demand. Graph via Bloomberg.” – Twitter
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