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A daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

BMO senior economist Robert Kavcic published BoC Takes a Hammer to Housing on Friday and here are some excerpts:

“With variable rates now around 4%, this week’s move by the BoC has cranked up the stress testing hurdle (the higher of the contract rate plus 200 bps, or 5.25%). Before the move, variable-rate borrowers were still generally qualifying at the 5.25% mark, but that has now shifted up to around 6% … the Canadian housing market has gone from being incrementally priced at a 1.5% cost of borrowing, to now around 4.5% within the span of six months. This is a massive pill for the market to swallow… Five years ago, fixed-rate mortgages were being taken around the 3% level, so coming into a 4.5% world will lead to a monthly payment increase of roughly 15%, all else equal. Meantime, the vast majority of borrowers currently on variable-rate mortgages have fixed payment features, but even there things are now getting dicey. For example, moving a variable rate up from 1.5% to 4% with a fixed payment would effectively increase the amortization from 25 years to 45 years… more Canadians now expect lower home prices ahead than higher prices, and that was before the BoC’s 100 bp hammer.”

I will continue to watch retail sales data for signs that a weakening housing market is affecting the broader economy.

“BMO Capital Markets Economics | A Weekly Financial Digest” – BMO Economics


Morgan Stanley chief U.S. economist, who has been correctly bearish since at least the fourth quarter of last year, is still pessimistic.

“Counter-trend rally may continue, but make no mistake, we don’t believe this bear market is over, even if we avoid a recession – the odds of which are increasing… Defensive sectors now comprise a weight within the momentum factor that historically only happens during a recession. While that may seem like an enticing signal to go the other way, we think it’s premature until either a recession is confirmed or the risk of one is extinguished. Another favorable factor is that investors still don’t own it… MS recession model is now at 36% and is approaching the proverbial red line, historically speaking. Other warnings include rising jobless claims and falling job openings, albeit from extreme levels. With profit growth likely to fall sharply over the next several quarters, the risk of a labor cycle is increasing, in our view, and this is the only metric that we think matters for whether we enter a recession or not… One reason why we remain [convinced] that forward dollar EPS estimates are likely to decelerate over the coming months from levels meaningfully above trend (+20% above trend for the SPX and NDX) is that earnings revisions breadth is in negative territory. Importantly, this move to the downside in revisions breadth has accelerated in the last week, and the measure is now at the lowest level since July 2020. The main drivers of more recent downside have been Transports, Financials, Materials, Consumer Durables and cyclical Tech.”

“MS: “Earnings revisions breadth continues to fall further…”” – (research excerpt) Twitter


BofA Securities analyst Ebrahim Poonawala noted that the scale of the one day sell-off in Royal Bank shares last Thursday was really, really rare.

“What? RBC-RY shares closed -5.6% Thursday (TSX-Banks -3.8%). This is noteworthy as prior to yesterday, during the last decade there have only been 9 instances when RY shares declined 4%+ with 8 out of 9 of these occurring during the peak of the pandemic in March/April 2020 (Exhibit 3). We attribute this weakness to three reasons: 1) Delayed reaction to Bank of Canada’s (BoC) 100bp rate hike: Investors were already concerned about the impact of higher interest rates on the Canadian housing market and the consumer. With the 5yr govt. yield near decade highs, the risk of a payment shock to homeowners and its implications for consumption and economic growth have raised red flags … MTM [mark to market] hit on bridge loans: We also heard that investors reacted cautiously to updates from JPMorgan (JPM) and Morgan Stanley, with both banks incurring MTM hits on bridge loans during 2Q22. While we don’t rule out the potential for Royal and its peers to incur losses tied to widening bond spreads, we don’t see this as a systemic issue… 3) Royal had outperformed the TSX-banks index by ~700bp YTD prior to yesterday’s sell-off given its best of breed status, likely as investors gravitated toward the name during a period of heightened macro uncertainty. As a result the stock trades at a healthy premium to peers. The outsized decline suggests indiscriminate selling on the back of rising fears of an economic downturn that is unlikely to leave no bank unscathed in terms of risk of negative EPS revisions.”

“BofA: Last week’s Royal Bank sell-off was really rare” – (research excerpt) Twitter


Diversion: " Something is really, really weird about music in 2022. Let me explain. - Alan Cross” – A Journal of Musical Things

Tweet of the Day: “The Energy sector is now down more from its 52-week high than the S&P 500″ – Twitter

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