Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BMO economist predicts “challenging time ahead” for the Canadian economy,
“On the housing front, interest rates really started to ramp up in Q2, and housing was hammered accordingly. We’ve highlighted the excesses in housing for over a year, and we’re seeing those unwind now. Q2 was just the beginning, as home sales plunged, renovation activity likely pulled back somewhat, while housing starts remained buoyant (they tend to lag the broader housing market). The early read on Q3 shows a deepening downturn in home sales and prices, which, along with higher rates, will no doubt put a chill in renovation activity. Look for construction to start slowing notably in the later stages of this year … The solid first half for GDP growth is in distinct contrast to the U.S., which recorded back-to-back contractions in H1. Unfortunately, it’s likely downhill from here for the Canadian economy. A big reason for the H1 strength was the delay in re-opening relative to our southern neighbour. Accordingly, we’re likely still in the midst of unleashing pandemic-driven pent-up services demand, or ‘revenge spending.’ However, we’re probably in the later stages of this spending surge … Key Takeaway: Slower growth is coming. We’re already seeing the early stages, but there’s likely further weakness ahead. That will pose a challenge for the Bank of Canada’s fight against inflation. Despite the softening outlook, the Bank needs to keep its eye on inflation to ensure Canadians don’t have to pay a bigger price down the road to return inflation to target.”
“Focus: Workers Wanted: Demand, Demographics and Disruption” – BMO Economics
***
Morgan Stanley’s U.S. equity strategist Michael Wilson warned investors to be careful what they wish for,
“Be careful what you wish for … Inflation has likely peaked and will probably fall faster than the market currently expects. That’s good for multiples and is why we have seen rates fall and P/Es expand sharply over the last 1-2 months. Now, however, we see falling inflation weighing on profits as operating leverage starts to reverse. Just like most underestimated the positive effects of inflation on operating leverage, we think they are underestimating the negative effects from inflation falling … Second quarter earnings are tracking at +7% YOY for the S&P 500 with about half of sectors seeing positive earnings growth. Topline growth is tracking at +14% YOY for the S&P 500 with Energy once again the key contributor to index level growth. Most sectors are seeing revenue growth in the mid teens. That said, the majority of sectors are experiencing negative operating leverage, meaning that sales growth exceeds EPS growth—a dynamic that is evident at the index level. Despite signs of margin compression this quarter amid this operating leverage dynamic, bottoms up consensus is still calling for margin expansion into 2023, a development that we find unrealistic due to sticky cost pressures”
“MS’s Wilson warns ‘be careful what you wish for’” – (research excerpt) Twitter
***
RB Advisors posted a dispiriting chart in the firm’s annual Charts for the Beach publication,
“The real Fed Funds rate (i.e., the Fed Funds rate less the inflation rate) has historically been a reliable measure of the tightness of monetary policy. A positive real Fed Funds rate suggested the Fed was tight, whereas a negative one implied monetary policy was easy. Our second chart shows the real Fed Funds rate through time. The long-term average is about 1% and the real Fed Funds rate peaked at about 10% during the famous Volcker anti-inflation monetary regime. Recent monetary policy has gotten tighter in response to the highest inflation rates in 40 years. However, the current real Fed Funds rate suggests monetary policy remains remarkably easy relative to inflation. In fact, the real Fed Funds rate is more negative today than after the Global Financial Crisis. This implies the Fed is historically behind inflation, inflation might be more stubborn than investors expect, and the tightening cycle might last longer than is currently consensus.”
“Charts for the Beach 2022″ – RB Advisors
***
Diversion: “History’s Greatest Obstacle to Climate Progress Has Finally Fallen” – The Atlantic
Tweet of the day:
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.
Scott Barlow