A daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
CIBC economist Andrew Grantham believes the end of Bank of Canada rate hikes is in sight,
“In the US, the excess in demand is very clear cut… final sales to domestic buyers (basically household spending and business investment) is 5.4% higher than in Q4 2019 and above its pre-pandemic run rate. American households and businesses have been buying more than the domestic economy can produce …That is not, however, the case for Canada. Unless we are thrown a big curveball by the statisticians next week, the levels of both headline GDP and final demand from the private sector should both be around 1½% above their Q4 2019 level as of Q1 2022, but below their pre-pandemic trends…and large excess demand in Canada is much more concentrated in one area — housing . That also just happens to be the area of the economy that is the most sensitive to interest rate increases, and an area that recent home resale data suggests is already starting to slow from the “exceptionally high” levels that the Bank of Canada described in its last policy statement…In terms of [this] week’s decision and policy statement, the Bank will have to sound hawkish … However, any admission that the housing market is already responding to higher interest rates should also be seen as an admission that excess demand is about to become less excessive. That is one of the key reasons why we think that, after another 50bp hike in July, the pace of hikes will slow down, and the Bank won’t need to take rates any higher than the 2.5% mid-point of its neutral band”
“The Week Ahead: Defining “excess” – CIBC Economics
Strategists at Morgan Stanley were correctly cautious on equities as 2022 began but global strategist Andrew Sheets is now sounding, if not outright bullish, a lot less pessimistic,
“The post-GFC period was filled with paradoxes. It was a period of serially disappointing economic growth but exceptional cross-asset returns. Wealth exploded in relation to the economy, while capital investment withered. It was a period of fragility that demanded enormous policy support, yet produced a remarkably consistent pattern of performance … All this is changing. Year to date, commodities have outperformed stocks, cash has outperformed bonds, Value has outperformed Growth and non-US stocks are beating their US counterparts (especially if you hedged the currency). The macro backdrop is also different; US core PCE [personal consumption expenditures] just printed at 4.9%, US 1Q nominal GDP was +10.6%Y and capital investment is strong, while global central bank policy has been more restrictive, less predictable and has thrown cold water on the idea of a policy solution to every market wobble. Does this shift have risks? Yes. But how many conferences did you attend in the last decade that bemoaned the trapped state of the global economy, doomed to a future of insufficient demand that required extreme monetary policy as far as the eye could see… We think we’re through the worst of markets being surprised by inflation and policy. That should help yields to stabilize over the summer and bring down rate volatility, which in turn should help mortgages, munis and IG credit (in that order)… Finally, energy over metals remains a good example of relative value that can continue to work.”
The end of central bank-caused market volatility would be welcome, and signal that a more sector by sector, fundamentally based investment approach would be successful.
“MS (Surprisingly less pessimistic) “We think we’re through the worst of markets being surprised by inflation and policy” – (research excerpt) Twitter
Citi mining analyst Ephrem Ravi ponders a question of great importance to Canadian investors – where is the bottom for mining stocks?
“[Positive] drivers have started cooling off, resulting in a sell-off in commodity stocks (despite relatively resilient commodity prices) and a de-rating in sector valuation multiples. The EV/EBITDA multiple for the global mining sector has declined to 4.4x from the highs of 5.5x earlier this year. The sector continues to trade at a discount to the broader markets which we believe would continue to be the case. That said, expected policy support from China (although timing is uncertain) could propel sentiment for mining equities and boost valuation multiples. We would be buyers of any dips through the summer as the inflation narrative continues to support the investment thesis.”
“Citi: “MSCI World Mining EV/EBITDA - absolute and relative to the market”” – (charts) Twitter
Diversion: “Without intervention, ‘superpigs’ could soon invade Alberta cities, researcher warns” - CBC
Tweet of the Day: " Had #ldnont home price growth simply followed 2005-16 trends, an average single-family home would sell for just over $300,000. Instead, the March 2022 average price was $831,000.” – Twitter
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