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

BMO chief economist Doug Porter explains how domestic inflation can remain in check while housing prices rocket higher,

“You would be forgiven for wondering how Canadian inflation can remain so contained (1.1% in February), when home prices are soaring. Shelter costs are up just 1.4% year-over-year, almost a point lower than a year ago. How is that even remotely possible when the MLS HPI has jumped 17% y/y? First, the CPI’s homeowner replacement cost is drawn from new home prices. This is up 7% y/y, the fastest since 2007. But it tends to trail the HPI, and has much milder swings. Also, it has a modest 5% weight in the overall index, and is less than 1/5 of shelter costs. Second, rents have plunged in the past year, quickly going from a three-decade high in late 2019 to a 60- year low now. And rent has a larger weight than home prices at just over 6%. Third, mortgage rates are still dragging on shelter costs, down 5.4% y/y in February. The recent bond yield back-up will soon halt this drop, but the mortgage cost index is smoothed over time, and turns only slowly”

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“@SBarlow_ROB BMO: How inflation can stay tame during a housing bubble’ – (research excerpt, chart) Twitter

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BofA Securities economist Michelle Meyer explained the importance of Fed Chairman Jerome Powell’s comments Wednesday to investors,

“The median expectation is for the Fed to sit at the zero-lower-bound (ZLB) through 2023. This underscores three points: 1) Although the headline numbers will look impressive in 2023 – unemployment rate at 3.5% and core PCE at 2.1% -- it will be not be sufficient to justify a rate hike. The Fed is looking at broader measures of maximum employment which are not expected to be strong enough to justify a hike in 2023. 2) The Fed will look past exceptional data and even above-target inflation on the view that it is transitory. This means that the hurdle is high for the incoming data to adjust the Fed’s outlook for policy. 3) The Fed will not be preemptive but instead reactive. Powell underscored several times that the Fed will only react to actual data and will not signal policy changes based on expectations of growth and inflation”

“@SBarlow_ROB BoA: Why the Fed will let inflation pressure run” – (research excerpt) Twitter

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BMO’s New York-based strategist Brian Belski believes patient investors will be rewarded in Canadian industrial stocks,

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“Compared to the US, where Industrials include a wide range of sub-sectors including aerospace & defense, construction & engineering, electrical equipment, industrial conglomerates, machinery, the Canadian Industrials sector is focused on certain sub-sectors such as railways, waste companies and professional services, from a market weight perspective. Historically, such sectors have shown a strong correlation to certain economic indicators, for instance, according to BMO Transportation Research, the ISM PMI reading is highly correlated to rail volumes, leading carloads by four months. Waste management stocks typically follow housing starts, leading volume growth by 6-12 months. With such indicators pointing upward over the next 12 months, we believe there will be a cyclical rotation into Industrials with a focus on companies with earnings growth, improving profitability and strong free cash flow generation. As such, we believe investors should focus on rails, select manufacturers, and waste companies within Canadian stocks, especially those with a solid balance sheet and leveraged to the US.’

Mr. belski helpfully included a list of industrial stocks rated outperform by BMO analysts. These are Air Canada, Badger Daylighting Ltd., Bombardier Inc., Black Diamond Group Ltd., Ballard Power Systems Inc., Boyd Group Services Inc., CAE Inc., Cargojet Inc., CN Railway Co., CP Railway Ltd., Finning International Inc., GFL Environmental Inc., Morneau Shepell Inc., Mullen Group Ltd., NFI Group Inc., Stantec Inc., TFI International inc., Thomson Reuters Corp., and Waste Connections Inc.,

“@SBarlow_ROB BMO bullish on Canadian industrials’ – (research excerpt) Twitter

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Newsletter: “Portfolio managers cut tech holdings by most in 15 years” – Globe Investor

Diversion: “A large project underway to disease-proof pigs using CRISPR shows that gene editing might be able to give humans inborn “genetic vaccines” against the worst infectious diseases they might encounter” – M.I.T. Technology Review

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