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

Morgan Stanley chief economist Seth Carpenter wrote the firm’s Sunday Start weekly report and entitled it The Brewing Storm,

“The clouds of recession are gathering globally. The Chinese economy contracted in 2Q. The US notched a ‘technical recession.’ The flow of natural gas to Western Europe is restricted. In the past three months, we have revised down our forecast for global growth to 2.5%Y in 2022, which is about 50bp below consensus and 40bp lower than in May. We are edging closer to the bear scenario from our May Mid-year Outlook. Is a global recession upon us? … Recession is our baseline view for the euro area. The flow of natural gas from Russia has been restricted, prices have surged, and we see weak growth through the end of the year … I am only slightly more optimistic about growth in the US … The world has been simultaneously hit by supply, commodity, and dollar shocks. Central banks are pulling back on demand to contain inflation. But even as we start to glimpse the other side of the inflation peak, the full effects of rate hikes are not yet manifest in the economy. Even if we avoid a global recession, it is hard to see economic activity getting back to its pre-Covid trend.”

“From MS’s “The Brewing Storm”” – (research excerpt) Twitter


BofA Securities U.S. quantitative strategist Savita Subramanian pointed out the lack of breadth in U.S. inflation-adjusted sales growth,

“The refrain we hear from bulls is that corporates did better than expected in 2Q - the S&P 500 grew sales by 15%! But most of that was driven by Energy’s +77% year-over-year sales growth. Just 53% of S&P 500 companies had sales growth that cleared inflation; the most crowded, growth-y sectors (Comm. Svcs. and Tech) sported negative real sales growth. Since 1964, sales growth has been strongly correlated with CPI (even slowing CPI) but earnings have not been. Sales growth is easy when inflation is high, and the market figured this out in the 70s: the S&P 500 Price to Sales ratio (P/S) compressed by an avg. of 40% during the three inflation cycles. Today we may be assigning too much credit to sales: since May 2020′s CPI trough, P/S expanded by 15%. "

“BofA: “Half of the S&P 500 has no real growth”” – (research excerpt) Twitter


CIBC economist Avery Shenfeld believes the equity market is over-estimating potential help from central banks,

“Investors are hoping that central bankers are ready to bend over backwards to help them out, or will be next year. A look at the US futures curve, for example, sees markets expecting the Fed’s target rate to get a bit above 3½%, but start to build in rate cuts over the latter half of 2023. In the US, prospects for such cuts were seriously dimmed after the huge gains reported for July payrolls and the Q2 employment cost index, but they were revived somewhat after July’s deceleration in core CPI. .. Sure, if we went into an outright recession with policy rates in the mid-3% range, there’s little doubt that the central bankers would see enough of a further slide in inflation that they would have room to provide some rate relief… But the equity market can’t really be cheering about an oncoming recession. Its hopes must rest on some combination of continued growth to support earnings, but lower inflation that convinces the central bankers to ease off. From our perspective, that something-for-everyone combination looks implausible, at least for 2023. There is indeed a path to sharply lower inflation next year in the absence of a recession. But it’s not 2023 inflation prospects that would prevent a rate-cut in that scenario. It’s the 2024 CPI outlook.”

“The Week Ahead: Are central banks ready to bend over backwards?” – CIBC Economics


Diversion: “If You Live on the East Coast, Your Mission Is to Squash These Bugs” – Gizmodo

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