Daily roundup of research and analysis from he Globe and Mail’s market strategist Scott Barlow
Deutsche Bank strategist Binky Chadha sees economic data consistent with a decline into recession,
“The outlook from here looks pretty binary … Depending on whether we slip into an imminent recession in which case there is further downside (S&P 500 3000) or we don’t in which case we see a strong rally back to this year’s highs (4750) … Our preferred approach is to use a wide set of indicators for monitoring cyclical turns, sorting them by the leads by which they typically turn and color coding them in traffic light style. Presently, those that turn early, 6 months or more before, are predominantly red (have already turned down) and yellow (flattening or modest turn down so far); those that turn 1-5 months before are mostly a mix of red and green (no sign of a turn down); those that turn late are predominantly green … Consumer indicators have clearly turned down and are flashing red, industrial indicators are mixed … The set of macro indicators is consistent with a descent into recession but are not signaling we are already there”
“DB: ‘The set of macro indicators is consistent with a descent into recession but are not signaling we are already there”” - - (research excerpt) Twitter
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Commodity prices indicate that the loonie should be higher. BofA Securities analyst John Shin explains what’s happening,
“Despite high commodity prices producing a highly-positive terms-of-trade shock for Canada, CAD has yet to fully respond. More importantly in our view, global risk aversion remains high amid concerns around Russia’s invasion of Ukraine, the pandemic, persistently high inflation, and now growing likelihood of a recession in the US. This change in sentiment has effectively caused CAD risk premium to remain persistently elevated. We continue to expect that as risk aversion normalizes, USDCAD will resume its decline and recouple back to fundamentals. Forecast: raising USD-CAD profile, now focused on $1.25 [CADUSD $0.80] We raise modestly our USD-CAD profile, but still look for some CAD upside, with a forecast of 1.27 [CADUSD $0.79] for end-Q3 and a focus around 1.25 afterward.”
“The loonie should be higher but isn’t (BofA)” – (research excerpt) Twitter
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BMO economist Sal Guatieri finds evidence the market has confidence in the Federal Reserve,
“The Fed’s tough talk and recent actions may not have convinced households that the inflation dragon will be slayed, but it is winning over bond investors. After touching an 8-year peak of 2.7% in mid-April, the TIPS implied five-year forward inflation rate is down to 2.3%, just two ticks above the past-decade norm. If this holds, it would limit the climb in bond yields even as the Fed tightens policy further. The dark lining, of course, is that investors sense a recession (and mounting worker casualties) might be needed to win the battle”
“BMO: Investors Believe Fed Will Win Inflation War” – (research excerpt) Twitter
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Diversion: “Kate Bush Has Thoughts About Her Massive Stranger Things-Inspired Success” – Gizmodo
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Scott Barlow