The Globe and Mail’s market strategist offers eight thoughts on the research, analysis and ephemera that’s crossed his desk this week.
1. Scotiabank strategist Hugo Ste-Marie highlighted the release of the U.S. leading economic indicator index this week which, at minus-7.6 per cent year-over-year, is consistent with economic contraction and recession. The coincident leading indicator, however, is up 1.3 per cent year-over-year, and needs to decline in order to reaffirm the leading indicator signal.
2. BofA Securities analyst Ebrahim Poonawala wrote an update on Canadian bank stocks after describing them a “dicey proposition” in his 2024 report on the sector. He noted that almost half a trillion dollars in mortgages are scheduled to renew at much higher rates in 2024 and 2025, a blow to consumer financial health. The analyst expects “noisy” earnings reports from the banks as restructuring charges blur operating profit growth. Every 10 basis-point rise in provisions for credit losses represents a roughly 6-per-cent decline in profits. Consensus earnings estimates for 2024 have been reduced by 11 per cent so far this year. His notable ratings include a “buy” rating on TD Bank TD-T and an “underperform” on CIBC CM-T.
3. BMO chief economist Doug Porter noted that domestic credit growth came in at 2.9 per cent year-over-year, the lowest rate in 30 years. It’s also the first time in 30 years that credit growth has trailed disposable income improvement.
4. J.P. Morgan global equity strategist Mislav Matejka expects that weakening U.S. economic growth and falling corporate pricing power will place downward pricing pressure on banks, autos, consumer discretionary and (non-aerospace and defense) industrials.
5. CIBC economists Benjamin Tal and Katherine Judge published a report called Trying Times, an in-depth look at the domestic housing market with some remarkable data points. For one, new listings are up 31 per cent from the March, 2023, lows. The authors attribute this in part to “increased distress sales as owners list their properties due to financing issues as mortgages payments increase rapidly.” In the condo market, speculative investors owning multiple units are listing their properties aggressively as rising mortgage payments result in negative cash flow positions. Default rates generally remain low so far but CIBC also reports that “the current pace of slowing in mortgages outstanding is the fastest on record.
6. Goldman Sachs U.S. equity strategist David Kostin analyzed third-quarter executive conference calls and uncovered the four most common themes. These are concerns about higher interest costs, the importance of paying down debt, concerns about the negative effects of inflation on consumer demand and continued, broad investment in artificial intelligence.
7. Also from BofA Securities, oil and gas analyst Doug Leggate made two remarkable observations, one of which is very bullish for Canadian producers. One, he calculates that at current futures prices, 40 per cent of his coverage universe has zero upside from today’s stock prices. Second, he writes “Increasingly we see Canadian oils displacing midcap [U.S. exploration and production companies ] as the incremental investment opportunity to leverage [our] commodity outlook.”
8. TD economist Shernette Mcleod estimates that U.S. holiday spending will rise 4.5 per cent this year, down from 6.0 per cent in 2022. Wage gains and pandemic-era savings are supportive, offsetting weak sentiment and a shift toward services-related spending (like restaurants) that are not included as holiday spending.