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Hello, everyone and welcome to Economic Impact. Today is July 11, 2024, and as usual, I am with our Chief Economist, Stéfane Marion. Good morning, Stéfane.

Good morning, Denis.

Once again, we're going to start with the performance of the stock market. It's going well, huh?

Yeah, it's been a hot summer, not just temperature wise. Stock market is on fire. We have records pretty much everywhere around the planet. Notice, Denis, if we focus on the US it’s 17% up this year, but driven by sectors, 2 sector sectors in particular, it's anything related to IT or technology, media and telcos. Yeah.

And they're doing very, very well compared to the rest of the other sectors.

Massively well. So much so that you know, the market share of the TMT sector now accounts for 40% of the S&P 500's valuation, which is a big deal Denis because we haven't seen this in 20 years. So keep this in mind. It represents 40% of the market cap of US equities, but only 24% of earnings. So there's high hopes that to hear that the this sector will continue to deliver on the earnings front.

And not only analysts have hopes for the TMT sectors, but they have hopes also for the whole economy.

Oh yeah. And it's not just that, you know, earnings will continue to do well. It's actually that they will even do better going into the next 12 months. So economy wide US expectations for earnings to accelerate from, you know, roughly 8% where we are now to growth of 13%. Notice on the slide too for the IT sector, the expectations, as you will pick up speed on the earnings growth and reach a pretty impressive figure in the next 12 months, 20%, Denis. So you better hope that everything is fine.

They're drinking nice Kool-Aid, maybe. If you look at the economy and the news that we have and the data that we're collecting so far, it doesn't show that.

I don't mind if they're doing Kool-Aid, but there might be too much sugar in that Kool-Aid right now. Because if you look at the economic surprise index in the US, then it's the worst reading since 2015. So it's been a massive downward surprise recently. It doesn't mean that the economy is not growing, Denis, it's just growing much less rapidly than what we've seen in the past. And this is what you have to take into context. If your economic surprises are negative, can you actually deliver on better earnings growth? And what history suggests is, given the current reading that we're seeing on economic surprise, which is a 2 standard deviation, historically, earnings are actually revised down as opposed to being revised up. So that's the challenge for equity market price for perfection with an economy that does not decelerate. But unfortunately, that's not what we're seeing right now. Economic surprise suggests deceleration.

Yeah. To make things worse, the labor markets, you know, keep deteriorating.

So this is a topic we addressed in the past. You know, in order to, you know, boost your earnings, if you can't do with the higher sells, you have to increase your profit margins. If you increase your profit margins you might need to reposition your hiring pace. And what we're seeing in US right now is the unemployment rate is on the rise up above 4% for the first time since 2021. So clearly that's a big-ticket item for the economy because that's that 60% of GDP in US is determined by consumer spending. I can tell you that when the unemployment rate is rising, Denis, historically consumer spending does not accelerate.

And to keep going in the same direction. Our leading economic indicator keeps going downward.

Yeah, so this is where we are now. So the unemployment rate would be more coincident. So what about the outlook? Well, if you look at leading indicators in the US and leading economic indicators, it's actually back to where it was at the worst of the COVID recession. So again, Denis, it's just to say that anticipating a better economy in the months ahead might be a challenge because most indicators would suggest a weaker economy, not a stronger economy, which opens the door for rate cuts, don't get me wrong. But will the Fed be able to cut rates aggressively given where we already are and that monetary policy remains restrictive? So again, it's a challenge for earnings growth in the months ahead.

And if we come back to Canada, we'll look at the, you know, jobless rate. Not that good too. Well, it was 6.5% of the national level. But if you want to dig a little bit deeper to look at younger people, 15- to 24-year-old, I mean, you know, it's an unemployment rate above 13% for the first time in a decade so there's got to be some frustrated parents around the table nowadays. And it is an issue. And it does show that once the economy starts doing worse, well, yeah, younger people will be hit first. And this is exactly what we're seeing right now. So there's clearly a deceleration of the economy that's ongoing right now in this country. So let's not be too greedy on earnings growth also from a Canadian perspective.

Yeah. And at the same time, you know, we talked quite a lot about the soft landing. Is it still true? Well, the Bank of Canada has been, you know, going public saying that it's mission accomplished on a soft landing or it looks good for that. I would say, well, depends. Denis, there will always be a landing. I don't know if it's going to be soft or hard, but I can tell you in the GTA right now, the Greater Toronto Area, which is 20% of the Canadian economy, retail sales are actually contracting. And that's a reflection of deterioration in labor markets, restrictive monetary policy, mortgage interest rate resets, right. So yes, the economy is clearly slowing from beginning in perspective. So I don't know yet whether it's mission accomplished on a soft landing or not. I do believe that the Bank of Canada is in position to cut rates a little bit more aggressively in the months ahead. But monetary policy will still be restrictive by the end of this year, meaning the economy will underperform.

And to wrap it up a little bit, you know, we're seeing an economy that is slowing down then probably more rate cuts. But at the same time, we have analysts that have a prediction of pretty nice growth of, you know, revenue of a company or bottom line of a company. We need to be careful here.

Yeah, the next few weeks will be very telling. No, next few weeks will be very telling. We're about to start the earnings reporting season. So let's keep an eye on that. I do believe Denis, as you say that expectations are too aggressive from my standpoint.

We haven't talked inflation yet. It's our favorite subject. Now you're bringing us on what's going on in the eurozone.

Yeah, because you asked me to speak to politicians and I have to speak to politicians I have to speak to inflation at the same time. We saw elections in Europe where the incumbents have been defeated and the parties have been elected, whether it's UK or France, are promising to deliver on services to their people, but I'm just not sure they can be very aggressive on that front. And what that does is when you have these politicians that are promising more fiscal stimulus, well, that keeps your inflation and service component higher, which limits the ability for central bank to cut rates. And Denis that's a reality in the US, in Europe, even from a Canadian perspective, and that brings the great uncertainty as we look towards the next 12 months in 2025, how will central banks be able to cut rates if politicians continue to promise to spend more? And if you promise to spend more, keep an eye on service inflation that will determine the ability of these central banks to cut or not. Right now, I have to say some cuts are coming, but they cannot cut aggressively because of politicians.

OK, on that thank you, Stéfane. Thank you, everyone for being with us today. We'll see you back in September because in August, you know, it's holiday season for us too. Then hopefully we'll see you back in September. Thank you for joining us today.

Hello, everyone and welcome to Economic Impact. Today is June 11th, 2024 and I am with our Chief Economist, Stefane Marion. Hello, Stefane! Morning. How are you today?

I'm good. Thank you very much.

Stefane, for change, we're going to start with rates or inflation?

We've been talking about potential rate cuts for a long time Denis. I don't know how many months it's been. First rate cuts in over four year... Last time we had a rate cut in Canada was the US presidential election. And so be it. We have rate cuts on the same year that we got another presidential election in the US but I don't think it's because of the US election that they're cutting rates.

I don't think so.

Now they're cutting rates because we're feeling the impact of restrictive monetary policy and case in point, profitability of US, of Canadian corporation has been declining in recent months. So yeah, I think it was time to cut rates. And at the same time, we're seeing a private employment kind of a stagnation. Well, I used to think policy makers or politicians don't like to admit if you don't have profits in your economy, there's a good chance that private sector employment won't do well. And the reality is with lack of profits, we've seen some stagnation in terms of private sector jobs. And you know Denis, the latest employment report in Canada show that on a monthly basis, the month of May was not very good, with seven of 10 provinces reporting a decline in job creation. It's actually outright job contraction. So yeah, you know what? It was time to cut rates.

And once again, when you're looking at the inflation, you know the ex shelter is still going down. Yeah, so I will admit to the fact that I know you're asking me that. Can I just look at employment? No, the BoC actually targets inflation, not the level of employment or the unemployment rate. And when you look at overall inflation at 2.7%, you could argue while it's still well above the 2% target, however, it's really is a shelter component that's driving the show. Excluding shelter 1.2%, yeah, the bank account was justified to cut rates. And who knows they and I do believe this is going to happen with rate cuts. You might entice property builders to bring us more supply of housing, which is desperately needed in Canada at this point in time.

That's quite interesting because lowering rates sometimes doesn't mean that you know the inflation will go down. Now it's the case because you're going to build more houses and probably that component will go down and it will help.

Permit and process the need because it's the first time that the Bank of Canada faces an environment where shelter is decelerating, where our shelter is accelerating. You never see this. But we've never seen this type of demographic growth or population growth. We've been speaking about that in 2024, it's going to be a very big year in terms of population growth. So yeah, it's an experiment in process. So I think you can think that those rate cuts, but it might entice more supplies. So let's see what happens in the coming months. And to add to all of this, economic data are not that good. No, not on the other side of the border in the US. So you you can see the Canadian side was decelerating. And in US as our main training partners still to this day, economic surprises have turned more negative in recent weeks. So clearly the impact of restrictive monetary policy is now being noticed in the US. And at the same time, US full time employment is going down. Yeah, so total employment was above expectation in May, but guess what full time jobs were down for the, I think the fifth time in six months and then you were down 1% year over year. It's a decline that's never been observed in the US outside the recession. So I think this is where corporations are also trying to protect the profit margins. They're hiring, but they're no only hiring part time, which doesn't speak to superb economic growth for the second-half of the year for the US. And with all of those good news that should bring rates down in the United States. Inflation is still high. Yeah. No, the Fed is handcuffed right now because we've had 4 consecutive months where the monthly change in inflation on an annualized basis is well above the 2% target, you know that the Fed would like to see. So no, you can't cut rates aggressively right now. So even though the job market is slowing down, the Fed is handcuffed. It's unable to provide fiscal or monetary stimulus as quickly as Canada. This is where we're seeing a big difference between the inflation in Canada and the inflation in the US. You know, the, let's say the data are different, the components are totally different, The source of inflation is different. In Canada, 70% of inflation is driven by supply issues, mostly because of the shelter component of CPI. In US it's only 30%. So 70% is driven by demand factors, which has been stimulated by this fiscal policy in the US. This is the US election year. So they've deployed the most aggressive fiscal stimulus in U.S. history with the unemployment below 4%. That generates inflation. Yeah, for sure. And at the same time, you know, to make things even worse or more difficult to predict, we see the shipping costs going up once again. So, you know, we've said before you have to manage your portfolio risk, but you have to have to manage uncertainty because of politicians. And while with all these fights between countries about, you know, tariffs, protectionism, etcetera, shipping costs are up 400% since the start of 2024. So that makes your inflation outlook slightly more uncertain as these politicians come in with more tariffs. So that's why the Fed can't act quickly. There's some resilience in inflation coming that from these policy maker. And that will affect all country no matter what. I absolutely believe so. So, yes. OK. And now if we talk about performance and return, assets did quite well, except bonds. Yeah, so, so far so good. 2024 has been the first half anyway, has been a good vintage. Every asset classes are up except the bond market. So for Canadian investors, we, we, we've done great this year considering all the challenges, but there's a lot of good news embedded in these, in these, in these evaluations. So I can't promise that we're going to get the same type of return in the second-half this year. Note Denis that what frustrates me on this is that the stock market has done well... Canada, not so good. It's still a positive return, don't get me wrong. But we are trailing the rest of the world when it comes to the performance of our stock market. And we tought just at our last Economic Impact, you know, and this time, once again, we see the gap going wider. Yeah. So the reason we're not performing as well as the other stock market is because the S&P/TSX is not seeing multiple expansion as aggressive as what we see elsewhere, so much so that we're trading in the second quarter of this year right now, where we are now at a nearest direct discount to the US. So yeah, hopefully we'll do better in 2025. Clearly, this is abnormal and reflects some unease about the Canadian economy. And with that data and that statistic, you know, we can translate that with investor demand in Canada and we see that the investors are not buying canadian asset. Yeah. So, yeah, there's a discount, no multiple expansion is because we're facing continued outflows from foreign investors. So if you look at net foreign purchases of Canadian equities, they've been on a trend decline since 2023. So 18 months, Denis. Hopefully the worst is behind. We're getting rate cuts in Canada that should stimulate profits and hopefully 2015 will show a better year in terms of economic policies. It's an election year. We're going to get fiscal stimulus. So hopefully we do better because clearly this is a trend that has never been observed outside the Canadian recession. So surely things are better than that in Canada. We'll see for 2025. OK, We start with rate cuts. We have to finish with rate cuts. How many rate cuts and where's the floor? So, I would think that maybe we can go, two to three times more by the end of this year. Monetary policy will still be restrictive. Now you're asking me how low can we go? I don't think we can go much lower than 3% Denis and again, the geopolitical backdrop argues for maybe stick your inflation globally. And as I said before, the reason why we see maybe less rate cuts in 2025 or the pace of rate cuts is more uncertain because we're going to get this fiscal stimulus in 2025 in Canada. So, ... good news, Denis, yes, more rate cuts coming this year and let's not be greedy on how many we're going to see though. OK, well on that, thank you, Stefane. Thank you everyone for being with us. Hopefully we'll see you next time in July. See you.