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Economic Impact

To keep you informed and stimulate your thinking, Stéfane Marion and Denis Girouard take a look at economic news and share their perspectives in our monthly informative videos.

Hello everyone, welcome to Economic Impact. Today is October 17th 2024, and as usual I am with our Chief Economist, Stéfane Marion, who exceptionally is in Calgary right now and we are at a distance. Hello, Stéfane, how are you today?

Good morning, Denis. So we're doing this remotely this morning.

Yeah, remotely exactly. Stéfane, you know, we've been talking about the stock market for a while and we said we should be prudent but despite of that, the stock market keeps going up.

Yeah, the enthusiasm is still there Denis. We're hitting an all-time high and it's in many regions of the world driven by both expectations of more rate cuts by the central banks. So we're talking about the synchronized monetary easing cycle and also expectations that, you know, we could have sizable fiscal stimulus from countries such as China that will help support global growth and obviously earnings going into. But I have to say, Denis, there's a lot of these expectations that are already embedded in current valuations.

And at the same time, you know, valuations are quite high compared to the past.

Yeah.

So if we look at this slide and the little red, you know, sorry– yellow dots shows the beginning of easing cycles in the US And you can see that it's exceptional for the US stock market to be valued at 21 or close to 21 times forward earnings at the beginning of an easing cycle. So there's only one precedent for such a situation, Denis. So again, we're navigating into unusual waters if you want and on certain waters, I would say when it comes to valuations on the stock market.

Yeah. And we're seeing on that graph that only a two time out of seven we saw the market going down after rates cuts. And you know, it's interesting to see where we are in the cycle compared to the past. But also, the next slide will show us how the market interprets, you know what's going on in term of you know, valuation and volatility. And I would say the first three lines, that's quite busy. But it's quite interesting because it shows, you know, as the market is doing different signals depending on what you look at.

Yeah, so you're right. So that, you know, the blue bar represents the range in which the market has already as traded in the past. The green line, if you want, the green number represents where we are now versus what you see on average in any other episodes. So you can see that valuations, you know, trading at, you know, almost 21 times forward earnings is quite high relative to the norm. The fact that, you know, earnings expectations are at 14% versus normal of 10% means that, you know, we're expecting significant growth in the months ahead. And the stock market has not really corrected historically the Fed starts cutting rates once the stock market starts correcting, which hasn't been the case this time around. So from a stock market, the first 3 bar show that, yeah, there's a lot of good news already expected in the stock market.

And at the same time, the last three bar are giving a different signal. The one what we call the MOVE is the volatility on the bond market, the VIX is the volatility on the stock market and after that the corporate spread and all of those data are, you know, below the line.

So historically the markets a little bit nervous because you know, the Fed starts cutting rates because maybe something's happening to the economy. So this time around the stock market is already concluded that this is a soft landing and other markets are saying it's going to be a perfect soft landing with no volatility. You can't get more perfect than this Denis because volatility for bonds or for the stock market is well below the historical average and corporate spreads are the least stress we've ever seen at the beginning of the easing cycles. So again, there's a very strong conviction in the markets that the soft landing is mission accomplished, and it only gets better from this point on.

Yeah. And but, you know, there's probably cloud above our head because when you look in the United States, you know, the very small business optimism is not there.

Yeah. So small businesses in US, and we said it before, the uncertainty index is important to look at because they account for 50% of job creation. So I do recognize that the latest jobs report in the US was stronger than expected. But, you know, it seems like it broke the trend from the past six months to me. But I don't think, you know, one month makes a trend. So we'll have to see another good employment report before we change our mind on a potential stress on US labor markets that could undermine profit expectations. But I have to say, people always claim that an election year is good for equities. It's been the case so far. I get this, Denis. But at the same time, we've never seen so much uncertainty prior to US election, and that's quite evident in this slide. So my point, Denis, here's, yeah, if we are going to change our view on the US economy, let's wait for another jobs report. But more importantly, let's wait for the result of the US election and to see whether it's contested or not by one of the two candidates. Both candidates could also contest. We'll see that, Denis. So I think, you know, going into the US election, we've never seen so much uncertainty. And at the small business level, that should transpire theoretically with less aggressive hiring. But let's see the next job report to see if I'm right or not on that one.

Yeah. And we won't wait too long because all of this will happen the beginning of November, then we'll know more really at the start of November about that.

When we meet next month in person, then we will be able to assess the whole situation.

Yeah, might be quite different. But if you come back in Canada, you know, the story is a bit different where, you know, the economy is not doing so well.

Yeah. So people are uncertain about this, you know, the health of the US economy. I have strong conviction that from a Canadian perspective, we're not that great. It's pretty weak. If you look at the manufacturing sector, it's stagnation. If you look at the service sector, it's contraction. So I know the latest jobs report in Canada, like in the US, was better than expected. But I think the uptrend on the unemployment rate is still intact. And that suggests that the Canadian economy is underperforming, Denis. So yes, we're looking at yet another quarter of weak growth in Canada. It's not a recession, Denis, don't get me wrong, but it's still below potential growth and it's underwhelming. And underwhelming growth means higher unemployment in the months ahead.

But probably more and bigger rate cuts have to come in Canada.

Yes, Denis, because underwhelming growth means that inflation is coming down quite significantly in Canada. So headline inflation surprised everyone at 1.6% only in September. Notice on this slide Denis, if you exclude the mortgage interest rate component, which you know the cost of financing your mortgage inflation is only at 1%. But Denis, if you exclude shelter on which the Bank of Canada has no control because of surging population growth, we're at 0.4%. Denis, that is extremely low, I cannot justify keeping rates where they are right now in Canada. I have to up the ante on rate cuts in Canada, 25 basis points is just too slow, they have to move to 50 basis points increment. And that's where the whole Canada.

But if you go province by province, some provinces are not that great too. They are in deflation situation right now, in territory of deflation.

Yeah, actually it's a good point. If you exclude, if you look at inflation, excluding shelter, it's at 0.4%, so anemic at the national level. But there are 4 provinces we're actually talking about deflation. So prices actually coming down if you exclude the shelter component. Those four provinces, Denis, it would be Quebec, Manitoba, New Brunswick and Saskatchewan. So you rarely see so many provinces showing deflation. So as I said before, the Bank of Canada, despite the rate cuts, monetary policy is overly restrictive. They need to start cutting rates by  basis points increment because now Denis what they've been doing, they've been cutting rates, but inflation is falling faster, which means that you're not you're not moving the needle on real interest rates. So 50 basis points would be my best guess for next week and another 50 basis points after that. We got to come back to % very quickly to help the economy for next year.

Well, on that positive note for consumers. Thank you very much for being with us, Stéfane. And hopefully next time we'll be close together in the same room. And thank you all for being with us. We'll see you next month, beginning of November.

Thank you.

Property Perspective

Our National Bank specialists decode the latest trends in the real estate market, including interest rates, the resale market and forecasts for the coming months.

Hello everyone, and welcome to the September 25th edition of Property Perspective. Today I have the pleasure to be with Matthieu Arseneau.

Hi Simon.

Hello Matthieu.

And with Veronique Corriveau, hello Veronique. Our topic of the day real estate and estate planning. But before we go into that interesting discussion with Veronique, um, let's talk with Matthieu about recent economic news that influence the real estate market. Matthieu, while the Bank of Canada slowly lowered its policy rate over the summer, announcing cuts of 25 basis points, the Federal Reserve, I believe, surprised the economist by announcing a cut of no less than 50 basis points in the first announcement in September. What pace of cut can we expect from the Bank of Canada now that the Fed has entered the dance. 

Yes, Simon that was a surprising one to that the Fed is going with the 50 basis point with the start of. So in this easing cycle that we are getting into, clearly it opens the door for the Bank of Canada to do more. If the if the Fed hadn't declined rates, it can have an impact when you decline rates on currency, pushing it down and ultimately lead to inflation. So when both central banks are going in the same direction, there's no impact on that front. And that opened the door for the Bank of Canada to go ahead perhaps with and I hope will be inspired by that kind of move. So increasing maybe 50 basis point cuts in the next meeting. Let's hope they will go in that direction. Clearly when we are looking at the inflation data a big milestone in August with the data that came out inflation at 2% on an annual basis, that's the goal of the Central Bank. So that was really good news. And if you exclude mortgage interest costs, we know the Central Bank is mainly responsible of that increase for that component. So if you exclude that component, we are only 1.2%. So for us clearly rates at those restrictive levels, it's not a good idea in the short term and they should decline rates faster over the next couple of meetings to bring back inflation rates much more neutral in the coming months.

Finally good news.

Good news on interest rate front, yeah.

Matthieu, we saw that controlling inflation has not come without economic cost, as evidenced by the rising unemployment rate. How do you assess the economic health of the labour market recently?

Exactly. It's not magic. Inflation has moderated because there's economic weakness. And when we look at the unemployment rate, in fact, it continued to increase during the summer and it's now at 6.6%. Not that high on historical basis, but still higher than it was prior to the pandemic. But there's not that much layoff at this point. It's much more hiring freeze on the macro perspective with corporations not hiring and a big increase in population. So as a result, it's the segment of population who tried to enter the labour market that are the most impacted at this point. If we look at the unemployment rate for people at the younger ones and recent immigrants, in fact, the cumulative increase since 2022 is as large as what we experienced during the global financial crisis of 2008, 2009. So for those segments of population is comparable to a recession at this point. So, and my concern Simon is the fact that job vacancy rates so are declining very fast. So that does not bode well for hiring in the coming months. In fact, it's the lowest since 2016, 2017 for those segments of population. So it's a, it's a warning for the Central Bank. Perhaps interest rates at those current levels are too high for the health of the labour market. As I recall unemployment rate at 6.6%, that was the level back in 2017 and rates were at 0.5% versus 4.25% at this point. So yes, I'm not saying that they should go there, but perhaps between 2.5% and 3%, very soon, that could be a good idea so we won't have too much damage on the labour market.

OK, remains to be seen. Matthieu, last question, what do you think of the government's latest announcement about raising the ceiling of insured mortgages from $1M to $1.5M and also giving first time buyers the option of repaying their loans over 30 years versus 25 years? Is it a good solution to the affordability challenges? We discussed a lot this affordability challenge over the past few months. For the first measure, the increase of the ceiling, we won't we don't expect that much impact because most of the transactions are way below this this threshold. So that's for this measure. For the other one, that could have material impact on the market, we made some calculations, and you can see the amounts are a bit different depending on the province, but just a general picture. For the same house, in fact, if you increase the amortization from 25 to 30 years, you have a decline of payment of 9% on a monthly basis. And if you maintain the same, the same payment, you can buy a house 10% higher in terms of price. So that gives you a leeway. But the big question here is, is it more affordable when you pay your mortgage for a longer period? So that's the first question. And if this option became very popular at some point, there could be an adjustment in prices given this increase in purchasing power of first-time home buyers and it will reverse the initial intentions. So that's, that's the tricky part. No evident solution with that kind of measure.

Alright Matthieu, thank you very much for your very, as usual, interesting comments. Thank you. Let's now discuss with Veronique, hello Veronique.

Hello.

About the real estate as part of the estate planning process, many of us put off these important decisions thinking that they are either too complex or not necessary. Yet when the time comes, navigating the legal and also emotional aspect of passing down property down can feel overwhelming. Veronique, a notary of extensive experience is here to shed light on the basics and help us take the first step toward thoughtful thinking. To start, can you please explain why having a will is so important, especially when real estate is involved?

Yeah, it's important to have a will to ensure that we do not leave our wishes to chance. Having a will allows the testator to decide for himself who will inherit his property and to choose the person or the people who will administrate the property in the process of liquidating an estate. For example, in the case of common law partners, if you die without a will, your partner could find himself co-owner of the building with your legal heirs. It's not perfect.

You could say that. Véronique, one of the key aspects of estate planning is the transfer, obviously, of ownership after someone passes away. Can you quickly walk us through the process of transferring real estate ownership from a deceased person to their heirs?

When you inherit real estate, the liquidator of the estate must transfer the title of the property. This is what we call in legal language the "declaration of transmission". By this act, the succession transfers the property right to the heirs, so the new owner of the building. It is a myth that we often have to deconstruct that the transfer does not take place automatically in the will. This act formalizes everything.

OK. Finally, Véronique, what specific considerations should heirs be aware of when inheriting real estate are there some challenges, pitfalls that they should be prepared for?

I can give you some examples. We can think of the co-ownership of real estate. For example, in this situation we should think about how they will administer the property together. Sometimes we can see some family dynamics in this kind of situation. We can also think of bequests of a building to minor children. If the bequest was made with or without a protection mechanism. This situation can complicate the administration of the child's property, and we have to think for the tax aspect too. It can bring us for example, a lack of liquidity when we put heirs in an unknown situation for the for the taxes.

You're right, so important to consider. So thank you Véronique for sharing your insights today. Estate planning, especially when it involves a real estate as we just saw, can be overwhelming at times. But as we discussed, taking the time to plan ahead can make a world of difference for your loved ones. We hope today's conversation has helped clarify the process of estate planning and real estate transfers and don't hesitate to discuss that important topic with your advisor. So thank you all for watching and see you in the next weeks for your next edition of Property Perspective. Thank you.

5 • 4 • 3 Market Outlook

5 minutes, 4 graphs, 3 key takeaways! Discover a fresh focused quarterly review of markets, the economy and investments with expert Louis Lajoie from our CIO Office.

Hello, everyone. Today is September 10. We're going to take stock of how the markets and the economy have evolved over the last few months and what that likely means for what's to come. So if we begin by looking at how the equity market has behaved year to date. We remember that in Q1, we had a very substantial upsurge in equity markets, followed by in Q2 a somewhat more hesitant price action. And in Q3, so far, it has been much more volatile, although equity markets remain largely positive year to date. But what's new here is that bonds have actually been doing some catch up against the rest of the market, now actually even above what cash has returned year today. So as you can see, the race is tightening across asset classes.

And the key factor behind that is actually what we've been talking about for some time, a further slowdown in the labour market, featuring an increase in the unemployment rates, which to be clear remains far from being dramatic, just barely above 4%. But what's more worrisome is that historically, whenever the unemployment rate begins to rise, it usually keeps on rising, especially when we reach a certain threshold, which we did, and reaching above the Sahm rule, which is a recession indicator that's never been mistaken since the 1950s.

Now, I want to be clear: the U.S. economy is still too strong to be deemed in a recession. But what's equally clear is that the warning signal has been heard at the Fed. And indeed, we've seen markets review their rates expectation accordingly much lower and indeed, in all likelihood will see a first rate cut by the U.S. Federal Reserve this month. Now, if we know that now that the Fed's about to begin cutting rates, the follow up questions is where is it going to stop? And right now, markets expect the Fed to stop somewhere in the neutral range, which is totally reasonable against the current backdrop. But bear in mind that if we were to base our expectations simply on the average response from the Fed following a similar rise in the unemployment rate, we would instead be talking about a policy rate that could be close to 2%. That is essentially where it was just before the pandemic. And I want to be clear again, we're not there yet. That's not the base case here. But we should expect rate expectations to move quite a bit over the coming in the coming few months.

If we do the exact same or similar actually exercise with how the equity markets have fared around previous rises in the unemployment rate, what we see is that on average, stocks were already on the downtrend, a downtrend that typically continues for a few more months only to see stocks bounce back and finish the year positive, as you can see here. And obviously that's not the exact path that current markets are following. Stocks are actually on an uptrend this time around. And it's not all that surprising either that we're not following that pattern to the letter, knowing that there's a wide range of historical path behind that average featuring, for instance, both an increase and a drop of nearly 40% at some time. So I guess both optimists and pessimists can conclude what they want here. But in their mind, this all boils down to a backdrop in the near term that's probably more fragile for stocks, without necessarily meaning that this story will end up with losses over a one-year horizon. Hence why it will be important for investors to stay the course in the face of inevitable ups and downs that are ahead of us.

To conclude, so as I said earlier, the overall picture is a rather positive one for markets and especially so for bonds with the last quarter that, you know, recoup some of their losses or actually lost ground against the rest of the market. Even now beating cash in the face of an increase in unemployment rate, which has confirmed that the Fed is about to cut its policy rate as we have seen elsewhere in the world, including here in Canada. And for investors, it likely means a volatile year end. But the good news here is that with inflation now taking the backseat – note that I didn't talk about inflation, I believe that's a first –, we can better rely on bonds to play their diversification role should the economic backdrop deteriorate further.

That's it for today. Thank you for listening and we will talk again in December.

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