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

Morgan Stanley’s U.S equity strategist Michael Wilson, among the first to go bearish in late 2021, remains so,

“While we think there is still a long way to go before reality is fairly priced, investors may face a volatile path in the absence of an “event” to clear the decks … Whether it’s demand destruction, margin pressure, or both, we continue to think earnings forecasts are too high, particularly for 2023 … The rapid policy tightening we’ve seen year-to-date should serve as a headwind to growth well into next year … While most stocks this year have seen valuations reflect these concerns, the S&P 500 remains overvalued based on our framework that suggests the Equity Risk Premium (ERP) is significantly underpriced.”

“MS’s Wilson, “still a long way to go before reality is fairly priced”” – (research excerpt) Twitter


CIBC economist Avery Shenfeld wonders if U.S. wage inflation, particularly for union members, is set to push Canadian wages higher,

“News of a generous, multi-year wage settlement with US railway unions, which raised alarm bells over inflation risks stateside, have some questioning whether we should expect to see the same in Canada … the concerns are that this is a five-year package averaging close to 5% per year in wage hikes, partly backdated, but with a couple of years to run …worry had the Bank of Canada Governor wade into a bit of a PR pickle, when he warned Canadian businesses not to build in big wage hikes. He surely didn’t mean that workers shouldn’t bargain hard for what they could get, or that businesses shouldn’t pay what the market requires to get the staff they need today, even if it came off that way in the media.

“What he likely meant to say was that employers shouldn’t simply assume that we’ll have elevated inflation beyond the next few quarters. They should therefore be careful about locking themselves into pay gains … when it comes to union contracts in Canada, we haven’t seen the type of settlements that the rail workers achieved in the US, at least not yet.”

“Is inflation coming down the track?” - CIBC Economics


BofA Securities commodity strategist Francisco Blanch sees US$80 as the floor for Brent crude prices,

“As world GDP expands by just 2.5% next year, according to the BofA economics team, global oil demand growth should slow further. Weaker growth kicks in just as a strong dollar headwind and rising rates are poised to negatively impact oil demand in the coming months. Yet we do not expect a major pullback in oil prices, as OPEC+ has just delivered the first ever production cut signal above $90/bbl. Statements that the Strategic Petroleum Reserve (SPR) may start refilling at $80/bbl WTI should also support oil prices. Thus, as spare capacity dwindles and capex lags, we think $80/bbl is now the new $60 for Brent crude oil. Said differently, the “OPEC+ put” on average oil prices is higher today … we expect some gas-to-oil switching to lend support to Brent oil and we continue to forecast an average price of $100/bbl in 2023 (and $94 for WTI), with a 12 month target of $110/bbl. Still, we mark-to-market lower our 2H22 Brent call to $96.50/bbl on macro weakness.”

“BofA: $80 is the new floor for Brent” – (research excerpt) Twitter


Wells Fargo U.S. equity strategist Christopher Harvey believes the U.S. consumer is ‘running on fumes’,

“The Fed released US household balance sheet statistics for the June quarter, and as we forecasted three months ago, a drop in equity values drove a $6T (4.1%) decline in aggregate net worth to $144T. This was the largest quarterly decline in net worth since the onset of COVID, Equities fell 17%, from $38.4T to $32.0B, and to only 19.7% of total assets (Q1-end: 22.8%). The $32.0B is the lowest balance since 3Q20, and the 19.7% is the lowest since 2Q20. The decline in equities was only slightly offset by rising real estate values. Cash ticked slightly lower ($18.52T vs $18.65T), the first decline since 2Q19. Shrinking household balance sheets, the draw-down of excess savings, and the reliance on revolving credit (see charts below) suggest that the American consumer is running on fumes. A recession by the first half of 2023 may be inevitable

“Wells Fargo: U.S. recession ‘might be inevitable’” – (research excerpt) Twitter


Diversion: “Chess Is Just Poker Now” – The Atlantic

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