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

CIBC economist Avery Shenfeld’s weekly column was called If it gets ugly, how ugly will it get?,

“One certainly can’t rule out that the combination of monetary tightening here and abroad ends up in an unintended recession. And so, the question we’re being asked is, if it gets ugly, how ugly will it get? Just what kind of recession are we likely to see in Canada if it turns out that we’re overdoing it on rate hikes?... Unlike 2020, or 2007-08, when core inflation was reasonably well-contained when the recession hit, the Bank of Canada won’t be rushing to the rescue with rate cuts at the first whiff of trouble, because it’s actually looking to open up some economic slack. Economic data are reported with a lag, and a stall in growth might not look that different from an outright recession at first. As a result, many months could tick by before it’s clear that the slowdown is more severe than intended … If there’s a silver lining, it’s that while monetary easing won’t come quickly, and we could remain in a recession for several quarters, it’s likely to offer a greater boost to Canada’s economy than it could in 2020 … [The housing] sector could turn from bust to boom again should we need a monetary easing to dig us out of a bigger economic hole than was intended to battle inflation. So while housing is feeling a disproportionate share of the pain from monetary tightening, it’s waiting in the wings”

“”If it gets ugly, how ugly will it get?” – CIBC Economics

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This is the last big week of U.S. earnings reports and BofA Securities U.S. quantitative strategist Savita Subramanian warned investors to watch for downward earnings guidance,

“3Q wasn’t an ugly quarter, with EPS tracking just 1% below consensus and in line with our forecast (+2% year-over-year). But it wasn’t great either: this would mark only the third miss post-GFC, and 54% of reporters (ex-Fins) had negative real sales growth. But the big risk is in forward estimates: 4Q EPS has been cut by 2% month-to-date, but for reported companies, 4Q estimates fell more, -4%, suggesting further downside risk as analysts update their estimates after results. 2023 EPS also started to get cut (-2% MTD), but it is still tracking above the historical revision trend and well above the prior two recessions. Our 1-mo. earnings revisions ratio (# of upward vs. downward revisions) is tracking at just 0.26x in October, the 5th percentile in history… Misses are getting punished, underperforming the S&P 500 by 667bps the next day, the largest in history. This paints an ominous picture: 2Q11 was the closest analogy when misses underperformed by 515bps, during which the S&P 500 fell 18% peak to trough”.

“BofA: “Our 1-mo. earnings revisions ratio (# of upward vs. downward revisions) is tracking at just 0.26x in October, the 5th percentile in history”” – (research excerpt) Twitter

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The previously bearish Michael Wilson, Morgan Stanley’s chief investment officer, now believes in a “Fed pivot sooner rather than later,”

“Until NTM [next 12 months] EPS estimates come down meaningfully the rally can continue, particularly if the Fed meeting leads to lower rates. 4150 is achievable but stay disciplined with 3700 stop loss… Spooky price action supports tactical call ... Weak 3Q earnings hammered some of the biggest tech darlings [last week] , yet the S&P 500 and even the Nasdaq 100 ended the week up 4% and 2%, respectively ... We think this jibes with our thesis that the index will hold up until NTM EPS estimates come down more meaningfully. This kind of price action isn’t unusual toward the end of the cycle particularly as the Fed moves closer to the end of its tightening campaign, something we think is approaching.3M-10Y yield curve inversion, a negative y/y % change in the Duncan Leading Indicator, and M2 growth that is plummeting toward zero all support a Fed pivot sooner rather than later. Therefore, this week’s Fed meeting is critical for the rally to continue, pause or even end completely.”

“MS: “Fed pivot sooner rather than later”” – (research excerpt) Twitter

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Diversion: “Jack White can name any Beatles song in one second. Can you?” – A Journal of Musical Things

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