Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Retail sales data is arguably the most important for the Canadian economy as it will provide the initial indicator that higher interest rates are starting to bite consumers. The most recent results announced Wednesday were much weaker than expected as CIBC economist Katherine Judge reports,
“Canadian consumers ended the second quarter on a cautious note, and unlike their American cousins, don’t seem to be rushing to the stores at the start of Q3. Retail sales rose by only 0.1% in June, and that modest increase was entirely driven by autos, some of which might have been ordered months ago, as non-auto sales were down by 0.8%. That compared to the consensus expectation of 0.0% and 0.3% for total and ex. auto sales, respectively. Compounding the soft tone of the release was a downward revision to the prior month, with ex-auto sales now showing a 0.3% decline, relative to a flat prior reading. In volume terms, sales were down by 0.2% in June, and are up by only 0.6% in year-over-year terms, which would look even weaker in per-capita terms given strong population growth over the past year… Goods consumption looks to have swung from a boost to a drag on growth in the second quarter, leaving business investment as a more important source of growth. Still, Q2 GDP is tracking only slightly below the Bank of Canada’s 1.5% forecast. We’ve pencilled in a final quarter point hike for September, but that’s a fairly close call and one that could be impacted if the flash estimate for July GDP looks weak enough”
“June’s retail sales signal slowdown in consumer spending” - The Globe and Mail
***
Richard Koo, chief economist at Nomura Research Institute, made an interesting point about the effectiveness of monetary policy in taming inflation,
“During the last 30 years, meanwhile, globalization has prompted many businesses to shift investment from their home to cheaper overseas locations. As a result, the net borrowings of US nonfinancial corporations, which averaged 3.44 per cent of GDP from 1970 to 1985, have dropped to an average of just 0.74 per cent of GDP since then. As such, much of the domestic credit creation that is influenced by monetary policy has been used to finance the purchase of existing assets, including share buybacks. Such purchases do not add to GDP, and fluctuations in asset prices are not included in inflation indicators such as consumer prices. Money supply data have therefore lost much of their indicative value, and the Fed removed the money supply from its panel of leading indicators many years ago. This implies that monetary policy now has much less influence over the real economy and the inflation rate than it did up until the mid-1980s, when there was no shortage of borrowers in the real economy. Meanwhile, the influence of monetary policy on asset prices has increased to the extent that a substantial portion of the credit created by financial institutions is now being earmarked for the purchase of existing assets”
***
HSBC’s head of equity strategy Nicole Inui sees more upside for the S&P 500,
“We still see upside to the S&P even with higher rates. At the current level of US treasury yields, our S&P target would fall to 4,500. Our S&P target for year-end 2023 is 4,600. Current yields and consensus EPS forecasts support a S&P target closer to 4,300, implying further downside if yields are sustained and EPS forecasts materialize, according to our model. We, however, are more constructive on earnings growth backed by strong economic data and 2Q earnings season beats… The last time treasure yields were consistently above 4 per cent, the S&P traded at a forward PE averaging c15.3x, or an 18-per-cent discount to today´s levels. Our Fixed Income strategists hold onto their view that yields will end the year at 3.0 per cent, but if the higher rates for longer narrative persists, valuations for US equities should remain under pressure … Strong macro data support earnings growth. The US economy is showing few signs of slowing down: latest unemployment rate at 3.5 per cent and 2Q GDP grew 2.4 per cent quarter-over-quarter annualized. Consensus GDP growth continues to grind higher with estimates of 2-per-cent growth for 2023, up from 0.3 per cent at the start of the year”
***
Diversion: “India Becomes the Fourth Country Ever to Land on the Moon” – Gizmodo
Scott Barlow