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

Scotiabank strategist Simone Arel outlined the ominous economic signs from bond markets (my emphasis),

“Yield curves are back into the spotlight lately, with many segments inverting in the past few weeks. As flagged ...four out of ten U.S. yield curve segments that we track are currently inverted. Their average level has also fallen to 16bp, a highly concerning print as a negative level tends to be a strong predictor of economic contractions. Looking back at the last 10 U.S. recessions, all were preceded by an avg. negative YC signal by at least 5 months, while only once did the yield curve invert without a recession (1966). In Canada , 50% of key segments are now with the avg YC level falling slightly below 0. So far, on both sides of the border, all 3-month curve combinations (3M-2Yr, 3M-5Yr, 3M-10Yr, and 3M-30Yr) have been spared from inversions. Nonetheless, looking at the U.S. Treasury 3-month/10-year forward curve, markets are pricing an inversion within weeks. Our U.S. 10-Yr yield Fair Value model is also hinting at an imminent inversion given its estimated fair value at 2.54% and 3M yields at 2.47% (vs. actual 10-yr yield hovering around 2.80% currently). The Fed is likely to keep this in mind today as it ponders the appropriate rate hike size and communication tone. Peak-ish inflation and an abundance of slowdown signals may imply that it will try to shift investors’ focus towards some sort of monetary easing in 2023 if inflation eases in order to avoid a hard landing”

“Scotiabank, “Yield Curves Flash Red on Both Sides of the Border”” – (research excerpt) Twitter


Morgan Stanley economist Rajeev Sibal provided an update on global food prices,

“The median peak inflationary effect of food price shocks occurs six months after the shock. As we reach that point after the Russian invasion of Ukraine and food prices show a near-term peak, we analyze second-round effects of food price shocks and the persistence of domestic inflation in EMs … Comparing across EM economies, what mattered was not the relative exposure of a country to standard agricultural metrics, but rather the sustainability of fiscal policy. The viability of food-related subsidy programs relative to the domestic economy is what actually matters for inflation persistence. It is not a simple story that net exporters “win” and net importers “lose. .. Overall, higher food prices have been a clear negative for EM sovereign credit… Even among the supposed beneficiaries of high food prices, the benefits are not clear due to offsetting factors, such as for Brazil, Argentina and South Africa credit. Instead, we suggest positioning in those credits that have underperformed significantly on a year-to-date basis, in part due to higher food and energy prices, but where we see the impact as manageable, especially if the shock is peaking. We find that the Dominican Republic, El Salvador and Nigeria fit this bucket. On the other hand, if food prices were to rebound again, we would expect Pakistan, Kenya, Ghana and Egypt to be the larger underperformers.”


Goldman Sachs strategist Ryan Hammond does not think it’s time to invest in high growth, low profit stocks,

“EV/sales multiple for the typical Russell 3000 stock has declined by 23% YTD, compared with a 58% decline for the typical stock with 30%+ expected sales growth. In absolute terms, the median high-growth stock has de-rated from a peak EV/sales of 14x in 2021 to 4x today, slightly below its median since 1995. However, following both the Tech Bubble and GFC, growth stock EV/sales multiples troughed at roughly 2x. The median growth stock also trades modestly below the valuation that would be indicated today based on the historical relationship with real rates … Currently profitable growth stocks may be able to finance continuing operations through retained cash flow. However, some unprofitable growth companies will need to raise capital externally in order to remain solvent … The rising cost of capital, tightening financial conditions, and growing recession risk will limit the potential valuation upside for unprofitable growth stocks.”

“Not time for high growth, low profit stocks (GS)” – (research excerpt) Twitter


Diversion: “Miners unearth pink diamond believed to be largest seen in 300 years” –

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