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Hello everyone, welcome to Economic Impact. Today is October 17^th 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.

Hello, everyone and welcome to Economic Impact. Today is July 11, 2024, and as usual, I am with our Chief Economist, Stéfane Marion. Good morning, Stéfane.

Good morning, Denis.

Once again, we're going to start with the performance of the stock market. It's going well, huh?

Yeah, it's been a hot summer, not just temperature wise. Stock market is on fire. We have records pretty much everywhere around the planet. Notice, Denis, if we focus on the US it’s 17% up this year, but driven by sectors, 2 sector sectors in particular, it's anything related to IT or technology, media and telcos. Yeah.

And they're doing very, very well compared to the rest of the other sectors.

Massively well. So much so that you know, the market share of the TMT sector now accounts for 40% of the S&P 500's valuation, which is a big deal Denis because we haven't seen this in 20 years. So keep this in mind. It represents 40% of the market cap of US equities, but only 24% of earnings. So there's high hopes that to hear that the this sector will continue to deliver on the earnings front.

And not only analysts have hopes for the TMT sectors, but they have hopes also for the whole economy.

Oh yeah. And it's not just that, you know, earnings will continue to do well. It's actually that they will even do better going into the next 12 months. So economy wide US expectations for earnings to accelerate from, you know, roughly 8% where we are now to growth of 13%. Notice on the slide too for the IT sector, the expectations, as you will pick up speed on the earnings growth and reach a pretty impressive figure in the next 12 months, 20%, Denis. So you better hope that everything is fine.

They're drinking nice Kool-Aid, maybe. If you look at the economy and the news that we have and the data that we're collecting so far, it doesn't show that.

I don't mind if they're doing Kool-Aid, but there might be too much sugar in that Kool-Aid right now. Because if you look at the economic surprise index in the US, then it's the worst reading since 2015. So it's been a massive downward surprise recently. It doesn't mean that the economy is not growing, Denis, it's just growing much less rapidly than what we've seen in the past. And this is what you have to take into context. If your economic surprises are negative, can you actually deliver on better earnings growth? And what history suggests is, given the current reading that we're seeing on economic surprise, which is a 2 standard deviation, historically, earnings are actually revised down as opposed to being revised up. So that's the challenge for equity market price for perfection with an economy that does not decelerate. But unfortunately, that's not what we're seeing right now. Economic surprise suggests deceleration.

Yeah. To make things worse, the labor markets, you know, keep deteriorating.

So this is a topic we addressed in the past. You know, in order to, you know, boost your earnings, if you can't do with the higher sells, you have to increase your profit margins. If you increase your profit margins you might need to reposition your hiring pace. And what we're seeing in US right now is the unemployment rate is on the rise up above 4% for the first time since 2021. So clearly that's a big-ticket item for the economy because that's that 60% of GDP in US is determined by consumer spending. I can tell you that when the unemployment rate is rising, Denis, historically consumer spending does not accelerate.

And to keep going in the same direction. Our leading economic indicator keeps going downward.

Yeah, so this is where we are now. So the unemployment rate would be more coincident. So what about the outlook? Well, if you look at leading indicators in the US and leading economic indicators, it's actually back to where it was at the worst of the COVID recession. So again, Denis, it's just to say that anticipating a better economy in the months ahead might be a challenge because most indicators would suggest a weaker economy, not a stronger economy, which opens the door for rate cuts, don't get me wrong. But will the Fed be able to cut rates aggressively given where we already are and that monetary policy remains restrictive? So again, it's a challenge for earnings growth in the months ahead.

And if we come back to Canada, we'll look at the, you know, jobless rate. Not that good too. Well, it was 6.5% of the national level. But if you want to dig a little bit deeper to look at younger people, 15- to 24-year-old, I mean, you know, it's an unemployment rate above 13% for the first time in a decade so there's got to be some frustrated parents around the table nowadays. And it is an issue. And it does show that once the economy starts doing worse, well, yeah, younger people will be hit first. And this is exactly what we're seeing right now. So there's clearly a deceleration of the economy that's ongoing right now in this country. So let's not be too greedy on earnings growth also from a Canadian perspective.

Yeah. And at the same time, you know, we talked quite a lot about the soft landing. Is it still true? Well, the Bank of Canada has been, you know, going public saying that it's mission accomplished on a soft landing or it looks good for that. I would say, well, depends. Denis, there will always be a landing. I don't know if it's going to be soft or hard, but I can tell you in the GTA right now, the Greater Toronto Area, which is 20% of the Canadian economy, retail sales are actually contracting. And that's a reflection of deterioration in labor markets, restrictive monetary policy, mortgage interest rate resets, right. So yes, the economy is clearly slowing from beginning in perspective. So I don't know yet whether it's mission accomplished on a soft landing or not. I do believe that the Bank of Canada is in position to cut rates a little bit more aggressively in the months ahead. But monetary policy will still be restrictive by the end of this year, meaning the economy will underperform.

And to wrap it up a little bit, you know, we're seeing an economy that is slowing down then probably more rate cuts. But at the same time, we have analysts that have a prediction of pretty nice growth of, you know, revenue of a company or bottom line of a company. We need to be careful here.

Yeah, the next few weeks will be very telling. No, next few weeks will be very telling. We're about to start the earnings reporting season. So let's keep an eye on that. I do believe Denis, as you say that expectations are too aggressive from my standpoint.

We haven't talked inflation yet. It's our favorite subject. Now you're bringing us on what's going on in the eurozone.

Yeah, because you asked me to speak to politicians and I have to speak to politicians I have to speak to inflation at the same time. We saw elections in Europe where the incumbents have been defeated and the parties have been elected, whether it's UK or France, are promising to deliver on services to their people, but I'm just not sure they can be very aggressive on that front. And what that does is when you have these politicians that are promising more fiscal stimulus, well, that keeps your inflation and service component higher, which limits the ability for central bank to cut rates. And Denis that's a reality in the US, in Europe, even from a Canadian perspective, and that brings the great uncertainty as we look towards the next 12 months in 2025, how will central banks be able to cut rates if politicians continue to promise to spend more? And if you promise to spend more, keep an eye on service inflation that will determine the ability of these central banks to cut or not. Right now, I have to say some cuts are coming, but they cannot cut aggressively because of politicians.

OK, on that thank you, Stéfane. Thank you, everyone for being with us today. We'll see you back in September because in August, you know, it's holiday season for us too. Then hopefully we'll see you back in September. Thank you for joining us today.