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