Author: train2invest Admins

The Canadian economy faces a challenging path forward, as the impact of higher interest rates is poised to weigh further on a highly leveraged consumer and an overextended housing market. In addition, with global recessionary pressures on the rise, Canada’s export dependency makes it vulnerable to external demand shocks.

But there are also some reasons to be positive: The Bank of Canada’s rate hikes are now on hold, and inflation is showing more signs of going off the boil. Furthermore, the Canadian dollar is cheap by historical standards (leading to improved international competitiveness), and strong immigration flows will serve as a tailwind to long-term growth prospects.

Therefore, while we expect equities to see continued selling pressure due to tighter financial conditions and rising recession odds, we believe long-term investors could use future periods of weakness to add to Canadian stocks, given their attractive valuations. That’s especially so for exporters and companies with high international exposure that stand to benefit from a weak currency.

In addition, in an environment of slowing growth and inflation – as well as a central bank that has moved to the sidelines – we believe long-dated government bonds are an attractive option.

The principal risk for the Canadian economy stems from just how vulnerable it is to higher interest rates. Unlike U.S. consumers, who deleveraged in the aftermath of the Great Recession, Canadians added to their debt load significantly. This dynamic is evident in the respective household debt-to-disposable income ratios: While it sits at 96.4 per cent in the U.S., down from a peak of 129.4 per cent in the recession, it is hovering near an all-time high in Canada, at 168.1 per cent.

Clearly, given this massive debt load, as well as the increase in interest rates, servicing this debt is becoming more of a challenge. The household debt service ratio is back to 14.3 per cent, up from a low of 12.5 per cent in the aftermath of the pandemic. With debt payments taking up an increasingly large chunk of incomes, this means less money available for consumer spending (especially discretionary expenditures).

Beyond the economy’s high sensitivity to interest rates via consumer spending, residential investment (the segment of the economy with the greatest response to changes in monetary policy) is still two standard deviations above its long-term average. From our standpoint, this suggests the housing market will continue to act as a headwind for growth – especially as mortgages are renewed at much higher rates (the typical mortgage term in Canada is five years, compared with 30 in the U.S.). The full impact of this is still to be felt.

Canada’s export dependency is also a clear negative in an environment where the risk of a global recession is very high and rising. Exports account for 34 per cent of GDP in Canada – roughly three times the percentage in the U.S. Therefore, this country is far more susceptible to global developments, so a worldwide economic downturn will be felt more acutely.

But inflation is showing clear signs of rolling over – and at a much quicker pace than is the case in the United States. Indeed, over the past three months, Canadian CPI – excluding food and energy – has grown at an annualized rate of 3.1 per cent, slowing from a peak of 7.7 per cent in May of last year; by way of comparison, over the same period, U.S. core CPI has grown at an annualized pace of 4.6 per cent.

The marked deceleration in Canadian inflation has gone a long way toward validating the Bank of Canada’s recent pause. Alongside a more dovish central bank – vis-à-vis the U.S. Federal Reserve – interest rate differentials have widened. This dynamic has weighed on the Canadian dollar, taking it to one standard deviation below its long-term average against the greenback. A weaker currency will improve Canada’s international competitiveness and serve as a key source of support for the country’s manufacturers and exporters. There are also likely to be positive long-term growth implications (via capital deepening) from a larger and more competitive manufacturing sector.

Finally, with Canada dramatically boosting its immigration levels – to offset declining fertility rates – the country is likely to see stronger labour force growth than the United States. By 2025, the annual immigration rate in Canada will be 12.5 per 1,000 residents, quadruple what the U.S. expects. This is another long-term positive for economic growth in Canada, although not without its share of challenges (housing affordability, which is already dire, is likely to become even more of a challenge). Consequently, the extent of the positive growth boost remains to be seen – and will ultimately depend a lot on policy solutions to deal with this population surge (increasing housing supply, etc.).

Bottom line: There are good reasons to be negative on the Canadian economy at the current time.But it isn’t all bad news: Inflation has rolled over sharply, allowing the Bank of Canada to move to the sidelines. This has resulted in widening interest rate differentials with the U.S., taking the Canadian dollar well below its long-term average.

Against this backdrop, notwithstanding the challenges facing the Canadian economy, we believe there are still good opportunities for investors. For starters, the easing of inflationary pressures and slowdown in economic activity – as well as the pause from the BoC – make long-dated government bonds very appealing.

Furthermore, for equity investors, the fact of the matter is there is already a lot of “bad news” embedded in current prices. After all, the TSX Composite Index trades at just 13 times forward earnings versus 18 times for the S&P 500 (whereas they have traded much more in line historically).

As a result, although we believe equities are likely to see continued downside (on tighter financial conditions/growing recession risks), we think the Canadian equity market has decent value for long-term investors.

However, in light of the weakness in the Canadian dollar, and the softness in domestic demand, we would be inclined to screen for companies that derive a high share of their revenues internationally.

David Rosenberg is founder of Rosenberg Research, 

Renewed unease gripped world markets on Wednesday as news that Credit Suisse’s largest investor said it could not provide the Swiss bank with more financial assistance sent its shares and broader European shares sliding once more.

Signs of calm and stability in banking stocks, that have tanked in the past week, following the collapse of Silicon Valley Bank (SVB), soon paved way for renewed selling as Credit Suisse shares fell to fresh record lows.

European shares were last down almost 2 per cent, European bank stock tumbled 2.5 per cent and U.S. stock futures fell 1 per cent.

Investors rushed back into safe-havens, with two-year German bond yields down 21 basis points at 2.71 per cent.

“The Credit Suisse share price is falling and government bonds are rallying on the back of that. Still very much driven by the perceived health of the banking sector, but this time in Europe,” said Antoine Bouvet, senior rates strategist at ING.

The European Central Bank is still leaning towards a half-percentage-point rate hike on Thursday, despite turmoil in the banking sector, given high inflation, a source close to its Governing Council told Reuters.

Asian equities rose, tracking Tuesday’s relief rally on Wall Street after U.S. inflation data delivered no nasty surprises, reinforcing hopes the Federal Reserve will go for a smaller rate hike when it meets next week.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.9 per cent, having slid 1.7 per cent on Tuesday. Japan’s Nikkei index was flat while an index of Japanese banks, which has slid 8 per cent this week, jumped over 3 per cent. In Hong Kong, the Hang Seng Index climbed 1.52 per cent.

But U.S. equity futures fell sharply as European banking stocks tumbled in an ominous sign for the Wall Street open.

Bruised U.S. bank stocks regained some ground on Tuesday aided by news that private equity and buyout giants were looking to scoop up some of SVB’s assets. That left investors hopeful that efforts to shore up confidence would avert a wider financial crisis.

Data on Tuesday showed U.S. consumer prices rose 0.4 per cent, with a year-on-year gain of 6 per cent – in line with analyst expectations. There had been worries that stronger-than-expected data might lead the Fed to go for jumbo-sized hikes to battle inflation.

As recently as last week, markets were braced for the return of large Fed interest rate rises but the swift collapse of SVB has changed those expectations, with markets pricing in an 80 per cent chance of a 25 basis point hike next week.

Also helping boost sentiment was data showing China’s economic activity picked up in the first two months of the year, driven by consumption and infrastructure investment, and signs the beleaguered property sector is starting to recover.

In Europe, where markets had also rapidly dialled back ECB rate-hike bets at the start of the week, traders were betting again on a big increase in euro zone borrowing costs on Thursday.

According to a Reuters report, a source close to the ECB Governing Council said the central bank was unlikely to ditch plans for a big rate move this week because that would damage its credibility.

“The ECB is behind (the U.S. Federal Reserve) in terms of a tightening cycle and has a lot to do,” said Jorge Garayo, senior rates and inflation strategist at Societe Generale.

“Core inflation,” he added, “is still at very, very elevated levels. So we will be very surprised to not see 50 basis points delivered by the ECB.”

Short-term bond yields, which typically move in step with interest rate expectations, were mixed on Wednesday.

Germany’s two-year yield was down 3 bps at 2.89 per cent, having fallen to as low as 2.43 per cent briefly on Tuesday.

The two-year U.S. Treasury yield was up 10 bps at 4.33 per cent, well off Tuesday’s six-month low of 3.83 per cent.

In currency markets, the dollar index, which measures the U.S. currency against six rivals, was flat at 103.74, with the euro also mostly steady at $1.0735.

Oil prices rebounded more than 1 per cent, coming back from three-month lows the previous session, due to a stronger OPEC outlook on China’s demand. Brent crude futures climbed 1.6 per cent to US$78.68 a barrel. U.S. West Texas Intermediate crude futures (WTI) gained 1.6 per cent to US$72.48.

– Reuters

• The consumer price index rose 0.4% in February and 6% from a year ago, in line with market expectations.
• A drop in energy prices helped keep inflation in check, while shelter costs increased sharply.
• The probability that the Fed would raise benchmark interest rates a quarter percentage point next week increased following the report.

https://www.cnbc.com/2023/03/14/cpi-inflation-february-2023-.html

CNN
—
On March 13, the Biden administration approved the controversial Willow Project in Alaska.

ConocoPhillips’ massive Willow oil drilling project on Alaska’s North Slope moved through the administration’s approval process for months, galvanizing a sudden uprising of online activism against it, including more than one million letters written to the White House in protest of the project and a Change.org petition more than 3 million signatures.

Here’s what to know about the Willow Project.

What is the Willow Project?
ConocoPhillips’ Willow Project is a massive and decadeslong oil drilling venture on Alaska’s North Slope in the National Petroleum Reserve, which is owned by the federal government.

The area where the project is planned holds up to 600 million barrels of oil. That oil would take years to reach the market since the project has yet to be constructed.

Who started the Willow Project and when?
ConocoPhillips is a Houston-based energy company that has been exploring and drilling for oil in Alaska for years. The company is the only one that currently has oil drilling operations in Alaska’s National Petroleum Reserve, though its two operating projects are smaller than Willow would be.

https://edition.cnn.com/2023/03/14/politics/willow-project-oil-alaska-explained-climate/index.html

This a CNN posting – Beware of bias!

• Canada has one of the largest deposits of minerals that are essential to manufacture of electric cars.
• “We see today that, for example, China produces 98% of Europe’s supplies of rare earths,” European Commission President Ursula von der Leyen said earlier this month.
• The G-7 group of advanced economy announced in December a plan to ramp up the production of these minerals.

https://www.cnbc.com/2023/03/14/canada-is-aiming-to-beat-china-in-the-critical-race-for-rare-earth-metals-.html

• Meta CEO Mark Zuckerberg said Tuesday the company plans to cut 10,000 employees.
• The company laid off more than 11,000 employees in November.
• Zuckerberg has pitched 2023 as Meta’s “year of efficiency.”
• The CEO previously told analysts Meta plans “on cutting projects that aren’t performing or may no longer be crucial” while simultaneously “removing layers of middle management to make decisions faster.”

https://www.cnbc.com/2023/03/14/meta-layoffs-10000-more-workers-to-be-cut-in-restructuring.html

Gold and silver prices surged on Monday, as their safe-haven appeal drew in investors spooked by the collapse of Silicon Valley Bank, with the crisis also sparking hopes the U.S. Federal Reserve would have to slam the brakes on its aggressive monetary policy.

The U.S. dollar and Treasury yields extended their declines despite efforts by regulators to control the Silicon Valley Bank and Signature Bank turmoil.

https://www.cnbc.com/2023/03/13/safe-haven-gold-accelerates-as-traders-assess-svb-fallout.html

Oil prices fell over 2% in volatile trading on Monday as the collapse of Silicon Valley Bank roiled equities markets and raised fears of a fresh financial crisis, but a recovery in Chinese demand provided support.

Brent crude futures settled down $2.01, or 2.4%, to $80.77. The global benchmark earlier fell to a session low of $78.34, its lowest price since early January.

U.S. West Texas Intermediate crude futures (WTI) dropped $1.88, or 2.5%, to $74.80 a barrel. WTI earlier declined to $72.30 a barrel, its lowest price since December.

https://www.cnbc.com/2023/03/13/oil-prices-slip-as-concerns-over-rate-hikes-rattle-investors.html

• On Friday, Signature Bank customers spooked by the sudden collapse of Silicon Valley Bank withdrew more than $10 billion in deposits, a board member told CNBC.
• That run on deposits quickly led to the third-largest bank failure in U.S. history. Regulators announced late Sunday that Signature was being taken over to protect its depositors and the stability of the U.S. financial system.
• “I think part of what happened was that regulators wanted to send a very strong anti-crypto message,” said board member and former congressman Barney Frank.

https://www.cnbc.com/2023/03/13/signature-bank-third-biggest-bank-failure-in-us-history.html

The world’s leading French fry maker is making the largest investment in its history, with McCain Foods announcing plans on Monday for a $600-million expansion of its potato processing facility in southern Alberta, creating 260 new jobs.

McCain, maker of one in four fries eaten each day around the world, is doubling the size of its plant in the town of Coaldale, near Lethbridge.

“This investment is a sign of our confidence in the future of food production in our home country,” said Max Koeune, chief executive officer of New Brunswick-based McCain.

McCain operates in 160 countries and Mr. Koeune said: “The stability of Canada, in contrast to the geopolitical uncertainty in many parts of the world, is important to us when we think about the growth of our business.”

Expanding in Alberta encourages farmers to devote additional land to growing potatoes, building a stronger agriculture industry in the province, Mr. Koeune said. Demand for French fries traditionally grows at 2 per cent to 3 per cent annually. McCain’s sales to institutional customers, such as restaurants, and shoppers buying frozen food in grocery stores are rising at a slightly faster pace, Mr. Koeune said, as the company wins market share by successfully competing on product innovation.

Family-controlled McCain has 51 production facilities around the world, almost all of which are located in rural communities, and more than 20,000 employees. Over the past five years, McCain spent $157-millon expanding its two facilities in New Brunswick, $100-million building its first plant in Brazil, $200-million to expand in Idaho and $300-million building out a facility in Washington State.

“While we have grown globally, we are thrilled to be able to make our largest investment at home, in support of our employees and farmers,” Scott McCain, chair of McCain Foods, said in an e-mail. “Our family is proud of our Canadian roots and excited about the future of agriculture in Canada.”

The majority of French fries produced in Coaldale will be sold in North America, with a minority of future production exported to Asian and Latin American markets.

Alberta farmers dedicate 68,000 acres to growing potatoes, making the province the third-largest producer of the crop, behind Prince Edward Island at 85,000 acres and Manitoba at 79,000 acres. McCain has two facilities in both New Brunswick and Manitoba. The company closed a PEI processing centre in 2014, shifting the work to its New Brunswick operations.

Over the past five years, Alberta farmers increased the amount of land dedicated to potatoes meant for French fries by 29 per cent to 43,000 acres, or 63 per cent of the total crop, according to data from the Potato Growers of Alberta.

In a sign of consumer preference for frozen food, just 8 per cent of Alberta’s potato farmland is dedicated to growing fresh produce for grocery stores. Approximately 10 per cent of potato farming is devoted to making the raw material for chips.

McCain spent $94-million to build its Coaldale plant, which opened in 2000, and increased the facility’s capacity by 14 per cent in 2017. It employs 225 people. The renovations are scheduled to begin this year.

Expanding in Alberta gives McCain an opportunity to green its operations. The new plant will run on wind and solar power, and generate biogas to run boilers, cutting natural gas consumption. Mr. Koeune said the environmental initiatives will allow McCain to double the size of the facility without increasing its carbon emissions. “The work we are doing in Coaldale on sustainability will help us to hit our goal of cutting greenhouse gas emissions in half, globally, while continuing to expand our business,” he said.

Founded 66 years ago by four brothers, McCain has grown from a regional producer of frozen French fries to one of the world’s largest food producers, with annual sales of $11-billion. In addition to fries, the company makes pizza, snacks and desserts under various brand names.

Mr. Koeune joined McCain 10 years ago as chief financial officer and was named CEO in 2017. He was previously head of business development at Paris-based dairy company Danone SA.

Alberta farms and ranches sold a total of $15.4-billion of agricultural products in 2020, the most recent year provincial government statistics are available. Cattle, wheat and canola were the largest sectors, each accounting for roughly a third of sales. In 2020, farmers in the province sold $272-million of potatoes.