The Canadian market ended sharply lower on Friday as stocks fell on sustained selling pressure, after Bank of Canada Governor Tiff Macklem said the bank is unlikely to cut interest rate anytime before the second half of 2024.
Macklem said in a speech that the central bank’s policymakers will consider cutting interest rates when inflation is “clearly” on a path to the 2% target, but added that it’s still “too early.”
Meanwhile, hopes for near-term interest rate cuts in the U.S. faded a bit after New York Federal Reserve President John Williams said the Fed is not “really talking about rate cuts right now” and is focused on whether monetary policy is sufficiently restrictive to ensure inflation comes back down to 2%.
Selling in the Canadian market was so widespread that all the sectoral indexes ended in negative territory. Communications, energy, real estate and consumer discretionary shares were among the major losers. Utilties, materials and industrials stocks also ended notably lower.
The benchmark S&P/TSX Composite Index ended lower by 249.65 points or 1.2% at 20,529.15, about 30 points off the session’s low. For the week, the index gained nearly 1%.
Canadian Apartment Properties (CAR.UN.TO), Cogeco Communications (CCA.TO), Molson Coors Canada Inc (TPX.B.TO), goeasy (GSY.TO), Canadian Natural Resources (CNQ.TO) and Magna International (MG.TO) ended lower by 3.5 to 5.5%.
Dollarama Inc (DOL.TO), West Fraser Timber (WFG.TO), Cargojet (CJT.TO), WSP Global (WSP.TO), George Weston (WN.TO) and Fairfax Financial Holdings (FFH.TO) settled lower by 1.5 to 3%.
Hut 8 Corp (HUT.TO) soared 8.7%. CCL Industries (CCL.A.TO) climbed 4.2% and Gildan Activewear (GIL.TO) gained 4%.
Enghouse Systems (ENGH.TO) advanced nearly 4%. Richelieu Hardware (RCH.TO) and Docebo Inc (DCBO.TO) ended higher by 2.2% and 1.9%, respectively.
On the economic front, data from the Canada Mortgage and Housing Corporation showed housing starts in Canada slipped by 22% over a month earlier to 212,624 units in November, the lowest reading in six months.
Data from Statistics Canada showed wholesale sales in Canada declined 0.5% from a month earlier in October, following a revised 0.6% drop in the previous month.
Bank of Canada Governor Tiff Macklem said that inflation could be “getting close to” the bank’s target by the end of next year, and laid out conditions under which the bank might begin considering rate cuts in the coming quarters.
“The 2 per cent inflation target is now in sight,” Mr. Macklem said in the prepared text of his end-of-year speech in Toronto. “And while we’re not there yet, the conditions increasingly appear to be in place to get us there. The economy is no longer in excess demand, and underlying inflationary pressures are easing in much of the economy.”
He said the bank’s governing council has not begun discussing interest rate cuts, and warned that further declines in inflation would likely be gradual. “I expect governing council will continue to debate whether monetary policy is restrictive enough and how long it needs to remain restrictive,” he said.
But he added that the bank could start easing monetary policy once it’s confident that inflation is “on a sustained downward track.”
“We don’t need to wait until inflation is all the way back to the 2-per-cent target to consider easing policy, but it does need to be clearly headed to 2 per cent,” he said.
While Mr. Macklem and his team continue to say they could raise interest rates further, most Bay Street economists and bond traders think that interest rates have peaked. Interest rate swaps markets, which capture market expectations about monetary policy, put the odds of a rate cut in March at about 60 per cent, and they are fully pricing in a quarter-point rate cut by April, according to Refinitiv data.
The central bank has raised interest rates 10 times since March 2022, bringing its policy rate to 5 per cent, the highest level since the early 2000s. It has held rates steady since July, delivering its third stand-pat decision earlier this month.
Mr. Macklem said that 2024 will be a “year of transition.”
“By the time I give my year-end speech next year, I expect the economy will be growing, business hiring plans will be expanding, and inflation will be getting close to the 2 per cent target,” he said.
The annual rate of Consumer Price Index inflation was 3.1 per cent in October, down from a four-decade high of 8.1 per cent in summer of 2022. The bank’s latest forecast, from October, shows inflation staying around 3.5 per cent until the middle of 2024 then easing to around 2.5 per cent in the second half of the year. The bank will publish new forecasts in January.
Mr. Macklem’s speech bookended a pivotal week for central banks. On Wednesday, the U.S. Federal Reserve held interest rates steady for the third consecutive decision, but suggested that further interest rate hikes are essentially off the table and rate cuts are coming in the new year. This message was more dovish than expected, prompting a surge in stock and bond prices, and increased bets on rate cuts from the Fed in the first half of the year.
The European Central Bank and Bank of England followed up with holds on Thursday, although both central banks avoided the kind of tone shift seen at the Fed. Both said they needed more evidence of easing inflation before talking about rate cuts.
So far, the decline in inflation has not been accompanied by a recession in Canada or the United States that many analysts feared at the start of the year. But high interest rates, which make it more expensive for businesses and households to borrow money and service their debts, are weighing on economic activity.
Canada’s gross domestic product contracted in the third quarter, consumer spending and business investment is down, and the rate of unemployment has risen to 5.8 per cent from 5 per cent at the start of the year. Many homeowners with mortgages have been hit by big jumps in their monthly payments, and more will see sizable increases in the coming quarters when their mortgages reset.
Mr. Macklem warned of more pain to come.
“With the cost of living still increasing too quickly, and with growth subdued, the next two to three quarters will be difficult for many,” he said. “Consumers will continue to hold back on spending. Businesses will see weak demand and employment will grow more slowly than the labour force, which means the unemployment rate will likely increase further.”
When it comes to inflation, Mr. Macklem said the bank is seeing prices stabilize across a broad range of goods and services. But there are pockets where prices continue to rise quickly, including food and shelter. He said he expects food inflation to decline in the coming months, but shelter inflation to remain a more persistent problem.
“Increases in interest rates are moderating the demand for housing and bringing the housing market into better balance, but the structural undersupply of housing means that inflationary pressures on shelter prices remain elevated,” he said.
Mr. Macklem used his speech to outline several changes to central bank communications and forecasting. Going forward, Mr. Macklem and senior deputy governor Carolyn Rogers will hold a press conference after each of its eight-times-a-year rate decisions, rather than only after the four decisions each year that are accompanied by the bank’s quarterly Monetary Policy Report. Rate announcements will also be made at 9:45 a.m. ET rather than 10 a.m. ET in a bid to improve market functioning.
Mr. Macklem said that the bank is also working to improve its forecasting and analysis tools, putting more emphasis on modelling the supply side of the economy and introducing additional models to help with risk management.
The bank’s next interest rate decision is on Jan. 24
Cenovus Energy CVE-T +1.83%increase said on Thursday it expects higher production from its U.S. refineries in 2024 as the Canadian company’s two refineries restarted operating at full capacity.
The company had been grappling with production snags following a deadly fire at its refinery in Toledo, Ohio last year and an explosion at the refinery in Superior, Wisconsin in 2018.
Cenovus forecast downstream throughput for 2024 between 630,000 and 670,000 barrels per day (bpd), compared with 580,000 bpd to 610,000 bpd expected this year.
The company’s U.S.-listed shares rose 1.6 per cent before the bell.
Cenovus also expects higher operating costs in 2024 due to maintenance and repair activities.
The Calgary, Alberta-based company forecast expenses between $4.5-billion and $5-billion in 2024, higher than its estimated 2023 costs of $4-billion to $4.5-billion.
“We will remain focused on reducing costs and continued capital discipline,” Cenovus CEO Jon McKenzie said.
Global oil prices have cooled compared with last year, but still remain at a level when companies can drill profitably.
Cenovus also said it plans to expand production at its Foster Creek, Christina Lake and Sunrise oil sands projects.
The company forecast total upstream production for 2024 between 770,000 and 810,000 barrels of oil equivalent per day (boepd), compared with 775,000 boepd to 795,000 boepd expected this year.
Statistics Canada says manufacturing sales fell 2.8 per cent to $71.0-billion, led by a drop in petroleum and coal product sales as well as lower sales in the machinery and computer and electronic product subsectors.
The agency says sales fell in 12 of 21 subsectors it tracks.
The petroleum and coal products subsector fell 10.3 per cent to $8.4-billion in October as it saw lower prices as well as a decline in volumes.
The machinery subsector dropped 6.6 per cent to $4.4-billion, while computer and electronic products fell 15 per cent to $1.4-billion.
Sales of aerospace products and parts rose 6.9 per cent to $2.2-billion.
Statistics Canada says total sales in constant dollars fell 2.2 per cent in October, indicating a lower volume of goods sold.
World oil demand will rise faster than expected next year, the International Energy Agency (IEA) said on Thursday, a sign that the outlook for near-term oil use remains robust despite this week’s COP28 agreement to transition away from fossil fuels.
Despite the upgrade, there is still a sizable gap between the IEA, which represents industrialized countries, and producer group OPEC over 2024 demand prospects. The two have clashed in recent years over issues such as long-term demand and the need for investment in new supplies.
World consumption will rise by 1.1 million barrels per day(bpd) in 2024, the Paris-based IEA said in a monthly report, up 130,000 bpd from its previous forecast, citing an improvement in the outlook for the United States and lower oil prices.
The IEA, which advocates a speedy transition away from fossil fuels, detailed the increase to its 2024 forecast only at the bottom of Page 4 of its report, after discussing other findings including a demand slowdown in the last three months of 2023 and rising supply.
The 2024 revision reflects “a somewhat improved GDP outlook compared with last month’s report,” the IEA said. “This applies especially to the U.S. where a soft landing is coming into view.”
“Falling oil prices act as an additional boost to oil consumption,” it said.
Oil has weakened to a six-month low near $72 a barrel this week, even after OPEC+, which includes OPEC oil-exporting nations and allies such as Russia, on Nov. 30 announced a new round of production cuts for the first quarter of 2024.
Crude was up almost 2 per cent on Thursday after the IEA report was released to trade near $76.
In the report, the IEA also trimmed its forecast for oil demand growth in 2023 by 90,000 bpd to 2.3 million bpd and lowered its fourth-quarter estimate by almost 400,000 bpd.
A halving in the rate of demand expansion next year is due to below-trend economic growth in major economies, efficiency improvements and a booming electric vehicle fleet, the IEA said.
The extension of OPEC+ supply cuts into the first quarter of next year had done little to boost prices and higher output in other nations would act as a headwind, it added.
“The continued rise in output and slowing demand growth will complicate efforts by key producers to defend their market share and maintain elevated oil prices,” it said.
OPEC in a monthly report on Wednesday kept its forecast for world oil demand growth in 2023 at 2.46 million bpd. In 2024, OPEC sees demand growth of 2.25 million bpd, also unchanged from last month.
The difference between the IEA and OPEC 2024 forecasts has narrowed slightly but stands at 1.15 million bpd – equivalent to roughly 1 per cent of daily world oil use and the daily production of an OPEC member such as Libya.
Oil demand forecasters often have to make sizable revisions given changes in the economic outlook and geopolitical uncertainties, which this year included China’s lifting of coronavirus lockdowns and rising interest rates.
Sobeys parent company Empire Co. Ltd.EMP-A-T -7.45%decrease reported sales and earnings growth in its grocery business in the second quarter, while income from investments and other operations led to an overall decline in profits.
The Stellarton, N.S.-based retailer reported on Thursday that net earnings fell to $181.1-million or 72 cents per share in the quarter ended Nov. 4, compared to $189.9-million or 73 cents per share in the same period last year.
Empire recorded a $20.6-million insurance recovery related to a cybersecurity breach that hit the company last November. It also recorded $16.8-million in restructuring costs related to a plan to improve efficiencies in the company. Not including those items, adjusted net earnings were lower, at $178.3-million or 71 cents per share. Both sales and adjusted earnings per share came in below analysts’ estimates for the quarter.
The company, which owns chains including Sobeys, Safeway, IGA and FreshCo, reported that both sales and profits were up in its grocery operations, with adjusted net earnings in the food retailing segment rising 8.5 per cent to $171.5-million. Income from its investments and other operations declined, mostly because fewer property sales led to lower equity earnings from Empire’s interest in Crombie Real Estate Investment Trust.
Grocery retailers have faced scrutiny over whether they are doing enough to fight food inflation. Growth in grocery prices slowed in October, when prices were up by 5.4 per cent on an annual basis. That was a significant improvement compared to peak levels of more than 11 per cent in late 2021 and early 2022. But even food inflation slows down, shoppers are still faced with significantly higher grocery bills than compared to a couple of years ago.
In an appearance before the House of Commons agriculture committee last week, Empire chief executive officer Michael Medline expressed frustration at being compared to other grocers who have higher profit margins. He also noted that Canada has done better than other countries when it comes to food price growth.
“Although our country’s food inflation has been among the lowest in the world, and Canada is among the most competitive nations on earth when it comes to grocery retail, this provides little comfort to Canadians who are struggling,” he told the committee.
In October, Empire was among the grocery chains who complied with a request from the federal government to submit plans to stabilize prices, though some critics pointed out the plans mostly included strategies the sector already employs, such as discounts and price matching. Like other food retailers, Empire reported that its internal measures of food inflation have continually fallen slightly below the the food price growth tracked by Statistics Canada’s Consumer Price Index.
“Although it is difficult to estimate how long these inflationary pressures will last, the company continues to focus on supplier relationships and negotiations to ensure competitive pricing for customers whose shopping behaviours become more price sensitive in a heightened inflationary environment,” the company stated in a press release on Thursday.
Empire’s sales grew by 1.4 per cent in the second quarter compared to the prior year, to nearly $7.8-billion. Grocery sales were up, especially in the company’s FreshCo discount stores. But some growth was offset by the effects of Empire’s sale of its 56 gas stations in Western Canada in the first quarter, leading to lower fuel sales in the second quarter compared to the prior year. Sales from Empire’s e-commerce service, Voilà, increased by 15.4 per cent in the quarter.
Same-store sales – an important industry metric that tracks sales growth not tied to new store openings – grew by 2.2 per cent in the quarter, or 2 per cent excluding fuel. That represents slower growth compared to a year ago, but in a press release on Thursday the company said that same-store sales growth has improved in the first five weeks of the current quarter.
Empire is continuing to make claims under its cyber insurance policies related to last year’s breach. The company’s management said they are anticipating further insurance recoveries throughout this fiscal year, according to a press release on Thursday. Empire has previously estimated the cost of the breach will represent approximately a $32-million impact after insurance recoveries, and that estimate remains unchanged.
Pembina Pipeline PPL-T -2.97%decreasesaid on Wednesday it would buy Enbridge’s ENB-T -0.10%decreaseinterests in the Alliance Pipeline, Aux Sable and NRGreen joint ventures for $3.1 billion.
Alliance delivers liquids rich natural gas sourced in Northeast B.C., Northwest Alberta and the Bakken region to Chicago.
Aux Sable operates natural gas liquids (NGL) extraction and fractionation facilities in both Canada and the U.S., with extraction rights on Alliance, offering connectivity to key U.S. NGL hubs.
Pembina would assume $327-million of debt as part of the deal, helping Enbridge offload some leverage.
Investors fretted over Enbridge’s debt load from the US$14 billion bid for three of Dominion Energy’s natural gas distribution companies in September.
“The sales proceeds will fund a portion of the strategic U.S. gas utilities acquisitions and be used for debt reduction,” Enbridge said in a separate statement.
Pembina added the deals are expected to be completed in the first half of 2024.
Pembina currently owns 50% of the equity interests in Alliance, Aux Sable’s Canadian operations and NRGreen.
It also owns about 42.7% of the equity interests in Aux Sable’s U.S. operations.
