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European markets were higher Thursday as investors weighed up the economic outlook and interest rate trajectory.
https://www.cnbc.com/2023/02/09/european-markets-live-updates-stocks-data-earnings-and-news.html
Morgan Stanley analyst Keith Weiss described the stakes,
“New Bing features four key innovations (detailed in a company blog post):
1. New Bing runs on a new large language model (LLM) developed with OpenAI, but more powerful than ChatGPT and customized specifically for search. 2. Microsoft Prometheus Model developed as a proprietary method of interacting with the large language model to best support the search modality. This innovation improves relevancy, annotates answers, provides more up-to-date. answers and works to best understand geolocation… 3. Applying AI model to core search algorithm which drives step-function improvement in relevancy, the largest increase in relevancy Microsoft has seen in over a decade. 4. Improved user experience as search, browser and chat are pulled together into a single unified experience; this primes New Bing to answer more complex queries and more seamless enable workflows (e.g. like making travel arrangements). .. With a revenue run rate exceeding $210 billion, Microsoft continually assesses large market opportunities to enable growth going forward, and at a $570 billion TAM [total addressable market], the digital advertising market looks to be an increasingly interesting focal point.”
Brookfield Asset Management Ltd. BAM-A-T -0.57%decrease is looking to buck the trend in a tough market for fundraising with plans to raise significant capital to invest in its areas of focus, including infrastructure, renewable energy and private credit.
The asset manager reported earnings for the first time as a standalone entity on Wednesday after it was spun off from parent Brookfield Corp. in December. The company raised US$93-billion in capital in 2022, including US$14-billion in the fourth quarter, which was its best fundraising year on record.
Even as available capital becomes more scarce while investors grapple with the uncertainty caused by high inflation and spiking interest rates, Brookfield is betting that it can continue to attract flows of institutional money that are increasingly going to only the largest asset managers with the broadest reach. It is also betting that its strength in asset classes that are most in demand because they generate stable income in volatile times will give it an edge.
“We’re increasingly seeing large institutional [limited partners] looking to concentrate their capital amongst a smaller number of managers, but those managers who can offer them a greater diversity of products,” said Connor Teskey, president of Brookfield Asset Management, on a Wednesday conference call.
“We do expect this to continue in the coming years and perhaps this is one of the reasons why we have such a robust and positive outlook for fundraising in 2023 when we know that there are some pockets of weakness for other market participants,” Mr. Teskey said.
Fundraising helped Brookfield Asset Management boost its fee-bearing capital to US1$418-billion, up 15 per cent over the past year. During the fourth quarter, the company closed new funds for its fifth flagship infrastructure fund, which now stands at US$22-billion, and its sixth flagship private equity fund, which reached US$9-billion.
After Brookfield quickly deployed about half of a $15-billion, climate-focused fund that launched in 2021 to make large investments in the global transition to a net zero economy, Mr. Teskey said Wednesday that it is intended to be only the first in a series of such funds. Brookfield plans to bring a second, “meaningfully larger” transition fund to market “sooner rather than later,” he said.
In a letter to shareholders, Brookfield chief executive Bruce Flatt and Mr. Teskey said the company expects to have three flagship funds in the market in 2023. And they predicted that the asset manager’s earnings should “at least double over the next five years.”
Brookfield Asset Management, which was spun off in December, reported higher earnings from fees in the fourth quarter, largely shrugging off the volatility in roiling markets.
Overall profit was down 9.5 per cent to US$504-million in the final three months of the year, including US$84-million earned from the spinoff on Dec. 9 to the end of the year.
But full-year profit was up 3 per cent to US$1.92-billion. And fee-related earnings increased nearly 8 per cent in the quarter to US$576-million, while distributable earnings – which adjust for items such as taxes and share-based compensation – rose 5.5 per cent to US$569-million.
For the full year, fee-related earnings were US$2.1-billion. The company now has approximately US$800-billion of assets under management.
The asset manager’s board declared a quarterly dividend of 32 US cents a share.
Analysts probed the company on Wednesday about its appetite for mergers and acquisitions, but Mr. Flatt said any larger deal would need to “hit a very high test,” adding: “We don’t have any expectations of something happening in 2023.”
On Wednesday, Brookfield Reinsurance – a subsidiary of Brookfield Corp. – announced a US$1.1-billion, all-cash deal to acquire specialty insurer Argo Group International Holdings Ltd., helping expand Brookfield’s U.S. insurance operations. Argo shareholders will have the right to receive US$30 in cash per share at closing, which is a 6.7-per-cent premium to the company’s closing share price on Feb. 7.
Oil prices rose early on Wednesday, extending gains from the previous two days, as the dollar fell after Federal Reserve Chair Jerome Powell sounded less hawkish on interest rates than markets had expected and as U.S. crude stocks surprisingly fell.
Brent crude futures inched up by 11 cents, or 0.1%, to $83.80 a barrel at 0119 GMT, adding to a 3.3% gain in the previous session.
U.S. West Texas Intermediate (WTI) crude futures advanced by 13 cents, or 0.2%, to $77.27 a barrel, after jumping 4.1% in the previous session.
The dollar index was down slightly at 103.29 in early trade, extending losses after Powell’s comments on Tuesday, making oil cheaper for those holding other currencies.
With less aggressive interest rate hikes in the United States, the market is hoping the world’s biggest economy and oil consumer can dodge a sharper slowdown in economic activity or even a recession and avoid a slump in oil demand.
“I think we’re in a reasonably balanced market,” said Westpac senior economist Justin Smirk.
“If we have stronger than expected growth out of the developing world, (oil) prices will be firmer and OPEC will have to step up output. That’s not our core view. We don’t see a big surge in demand,” he said.
Supporting the market, weekly inventory data from the American Petroleum Institute industry group showed crude stocks fell by about 2.2 million barrels in the week ended Feb. 3, according to market sources.
That defied expectations from nine analysts polled by Reuters, who had estimated crude stocks grew by 2.5 million barrels.
However, gasoline and distillate inventories rose more than expected, with gasoline stocks up by about 5.3 million barrels and distillate stocks, which include diesel and heating oil, up by about 1.1 million barrels.
The market will be looking to see if data from the U.S. Energy Information Administration, due at 1530 GMT, confirms the decline in crude stocks.
Canada’s economy loses momentum as rate hikes take hold
The Canadian economy is slowing quickly as the Bank of Canada hikes interest rates to tamp down excessive inflation, the prelude to a potential recession this year.
Real gross domestic product rose 0.1 per cent in November, according to figures published Tuesday by Statistics Canada, with a preliminary estimate showing little change in December. All told, the economy grew at an annualized rate of 1.6 per cent in the fourth quarter, based on that reading for December, which will be updated near the end of February.
The economy is showing resilience as it faces mounting headwinds and financial strain for many households. Growth in the fourth quarter was stronger than what the Bank of Canada and several financial analysts had predicted. During the final months of 2022, employers were continuing to hire workers in droves, which kept the unemployment rate near an all-time low.
There is, however, a clear loss of momentum. The economy grew at annualized rates of 3.2 per cent in the second quarter and 2.9 per cent in the third quarter.
The Bank of Canada expects the economy to stall during the first half of 2023. It has not ruled out a mild recession, an outcome that many analysts on Bay Street are predicting.
“It’s just as likely that we’ll have two or three quarters of slightly negative growth as slightly positive growth,” Bank of Canada Tiff Macklem said at a press conference last week. “So yes, it could be a mild recession. It’s not a major contraction.”
In November, 14 of 20 industrial sectors managed to post growth. Transportation and warehousing rose 1 per cent for the month, highlighted by a 4.6-per-cent surge for air transportation. The finance and insurance sector jumped by 0.5 per cent, following three consecutive monthly declines. The public sector expanded by 0.3 per cent.
At the same time, there was contraction in rate-sensitive industries. Construction fell 0.7 per cent in November as residential building and repairs hit a weak spot.
Retailers fared poorly in November as the industry dropped 0.6 per cent. The declines were particularly large at stores selling food, building materials and general merchandise.
Restaurants and bars had a rough month, posting a 2.9-per-cent contraction.
“There are lots of moving parts here, with some sectors retreating and other industries still bouncing back to something like normal,” Bank of Montreal chief economist Doug Porter said in a note to clients. “But the overriding message is that the economy is just managing to keep its head above water,” he added.
The Bank of Canada is raising interest rates at the fastest pace in a generation, which has taken the benchmark rate to 4.5 per cent from a pandemic low of 0.25 per cent in March, 2022. The central bank is intentionally trying to slow the economy and bring supply and demand into better balance to quell soaring rates of consumer price growth. The annual rate of inflation has eased to 6.3 per cent in December from nearly a four-decade high of 8.1 per cent in June.
At last week’s rate announcement, the Bank of Canada said it was holding its policy rate at 4.5 per cent to assess whether its policies were restrictive enough to knock inflation back to the bank’s 2-per-cent. It cautioned, however, that it would raise rates again if needed.
Bank of Canada delivers quarter-point rate hike, signals pause to further increases
The Bank of Canada increased its benchmark interest rate by a quarter of a percentage point, but said that it expects to hold off further rate hikes, making it the first major central bankto say it would pause monetary policy tightening.
This is the eighth consecutive rate increase, and brings the bank’s policy rate to 4.5 per cent.
“We have raised rates rapidly, and now it’s time to pause and assess whether monetary policy is sufficiently restrictive to bring inflation back to the 2-per-cent target,” Bank of Canada Governor Tiff Macklem said in a news conference.
“To be clear, this is a conditional pause,” Mr. Macklem added. “If we need to do more to get inflation to the 2-per-cent target, we will.”
The bank lowered its forecast for inflation on Wednesday. It also reiterated that it expects the economy to “stall” in the first half of the year, but does not foresee a significant recession.
The widely expected decision marks a turning point for the central bank. Over the past year, it has pushed Canadian borrowing costs rapidly higher to combat runaway inflation. Now, with price pressures easing and the economy slowing, the bank has said that interest rates are likely as high as they need to go.
The bank now expects consumer price index inflation to fall to about 3 per cent by the middle of this year, and to 2.6 per cent by the fourth quarter. It sees inflation returning to the 2-per-cent target in 2024.
The annual rate of inflation remains well above those levels, clocking at 6.3 per cent in December. But that is down from a peak of 8.1 per cent in June. Price pressures continue to ease thanks to a drop in oil prices and improvements in global supply chains, plus the slowing effects on the economy of the bank’s rate increases.
The average price of gasoline, for instance, has fallen from about $2 a litre last summer to about $1.50 in January, the bank noted in its quarterly Monetary Policy Report (MPR), published Wednesday.
“While the Bank did not rule out future rate hikes entirely, the new guidance reinforces our view that the Bank’s next move is likely to be a rate cut, albeit not until later this year,” Stephen Brown, senior Canada economist at Capital Economics wrote in a note to clients.
The expected drop in inflation comes alongside a slowdown in the Canadian economy. The bank expects growth to flatline through the first half of 2023, as higher borrowing costs squeeze Canadians’ finances and weigh on consumer spending and business investment.
“It’s just as likely that we’ll have two- or three-quarters of slightly negative growth as slightly positive growth,” Mr. Macklem said. “So yes, it could be a mild recession. It’s not a major contraction.”
“We do need this period though of essentially no growth to allow supply to catch up,” he added. “But I don’t want to pretend that it’s painless. It’s not painless.”
So far, the Canadian economy has proven more resilient than expected. Unemployment is near a record low and consumer spending has remained relatively robust. But there is “growing evidence that restrictive monetary policy is slowing activity,” the bank said.
Higher interest rates hammered the housing market in 2022, and consumers have begun to cut spending on big-ticket items. The bank expects spending to slow further as homeowners renew their mortgages at higher interest rates and nervous shoppers trim non-essential purchases.
“The rise in borrowing costs is expected to continue to strain many household budgets. Interest payments on household mortgages are estimated to be about 4.5 per cent of disposable income at the beginning of 2023, up from 3.2 per cent at the beginning of 2022,” the bank said in the MPR.
The bank is intentionally using interest rates to slow the economy and inflation. The goal is reducing spending on goods and services to bring overall demand in line with supply, which eases price pressures.
The bank says that the economy remains in a position of “excess demand.” This is most visible in the labour market, where unemployment is low and businesses continue having trouble finding enough workers. This is fuelling wage growth and feeding through into inflation, particularly in the service sector.
The bank has argued that unemployment will need to rise to get inflation back to target.
“With the pace of wage growth no longer increasing, the risk of a wage-price spiral has declined. However, unless a surprisingly strong pickup in productivity growth occurs, sustained 4 per cent to 5 per cent wage growth is not consistent with achieving the 2 per cent inflation target,” the bank said.
There are other risks to the inflation outlook, the bank said. Service prices could prove “stickier” than expected. Oil prices could also rise more than anticipated, depending on what happens with the war in Ukraine and China’s reopening from COVID-19 lockdowns.
U.S. business activity contracted for seventh straight month in January, but outlook perks up
U.S. business activity contracted for the seventh straight month in January, though the downturn moderated across both the manufacturing and services sectors for the first time since September and business confidence strengthened as the new year began.
At the same time, however, a survey from S&P Global out Tuesday showed price pressures ticking higher for the first time since last spring, indicating that inflation is far from licked despite aggressive measures to contain it by the U.S. Federal Reserve. That lifts the odds the U.S. central bank may need to keep up the pressure through higher interest rates, including at next week’s first policy meeting of the year.
S&P Global’s Flash U.S. Composite Output Index rose to 46.6 in January – with readings below 50 indicating contraction in activity – from a final reading of 45.0 in December. While that was the highest in three months, companies still reported demand was soft and high inflation was a headwind to customer spending.
On the manufacturing side, S&P Global’s flash Manufacturing PMI came in at 46.8 this month, up from 46.2 in December and exceeding the median estimate of 46.0 in a poll of economists by Reuters.
In the vast services sector, accounting for two-thirds of U.S. economic output, the pace of contraction moderated to 46.6 in January from 44.7 last month. That also exceeded the median estimate in the Reuters poll of 45.0.
Meanwhile, the survey’s measures of input prices for both services firms and goods producers rose month-over-month for the first time since May.
“The worry is that, not only has the survey indicated a downturn in economic activity at the start of the year, but the rate of input cost inflation has accelerated into the new year, linked in part to upward wage pressures, which could encourage a further aggressive tightening of Fed policy despite rising recession risks,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said in a statement.
Last year the Fed – after being slow to recognize that surging inflation was not the transitory phenomenon it had hoped it would be – raised its benchmark rate from near zero in March to a range of 4.25 per cent to 4.50 per cent in December. It was the most aggressive monetary policy tightening since the 1980s and was aimed at bringing inflation back to its target of 2 per cent annually.
After peaking at 7 per cent in June, inflation by the Fed’s preferred measure had receded to 5.5 per cent as of November. That gauge – the Personal Consumption Expenditures price index – will be updated for December later this week, and while it is seen having moderated further last month, it remains far too high for the liking of Fed officials meeting next week on Jan. 31-Feb. 1. Another quarter-percentage point increase is expected enroute to a policy rate officials see rising above 5 per cent this year.
The S&P Global survey is the latest indicator to show the U.S. economy is cooling off – largely in response to the Fed’s rate hikes – but whether it falls into recession remains an unsettled issue. Even as consumer demand for goods has shown notable cooling as Fed rate hikes make purchases like homes and motor vehicles more expensive, other indicators signal demand for services remains on more solid footing.
Moreover, despite growing anecdotal evidence of companies reducing hiring and in some cases laying off staff, the U.S. job market remains tight. There has been little by way of an increase in jobless benefits rolls as the new year began, and the national unemployment rate was 3.5 per cent in December, back to the half-century lows recorded right before the pandemic.
The S&P Global survey’s forward-looking indexes did show improved confidence in the outlook, indicating businesses expect the situation to improve later in the year.
“The pickup in positive sentiment was broad-based, with companies hopeful of a resurgence in customer demand as 2023 progresses,” it said.
Bank of Canada to raise rates by 25 basis points to peak of 4.5% on Jan. 25, poll suggests
The Bank of Canada will hike its key interest rate by a modest quarter point to 4.50 per cent on Jan. 25 and then hit pause on an aggressive tightening campaign, according to a Reuters poll of economists, with risks skewed toward a higher peak.
Inflation, which clocked 6.3 per cent in December, is still more than three times the bank’s 2 per cent target and is expected to remain above it at least through Q3 2024, despite a median 65 per cent chance of recession within a year, up from 51 per cent in the last poll.
That leaves the BoC in a tight spot, having been inclined to pause its rate-hiking campaign in December but with recent economic data on jobs and inflation suggesting it may not be quite done.
A strong majority of 90 per cent of economists, 26 of 29, expected a quarter-point rise on Jan. 25 to 4.50 per cent, according to a Jan. 17-20 Reuters poll, in line with interest rate futures. The other three expected no change.
The BoC has hiked rates by a cumulative 400 basis points since March 2022. That is slightly less than the U.S. Federal Reserve, which is expected to deliver two more 25 basis hikes this quarter, according to a separate Reuters poll.
“The big risk to our forecast that a 25 bp hike next week will mark the end of the tightening cycle is that the Bank is more concerned than we judge about inflation expectations and the tight labour market, which could prompt it to raise interest rates further,” said Stephen Brown, senior Canada economist at Capital Economics.
“Rather than raise interest rates much further, the bigger risk to our policy rate forecasts is that the Bank will probably keep rates high for longer than we currently assume.”
The BoC is then expected to keep its overnight rate on hold at 4.50 per cent for the remainder of the year, poll medians showed. There were just two forecasts for the terminal rate to reach 4.75 per cent in coming months.
Still, slightly more than two-thirds of respondents, 14 of 20, said the risks to their forecasts were skewed towards a higher terminal rate.
Respondents to an additional question were almost evenly split on whether the BoC was more likely to hold rates for at least the rest of the year than cut them. About 55 per cent, or 16 of 29, expected it to hold, while the remaining 13 saw a cut.
In the meantime, nearly three-quarters of economists in the latest poll had an official forecast that expects a recession to start this quarter and last until the third quarter. That is in line with a recent BoC survey which showed most firms now think a recession is likely.
“We expect a relatively mild recession with an increase in the unemployment rate of slightly less than 2 percentage points, which would be on the lower end of historical recessions,” said Josh Nye, senior economist at RBC.
The Canadian economy generated many more new jobs in December than forecast and the jobless rate unexpectedly declined to 5.0 per cent from 5.1 per cent. It was forecast to rise to 6.2 per cent in the third quarter and average 6.1 per cent next year, according to medians from the poll.
Economic Calendar: Jan 23 – Jan 27
Monday January 23
Euro zone consumer confidence
(8:30 a.m. ET) Canada’s new housing price index for December. Estimate is a decline of 0.2 per cent from November and a 3.7-per-cent increase year-over-year.
(10 a.m. ET) U.S. leading indicator for December. Estimate is a month-over-month dip of 0.7 per cent.
Earnings include: Baker Hughes Co.; Brown & Brown Inc.
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Tuesday January 24
Japan and Euro zone PMI
Germany consumer confidence
Earnings include: Canadian National Railway Co.; Danaher Corp.; General Electric Co.; Johnson & Johnson; Lockheed Martin Corp.; Metro Inc.; Microsoft Corp.; Raytheon Technologies Corp.; Texas Instruments Inc.; Union Pacific Corp.; Verizon Communications Inc.; 3M Co.
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Wednesday January 25
Germany business climate
(8:30 a.m. ET) Canadian manufacturing sales for December.
(10 a.m. ET) Bank of Canada’s policy announcement and monetary policy report with Governor Tiff Macklem’s press conference to follow.
Earnings include: Abbott Labratories; AT&T Inc.; Boeing Co.; Celestica Inc.; CSX Corp.; Freeport-McMoran Inc.; IBM; NextEra Energy Inc.; Novagold Resources Inc.; Tesla Inc.
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Thursday January 26
Japan machine tool orders
(8:30 a.m. ET) Canada’s Survey of Employment, Payrolls and Hours for November.
(8:30 a.m. ET) Canadian wholesale trade for December.
(8:30 a.m. ET) U.S. GDP for Q4. The Street is expecting an annualized rate rise of 2.6 per cent.
(8:30 a.m. ET) U.S. durable goods and core orders for December. The consensus forecasts are a month-over-month rise of 2.9 per cent and a decline of 0.2 per cent, respectively.
(8:30 a.m. ET) U.S. goods trade deficit for December.
(8:30 a.m. ET) U.S. wholesale and retail inventories for December.
(8:30 a.m. ET) U.S. initial jobless claims for week of Jan. 21. Estimate is 210,000, up 20,000 from the previous week.
(10 a.m. ET) U.S. new home sales for December. The Street is projecting an annualized rate decline of 3.1 per cent.
Earnings include: Comcast Corp.; Dow Inc.; Intel Corp.; Mastercard Inc.; Nucorp Corp.; Visa Inc.
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Friday January 27
Japan CPI
(8:30 a.m. ET) U.S. personal spending for December. The Street is estimate a decline of 0.1 per cent from November with personal income rising 0.2 per cent.
(8:30 a.m. ET) U.S. Core PCE Price Index for December. Consensus is an increase of 0.3 per cent from November and up 4.4 per cent year-over-year.
(10 a.m. ET) U.S. pending home sales for December. Consensus is a decline of 1.0 per cent from November.
(10 a.m. ET) U.S. University of Michigan consumer sentiment for January.
Also: Ottawa’s budget balance for November.
Earnings include: Real Matters Inc.
