The Fed is expected to raise interest rates by three-quarters of a point and then signal it could slow the pace
The Federal Reserve is expected to raise interest rates by 75 basis points Wednesday but also signal it could begin to slow down the size of its rate hikes in December.
Markets are also braced for the Fed to end rate hikes in March at a level of 5%, and market pros say a more hawkish Fed could trigger a violent reaction.
Fed Chair Jerome Powell is expected to sound somewhat hawkish in his briefing Wednesday and emphasize that the Fed’s goal is to crush inflation.
The Federal Reserve is expected to raise interest rates by three-quarters of a percentage point Wednesday and then signal that it could reduce the size of its rate hikes starting as soon as December.
Markets are primed for the fourth 75-basis point hike in a row, and investors are anticipating the Fed will slow down its pace before winding down the rate-hiking cycle in March. A basis point is equal to 0.01 of a percentage point.
“We think they hike just to get to the end point. We do think they hike by 75. We think they do open the door to a step down in rate hikes beginning in December,” said Michael Gapen, chief U.S. economist at Bank of America.
Gapen said he expects Fed Chair Jerome Powell to indicate during his press briefing that the Fed discussed slowing the pace of rate hikes but did not commit to it. He expects the Fed would then raise interest rates by a half percentage point in December.
Oil climbs on demand hopes after big drawdown in U.S. crude stocks
Oil prices rose in early trade on Wednesday after industry data showed a surprise drop in U.S. crude stockpiles, suggesting demand is holding up despite steep interest rate hikes dampening global growth.
Brent crude futures picked up 17 cents, or 0.1%, to $94.82 a barrel at 0014 GMT, while U.S. West Texas Intermediate (WTI) crude futures rose 26 cents, or 0.3%, to $88.63 a barrel.
Oil prices rose in early trade on Wednesday after industry data showed a surprise drop in U.S. crude stockpiles, suggesting demand is holding up despite steep interest rate hikes dampening global growth.
Both benchmark contracts rose about 2% in the previous session on a weaker U.S. dollar and after an unverified note trending on social media said the Chinese government was going to consider ways to relax Covid rules from March 2023.
In a further positive sign for demand, data on Tuesday from the American Petroleum Institute showed crude stocks fell by about 6.5 million barrels for the week ended Oct. 28, according to market sources.
Eight analysts polled by Reuters had on average expected crude inventories to rise by 400,000 barrels.
At the same time, gasoline inventories fell more than expected, with stockpiles down by 2.6 million barrels compared with analysts’ forecasts for a drawdown of 1.4 million barrels.
China’s zero-Covid policy has been a key factor in keeping a lid on oil prices as repeated lockdowns have slowed growth and pared oil demand in the world’s second largest economy.
“Potential changes to China’s Covid-19 policy could have significant implications for oil demand,” ANZ Research analysts said in a note.
Bidding for HSBC Canada narrows as two major banks drop out
The field of contenders to acquire HSBC Bank Canada is narrowing, with at least two major Canadian banks now out of the running.
National Bank of Canada NA-T +0.05%increase is no longer in the auction for the Canadian arm of Britain-based HSBC Holdings Inc., according to two sources familiar with the process. Canadian Imperial Bank of Commerce CM-T -0.13%decrease is also out of the process, said a third source with direct knowledge of the bank’s position.
Bank of Montreal BMO-T -0.14%decrease is among the banks that are still pursuing HSBC Canada – a prized asset that could fetch more than $10-billion in a sale – according to a fourth source with knowledge of BMO’s participation in the auction.
The Globe and Mail is not identifying the sources because they are not authorized to discuss the confidential bidding process.
Spokespeople for HSBC, BMO, National Bank and CIBC declined to comment.
HSBC confirmed in early October that it was considering selling its Canadian unit, a profitable business with strong roots in commercial banking and a large presence in British Columbia and Ontario. All six of Canada’s largest banks held preliminary meetings to kick the tires on HSBC Canada, and the auction process has moved quickly. The Globe has reported that first-round bids were due late last week.
HSBC Canada would offer a buyer a meaningful increase in scale in the Canadian banking market. But a potential deal is fraught with challenges, some of them having to do with the sheer size of the transaction.There are also potential political problems related to competition in an already concentrated banking market.
In the auction’s early stages, CIBC and National Bank were considered by some analysts to have some of the most compelling strategic reasons to buy HSBC Canada, though each would have had to raise billions of dollars to meet the purchase price. As the fifth- and sixth-largest banks in the country respectively, the two institutions might have viewed acquiring HSBC Canada as a singular opportunity to narrow the gaps between themselves andlarger rivals. And both banks would presumably have presented lesser competition concerns than their more-dominant competitors.
For National Bank, which is considered a “super-regional” bank with a stronghold in Quebec, a deal would have meaningfully extended its reach in Western Canada. And last week, Scotia Capital Inc. analyst Meny Grauman wrote in a note to clients that CIBC had “a compelling strategic case for doing this deal, especially when it comes to boosting its commercial market share.”
But when CIBC’s chief executive, Victor Dodig, was asked about the HSBC sale at a meeting of hundreds of his bank’s senior staff on Thursday, he hinted that preserving capital is important in the current climate of market uncertainty, and that the bank’s priority is still organic growth, according to a fifth source with direct knowledge of the meeting.
Analysts have pegged Royal Bank of Canada RY-T +0.08%increase, the country’s largest bank, as an obvious front-runner, because it is the only Canadian lender that might have enough excess capital to buy HSBC Canada in cash, without raising additional funds. Toronto-Dominion Bank TD-T +0.55%increase and Bank of Nova Scotia BNS-T +0.06%increase could also be contenders, though both companies face hurdles in the path to a deal.
Scotiabank is in the midst of a CEO succession that stunned Bay Street by elevating a candidate from outside the banking industry. The change in leadershipwon’t officially take place until early next year. But the bank’s executives have expressed a desire to strengthen its presence in B.C., where HSBCalready does a great deal of business.
The fact that the largest of the large Canadian banks are likely still in contention for HSBC Canada, as the smallest of the Big Six drop out, will only sharpen questions about how the government might respond to a merger.
If RBC or TD acquired HSBC Canada, the deal would increase their share of bank deposits in Canada to 24 per cent or 21 per cent respectively. That would be higher than the market share created by a theoretical merger between National Bank and any of Scotiabank, BMO or CIBC – the type of deal that is widely considered to be a political non-starter because the federal banking regulator deems the Big Six banks systemically important to Canada.
Exxon Mobil Corp XOM-N +0.32%increase on Friday smashed expectations as soaring energy prices fuelled a record-breaking quarterly profit, nearly matching that of tech giant Apple XOM-N +0.32%increase.
Its $19.66-billion third-quarter net profit far exceeded recently raised Wall Street forecasts as skyrocketing natural gas and high oil prices put its earnings within reach of Apple’s $20.7-billion net for the same period.
As recently as 2013, Exxon ranked as the largest publicly traded U.S. company by market value – a position now held by Apple. Exxon shares jumped 2 per cent in premarket trading to $109.80, a new record high.
Oil company profits have soared this year as rising demand and an undersupplied energy market collided with Western sanctions against Russia over its invasion of Ukraine. U.S. exports of gas and oil to Europe have jumped and promise to set all-time profit records for the industry.
The top U.S. oil producer reported a per-share profit of $4.68, exceeding Wall Street’s $3.89 consensus view, on a huge jump in natural gas earnings, continued high oil prices and strong fuel sales.
“Where others pulled back in the face of uncertainty and a historic slowdown, retreating and retrenching, this company moved forward, continuing to invest,” Chief Executive Darren Woods told investors. Its quarterly profits “reflect that deep commitment” as well as higher prices, he added.
Exxon led record gains among oil majors in the second quarter and has leapfrogged Shell Plc and TotalEnergies SE with earnings almost twice as big from continued bets on fossil fuels as competitors shifted investment to renewables.
Exxon banked $43-billion in the first nine months of this year, 19 per cent more than in the same period of 2008, when oil prices traded at a record level of $140 per barrel.
Earnings from pumping oil and gas tripled last quarter while profit from selling motor fuels jumped tenfold compared with year-ago levels. Natural gas sales to Europe and soaring demand for diesel fuel led the company’s better-than-expected results.
“The refining businesses – both in the U.S. and international – was the star performer,” said Peter McNally, an analyst at Third Bridge.
Those rising fuel profits have renewed calls by U.S. President Joe Biden for companies to invest the windfall from this year’s energy price run-up in production rather than buy back their own shares.
Exxon will maintain its $30-billion share buyback through 2023 while increasing dividends, Chief Financial Officer Kathryn Mikells told Reuters. On Friday, it declared a fourth-quarter per-share dividend of 91 cents, up 3 cents, and will pay $15-billion to shareholders this year.
Exxon said its U.S. oil and gas production from the Permian Basin was near 560,000 barrels of oil and gas per day (boed), a record. Production for the year will increase about 20 per cent over 2021, said CEO Woods.
“We’re optimizing and adjusting our development plans,” he told analysts, with the full-year production gain below the 25 per cent increase Exxon had forecast in February.
Results also were helped by an almost 100,000-boed increase over the previous quarter in Guyana, where Exxon leads a consortium responsible for all output in the South American nation.
But its withdrawal from Russia reduced its overall production forecast for the year by about 100,000 barrels per day. Exxon said its Russian assets were expropriated.
“We are going to end up at about 3.7 million barrels a day for the full year,” Mikells said, down from a 3.8 million goal set in February.
Crescent Point Energy announces special dividend, reports third-quarter profit up from year ago
Crescent Point Energy Corp. CPG-T +2.63%increase announced a special dividend for shareholders Wednesday, as continued high oil prices helped the Calgary-based oil and gas company deliver a five-fold increase in profits in its third quarter.
Crescent Point, which has drilling operations in Alberta, Saskatchewan and North Dakota, reported third-quarter net income of $466.4 million, up from $77.5 million in the same quarter last year.
The company said it will pay a special dividend of 3.5 cents per share based on its latest quarterly results in addition to its regular quarterly dividend of eight cents per share.
However, the company also acknowledged it is beginning to feel the pinch of wide-spread inflation throughout the economy. On Wednesday, Crescent Point revised its capital expenditure guidance for 2022 to $950 million from its previously indicated range of between $875 and $900 million.
“Our new 2022 guidance of $950 million is a seven per cent bump from our previous mid-point,” said Crescent Point chief executive Craig Bryksa on a conference call with analysts, adding the increase is in part due to increased drilling activity in the Duvernay and North Dakota regions, but also the result of rising costs for everything from trucking, well servicing, labour and equipment repair.
“We’ve seen a little bit of a bump in drilling rig day rates … and obviously plays that are a little bit deeper, like Kaybob and North Dakota, require more casing, more fracking, and obviously fuel costs hit us.”
Canadian oil and gas companies have been enjoying windfall profits in 2022, ever since Russia’s invasion of Ukraine disrupted the global energy supply balance and drove up commodity prices.
In the third quarter alone, Crescent Point was able to pay down approximately $270 million worth of debt, bringing its total net debt as of Sept. 30 down to $1.2 billion.
The company’s excess cash flow in the third quarter totalled $233.7 million, and Bryksa said for 2023 Crescent Point expects to generate approximately $1.1 to $1.5 billion of excess cash flow, at forecast West Texas Intermediate oil prices of between US$75 to US$85 per barrel.
Crescent Point’s average production for the quarter ended September 30, 2022 was 133,019 boe/day, up from 132,186 a year earlier, and the company said it plans to generate an annual average production of 134,000 to 138,000 boe/d in 2023.
Oil and gas sales totalled nearly $1.1 billion, up from $826.7 million in the third quarter last year, boosted by higher realized oil and natural gas prices.
The company continues to be pleased with the performance of its Kaybob Duvernay assets in northern Alberta, which it acquired last year from Shell Canada for $900 million. During the third quarter, Crescent Point acquired additional lands in the Kaybob Duvernay for approximately $87 million, and Bryksa said the company expects to increase the proportion of capital it allocates to the asset within its five-year plan.
He said production in the Kaybob is expected to grow “in a disciplined manner” from approximately 35,000 boe/d in 2022 to over 50,000 boe/d by 2027, subject to commodity prices.
Thomson Reuters posts higher third-quarter revenue, holds guidance steady even as inflation lifts costs
Thomson Reuters Corp. TRI-T -3.32%decrease reported higher third-quarter revenue and kept its annual guidance steady even as inflation is starting to push the company’s costs higher, which could squeeze profit margins over the coming year.
The information and news provider’s three main business lines serving legal, tax and accounting as well as corporate clients, all posted higher revenue in the quarter that ended Sept. 30.
Revenue rose 3 per cent to US$1.57-billion, and was up 5 per cent after adjusting for the effects of currency fluctuations. Recurring revenues – the subscription-based fees that make up a large majority of the company’s revenue – were up 7 per cent. That was emblematic of the stability the company’s revenues have shown through more than two years of global economic upheaval, as most clients are locked in to contracts and there are a limited number of competitors for the same products and services.
With high inflation, rising interest rates and geopolitical upheaval starting to slow economic growth, however, some corporate clients are starting to look harder at the costs of their software contracts.
“We’re pretty optimistic on the revenue front as we head into 2023,” said chief executive officer Steve Hasker, in an interview. “I think where we’re cautious is in corporates, we see some software purchase decisions being put through an extra hurdle or two.”
Mr. Hasker said the company is also closely watching ad revenue from its Reuters News business, as well as revenues from events, one-time transactions and print products, which are “a little bit less bolted down” than income from its core subscription-based products.
Operating expenses decreased 3 per cent at Thomson Reuters, compared with a year ago, as the company continues to work through a two-year change program that will ultimately strip out costs while increasing the company’s focus on new technologies. But Mr. Hasker said the inflationary environment is pushing up labour costs, especially for engineering and technology skills, as well as the prices charged by the company’s vendors.
“We see it everywhere,” he said. “We see it in our input prices, everything from paper, through our print facility, all the way through to software renewals to run our front and back offices. … I can’t think of a single category where our vendors aren’t asking for price increases.”
Over time, Thomson Reuters also has an opportunity to raise prices in step with inflationary trends, and the company has made some price increases this year. But there is a lag before those increases take effect across the board as multi-year contracts with many clients gradually come due for renewal.
In the third quarter, Thomson Reuters reported profit of US$228-million, or 47 US cents per share, compared with a loss of US$240-million, or a loss of 49 US cents per share, in the same period last year.
“It was another solid quarter,” said Aravinda Galappatthige, an analyst at Canaccord Genuity Group Inc., in a note to clients.
Woodbridge Co. Ltd., the Thomson family holding company and controlling shareholder of Thomson Reuters, also owns The Globe and Mail.
Thomson Reuters kept its guidance for 2022 and 2023 unchanged, after six straight quarters in which it had increased some aspect of its targets. And the company has bought back US$855-million of shares through October 28 as part of a US$2-billion repurchase program announced in June.
The company’s leaders continue to hunt for acquisitions, as falling valuations for many technology companies make have made the math on deals “much friendlier to an acquirer,” Mr. Hasker said. In January, the company will be able to sell part of its US$6.3-billion stake in the London Stock Exchange Group (LSEG), which will give it added financial firepower.
The Reuters News division is also “moving methodically toward testing a paywall,” Mr. Hasker said, after Paul Bascobert was named president of Reuters in September. A previous attempt by the company to a website paywall was postponed last year after a dispute with financial data provider Refinitiv, which has since been acquired by LSEG, over the terms of an agreement to supply news.
The revamped paywall is likely to launch next year. “I’d put pretty modest growth expectations against that,” Mr. Hasker said, “but it does represent a pretty exciting step forward for the company.”
As the economy stumbles, FORTIS’s growth plans stand out
Fortis Inc.’s share price has been battered by rising interest rates over the past five months, yet the St. John’s-based utility is offering investors a compelling argument to consider the stock: low-risk growth built on the expansion of cleaner energy.
This reason is certainly worth a closer look.
Last Friday, Fortis FTS-T +0.28%increase updated its five-year capital plan with the release of its third-quarter financial results. The utility – whose electricity transmission and distribution operations span Canada, the United States and parts of the Caribbean – will make investments worth a total of $23.5-billion over the next five years through 2027.
That’s up $2.3-billion from the previous five-year plan through 2026.
“A good chunk of that is driven by our cleaner energy investments,” David Hutchens, chief executive officer of Fortis, said in an interview.
Fortis will spend $5.9-billion on such investments over five years, through building wind and solar interconnections in several U.S. states, developing renewable energy and storage in Arizona in place of existing coal generation, and upgrading the natural gas system in British Columbia.
“There is a very strong alignment among our stakeholders to progress as quickly as we can towards a cleaner energy future,” Mr. Hutchens said.
Traditional energy, such as oil and gas, has gained a lot of attention this year amid concerns about energy security and reliability, particularly in Europe.
But the U.S. Inflation Reduction Act, which includes US$370-billion to fight climate change through incentives and tax credits, is spurring growth in renewable energy in the United States. It is also accelerating the trend toward more electricity demand by encouraging things like electric vehicles.
Mr. Hutchens credits the act for bolstering Fortis’s long-term energy transition plans, which include being coal-free by 2032 and eliminating 75 per cent of greenhouse gas emissions by 2035 – even as some countries in Europe are now delaying planned shutdowns of aging power plants as fossil-fuel energy prices soar.
“You can get caught up in a short-term blip in energy prices, but longer-term we expect them to revert back to normal and for us to continue along with our plans,” Mr. Hutchens said.
He added: “I would not expect us to push back any of those retirements, because we do have economic ways of replacing that power.”
The best part for investors: The utility’s updated capital plans will translate into growth in its rate base – or the allowed rate of return on its assets – of 6.2 per cent a year over the next five years, according to the utility’s projections. That will underpin revenue growth and dividend increases.
David Quezada, an analyst at Raymond James, said in a note that the rate base projections, up from 6 per cent a year previously, are at “a level we consider to be highly attractive given Fortis’ diversified footprint and scale.”
The updated plan arrives at a time when the stock is trading at a relatively low valuation of 17.8 times the analyst’s estimated 2023 earnings. That’s near the low end of a price-to-earnings ratio that tends to hover between 16 and 23, according to Mr. Quezada.
The reason for the recent valuation dip: Rising interest rates have sent government bond yields surging to multiyear highs in recent months as central banks battle surging inflation.
The 10-year U.S. Treasury bond yields more than 4 per cent, for example, offering meaningful competition to stocks backed by slow-growing profits and dividends. Fortis stock currently yields 4.2 per cent.
“While we acknowledge the cycle of rising rates may not yet be complete, we stress that looking back over an extended period, this stock has only seen a valuation level below this a handful of times,” Mr. Quezada said.
The bullish case for utilities rests on central banks hitting the brakes on rate increases, perhaps by the start of 2023. And if the global economy falters from tighter monetary policy, as many economists expect, steady utilities can offer investors considerable safety from a broader downturn in corporate profits.
Fortis has laid out its growth plans for the next five years, offering an attractive opportunity in an economy that is looking increasingly murky.
Job openings surged in September despite Fed efforts to cool labor market
Job openings surged in September despite Federal Reserve efforts aimed at loosening up a historically tight labor market that has helped feed the highest inflation readings in four decades.
Employment openings for the month totaled 10.72 million, well above the FactSet estimate for 9.85 million, according to data Tuesday from the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey.
The total eclipsed August’s upwardly revised level by nearly half a million.
Fed policymakers watch the JOLTS report closely for clues about the labor market. The latest numbers are unlikely to sway central bank officials from approving what likely will be a fourth consecutive 0.75 percentage point interest rate increase this week.
September’s data indicates that there are 1.9 job openings for every available worker. The disparity in supply and demand has helped fuel a wage increase in which the employment cost index, another closely watched data point for the Fed, is growing at about a 5% annual pace.
In other economic news Tuesday, the ISM Manufacturing Index posted a 50.2 reading, representing the percent of companies reporting expansion for October. That was slightly better than the Dow Jones estimate for 50.0 but 0.9 percentage points lower than September.
One good piece of news from the ISM data: The prices index fell another 5.1 points to a 46.6 reading, indicating a lessening of inflation pressures. Order backlogs also declined, falling 5.6 points to a 45.3 reading, while supplier deliveries fell 5.6 points to 46.8 and employment edged higher to 50.
Gordon Pape: NFI should be in a sweet spot, but nothing’s going right
At first glance, you’d think that Winnipeg-based NFI Group Inc. (NFI-T -7.53%decrease) is the right company in the right place at the right time. Instead, the company has been hit by Murphy’s law: Anything that can go wrong, will go wrong.
NFI is a leading manufacturer of buses and motor coaches. Its battery-electric and fuel cell-electric vehicles are in more than 110 cities in six countries. The company proudly proclaims on its website that it is “leading the evolution to zero-emission mobility.”
NFI operates in Canada and the United States. Apart from Winnipeg, it has facilities in Ontario and U.S. operations in Alabama, Minnesota, Washington and New York. Product names include New Flyer, MCI, Alexander Dennis and Arboc. The company has 3.5 million square feet of production space and the capability of manufacturing up to 8,000 vehicles a year, powered by everything from clean diesel and natural gas to a range of hybrid and electric products.
The buyers are out there. The company has a near-record backlog of 4,150 units. But it all seems to be falling apart.
As the switch to electric vehicles intensifies, you’d expect a company such as NFI Group to be flourishing. It’s not – quite the opposite. At this point, the firm looks more like a candidate for bankruptcy than an up-and-coming transportation disrupter.
The company’s woes are reflected in its share price. In April, 2018, the stock was trading at almost $60. A year ago at this time it was around $28. It closed Friday at $9.63, down about 65 per cent in the past 12 months.
What’s happening? On Oct. 24, the company released a third-quarter preview that can only be described as dismal. NFI expects adjusted EBITDA in the quarter to be a loss of between $15-million and $17-million. For the full year, the company is guiding toward an adjusted EBITDA loss of between $40-million and $60 million. (EBITDA stands for earnings before interest, taxes, depreciation and amortization.)
Full-year revenue is projected as coming in between $2-billion and $2.2-billion, down from the previous estimate of $2.3-billion and $2.6-billion.
“The third quarter was another very challenging period as we saw strong demand for our products and services, offset by continuing supply disruption resulting in production inefficiencies and the inability to complete and deliver contractually committed buses. In addition, we continued to experience short-term margin pressure from higher inflation and surcharge driven input costs,” Paul Soubry, NFI’s chief executive officer, said in the preview.
In response, the company is implementing a five-part action plan to attempt to stop the bleeding. This includes:
A two-week freeze on new vehicle starts at New Flyer in hopes that suppliers can deliver the needed parts to complete projects already under way.
Following the end of the freeze, the company will only increase production once confidence in supply chains has improved.
NFI will work with suppliers and sub-suppliers to search for alternate or substitute parts where possible, increase production-line parts inventories and develop longer lead times to better support new vehicle output.
Continue cost cutting initiatives, including reducing overhead. The company has already closed two production facilities, one fabrication facility and nine parts distribution locations.
Discuss additional financing solutions with its bankers and government partners.
The company says that demand for its products is strong and that is expected to continue into 2023. But strong demand doesn’t translate into revenue if it can’t deliver its products.
NFI described these problems as “near-term headwinds” and reiterated its guidance for 2025 of between $3.9-billion and $4.1-billion in revenue and adjusted EBITDA of between $400-million and $450-million.
Investors are clearly taking this optimistic forecast with a large grain of salt. The stock continued to tumble last week, losing 17 per cent even in the midst of a strong TSX rally.
Despite all this bad news, the stock continues to pay a quarterly dividend of 5.31 cents a share (21.24 cents a year) to yield 2.2 per cent. The dividend was slashed by about 76 per cent last December, but it’s surprising it hasn’t been eliminated completely. That could be the next step in management’s austerity plan. Full third-quarter results will be released Nov. 2. A dividend suspension could come then.
NFI shares could enjoy a huge recovery in the next few years if the company can turn this mess around. Based on what we’ve seen to date, don’t bet on it.
