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OPEC+ sticks with planned oil production hike as supply concerns weigh on energy markets
Fed’s preferred inflation measure rose 4.7% in May, around multi-decade highs
Air Canada reducing summer flights as industry faces ‘unprecedented strains’ on travel operations
Air Canada, AC-T -2.29%decrease citing “unprecedented strains” on the airline industry from resurgent travel, says it is cancelling 154 flights per day in July and August, or 15 per cent of its schedule.
“Regrettably, things are not business as usual in our industry globally, and this is affecting our operations and our ability to serve you with our normal standards of care,” chief executive Michael Rousseau said in a message to customers Wednesday night.
“Despite detailed and careful planning, the largest and fastest scale of hiring in our history, as well as investments in aircraft and equipment, it is now clear that Air Canada’s operations too have been disrupted by the industry’s complex and unavoidable challenges.”
Mr. Rousseau’s customer message did not provide details on the reductions, but Air Canada gave specifics in a response to questions from The Globe and Mail.
The airline said it is reducing its schedule, on average, by 77 round trips, or 154 flights, a day in total for July and August. Air Canada currently operates on average about 1,000 flights a day.
Three routes from Montreal to Pittsburgh, Baltimore and Kelowna will be temporarily suspended. Air Canada will also suspend its route from Toronto to Fort McMurray.
Most of the flights affected are to and from Toronto or Montreal, Air Canada said. “These will be mostly frequency reductions, affecting primarily evening and late-night flights by smaller aircraft, on transborder and domestic routes,” the airline said in an e-mailed statement. “Our international flights are unaffected, with a few timing changes to reduce flying at peak times and even out the customer flow.”
As travellers returned to the skies in 2022 after two years of the COVID-19 pandemic, the world’s airline infrastructure struggled to keep up. Travellers to Toronto’s Pearson airport have fared poorly, with massive line-ups at check-in, security and customs.
Air Canada cancelled more than 350 flights at Pearson in the first seven days of June – almost 10 per cent of its schedule – as staffing shortages and a surge in passengers beleaguered Canada’s busiest airport. WestJet and Air Transat also had delays and cancellations at Pearson. Airports in Calgary, Montreal and Vancouver experienced bottlenecks, but not to the extent of Pearson.
In his customer message, Mr. Rousseau described “flight cancellations and customer service shortfalls on our part that we would never have intended for our customers or for our employees, and for which we sincerely apologize.”
“This was not an easy decision, as it will result in additional flight cancellations that will hav
ive impact on some customers. But doing this in advance allows affected customers to take time to make other arrangements in an orderly manner, rather than have their travel disrupted shortly before or during their journey, with few alternatives available. It will also enable us to more reliably serve all customers.”
Shortly after the e-mail went out, Air Canada said its website was ”currently experiencing technical issues that may prevent you from retrieving your booking online … We are working to resolve the issue as quickly as possible, and appreciate your patience.”
U.S. economy contracts in first quarter; outlook murky as unsold goods accumulate
The U.S. economy contracted slightly more than previously estimated in the first quarter as the trade deficit widened to a record high and a resurgence in COVID-19 infections curbed spending on services like recreation.
The Commerce Department’s third estimate of gross domestic product on Wednesday also showed some underlying softness in the economy, with consumer spending revised lower and inventories higher than reported last month.
This is a potential red flag for domestic demand and the economic outlook amid recession jitters as the Federal Reserve aggressively tightens monetary policy to tame inflation. Fed Chair Jerome Powell told a European Central Bank conference on Wednesday that “there is a risk” the U.S. central bank could slow the economy more than needed to control inflation.
“The biggest effect from this report is that it leaves inventories in a more overbuilt position than previously thought, putting second-quarter GDP into negative territory pending what tomorrow’s data reveal about May consumption and consumer inflation and April revisions to the same,” said Chris Low, chief economist at FHN Financial in New York.
Gross domestic product fell at a 1.6% annualized rate last quarter, revised down from the 1.5% pace of decline reported last month. That was the first drop in GDP since the short and sharp pandemic recession nearly two years ago. Trade subtracted an unrevised 3.23 percentage points from GDP.
Economists polled by Reuters had forecast the pace of contraction would be unrevised at a 1.5% rate.
The economy was initially estimated to have contracted at a 1.4% rate. It grew at a robust 6.9% pace in the fourth quarter. GDP was 2.7% above its level in the fourth quarter of 2019.
Consumer spending, which accounts for more than two-thirds of the economy, grew at a 1.8% rate instead of the 3.1% pace reported last month. The downgrade reflected revisions to services, now estimated to have increased at a 3.0% rate instead of the previously reported 4.8% pace.
Spending on recreation, financial services and insurance as well as healthcare was downgraded. Outlays on goods meant to last three years or more increased at a 5.9% pace, slashed from the previously reported 6.8% rate. That reflected downgrades to motor vehicles and recreational goods spending.
Stocks on Wall Street were mostly lower. The dollar rose against a basket of currencies. U.S. Treasury yields fell.
INVENTORIES PILING UP
The moderate pace of spending left inventories significantly higher than estimated in May. Business inventories increased at a $188.5 billion rate, rather than the $149.6 billon pace reported last month. The accumulation was in the retail sector, mostly in general merchandise stores.
Major retailers like Walmart and Target have reported they are carrying too much merchandise.
Slower consumer spending was partially offset by stronger business investment in equipment, whose growth pace was raised to 14.1% from 13.2%. As a result, growth in final sales to private domestic purchasers, which excludes trade, inventories and government spending, was cut to a 3.0% rate last quarter.
This measure of domestic demand was previously reported to have risen at a 3.9% rate.
Revisions to corporate profits were minor. The saving rate was unrevised at 5.6%. The increase in personal income was little changed from May’s estimate.
But interest on assets was trimmed. That led to the rise in gross domestic income (GDI), an alternative measure of economic growth, being pared to a 1.8% rate from the 2.1% pace estimated last month. GDI advanced at a 6.3% rate in the fourth quarter.
The economy appears to have rebounded from the first-quarter slump, with consumer spending accelerating in April. Business spending on equipment remained solid through May, while the goods trade deficit narrowed significantly as exports hit a record high. But the bounce is losing momentum because of the Fed’s aggressive posture.
The U.S. central bank this month raised its policy rate by three-quarters of a percentage point, its biggest hike since 1994. The Fed has increased its benchmark overnight interest rate by 150 basis points since March.
Retail sales fell in May, while housing starts and building permits declined. Consumer confidence hit a 16-month low in June. May’s consumer spending report on Thursday could shed more light on second-quarter growth prospects, which range from as low as a 0.3% rate to as high as a 2.9% pace.
“It is extremely unlikely the economy is in recession now, however, despite the decline in first-quarter GDP and apparent weakness in output growth in the current quarter,” said Scott Hoyt, a senior economist at Moody’s Analytics in West Chester, Pennsylvania. “Job growth remains strong, investment is growing, both households and business have strong balance sheets.”
Why Canadian energy stocks are a no-brainer
Canadian oil and gas stocks were a compelling buy even before the sector’s latest drubbing. Now they’re almost a no-brainer.
Over the past few weeks, the energy sector has taken a big hit, as concerns about a global recession have knocked crude oil prices off their steady upward trajectory dating back to the start of the year.
The country’s big energy players, such as Canadian Natural Resources Ltd. and Imperial Oil Ltd., have seen their share prices drop by more than 15 per cent, while mid-sized oil producers, such as Crescent Point Energy Corp. and Whitecap Resources Inc., are nursing losses of closer to 30 per cent.
Global oil benchmarks, however, are still comfortably higher than US$100 a barrel, where they are very likely to remain for the foreseeable future.
That commodity backdrop equates to enormous profits for Canadian energy producers, which are suddenly on sale for those who still care to invest in fossil fuels.
“Investors absolutely should be taking advantage of the weakness here and buy,” said Randy Ollenberger, managing director of oil and gas equity research at BMO Nesbitt Burns. “What’s holding a lot of them back, I think, is just all the volatility in commodity prices.”
After soaring to record highs earlier this year, resource prices of all kinds have begun to reflect a shaky economic outlook. The combination of inflation, rising interest rates and growing signs of a downturn have driven down the prices of everything from copper to wheat to natural gas.
But the forces keeping energyprices high are enduring, whether there is a recession or not.
“Although the severity of a recession could put a dent in oil demand, history suggests it will not be big, if at all,” energy analyst Jason Bouvier at Scotia Capital wrote in a note.
Rarely does global demand for oil actually decline from one year to the next. It has only happened about a half-dozen times in the past 50-plus years – two of which were during the 1970s energy crisis, and two during the global financial crisis of 2007-08, Mr. Bouvier said.
When demand does slump on a worldwide basis, it tends to be on the order of 2 per cent. That pales in comparison with all the supply constraints still hanging over the global energy complex.
Nowhere in the world is there a major source of spare capacity ready to be tapped. This time around, the Organization of the Petroleum Exporting Countries is running out of room to boost production. And Russia is still producing around nine million barrels of oil a day, which could be increasingly squeezed by sanctions.
“We’re still looking at a supply shock – the largest we’ve seen since the 1970s, and it’s going to take several years for that to unwind,” Mr. Ollenberger said.
If triple-digit oil prices are an indefinite reality, Canadian oil stocks have a lot of catching up to do.
From the start of the year up to its peak in early June, the S&P/TSX Capped Energy Index gained 74 per cent, single-handedly keeping the Canadian stock market from falling into bear market territory.
Despite the impressive gains, the market never gave Canadian oil and gas stocks the benefit of US$100 oil – not even close. At the sector’s peak, it was priced for around US$70 a barrel. The recent sell-off took that number closer to US$60, Mr. Ollenberger estimates.
That should represent a huge margin of safety against current oil prices. But when West Texas Intermediate declined by about 15 per cent earlier this month, the Canadian energy sector fell by even more – 25 per cent, from peak to trough.
Much of that selling pressure was likely the result of profit-taking. After being the top performer on the TSX both year to date, and last year, the energy sector was a prime target for investors to lock in some gains.
After their sell-off, Canadian oil and gas names are not only cheap relative to energy prices, they are also cheap compared with their U.S. peers.
The discount is so large across the sector that investors can get plenty of upside potential by sticking with the largest names, such as Canadian Natural Resources Ltd., Suncor Energy Inc. and Cenovus Energy Inc., Mr. Ollenberger said. “You don’t have to go to some of the more volatile plays.”
Meanwhile, Scotia Capital’s Mr. Bouvier said he also prefers the integrated companies over the short term, citing Cenovus and Imperial Oil as top picks.
Mark Carney says global recession risk is ‘uncomfortably high,’ but Canada likely to fare better than most other countries
The former governor of the central banks of Canada and England says the risk of a recession in the United States and globally is “uncomfortably high,” but that Canada is likely to fare better in a slowdown than most other countries.
Mark Carney predicted the severity of an economic malaise, which could begin within the next year, won’t match the one that was triggered by the financial crisis that began in 2008.
“That recession, if it comes, will be relatively mild. This isn’t 2008, for [the U.S.], but it’s also not 2001 either,” Mr. Carney said at an Alberta Relaunch conference in Calgary. That year, the dot-com bust sideswiped stock markets and helped trigger a recession
A slowdown won’t be as painful as the last global one because there aren’t the same imbalances in the U.S. economy. The banks are not in as precarious a situation, and there is not the same oversupply of houses and cars. At the same time, consumer finances are in better shape than they were in 2008, he said.
“People are starting to be crimped, but, on the whole, they are not over their skis in debt,” Mr. Carney said.
However, he said, a new recession may be worse than the one that accompanied the dot-com crash when central banks were better positioned than today to “flood in support” to limit the damage. In addition, at that time the world was in the process of liberalizing trade, which helped the situation, he said.
Mr. Carney was governor of the Bank of Canada during the 2008-2009 crisis, and one of the levers that central bankers of the era used to lessen the shock stemming from the global credit crunch was to slash interest rates.
Today, central banks, including Canada’s, are increasing rates in an attempt to tame inflation that has climbed to multidecade highs, and that is raising fears of recession as consumers and businesses cut spending to deal with surging prices.
Mr. Carney is now United Nations Special Envoy on Climate Action and Finance. In that role he has spearheaded efforts to get the world’s major banks, insurers and asset managers to align their investment strategies with the goal of moving the world to net-zero carbon emissions by 2050. That coalition now comprises 500 institutions with more than US$130-trillion of assets. He also co-manages an energy transition impact fund for Toronto-based Brookfield Asset Management.
Today, Canada, and Alberta in particular, can take advantage of global energy systems that are shifting to lower-carbon sources tobuoy our economy, Mr. Carney said. He said Alberta’s energy sector was early in exploring technology to decarbonize oil and gas production, and is now making strides. As an example, he cited major oil sands producers that have banded together to implement carbon capture, utilization and storage and other technology in efforts to reduce emissions.
Interest rates and inflation are closely linked, which is why the Bank of Canada has been pushing up its key rate to try and keep inflation to a target of 2%. But it’s a careful balance between controlling inflation and not tipping the economy into a recession.
Manulife bids for full control of China joint venture, lured by $3.8-trillion funds market, sources say
Manulife Financial Corp moved closer toward taking full control of its funds joint venture in China after regulators there accepted an application for the ownership change, two sources with knowledge of the matter told Reuters.
Manulife, Canada’s largest life insurer, is seeking to bolster its presence in China’s $3.8 trillion funds market, which grew 27% in 2021 and is forecast by consultancy McKinsey to more than double by 2025.
China’s securities regulator officially accepted a recent application from Manulife’s asset management arm to increase its stake in the joint venture to 100% from the current 49%, said the sources.
Manulife shares fell 0.2% to C$22.46 at midday in Toronto, compared with a 0.85% decline in the Toronto stock benchmark.
Manulife Investment Management acquired the stake in Manulife Teda Fund Management in China in 2010 from ABN AMRO bank and teamed up with state-owned Tianjin TEDA International Holding, which owns the remaining 51% equity but is looking to sell it.
The move furthers Manulife’s stated goal of expanding both its Asian and asset management units, and its intention to deploy more capital in China.
Foreign companies are jockeying for position as China opens up the financial services sector, from investment banking to insurance, to global competition.
Manulife Investment Management and Manulife Teda Fund Management spokespeople declined to comment.
Since ownership caps for foreign companies in fund management JVs were scrapped in 2019, a growing number of foreign asset managers, including BlackRock and Fidelity, have set up operations in China to compete for a share of the country’s swelling mutual funds market.
The official acceptance of Manulife’s application by the China Securities Regulatory Commission (CSRC) means the Canadian company is “a step closer” to taking full control of the venture, which had around 60 billion yuan ($8.96 billion) in retail fund assets as of March. An approval could come soon, although the timing is unknown, one of the sources said.
A CSRC public disclosure on May 22 shows it had made a decision on whether it would consider a Manulife Teda application to change more than 5% ownership, but does not reveal its decision.
The CSRC did not respond to a request for comment.
Besides the fund management joint venture in China, Manulife also has a 51% stake in an insurance joint venture with Sinochem, and has been open about its aspiration to increase its share of that as well.
Manulife’s Asia CEO told Reuters earlier this month the regional unit was on track to account for half of the Canadian insurer’s core earnings by 2025 despite economic slowdowns and impact of COVID-19 on its key markets.
The change at the fund venture got underway in July last year when Tianjin TEDA put its stake on the block for around $263 million, one of the sources said.
The venture is also in the final stages of tapping the general manager of a rival foreign fund in China to head its operations, one of the sources said.
JPMorgan became the first global bank that filed with the Chinese regulator last year to convert its local fund joint venture into a wholly owned business, which has yet to receive regulatory approval.
June 28 – Shares in the Asia Pacific fall; Australia retail sales data ahead
https://www.cnbc.com/2022/06/29/asia-markets-wall-street-consumer-confidence-currencies-and-oil.html
China’s economy didn’t bounce back in the second quarter, China Beige Book survey finds
