Author: Consultant

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

• Shares in the Asia-Pacific fell on Wednesday after Wall Street’s negative performance on Tuesday.
• South Korea’s consumer sentiment index fell, standing at 96.4 for June 2022, down 6.2 points from May’s print, according to Bank of Korea’s survey.
• Elsewhere in the region, China cut the quarantine period for international travelers on Tuesday, in a step away from its strict Covid controls that have been in place for more than two years.

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

• Chinese businesses ranging from services to manufacturing reported a slowdown in the second quarter from the first, reflecting the prolonged impact of Covid controls.
• That’s according to the U.S.-based China Beige Book, which claims to have conducted more than 4,300 interviews in China in late April and the month ended June 15.
• The analysis found few signs that government stimulus was having much of an effect yet.

https://www.cnbc.com/2022/06/28/chinas-economy-didnt-bounce-back-in-the-second-quarter-survey-finds.html

Premarket (June 28): Stocks, oil edge up as China relaxes quarantine rules

Global shares moved into positive territory on Tuesday while oil prices firmed following China’s decision to ease some quarantine requirements for international arrivals that raised hopes for stronger growth and a revival in demand for commodities.

China slashed the quarantine time for inbound travellers by half in a major easing of one of the world’s strictest COVID-19 curbs, which have deterred travel in and out of the country since 2020.

Asian shares rose after the announcement and European stocks opened firmly in the green which sent the MSCI’s benchmark for global stocks into positive territory and on track for its fourth consecutive daily gain.

China’s strict zero-COVID regulations have been a drag on activity in the world’s number two economy, but an easing of travel restrictions and reopening of major cities from lockdowns boost optimism that growth can get back on track.

“This is a good step forward,” said Hani Redha, multi asset portfolio manager at PineBridge Investments.

“It’s not enough to lead to a very robust recovery, but it’s definitely going to be positive incrementally.”

MSCI’s broadest index of Asia-Pacific shares rose 0.3%, while Hong Kong’s Hang Seng reversed earlier losses to rise 0.7% and China’s CSI 300 Index gained over 1%. China’s tourism stocks gained over 5.5%.

The pan-European STOXX 600 was up 0.6%, boosted by oil & gas and mining stocks, but the outlook for developed market stocks remains challenging as central banks attempt to balance stubbornly high inflation with slowing growth.

“Equity markets will not be out of the woods until central banks shift their rhetoric to a less hawkish stance,” said Salman Baig, portfolio manager, cross asset solutions, at Unigestion.

“Unfortunately for many investors, such a pivot will likely not happen until after the economy has slowed down sufficiently to bring inflation on a sustainably downward path.”

The European Central Bank’s Forum on Central Banking in Sintra continued on Tuesday with a focus on a speech from ECB President Christine Lagarde.

Lagarde said the ECB will move gradually when it begins raising rates but with the option to act decisively on any deterioration in medium-term inflation, especially if there are signs of a de-anchoring of inflation expectations.

Euro zone government bond yields held near their highs after Lagarde’s comments, with Germany’s 10-year yield, the benchmark for the bloc, up 8 basis points at 1.63%.

The euro was little changed against the U.S. dollar following Lagarde’s initial comments, while China’s offshore yuan rose 0.1% after Beijing’s measures to ease travel restrictions.

The U.S. dollar index, which measures the greenback against a basket of six currencies, was little changed at 103.97.

Oil prices swung higher after China eased quarantine rules, with focus already on tight supply as G7 leaders agreed to study placing price caps on imports of Russian oil and gas.

U.S. crude rose 1.41% to $111.08 a barrel. Brent crude jumped 1.3% to $116.59 per barrel.

“A seam of tight supply news bolstered the (oil) market,” said analysts at Commonwealth Bank of Australia. “Political unrest might curtail supply from a couple of second-tier producers, Ecuador and Libya. And then there’s the G7′s proposed price cap on Russian oil.”

Gold was 0.2% higher with the spot price trading at $1,827 per ounce.

Bitcoin rose 0.8%, trading at $20,870 after falling as low as $17,588.88 earlier this month.

Reuters

One more blockbuster Supreme Court decision could still be coming even after Friday’s abortion ruling

Believe it or not, overturning Roe v Wade may not be the Supreme Court’s most dramatic decision this year. Instead, its ruling on West Virginia vs. the Environmental Protection Agency could prove far more consequential. It could literally upend how our government works.

West Virginia vs. the EPA asks whether important policies that impact the lives of all Americans should be made by unelected D.C. bureaucrats or by Congress. This SCOTUS could well decide that ruling by executive agency fiat is no longer acceptable.

The case involves the Clean Power Plan, which was adopted under President Barack Obama to fight climate change; the program was estimated to cost as much as $33 billion per year and would have completely reordered our nation’s power grid. The state of West Virginia, joined by two coal companies and others, sued the EPA, arguing the plan was an abuse of power. 

By deciding in favor of West Virginia, the court could begin to rein in the vast powers of the alphabet agencies in D.C. that run our lives and return it to legislators whom we elect to create…legislation. Just as the Supreme Court ruled in Roe v. Wade that abortion laws are more appropriately left up to the people’s elected representatives, it may decide in West Virginia vs. EPA that Congress, and not federal agencies, should write our laws.

A decision that puts Congress in charge would stall environmental rules intended to replace fossil fuels with renewable energy. Legislators, back in the driver’s seat, would have to debate and go public with the consequences – and costs — of regulations that are now adopted with little buy-in from the public. 

https://www.foxnews.com/opinion/one-more-blockbuster-supreme-court-decision-could-still-be-coming-after-fridays-abortion-ruling

Trudeau calls U.S. court decision overturning Roe v. Wade ‘horrific’

Prime Minister Justin Trudeau weighed in Friday on the U.S. Supreme Court’s decision to overturn decades-old jurisprudence on abortion, calling what’s unfolding south of the border a “horrific” development that threatens the right of women to choose what to do with their own bodies.

“My heart goes out to the millions of American women who are now set to lose their legal right to an abortion. I can’t imagine the fear and anger you are feeling right now,” Trudeau said in a social media post.

He said “no government, politician, or man” should force a woman to carry out a pregnancy, reiterating that, under his Liberal government, “women in Canada know that we will always stand up for your right to choose.”

Deputy Prime Minister Chrystia Freeland also condemned the ruling, saying she had a “visceral reaction” when she first heard of the court’s decision.

“I was just shocked and horrified and so worried, actually,” Freeland said in an interview with CBC’s Rosemary Barton Live airing Sunday.

https://www.cbc.ca/news/politics/trudeau-horrific-us-court-abortion-1.6500475