The Canadian market climbed to a fresh record high on Thursday with stocks from materials and energy sectors moving higher on firm commodity prices. A rate cut by the European Central Bank and expectations of interest rate cuts by the Federal Reserve and the Bank of Canada aided sentiment.
Data showing an unexpected increase in U.S. retail sales, and a drop in U.S. jobless claims contributed as well to the positive mood in the market.
The benchmark S&P/TSX Composite Index, which surged to 24,561.20, settled with a gain of 129.28 points or 0.53% at 24,690.48.
Onex Corporation (ONEX.TO) gained about 3.6%. GFL Environmental (GFL.TO), RB Global (RBA.TO), Cameco Corporation (CCO.TO), Imperial Oil (IMO.TO), Boyd Group Services (BYD.TO), Franco-Nevada Corporation (FNV.TO) and Senvest Capital (SEC.TO) climbed 1.5 to 3%.
CGI Inc (GIB.A.TO), Descartes Systems Group (DSG.TO), Intact Financial Corporation (IFC.TO) and Fairfax Financial Holdings (FFH.TO) also closed with strong gains.
Ag Growth International (AFN.TO), Ero Copper (ERO.TO), Brookfield Business Corporation (BBUC.TO), TFI International (TFII.TO), Restaurant Brands International (QSR.TO) and Stella-Jones (SJ.TO) lost 1 to 3.2%.
Canopy Growth Corporation (WEED.TO) announced today that it has made early prepayment on its senior secured term loan equal to $100 million at a discounted price of $97.5 million. Canopy expects that the prepayment will reduce its annualized interest expense by about $14 million. The stock gained 1.7%.d
BRP Inc. (DOO.TO) gained about 0.7%. The company announced today that it will sell its Marine businesses namely Alumacraft, Manitou, Telwater, and Marine parts, accessories and apparel. BRP said this process excludes all activities related to its Sea-Doo personal watercraft, Sea-Doo Switch pontoons and jet propulsion systems.
TORONTO, Oct. 17, 2024 /CNW/ – Royal Bank of Canada (TSX: RY) (NYSE: RY) today announced the offering of US$1.0 billion of non-viability contingent capital (NVCC) Additional Tier 1 (AT1) Limited Recourse Capital Notes, Series 5 (the “LRCNs”). The securities offered are registered with the U.S. Securities and Exchange Commission (the “SEC”).
The LRCNs will bear interest at a rate of 6.350 per cent annually, payable quarterly, for the initial period ending November 24, 2034. Thereafter, the interest rate on the LRCNs will reset every five years at a rate equal to the prevailing 5-year U.S. Treasury Rate plus 2.257 per cent. The LRCNs will mature on November 24, 2084. The expected closing date of the offering is November 1, 2024, subject to customary closing conditions.
RBC Capital Markets, LLC, BofA Securities, Inc., Citigroup Global Markets Inc., J.P. Morgan Securities LLC, Morgan Stanley & Co. LLC, and HSBC Securities (USA) Inc. are the joint book-running managers for the offering.
Concurrently with the issuance of the LRCNs, the bank will issue NVCC Non-Cumulative 5-Year Fixed Rate Reset First Preferred Shares, Series BX (“Preferred Shares Series BX”) to be held by Computershare Trust Company of Canada as trustee for Leo LRCN Limited Recourse Trust™ (the “Limited Recourse Trust”). In case of non-payment of interest on or principal of the LRCNs when due, the recourse of each LRCN holder will be limited to that holder’s proportionate share of the Limited Recourse Trust’s assets, which will consist of Preferred Shares Series BX except in limited circumstances.
The bank may redeem the LRCNs on November 24, 2034 and on each February 24, May 24, August 24, and November 24 thereafter, only upon the redemption by the bank of the Preferred Shares Series BX held in the Limited Recourse Trust, in accordance with the terms of such shares and with the prior written approval of the Superintendent of Financial Institutions (Canada), in whole on not less than 10 nor more than 60 days’ prior notice.
Stocks have climbed since the Federal Reserve lowered interest rates a month ago, with investors betting that it marked the beginning of a series of cuts that will offer a tail wind to the market.
And the economy continues to hum, with reports this month showing robust hiring and milder inflation, bolstering the rally.
As big companies begin to announce their latest quarterly financial results, providing key numbers that analysts use to model where the market is headed, there is a renewed sense of optimism across Wall Street. That bullishness is largely based on confidence that the Fed will tame inflation without tipping the economy into recession, a “soft landing” seldom achieved by policymakers.
“There has been a marked shift relative to 18 months ago,” said Ben Snider, an equity analyst at Goldman Sachs. “When I talk to investors there is much less concern about an economic downturn.”
Falling interest rates are generally good news for stocks because lower borrowing costs can boost corporate profits and raise market valuations. Lower rates also make the potential gains on stocks more attractive relative to the returns offered by bonds.
The S&P 500 index has risen 4% since the Fed cut rates last month as investors have funneled more than $20 billion into funds that buy U.S. stocks. The benchmark index has set a series of fresh record highs, including after a rise Monday.
Last week, analysts at Fundstrat and Goldman Sachs both raised their year-end forecasts for stocks, with Goldman expecting a further gain of just a little over 2%, with the index having already surpassed its previous prediction. That would come on top of what has already been a buoyant year, with the S&P 500 up more than 20% through Monday.
Even just a few weeks ago, concerns about the economy led analysts to lower their expectations for quarterly corporate earnings growth by more than usual, according to data from FactSet.
But the initial batch of earnings reports late last week from bellwether corporations like JPMorgan Chase and Wells Fargo were stronger than anticipated, a sign that the economy remained solid. More companies open their books this week, including the rest of the big banks, Johnson and Johnson, Netflix and Procter and Gamble. This next wave of presentations to analysts will help bolster the stock market’s heady valuation — or not.
Despite the bumper gains for major stock indexes, beneath the surface many companies and even entire sectors have recorded far less heady gains this year, with much of the rally being driven by the giant tech companies on the forefront of artificial intelligence. Investors hope that if the economy can remain resilient, the gradual decline of interest rates will lift more unloved areas of the market, offering a new driving force for the rally — and the economy in general.
And while the Fed’s September rate cut was too recent to have much of an impact on the latest batch of earnings, it could still shift sentiment, said James Demmert, chief investment officer at Main Street Research.
“It feeds the animal spirits of people running businesses to have the confidence to say we don’t need to be cost cutting, we need to be investing,” he said.
But the Russell 2000 index of smaller companies, which is linked to the ebb and flow of the U.S. economy, has struggled to keep up with the indexes dominated by multinational giants.
Much of the thinking behind forecasts for the continued ascent of stock prices centers on a broader group of industries generating the lift, but the reality is that indexes like the S&P 500 will continue to remain heavily dependent on investors’ exuberance for tech and especially AI.
Goldman Sachs expects higher earnings, and therefore higher stock prices, to be driven primarily by a more resilient economy that supports spending. But the bank also highlighted a recovery in the supply chain for the microchips that power AI applications to raise profits for companies that make the chips, as well as for companies like Google and Microsoft developing new AI applications.
“It’s not that we expect the megacaps to do poorly but the earnings environment for the rest of the market does seem to be improving,” Snider said.
Other concerns, such as the intensified fighting in the Middle East and the uncertainty around the U.S. presidential election, have been downplayed as less important than the positive economic conditions supporting earnings growth.
Typically, rising geopolitical tensions generate sharp but short-lived sell-offs, while presidential elections are often preceded by a mild sell-off followed by a rally. Analysts at Deutsche Bank recently said that these sorts of events may have less of an effect on the market than in the past.
“One key point with geopolitical shocks, as well as elections, is that the economic context has eventually always dominated,” the analysts noted.
And that context, for the time being, remains favorable to stock prices pushing higher. Even as the Fed has lowered the short-term interest rates it controls, longer-dated rates in the market for U.S. Treasury bonds have risen, typically a sign of expectations for future economic growth.
Bob Elliott, chief investment officer at fund manager Unlimited, said the economy is in “a pretty unusual circumstance globally.” Neither growth nor unemployment are flashing warning signs over the economy, “but still we are getting easing,” he said, referring to central banks around the world cutting interest rates as the global economy continues to expand.
“It’s not a normal cycle,” said Kristina Hooper, chief market strategist at Invesco.
Canada’s inflation rate dropped below 2 per cent in September for the first time in more than three years, the latest sign of price stability that potentially tips the Bank of Canada to a larger interest-rate cut next week.
The consumer price index (CPI) rose at an annual rate of 1.6 per cent in September, down from a 2-per-cent pace in August, Statistics Canada said Tuesday in a report. Financial analysts were expecting a slowdown to 1.8 per cent. On a monthly basis, consumer prices fell 0.4 per cent.
This marked the weakest inflation rate since early 2021, when Canada was in the throes of a pandemic that momentarily resulted in tepid price increases, but gave way to the largest upswing in consumer prices in four decades.
The surprisingly softresults in Tuesday’s report were heavily influenced by gasoline prices, which fell 7.1 per cent in September from August. Excluding gas, the CPI rose at an annual pace of 2.2 per cent, matching the increase in August.
The inflation fight is effectively over, a milestone for the Canadian economy after CPI growth peaked in 2022, prompting central bankers to jack up interest rates to cool demand. Because of the progress to date, the Bank of Canada has delivered three consecutive rate cuts since June, taking its policy rate to 4.25 per cent from 5 per cent.
In recent weeks, economists and investors have debated whether the central bank will cut rates by another quarter-point at its next decision on Oct. 23, or opt for a larger half-point reduction.
However, after the inflation report was published, investors are more heavily leaning toward a larger cut. Markets are pricing in a 75-per-cent chance that the BoC lowers its benchmark interest rate by 50 basis points next, compared to roughly 50-50 odds before the report, according to Bloomberg data. (A basis point is 1/100th of a percentage point.)
“The Bank of Canada needs to do something to revive the economy and stop inflation from falling too far,” said Royce Mendes, head of macro strategy at Desjardins Securities, in a client note. “Our view is that a 50-basis-point rate cut is the right dose of medicine.”
Inflation came in lower than Bank of Canada estimates in the third quarter, and it’s been generally soft this year. Weaker household spending, more resilient supply chains and lower commodity prices have all helped to quell consumer price increases. Because of higher borrowing costs, many households have been forced to tighten their budgets.
Housing costs rose by an annual 5 per cent in September, down from 5.3 per cent in August. Rents rose by 8.2 per cent – quite elevated by historical standards, but down from 8.9 per cent in August. Other data sources are indicating that rents are declining in some cities.
Grocery prices rose 2.4 per cent in September, year over year, matching the increase in August. Clothing and footwear prices have dropped 4.4 per cent over the past year.
On a three-month annualized basis, the Bank of Canada’s core measures of inflation – which strip out volatile movements in the CPI – slowed to 2.1 per cent in September from 2.3 per cent in August.
The Bank of Canada has recently warned that inflation could drift below its 2-per-cent target. And while the BoC is unlikely to be alarmed by one month of below-target inflation – especially when the results are heavily influenced by volatile gas prices – it has stressed that economic activity needs to pick up to ensure this doesn’t become a trend.
Several analysts have said that inflation could pick up in the coming months, particularly with gas prices rising in October. The Bank of Canada is projecting a sustainable return to the 2-per-cent inflation target in 2025, although its economic forecasts will be updated next week.
Bank of Montreal chief economist Doug Porter said the drop in the annual inflation rate below 2 per cent was a “watershed moment.”
“It’s a close call, but we suspect that the big improvement in inflation, the still-high unemployment rate, and the still-sour consumer and business sentiment will be enough to prompt the Bank of Canada to opt for a 50 [basis point] rate cut later this month,” he said in a client note. “After all, the BoC has dovishly signalled that they are now more concerned about downside risks to the economy and the possibility that inflation may drop too low.”
Oil prices have gained more than 10% through Thursday’s close since Iran hit Israel with ballistic missiles last week.
The rally has eased, however, amid uncertainty over how Israel will respond
U.S. crude oil on Friday was on pace to eke out its second weekly gain in a row as Israel prepares to retaliate against Iran.
The U.S. benchmark has gained 1% this week, while global benchmark Brent is ahead 0.8%. Oil prices have gained more than 10% through Thursday’s close since Iran hit Israel with ballistic missiles last week.
“Nevertheless, sustaining bullish price momentum in oil has proven to be a high maintenance task: without additional catalysts, the ‘war’ and ‘stimulus’ premiums have shown easy susceptibility to fading,” Natasha Kaneva, head of global commodity strategy at JP Morgan, told clients in a Friday note.
Here are Friday’s energy prices:
West Texas Intermediate November contract: $75.21 per barrel, down 64 cents, or 0.84%. Year to date, U.S. crude oil has gained nearly 5%.
Brent December contract: $78.77 per barrel, down 63 cents, or 0.79%. Year to date, the global benchmark has increased about 2%.
RBOB Gasoline November contract: $2.1414 per gallon, down 0.44%. Year to date, gasoline is ahead 1.7%.
Natural Gas November contract: $2.685 per gallon, up 0.37%. Year to date, gas has risen about 6%.
Israel’s security cabinet met Thursday to discuss the country’s response to Iran’s attack, according to media reports. President Joe Biden and Prime Minister Benjamin Netanyahu spoke by phone on Wednesday.
Traders have worried that Israel will hit Iran’s oil industry, potentially triggering a cycle of escalation that causes a significant disruption of supplies in the Middle East. Biden has discouraged Israel from targeting Iran’s oilfields. The Arab Gulf states have also reportedly lobbied the White House to pressure Israel to refrain from hitting Iranian energy infrastructure.
“We expect that the White House is potentially encouraging Israel to target refineries instead of oil export facilities, arguing that the economic impact would be more directly felt by Iran,” Helima Croft, head of global commodities strategy at RBC Capital Markets told clients in a Thursday note.
Croft warned, however, that the U.S. influence may have waned since April, when Israel’s response to Iran’s first missile and drone attack was relatively muted.
TD Bank pleaded guilty in a criminal money laundering case and agreed to pay a whopping $3 billion in fines and other penalties to the Department of Justice and federal financial regulators to settle a probe over its failure to monitor money laundering by drug cartels.
TD Bank is also set to accept limits on its growth as part of the settlement.
The restrictions on TD Bank’s growth would be similar to those imposed by the Federal Reserve on Wells Fargo in 2018.
The producer price index was flat for the month and up 1.8% from a year ago. Economists surveyed by Dow Jones had been looking for a monthly gain of 0.1%.
Excluding food and energy, the PPI rose 0.2%, meeting expectations.
A 0.2% decline in final demand goods prices offset a 0.2% increase in services.
Canadian employment rebounded in September and the unemployment rate ticked lower, forcing investors to trim their bets that the Bank of Canada will deliver a larger interest-rate cut later this month.
After four months of little change, employment jumped by nearly 47,000 in September, easily outpacing analyst expectations of a 27,000 gain, Statistics Canada said Friday in a report. The unemployment rate edged lower to 6.5 per cent from 6.6 per cent. Analysts were expecting the jobless rate to rise to 6.7 per cent.
Despite the increase in hiring, the employment rate has been sliding for much of the past two years, given the population is growing at a far quicker pace than jobs are being created.
The labour market has been going through a tough stretch as employers cope with higher interest rates and weaker consumer spending. Over the past year, the economy had added a net 313,000 positions, compared to 542,000 in the previous 12-month period.
Bank of Canada Governor Tiff Macklem has said he wants to see a pickup in hiring and economic activity, flagging concerns that inflation could drift below the central bank’s 2-per-cent target. The annual inflation rate ebbed to 2 per cent in August and has undershot the central bank’s expectations this year.
The BoC has delivered three consecutive quarter-point rate cuts since the summer, taking its policy rate to 4.25 per cent from 5 per cent. Because of some weak data of late, many economists and investors are predicting the bank will opt for a larger half-point cut on Oct. 23.
However, investors pared back their bets for a larger cut on Friday. Shortly after the release of Statscan’s numbers, financial markets were pricing in a 32-per-cent chance of a half-point cut, down from 53 per cent earlier on Friday morning, according to Bloomberg data.
The details of Statscan’s report were mixed. The entirety of the job gains were concentrated in the private sector and in full-time positions. Average hourly wages rose by an annual 4.6 per cent, down from 5 per cent in August – an encouraging sign for the Bank of Canada as it looks to tame price growth.
On the downside, total hours worked fell 0.4 per cent in September. Labour force participation also declined during the month, which contributed to a lower unemployment rate.
“Over all, the mixed report isn’t enough to make a [half-point] cut a sure thing in October,” Katherine Judge, an economist at CIBC Capital Markets, said in a note to clients.
Statscan will release its consumer price index for September on Tuesday, the last major economic release before the central bank’s decision.
Bank of Montreal chief economist Doug Porter said in a note that “one of the strongest arguments in favour a bigger rate move was the previously steady softening in the job market. With jobs delivering at least a one-month wonder of strength – and offering a tantalizing glimmer of hope that the economy may be pulling out of its funk –the case for an even more aggressive BoC just took a big step back.”
