Category: Uncategorized

Inflation has backed off from its highs, the economic outlook has picked up, and U.S. stocks have rallied toward fresh records, bringing Canadian stocks with them. But at least one thing stands in the way of a truly upbeat backdrop for investors: strong corporate earnings.

With 2023 now in the books, reports for the fourth quarter are on the way. Heavyweight banks such as JPMorgan Chase & Co.JPM-N -0.42%decrease, Citigroup Inc. C-N -1.77%decrease and Bank of America Corp. BAC-N -1.34%decrease will report their results on Friday.

Over the next couple of weeks, investors will get a look at everything from Microsoft Corp. MSFT-Q +0.49%increase to Netflix Inc. NFLX-Q +2.91%increase to Tesla Inc TSLA-Q -2.87%decrease. Their results will add to our understanding of how some of the world’s most influential companies are navigating an economy that seemed destined to slip into recession until a few months ago.

Now, though, stock prices are reflecting a far more optimistic future – a soft-landing, where inflation subsides but the U.S. economy continues to expand.

The Standard & Poor’s 500 Index has rallied 15 per cent since Oct. 27, and is now just 1 per cent below its record high two years ago.

These gains have pushed the benchmark’s price-to-earnings ratio to 22, according to Bloomberg, which is close to a two-year high. The lofty level implies that investors expect earnings will catch up with elevated stock prices.

Canadian stocks face less pressure because of lower valuations; the P/E for the S&P/TSX Composite Index is below 15. Still, the benchmark has gained 11 per cent since the end of October, and is now just 5 per cent shy of its 2022 high.

The question now is whether corporate earnings will justify the 11-week rally in stocks.

The bad news is that analysts are growing increasingly downbeat in the near-term. The consensus now expects that companies within the S&P 500 will report fourth-quarter earnings growth of 1.8 per cent, year-over-year, according to Hugo Ste-Marie, an analyst at Bank of Nova Scotia.

The change from the third quarter looks even worse, after a series of downward revisions from managers over the past few months: Earnings are expected to decline 7.9 per cent from the previous quarter, with few bright spots in the landscape.

“While poor corporate guidance is to blame, the magnitude of the adjustments suggest macro conditions also played a role,” Mr. Ste-Marie said in a note this week.

Technology is the only sector within the blue-chip index expected to report rising profits, as Microsoft, Nvidia Corp. NVDA-Q +0.87%increase, Amazon.com Inc. AMZN-Q +0.94%increase, Meta Platforms Inc. META-Q -0.22%decrease, Alphabet Inc. GOOGL-Q -0.14%decrease and Apple Inc. AAPL-Q -0.32%decrease power ahead.

Other sectors may be held back by an economy where the impact of high interest rates has not yet fully arrived. FedEx Corp. FDX-N +0.02%increase, which reported its fiscal second-quarter financial results in December, offers an example of what’s at stake here.

The global package delivery company, widely viewed as a window into economic activity, reported quarterly profits that were well below analysts’ expectations and slashed its full-year revenue guidance. The share price is down 10 per cent over the past three weeks.

But the outlook isn’t entirely grim.

Ohsung Kwon and Savita Subramanian, equity and quant strategists at Bank of America, believe that a conservative outlook for profits is already baked in to share prices, offering potential for pleasant surprises if companies beat low-ball expectations.

The strategists expect that fourth-quarter profits will rise 6 per cent, year-over-year, continuing an earnings recovery that began in the third quarter. As 2024 gains steam, they expect a bullish year ahead for stocks.

“Our analyst survey into 2024 painted a goldilocks scenario for stocks,” Ms. Subramanian and Mr. Kwon said in a note.

This scenario includes higher margins, efficiency gains and easing cost pressures. Their sense ahead of the fourth-quarter reporting season is that this goldilocks scenario is “well intact.”

Investors might wish for the sort of reception that greeted the latest quarterly financial results from Aritzia Inc ATZ-T +20.98%increase.

Though the Canadian retailer said that its profit slumped 39 per cent from last year, the adjusted per-share profit figure used by analysts easily topped estimates amid better-than-expected margins and rising revenue.

Aritzia’s share price jumped almost 21 per cent on Thursday, to $32.01 in Toronto, marking its highest level since July and offering a convincing recovery from the stock’s lows in November.

Investors can’t extrapolate a trend from this one company. But it highlights what can go right when financial results exceed low expectations. The hope for the next few weeks: More Aritzias emerge, making FedEx look like an anomaly.

U.S. stocks closed higher on Wednesday as megacaps rallied, but gains were limited ahead of inflation reports and major bank earnings later in the week. Canadian stocks eked out a minor gain.

Microsoft, Meta Platforms and Nvidia were the biggest boosts to the S&P 500 index, as the benchmark 10-year Treasury note yield held near 4% and a US$37 billion auction of the notes drew above-average demand.

Communication services was the best performing of the 11 major S&P sectors, lifted by a 3.65% rise in Meta Platforms’ stock, which hit its highest intraday level since September 2021, after Mizuho raised its price target to US$470 from US$400.

Nvidia hit a record high and closed up 2.28% after fellow chipmaker TSMC beat fourth-quarter revenue expectations.

After ending 2023 with a strong rally, stocks have struggled to find upward momentum, with the S&P 500 barely positive on the year, as mixed economic data and comments from Federal Reserve officials have led investors to dial back expectations for the timing and size of any rate cuts from the central bank this year. But Wednesday’s gains left the index just 0.27% away from its record close of 4,796.56 set on Jan. 3, 2022.

“What the market is doing, it’s reassessing its 2024 expectations in terms of earnings and in terms of interest rates, and really looking to justify the surge in prices that we saw in November and December,” said Sam Stovall, chief investment strategist at CFRA Research in New York.

“It’s sort of a good sign that the market is treading water early in the year because it implies that investors really don’t want to miss out on anything else that could be good.”

The Dow Jones Industrial Average rose 170.57 points, or 0.45%, to 37,695.73. The S&P 500 gained 26.95 points, or 0.57 %, at 4,783.45 and the Nasdaq Composite advanced 111.94 points, or 0.75 %, to 14,969.65.

The Toronto Stock Exchange’s S&P/TSX composite index ended up 18.44 points, or 0.1%, at 20,989.42 but holding below the 20-month high it posted on Monday at 21,074.91.

The Toronto market’s technology sector rose 1.2%, adding to its recent gains, while consumer staples was up 0.8%.

Energy shares were a drag, falling 0.9%, as the price of oil settled 1.2% lower at US$71.37 a barrel after a surprise jump in U.S. crude stockpiles raised worries about demand in the largest oil market.

Financials in Toronto also lost ground, ending down 0.4%.

The focus will turn to the December U.S. consumer and producer inflation reports, due on Thursday and Friday, respectively, which could help determine the monetary policy path for the central bank.

Federal Reserve Bank of New York President John Williams said on Wednesday it is still too soon to call for rate cuts as the central bank still has some distance to go on getting inflation back to its 2% target.

Market participants have scaled back expectations to a 67.6% chance for at least a 25-basis-point rate cut in March, according to CME’s FedWatch Tool.

On Friday, banking giants JPMorgan Chase, Bank of America, Citigroup and Wells Fargo are expected to report lower fourth-quarter profits.

The price of bitcoin barely reacted to news late Wednesday that the U.S. Securities and Exchange Commission has approved 11 spot bitcoin exchange-traded funds, including those of Grayscale, Bitwise and Hashdex.

Boeing rose 0.92% following a 9.3% tumble in the prior two sessions, after CEO Dave Calhoun acknowledged errors by the U.S. planemaker as more than 170 jets remained grounded for a fourth day.

DocGo plunged 37.58% after Fuzzy Panda Research revealed a short position on the health services company’s stock.

Advancing issues outnumbered decliners by a 1.4-to-1 ratio on the NYSE while advancers equaled decliners on a 1-to-1 ratio on the Nasdaq. The S&P index recorded 31 new 52-week highs and one new low, while the Nasdaq recorded 108 new highs and 97 new lows. Volume on U.S. exchanges was 9.81 billion shares, compared with the 12.22 billion average for the full session over the last 20 trading days.

Reuters, Globe staff

Federal officials are planning to meet this week with Honda HMC-N +0.88%increase representatives about the possibility of the Japanese automaker building an electric-vehicle factory in Canada, adding another name to the list of manufacturers Ottawa is courting as part of a multibillion-dollar effort to transform the domestic auto industry ahead of a shift away from fossil fuels.

The meeting has not been publicly announced, but a senior government official told The Globe and Mail on Monday that it will take place this week, and that several federal departments will participate. The official said there had already been a meeting in December between federal representatives and Canadian and international personnel from Honda.

The Globe is not identifying the official, because they were not authorized to comment publicly on the discussions.

Japanese news group Nikkei reported on Sunday that spending on the potential electric-vehicle plant could reach $18.5-billion, and that the facility could also produce vehicle batteries.

If Honda’s investment is near that reported figure, it would be by far the biggest by an automaker in Canadian electric-vehicle production to date, dwarfing the roughly $7-billion Volkswagen Group battery factory coming to St. Thomas, Ont., and the roughly $5-billion battery plant being built by Stellantis NV STLA-N +1.34%increase and LG Energy Solution in Windsor, Ont.

The Honda facility would be a cornerstone of the company’s effort to play catch-up in the race to serve the growing market for fully electric vehicles. It previously built its strategy around hybrid electric vehicles, for which its assembly plant in Alliston, Ont., is currently being retooled.

And it may represent the latest test of Canada’s willingness to match massive subsidies being offered by the United States, as Ottawa seeks to build a domestic electric-vehicle supply chain in advance of an expected global move away from gas-powered cars and trucks. Although the federal and Ontario governments have committed up to $15-billion in production subsidies for the Stellantis-LG plant, and up to $13.2-billion for the Volkswagen plant, Ottawa has since been non-committal about extending such deals to other automakers.

Honda has been meeting regularly with federal officials over the past few months, according to the federal lobbying registry. But the registry does not clearly say what topics were discussed.

The registry shows a Nov. 27 meeting with Natural Resources Canada officials, a Nov. 15 meeting with a senior Innovation Department official and a Nov. 2 meeting with a senior Transport Canada official. The month before, Honda met with policy advisers in the office of Deputy Prime Minister and Finance Minister Chrystia Freeland.The company’s representatives also met with Environment Minister Steven Guilbeault’s chief of staff, Jamie Kippen.

Francesco Sorbara, an MP who chairs the Liberal auto caucus, and whose Ontario riding of Vaughan-Woodbridge is just south of the existing Honda plant in Alliston, said opening a Canadian electric-vehicle plant would make sense for the automaker.

“It’s only natural, with Honda being in Canada for 50 years,” he said. “With its operations in Alliston, our work force, the trade agreements bolstering our case and this transition to a clean energy supply, Canada and Ontario are uniquely positioned for Honda.”

Nikkei reported that Honda is looking at several potential sites, including one next to its existing factory in Alliston. The automaker expects to decide by the end of 2024, with the new facility to go into operation as early as 2028, the Japanese outlet said.

Vanessa De Matteis, a spokesperson for Ontario’s Economic Development Minister, Vic Fedeli, would not confirm any details related to the potential electric-vehicle plant, but said the province continues to seek global investments.

John Bordignon, a spokesperson for Honda Canada, said in a statement over the weekend that the automaker “is considering a number of initiatives as we move into the electrified era.” He said Honda is currently focused on what he called the automaker’s “EV Hub,” in Ohio, where it will begin production of electric vehicles and batteries in late 2025.

Honda’s Ohio investment was announced at about US$4.4-billion, suggesting the project under consideration in Ontario could be significantly larger.

While Honda appears to be considering new facilities for manufacturing both vehicles and batteries in Canada, it’s unclear whether the latter would be in partnership with another company. In Ohio, the company has partnered with LG, the South Korean battery maker. LG is also building the Windsor factory with Stellantis.

It’s also unclear what level of subsidy Honda might be seeking. Automakers have to date demanded that Canadian governments match a battery production tax credit offered in the United States. Canada has done so for the Volkswagen and Stellantis-LG plants, and also in the case of Swedish battery maker Northvolt AB’s planned facility in Quebec.

But U.S. grants for new or retooled vehicle assembly plants, with which Canada might also be competing in this case, are less predictable.

Brendan Sweeney, the managing director of the Trillium Network for Advanced Manufacturing, said that the complexity of the investments that Honda appears to be pursuing in Ontario could make them challenging for governments to back.

“The question is about how to best structure an incentive package for an investment that includes batteries, a new assembly plant and all the requisite machinery, and potential upgrades to existing facilities,” Mr. Sweeney said. “The ability to take on such a complex investment would represent a monumental achievement.”

Honda is not the only company currently testing Canadian willingness to continue offering billions of public dollars to back electric-vehicle investments. Toyota Canada, another Japanese auto giant relatively late to the electric transition, has been seeking government backing for retooling its existing plants.

In addition to keeping pace with the U.S., Ottawa is under pressure to support such investments to demonstrate that new regulations requiring a growing share of vehicles sold in Canada to be electric will benefit domestic industry.

In December, the government announced the latest version of its proposal to end sales of new gasoline-powered or diesel-powered passenger vehicles by 2035.

Published: 1/5/2024 3:24 PM ET | 

After turning lower over the course of the previous session, the price of crude oil showed a strong move back to the upside during trading on Friday.

Crude for February delivery surged $1.62 or 2.2 percent to $73.81 a barrel after falling $0.51 or 0.7 percent to $72.19 a barrel during Thursday’s session.

The significant rebound by the price of crude oil partly reflected ongoing fears of an escalation of the Israel-Hamas war into a broader regional conflict.

Attacks by Yemen’s Houthi rebels against merchant shipping in the Red Sea as well as a U.S. airstrike that killed top leader of an Iran-backed terrorist group in Iraq added to the concerns.

Daan Struyven, head of Goldman Sachs’ oil research division, warned in an interview with CNBC on Thursday that Houthi rebel disruptions reaching the Straits of Hormuz could double oil prices.

“The Red Sea is a transit route and a prolonged disruption there, oil can be three or four dollars higher,” Struyven said. “However, if you have a disruption in the Strait of Hormuz for a month, prices would rise by 20 percent and could even eventually double if the disruption there lasted for longer.”

Monday January 8

Japanese markets closed

China aggregate yuan financing, new yuan loans, money supply and foreign reserves

Euro zone retail sales, economic and consumer confidence

Germany factory orders and trade surplus

(3 p.m. ET) U.S. consumer credit for November.

—

Tuesday January 9

Japan household spending

Euro zone jobless rate

Germany industrial production

(6 a.m. ET) U.S. NFIB Small Business Economic Trends Survey for December.

(8:30 a.m. ET) Canada’s merchandise trade balance for November.

(8:30 a.m. ET) Canadian building permits for November. Estimate is a month-over-month decline of 1.0 per cent.

(8:30 a.m. ET) U.S. goods and services trade balance for November.

—

Wednesday January 10

(10 a.m. ET) U.S. wholesale trade for November. Estimate is a month-over-month decline of 0.2 per cent.

Earnings include: Aritzia Inc.

—

Thursday January 11

ECB economic bulletin is released

(8:30 a.m. ET) U.S. initial jobless claims for week of Jan. 6. Estimate is 210,000, up 8,000 from the previous week.

(8:30 a.m. ET) U.S. CPI for December. The Street is expecting an increase of 0.2 per cent from November and up 3.3 per cent year-over-year.

(2 p.m. ET) U.S. treasury budget for December.

Earnings include: Cogeco Communications Inc.; Delta Air Lines Inc.; Infosys ADR; Opsens Inc.; Postmedia Network Canada Corp.

—

Friday January 12

China CPI, PPI and trade surplus

Japan bank lending

(8:30 a.m. ET) U.S. PPI for December. Consensus is an increase of 0.1 per cent from November and up 1.3 per cent year-over-year.

Earnings include: Bank of America Corp.; Bank of New York Mellon; BlackRock Inc.; Citigroup Inc.; Corus Entertainment Inc.; JPMorgan Chase & Co.; UnitedHealth Group Inc.; Wells Fargo & Co.

Canada’s labour market finished 2023 in the doldrums, with employers pulling back on hiring as part of a broader economic slowdown driven by high interest rates.

The country added just 100 net new jobs in December, after an increase of 25,000 in November and 18,000 in October, Statistics Canada said Friday. Bay Street analysts were expecting an increase of 13,500 jobs last month.

The unemployment rate remained at 5.8 per cent. It has risen consistently over the past year as rapid population growth has outstripped job creation. But last month, this dynamic was offset by a decline in labour-force participation, keeping the unemployment rate steady.

The stall in job growth appears to shore up the case for the Bank of Canada to start cutting interest rates in the coming quarters. However, the central bank remains wary of rapid wage growth. And here the December data was surprisingly robust.

On an annual basis, average hourly wages rose 5.4 per cent in December, up from 4.8 per cent in November and the quickest pace since last February. Bank of Canada officials have said that continuing wage growth in excess of four per cent is not compatible with its two-per-cent inflation target, unless there is a significant jump in labour productivity.

“December data provided a classic mixed bag of results, with some stronger than expected news in terms of wages and hours worked, alongside a weaker than anticipated headline change in employment,” Canadian Imperial Bank of Commerce senior economist Andrew Grantham said in a note to clients.

“Because of that, today’s data don’t change our expectation for the timing of a first Bank of Canada interest rate cut, which we still see occurring in June this year.”

Most private-sector economists expect the central bank to start lowering its policy interest rate, currently at a 22-year high of five per cent, some time around the middle of the year. Financial markets are leaning toward the first rate cut coming in April. The bank’s next rate decision is on Jan. 24.

The stagnant labour market in Canada contrasts with the United States. On Friday, the U.S. Labour Department published larger-than-expected job growth numbers for December.

Non-farm payrolls increased by 216,000, up from a rise of 173,000 in November, while the U.S. unemployment rate remained steady at 3.7 per cent. These numbers lent credence to the idea that the U.S. Federal Reserve is guiding the American economy toward a “soft landing,” where inflation comes down without a major recession. But they also suggest that markets might be overly optimistic in betting that the Fed could begin to lower rates as soon as March.

The Fed, like the Bank of Canada, is deliberately trying to cool the economy and weaken the labour market to reduce inflationary pressures. In December, Fed officials said they expected to cut interest rates three times in 2024, but said nothing about timing.

The Canadian economy overall has slowed more rapidly than its neighbour to the south. And this showed up in softer labour market data through the back half of 2023. Job growth in Canada averaged 48,000 per month in the first half of the year, but only 23,000 per month in the second half, Statscan said.

“Today’s sluggish results suggest that the softening seen in the broader economy is finally catching up with the job market,” Bank of Montreal chief economist Douglas Porter wrote in a note to clients about the Canadian job numbers.

“Prior to December, employment gains had remained amazingly sturdy in the face of paltry GDP growth (at the expense of sickly productivity). That may now be shifting. If so, this would suggest that the jobless rate is almost certain to head higher, pushing above six per cent in coming months,” he said.

The employment picture varied across sectors and between full-time and part-time work in December. Part-time jobs increased by around 23,600 while full-time jobs declined by roughly the same amount.

There were big gains in professional, scientific and technical services jobs, which rose by 46,000, as well as gains in health care and “other services” jobs. But this was offset by job declines in five industries, including retail, manufacturing and agriculture.

Employment increased in British Columbia, Nova Scotia, Saskatchewan and Newfoundland and Labrador, but declined notably in Ontario, falling by 48,000. Employment in other provinces was essentially flat.

Rapid population growth, driven by record levels of immigration, remains a key dynamic in the labour market. Canadian employers created around 430,000 new jobs last year, according to the monthly labour force survey. But over that same period, the working age population increased by 945,000 – including by 74,000 in December.

This mismatch between newcomers and new jobs has helped push the unemployment rate up from five per cent last January to 5.8 per cent by the end of the year.

Brendon Bernard, senior economist at hiring site Indeed Canada, said he expects the unemployment rate to trend higher in the coming months, driven by population growth and slower hiring. But he is not expecting a sudden jump in joblessness. So far, at least, weak job creation has not been accompanied by layoffs.

“If layoffs were at more normal levels, then all these moving parts together would make for a much weaker overall labour market,” Mr. Bernard said in an interview.

“At least if the past few quarters are any indication, relatively flat GDP growth has come along with relatively low layoff rates. So now it’s a question of, do we descend into a hard [economic] landing?” he said.

• December’s jobs report showed employers added 216,000 jobs for the month while the unemployment rate held at 3.7%. That compared with respective estimates of 170,000 and 3.8%.
• The hiring boost came from a gain of 52,000 in government jobs and another 38,000 in health care-related fields such as ambulatory health-care services and hospitals.
• Average hourly earnings rose 0.4% on the month and were up 4.1% from a year ago, both higher than the respective estimates for 0.3% and 3.9%.

Jobs report December 2023: Payrolls increased by 216,000 in December (cnbc.com)

China’s factory activity expanded at a quicker pace in December due to stronger gains in output and new orders, but business confidence for 2024 remained subdued, a private-sector survey showed on Tuesday.

The Caixin/S&P Global manufacturing PMI rose to 50.8 at the end of 2023 from 50.7 in November, marking the fastest expansion in seven months and surpassing analysts’ forecasts of 50.4. The 50-point mark separates growth from contraction.

The sprawling manufacturing sector came under pressure amid weak demand in 2023, with a property downturn, geopolitical factors and tight-fisted consumers all weighing on the post-pandemic recovery.

Chinese top leaders at the end of last year pledged to adjust policy to support an economic recovery in 2024, while markets and investors are waiting for more stimulus measures to be rolled out.

The Caixin PMI contrasted with official data released on Sunday that showed manufacturing activity shrinking at a faster pace and more than expected in December.

Factory output in December rose at the quickest pace since May, while growth in new orders hit a 10-month high thanks to firmer demand and a pick up in customer spending at the year-end, according to the Caixin survey.

New export orders fell at a slower pace as some firms reported an improvement in external demand from November.

While factory owners continued to hold an optimistic view on 2024 outlook, their confidence edged down from November and remained below the series long-run trend.

They said squeezed customer budgets, tough competition and concerns over sluggish markets were among key concerns.

Stocks of finished goods increased slightly, partly due to the delayed shipment of items to clients. Although input costs continued to rise at the year-end, the rate of inflation moderated to a four-month low and was only marginal.

The data was collected Dec. 6-14, according to S&P Global.

Amid weaker-than-expected demand, factory owners cut payrolls for the fourth straight month and at the quickest pace since May.

“The expansion of market supply and demand did not translate to an increase in hiring,” said Wang Zhe, economist at Caixin Insight Group, adding some surveyed firms said existing capacity was sufficient to handle additional orders under the current market condition.

“Looking to the new year, there is still room for adjustments in fiscal and monetary policies,” Wang said, calling for strengthened efforts in increasing employment to alleviate pressure on the job market.

 Published: 1/2/2024 5:00 AM ET | 

Oil prices rose over 2 percent on Tuesday amid concerns of potential supply disruptions in the Middle East.

Benchmark Brent crude futures jumped 2.1 percent to $78.68 a barrel, while WTI crude futures were up a little over 2 percent at $73.11.

Both benchmark contracts plunged over 10 percent in 2023 on concerns over sluggish demand and higher-than-expected supply conditions.

The risks of the Israel-Gaza conflict morphed into a wider regional conflict after U.S. helicopters repelled an attack on Sunday by Iran-backed Houthi militants on a Maersk container vessel in the Red Sea, a vital trade route between Europe and Asia.

Iran, meanwhile, sent a warship to the Red Sea in response to the U.S. Navy’s sinking of three Houthi boats over the weekend that had killed about 10 Houthi fighters.

Hopes for strong Chinese demand also lifted oil prices after a private survey showed China’s factory activity expanded at a quicker pace in December due to stronger gains in output and new orders