Category: Uncategorized

Before the Bell: Aug 30

Equities

Wall Street futures were higher early Tuesday after two negative sessions in a row. European markets were also positive. TSX futures were up with the last of bank earnings due.

In the early premarket period, futures tied to the three key U.S. indexes advanced with Nasdaq futures up more than 1 per cent at one point. On Monday, all three marked another day of declines with the S&P 500 losing 0.67 per cent while the Dow ended down 0.57 per cent and the Nasdaq fell 1.02 per cent. The S&P/TSX Composite Index finished the session 0.19-per-cent lower.

“If the market price action of the last few days is any guide the penny finally appears to have dropped that the Federal Reserve is willing to risk a recession to get inflation under control,” Michael Hewson, chief market analyst with CMC Markets U.K., said.

“[Fed chair Jerome] Powell’s message from last week’s speech at Jackson Hole on Friday, couldn’t have been any clearer, that the Fed would keep going until the job is done, the pity being it took so long for investors to take notice, as stock markets dropped, and bond yields spiked higher.”

In Canada, bank earnings are back at the forefront with results from Bank of Montreal. The country’s other big banks reported results last week.

BMO reported net income, excluding one-off items, of $2.13-billion, or $3.09 a share, in the three months ended July 31, from $2.29-billion, or $3.44 a share, a year earlier.

Quebec-based convenience store giant Alimentation Couche-Tard reports after the close of trading. In the U.S., electronics retailer Best Buy releases its latest quarterly results Tuesday morning.

Overseas, the pan-European STOXX 600 gained 0.80 per cent. Germany’s DAX and France’s CAC 40 were up 1.32 per cent and 1.01 per cent, respectively. Britain’s FTSE 100 gained 0.44 per cent.

In Asia, Japan’s Nikkei closed up 1.14 per cent. Hong Kong’s Hang Seng slid 0.37 per cent.

Commodities

Crude prices pulled back somewhat after the previous session’s sharp gains with recession concerns offsetting worries about supply.

The day range on Brent is US$104.09 to US$105.45. The range on West Texas Intermediate is US$96.48 to US$97.66. Both benchmarks added more than 4 per cent on Monday.

“The one trade that everyone can agree upon is that the oil market will likely remain tight,” OANDA senior analyst Ed Moya said.

“Oil rallied on rising risks of a potential civil war that could put Libyan output at risk and over growing expectations that OPEC+ is positioning themselves to cut production.”

Traders are now awaiting next week’s OPEC+ meeting after some members have suggested that the group could cut output to shore up prices. The meeting is set for Sept. 5.

Later Tuesday, markets will get the first of two weekly U.S. inventory reports with new numbers due from the American Petroleum Institute. Official government figures follow on Wednesday morning.

Analysts are expecting to see a decline in crude stocks by about 600,000 barrels last week.

In other commodities, gold prices were lower, weighed down by a still-high U.S. dollar.

Spot gold was down 0.3 per cent at US$1,732.10 per ounce by early Tuesday morning, having hit a one-month low of US$1,719.56 in the previous session.

U.S. gold futures were also down 0.3 per cent at US$1,744.10.

Currencies

The Canadian dollar was higher, trading around 77 US cents early Tuesday morning, as risk sentiment steadied on global markets.

The day range on the loonie is 76.77 US cents to 77.10 US cents.

There were no major Canadian economics releases due Tuesday. Traders will get June and second-quarter GDP figures from Statistics Canada on Wednesday morning.

On world markets, the U.S. dollar index, which weighs the greenback against a group of world currencies, stood at 108.46, after dropping back from 109.48 overnight, a high not seen since September 2002, according to figures from Reuters.

The U.S. dollar was down 0.27 per cent against the Japanese yen while Britain’s pound gained 0.32 per cent to US$1.1743.

The Australian dollar, often seen as a proxy for risk sentiment, rallied 0.5 per cent, Reuters reports.

In bonds, the yield on the U.S. 10-year note was lower at 3.063 per cent in the predawn period.

Economic news

(9 am ET) U.S. FHFA House Price Index for June.

(9 am ET) U.S. S&P CoreLogic Case-Shiller Home Price Index for June.

(10 am ET) U.S. Conference Board Consumer Confidence Index for August.

(10 am ET) U.S. Job Openings & Labor Turnover Survey for July.

With Reuters and The Canadian Press

US Coast Guard cutter denied entry into Solomon Islands port sparking concerns of China’s growing influence

A United States Coast Guard cutter conducting patrols on an international mission in the Pacific Ocean was denied entry to a port in the Solomon Islands raising concerns about China’s growing influence in the area.

The cutter Oliver Henry was taking part in Operation Island Chief monitoring fishing activities in the Pacific, which ended Friday, when it sought to make a scheduled stop at Guadalcanal, Solomon Islands, to refuel and re-provision, the Coast Guard office in Honolulu said.

There was no response from the Solomon Islands’ government for diplomatic clearance for the vessel to stop there, however, so the Oliver Henry diverted to Papua New Guinea, the Coast Guard said.

https://www.foxnews.com/world/us-coast-guard-cutter-denied-entry-solomon-islands-port-sparking-concerns-chinas-growing-influence

Stocks are starting to look vulnerable as the ‘cruellest month of the year’ approaches

Uh-oh: September is approaching, ratcheting up the drama on a precarious stock market.

The month arrives at a time when recovering stock prices face rising interest rates, slower economic activity and muted corporate profits.

If that’s not enough to rattle investors, consider that September historically has delivered the worst average returns of any month for U.S. stocks.

According to Bespoke Investment Group, the Dow Jones Industrial Average in September has declined by 1.2 per cent, on average, and showed a positive return just 40 per cent of the time over the past 100 years – making it by far the worst month for stocks.

“In our business, September has often tended to be the cruellest month of the year,” Ed Yardeni, chief investment strategist at Yardeni Research, said in a note this week.

While he’s not spooked by the coming month’s poor track record, there are plenty of reasons why many observers believe next month could be particularly important in establishing whether the summer’s stock market recovery has legs.

For one thing, it’s a big month for central bank policy, which has been focused on fighting inflation at the expense of economic activity.

Federal Reserve chair Jerome Powell’s Friday speech at the central banker Jackson Hole conference in Wyoming, which weighed on markets all week, added to widespread concerns the Fed will continue to hike rates even if it brings pain to households and businesses.

“Those are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain,” Mr. Powell said.

The S&P 500 index fell 3.4 per cent on Friday, suggesting those comments weren’t what investors had hoped to hear when economic activity is already stumbling.

In one of the more alarming indicators, S&P Global’s flash composite purchasing managers’ index for U.S. companies – a reading of manufacturing and service sector activity – slumped to 45 in August, down from 47.7 last month.

Any reading below 50 shows a contraction. And this particular one, according to Capital Economics, is consistent with a deep recession.

Corporate profits are also starting to look vulnerable.

Most of Canada’s biggest banks reported their latest quarterly financial results this week, with some missing forecasts and bolstering provisions for loan losses in expectation of problems ahead.

Though companies in the S&P 500 reported profit growth of 8.5 per cent in the second quarter, year over year, according to Refinitiv, results from the red-hot energy sector are masking broader problems. Indeed, exclude the energy sector, and S&P 500 profits are down 2.2 per cent.

Perhaps this wouldn’t matter much if stocks were in the dumps.

But after the S&P 500 turned in its worst six-month performance since 1970 at the start of this year, the index has embarked upon an impressive – if fitful – comeback in the second half: It has risen 13.5 per cent from its low in mid-June.

Investors are showing more interest by putting money back into equity mutual funds and exchange-traded funds.

According to data from Refinitiv Lipper, investors put a net US$11.7-billion into equity funds over a two-week period earlier this month, reversing US$44.1-billion of outflows in June and July.

These enthusiastic investors likely hope U.S. inflation peaked in June at 9.1 per cent. Key commodity prices, such as crude oil, have declined since then. The Commerce Department’s personal consumption expenditures index, released Friday, showed consumer prices subsided in July.

But Mr. Powell’s comments on Friday suggest the Federal Reserve isn’t content.

“Overall, Powell tried to make clear that policy rate tightening would continue and they wouldn’t be deterred by a sustained period of below-trend growth,” Taylor Schleich and Jocelyn Paquet, economists at National Bank Financial, said in a note.

What does this mean for stocks?

They could always continue to rebound as inflationary pressures subside and the economy glides toward either a shallow recession or avoids one altogether.

But plenty of observers are cautious. Morgan Stanley’s Global Investment Committee believes the recent rebound is a bear market rally – short-term gains that occur within a broader downturn. In part, the gains point to relatively high stock valuations that might not reflect slowing profits.

“It’s not unusual for stocks to rally during a bear market,” Lisa Shalett, Morgan Stanley’s chief investment officer, wealth management, said in a note this week.

Rallies have occurred in nearly every bear market over the past 95 years, she said. The average gain during these rallies was 18 per cent, before the downward slide resumed.

September is not going to be easy.

NASA is set to launch the Artemis 1 mission on its most powerful rocket yet — here’s what you should know

• NASA plans to launch the Artemis I mission on Monday from Kennedy Space Center in Florida, sending the Space Launch System (SLS) rocket and Orion capsule on a more than month-long journey around the moon.
• The uncrewed launch marks the debut of the most powerful rocket ever assembled and kicks off NASA’s long-awaited return to the moon’s surface.
• Artemis I will travel about 1.3 million miles over the course of 42 days.

https://www.cnbc.com/2022/08/27/nasas-artemis-1-mission-what-you-should-know-about-sls-orion.html

EEconomic Calendar: Aug 29 – Sept 2

(1030 am ET) Dallas Fed Manufacturing Activity

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Tuesday, August 30

Euro area economic and consumer confidence. Germany consumer price index for August.

(830 am ET) Canada current account balance for the second quarter

(9 am ET) U.S. FHFA House Price Index for June. Consensus is for a 17.6% rise from a year ago.

(9 am ET) U.S. S&P CoreLogic Case-Shiller Home Price Index for June. Consensus is for a 19.6% rise from a year ago.

(10 am ET) U.S. Conference Board Consumer Confidence Index for August.

(10 am ET) U.S. Job Openings & Labor Turnover Survey for July.

Earnings include: Alimentation Couche-Tard; Bank of Montreal; Best Buy; Big Lots; Chewy; Hewlett Packard Enterprise; Crowdstrike Holdings

—

Wednesday, August 31

China purchasing managers indexes. Japan industrial production, retail sales and consumer confidence data.

Euro area Consumer Price Index for August. It’s expected to be up 9% on an annualized basis, with core CPI at 4.1%. Separate CPI reports due out from France and Italy.

(830 am ET) Canada real GDP for the second quarter. Consensus is for annualized growth of 4.4%, accelerating from the first quarter’s 3.1%. For June, consensus is for growth of 0.2%.

(815 am ET) U.S. ADP National Employment Report

Earnings include:Laurentian Bank of Canada; Barnes & Noble Education

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Thursday, September 1

China Caixin Manufacturing PMI. Japan capital spending and manufacturing PMI data.

Euro area jobless rate for July and manufacturing PMI for August. Plus, Germany retail sales for July, and Italy’s latest jobless figures and real GDP. U.K. releases nationwide house prices and manufacturing PMI

(830 am ET) Canada building permits for July. An unchanged reading is expected after falling 1.5% in June.

(830 am ET) U.S. jobless claims for last week

(830 am ET) U.S. productivity and unit labour costs for the second quarter.

(930 am ET) Canada S&P global manufacturing PMI.

(945 am ET) U.S. S&P global manufacturing PMI, followed by the ISM manufacturing PMI

(10 am ET) U.S. construction spending. Consensus is for a decline of 0.1%.

North American auto sales

Earnings include:Lululemon Athletica; Hormel Foods; Weibo; BRP

—

Friday, September 2

Euro area producer price index

(830 am ET) Canada labour productivity for the second quarter

(830 am ET) U.S. nonfarm payrolls for August. Consensus is for net job gains of 300,000, down from July’s 528,000. The unemployment rate is expected to hold steady at 3.5%. Average hourly earnings are expected to be up 5.3% from a year ago, up from July’s 5.2%.

(10 am ET) U.S. factory orders for July. Consensus is for a rise of 0.2%.

Fed’s Powell pledges to combat inflation ‘forcefully,’ but warns of economic pain ahead

Federal Reserve Chairman Jerome Powell on Friday delivered a stark message on the state of the U.S. economy at the annual central bank gathering in Wyoming: Inflation remains painfully high, and cooling it will require forceful action that could soon bring “pain” to households and businesses nationwide. 

In his hotly anticipated speech at the Kansas Federal Reserve’s Jackson Hole symposium, Powell reiterated a pledge to “forcefully” fight inflation that is still running near the hottest pace in 40 years and wrestle it closer to the Fed’s 2% goal. 

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” he said. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

Even with four consecutive interest rate hikes, including two back-to-back 75 basis point increases, Powell stressed that the Fed is not in a place to “stop or pause” – an unwelcome sign for investors who were predicting a rate cut next year. 

The current benchmark federal funds range of 2.25% to 2.50% is around the “neutral” level, meaning that it neither supports nor restricts economy activity. But the Fed chief signaled that a restrictive stance will almost certainly be necessary in order to prevent inflation from becoming entrenched in the economy, which could further weigh on businesses.

“We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2%,” he said, suggesting that “restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.”

Dow drops 400 points after Powell reiterates Fed will continue to raise rates to fight inflation

Stocks fell sharply Friday after Federal Reserve Chair Jerome Powell said he will continue to raise rates to fight inflation in his Jackson Hole speech.

The Dow Jones Industrial Average dropped 407 points, or 1.22%. The S&P 500 fell 1.5% and the Nasdaq Composite slid 1.84%.

Those moves come after a hawkish speech out of the Fed chair as Wall Street sought information on the pace of future interest rate hikes.

“Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy,” Powell said.

Meanwhile, traders absorbed one of the Fed’s favorite inflation measures, the personal consumption expenditures data, which on Friday showed price increases eased in July. The University of Michigan consumer sentiment index showed a better-than-expected reading.

“It was fine. It was hawkish enough, but it wasn’t over the top,” said Wells Fargo’s Michael Schumacher. “There was expectations for a very hawkish speech so it’s hard to measure up to that.”

Communication services and information technology were the biggest laggards in the S&P 500 as investors fretted over the likelihood of higher interest rates. Meanwhile, utilities and energy were the best-performing sectors in the broader market index.

Shares of Affirm declined 17% after the consumer lending company issued weak full-year revenue guidance.

The major averages were on pace for their second straight down week. The Dow is on track for a 1.2% decline. The S&P 500 and Nasdaq Composite are heading to slightly smaller declines of roughly 0.7% each.

CIBC Reports $1.67B Q3 Profit, Down From $1.73B A Year Ago

The Canadian Press – Canadian Press – Thu Aug 25, 5:18AM CDT

TORONTO — CIBC says it earned $1.67 billion in its third quarter, down from $1.73 billion in the same quarter last year.

The bank says its net income amounted to $1.78 per diluted share for the quarter ended July 31, down from $1.88 per diluted share a year earlier.

Revenue totalled $5.57 billion, up from $5.06 billion in the same quarter last year.

Provisions for credit losses totalled $243 million compared with a reversal of credit losses that amounted to $99 million in its third quarter last year.

On an adjusted basis, CIBC says it earned $1.85 per diluted share compared with an adjusted profit of $1.96 per diluted share a year ago.

Analysts on average had expected an adjusted profit of $1.83 per diluted share, according to financial markets data firm Refinitiv.

This report by The Canadian Press was first published Aug. 25, 2022.

Higher interest rates boost lending margins at TD and CIBC

Two of Canada’s largest banks are reaping rewards from higher interest rates as profit margins on loans increased in their fiscal third quarter, though growing economic unease threatens to undercut some of those gains in the near future.

Toronto-Dominion Bank (TD) reported a lower third-quarter profit than in the same period a year ago, partly because of high costs driven by inflation and rising loan-loss provisions. Canadian Imperial Bank of Commerce (CIBC) also saw earnings dip in the quarter, faced with the same headwinds.

But both banks recorded good gains in net interest margins – the difference between what banks charge on loans and pay on deposits. Those profit margins were squeezed in the COVID-19 pandemic as central banks cut interest rates to ultralow levels. But central bankers have rapidly jacked rates up again to fight high inflation, which is allowing lenders to reprice loans and deposits and eke out more profit.

Banks expect margins will continue to increase in the coming quarters, albeit at a slower pace. They also acknowledged, however, that with inflation running high, borrowing costs rising and significant economic uncertainty, demand for new loans – especially residential mortgages – could dip. And banks expect loan defaults will start to creep higher, from unusually low levels.

“If all the forecasts are correct with respect to what will happen in the economy, with the rising rates, with the slowing down a bit of credit demand, you’re going to see a bit of offsetting of those factors,” said Hratch Panossian, CIBC’s chief financial officer, in an interview.

Between expanding margins and cooling demand for credit, however, “we’re confident that net interest income will continue having strong momentum going forward,” he said.

In TD’s U.S. business, the gains were much larger, with margins up 46 basis points year over year to 2.62 per cent. The bank’s heavy focus on retail consumers and commercial clients makes it the most sensitive to interest rates among Canadian lenders, and that has set high expectations for the boost TD will get from rising rates.

“The bar was set very high here and while TD did not leap over it, the bank did gingerly step over it,” said Meny Grauman, an analyst at Scotia Capital Inc., in a note to clients.

Banks are also still expecting a rebound in borrowing on credit cards, which are a high-margin product because they charge high interest rates. Spending levels on cards are back above prepandemic levels, with transaction volumes up 10 per cent year over year at TD and spending levels reaching a new record. But the balance customers carry on those cards is still lower than it was prior to COVID-19. When that borrowing bounces back, it could also help banks’ lending margins.

“We are seeing a lot of pent-up demand,” TD chief financial officer Kelvin Tran said in an interview.

TD earned $3.21-billion, or $1.75 a share, compared with $3.54-billion, or $1.92 a share, in the same quarter last year. But the bank also booked a $678-million accounting loss on a hedging strategy it is using to manage interest-rate risk related to its US$13.4-billion acquisition of U.S.-based bank First Horizon Corp., which is awaiting approvals from regulators.

Adjusting to exclude the hedging costs and other items, TD said it earned $2.09 a share, above the analysts’ consensus estimate of $2.04 a share, according to Refinitiv.

In the same period, CIBC earned $1.67-billion, or $1.78 a share, compared with $1.73-billion, or $1.88 a share, a year earlier. Excluding costs related to CIBC’s acquisition of retailer Costco’s credit card portfolio and other items, the bank said it earned $1.85 a share, whereas analysts expected $1.84 a share.

TD and CIBC joined National Bank of Canada as the three major lenders that have so far met or exceeded analysts’ expectations for the third quarter. Bank of Nova Scotia and Royal Bank of Canada’s profits fell shy of estimates, and Bank of Montreal reports next week.

In most cases, year-over-year profit comparisons have been hampered by increasing loan-loss provisions, weak capital markets results and rising costs. But underlying trends such as growth in loan balances and the health of consumer credit still look strong.

“Results are fairly solid in light of a challenging macroeconomic outlook,” said Rob Colangelo, vice-president and senior credit officer at Moody’s Investors Service, in an interview. “We could see some moderation in loan growth, you could see margins continue to expand. … Overall, the environment still bodes well for the banks.”

Even so, lenders are adopting a more conservative stance by adding provisions for credit losses to build reserves to cover loans that could default. TD added $351-million in provisions in the quarter and CIBC earmarked $243-million. In both cases, some of the increase was driven by changes to economic models that anticipate future problems with loans still being paid back today.

“This quarter, we have updated some of our economic scenarios to be more conservative,” TD’s Mr. Tran said. “There’s a lot of uncertainty in the market and we’re going to have to see how it plays out”