Briefing highlights
- ‘Short the loonie’: CIBC
- Markets at a glance
- Constellation buys Canopy stake
- Cenovus names new CEO
- What to expect from jobs reports
- What to expect from the Fed
- Trump expected to name Fed chief
- Earnings parade goes on and on
- What else to watch for this week
Some advice from Benjamin Tal as he forecasts a further sharp drop: Short the Canadian dollar.
The deputy chief economist at CIBC World Markets believes the loonie will tumble to just over 75 cents (U.S.) early next year for several reasons.
And he's not alone in projecting a weaker currency after its hefty fall last week, when the Bank of Canada held interest rates steady and signalled a pause in its hiking cycle.
"Too many factors are pointing in unison to one direction – a lower loonie," Mr. Tal said.
"First, the full-cent drop in the currency following the Bank of Canada's communication was highly predictable," he added in a report titled "Short the loonie."
"It was an easy trade. And that trade is still very attractive."
A 75-cent loonie would, of course, mark a violent turnaround from early September, when the currency topped 82 cents, driven by two Bank of Canada rate hikes and what then seemed like the promise of more.
Some observers believed at the time that central bank governor Stephen Poloz and his colleagues could raise their benchmark overnight rate, now at 1 per cent, again in December.
But they're changing their tune since, among other things, the Bank of Canada cited concerns over North American free-trade agreement negotiations and the potential impact of the earlier rate hikes on debt-weary consumers.
There are also recent mortgage rule changes from the commercial bank regulator, the Office of the Superintendent of Financial Institutions, to consider.
"We now believe that the bank will pause for longer, given the greater uncertainty over NAFTA, as well as the recent steps taken by OSFI to cool the housing market," Bank of Montreal's chief economist, Douglas Porter, and its Canadian rates and macro strategist, Benjamin Reitzes, said in their latest outlook.
"Accordingly, our rate forecast has been tweaked to depict a less aggressive rate-hike profile by the Bank of Canada over the next year," they added.
"In tandem, we have also trimmed our outlook on the Canadian dollar in 2018 (from an average of almost 82 cents to closer to 78 cents). Naturally, the actual timing of BoC rate hikes will depend critically on the incoming data, the fate of NAFTA negotiations, and the evolution of the housing market in 2018."
Okay, 78 cents isn't as low as Mr. Tal's call, but you get the idea. There's also a stronger U.S. dollar to factor in, though President Donald Trump's policies, and his ability to enact them, will play into that.
Here's what lies behind Mr. Tal's outlook:
1: Mr. Trump is poised to name a new Federal Reserve chief, who won't be Janet Yellen, the current chair of the U.S. central bank. Rather, the post may go to either Jerome Powell, a Fed governor and "Yellen's clone," or Stanford economist John Taylor, "who has never seen a monetary policy rule that he didn't like." Said Mr. Tal: "If it's Powell, nothing happens, but if it's Taylor or even a combination of Powell and Taylor – look for the short end of the curve to show some action as the market is likely to attach an increased probability of a more aggressive Fed. That's a negative for the C$."
2: Given Mr. Trump's failure to accomplish anything on the economic front to date, expectations are low: "Therefore, any progress, or even perceived progress, on the corporate tax file could lead to a notable market reaction, benefiting U.S. [small-cap stocks] and putting downward pressure on our currency."
3: "For some odd reason the market is still attaching a 28-per-cent probability to a December move [by the Bank of Canada]. That's 28 per cent too high. You have to be extremely creative to generate a scenario in which the bank moves in December. As that probability fades to zero in the coming weeks, the Canadian dollar will feel the pain."
4: The sour nature of the NAFTA talks is already playing out: "Now, we can suggest until we are blue in the face that the Americans will eventually realize that such a move will cost them dearly. But it's not really about logic. Trump wants out, and although it's impossible to predict how things will unfold, we can guess that, at least in the near future, it will not be in a positive direction."
While Congress can blunt him, the President can move on tariffs and certain other measures under his own authority.
"And with that power Trump can cause a lot of damage," Mr. Tal said.
"Already two-thirds of [small and medium-size businesses] in Canada are telling us that the uncertainty regarding NAFTA is impacting their investment decisions, and the ratio among larger firms is most likely higher. The apathy in the [foreign exchange] market to that unfolding reality is mind-boggling."
Read more
- Bank of Canada was ‘last, best hope’ of taming loonie’s sell-off
- Loonie slumps fast on Bank of Canada rate signal, sinks toward 78¢
- Barrie McKenna: Threat of NAFTA collapse, weak inflation put Bank of Canada on hold
- David Parkinson: Rate hike prospects dwindle as growth cools
- David Parkinson: Falling exports signal a slowing Canadian economy
- IMF warns Canada over perilous, longer-than-average credit boom
Markets at a glance
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Constellation joins Canopy
One of the world's leading booze companies joining forces with a Canadian marijuana firm.
Constellation Brands, which is in beer, wine and alcohol, is taking a 9.9-per-cent stake in Canada's Canopy Growth Corp. with an investment of about $245-million.
Constellation, the companies said, will back up Canopy on marketing and consumer analytics, among other things.
"In Constellation, we have a strategic ally that will join us as we lead the global cannabis sector into the future," said Canopy chief executive officer Bruce Linton.
"We have also strengthened our balance sheet to fund the ambitious expansion efforts we have planned heading into 2018 - a year that will see unprecedented growth in medical and adult-use opportunities," he added in a statement.
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What to watch for this week
Get ready for a busy few days on both the global economic and corporate fronts.
Key will be the Canadian and U.S jobs reports Friday morning, but there's much more, including decisions from the Fed and Bank of England and, notably, the continuing parade of corporate earnings.
"The Q3 earnings season is fully under way, and results so far suggest that corporate profits are in solid shape," said BMO senior economist Robert Kavcic.
"With almost half of the S&P 500 now reporting, roughly 76 per cent have beaten earnings expectations, according to Bloomberg's tally, up from the run rate of about 71 per cent seen over the prior four quarters – this measure tends to weaken later in the reporting period, but it's a strong start nonetheless," he added.
"Technology in particular continues to crank out upside surprises, with fully 22 of 24 reporting in the sector so far topping the mark. S&P's latest estimate pegs year-over-year growth near double digits for a fifth straight quarter."
The calendar:
Monday
Some second-tier economic numbers and quarterly results from Agellan Commercial REIT, Loews Corp., PrairieSky Royalty Ltd. and The Keg Royalties Income Fund.
Tuesday
Statistics Canada reports what economists expect will be flat economic growth for August, possibly inching up by 0.1 per cent.
That would mark a second month of weakness after July kicked off what's believed to have been a slower third quarter.
"Another soft reading in August keeps us on track to see a significant slowing in growth in the third quarter," said CIBC's Nick Exarhos.
"Although the 2-per-cent or so pace isn't a disaster by any stretch of the imagination, it isn't hot enough to force the Bank of Canada's hand toward another rate hike before the end of this year – something Governor Poloz apparently agrees with judging by the past week's rate announcement and [monetary policy report]."
We'll also get the latest picture from the euro zone, where third-quarter economic growth is expected to come in at 0.5 per cent, September unemployment at 9 per cent, and September annual inflation at 1.5 to 1.6 per cent, according to Royal Bank of Canada.
"The euro area's strengthened recovery should continue into Q3," RBC said.
"Our central expectation is that this week's 'preliminary flash' estimate will show the euro area growing at 0.5 per cent quarter over quarter in Q3," the bank added.
"However, we admit that the risks to that are tilted to the upside … In advance, we get the Spanish and French GDP releases. which we expect to show expansion of 0.9 per cent quarter over quarter and 0.4 per cent quarter over quarter, respectively."
The Bank of Japan also announces its decision.
Also on tap, and I do wonder who scheduled this just before trick or treating starts, is the Bank of Canada's Mr. Poloz and senior deputy Carolyn Wilkins at the Commons finance committee.
Carolyn Wilkins, Senior Deputy Governor and Stephen Poloz, Governor of the Bank of Canada.
Globe and Mail Update
Earnings: Aetna Inc., Anadarko Petroleum Corp., Archer Daniels-Midland Co., Cogeco Communications Inc., Devon Energy Corp., Electronic Arts Inc., Kellogg Co., Mastercard Inc., Shopify Inc., TransAlta Corp. and WestJet Airlines Ltd.
Wednesday
Don't expect much from the Fed in the afternoon.
"That said, we see two-sided risks: more cautious language on the inflation outlook (dovish), and a signal about an incoming rate hike (hawkish)," said Toronto-Dominion Bank.
"Given current market pricing for a December hike, we expect any hawkish tone in the statement to have a more modest impact than a dovish bias."
More important, though, will be what's expected to be Mr. Trump's new choice for Fed chair this week, the leading candidate believed to be Mr. Powell.
There's more on the central bank front, with Mr. Poloz and Ms. Wilkins speaking to the Senate banking committee.
Earnings: Allergan PLC, Allstate Corp., Canadian Natural Resources Ltd., Dorel Industries Inc., Hudbay Minerals Inc., Kraft Heinz Co., MetLife Inc., Occidental Petroleum Corp., Quebecor Inc., Symantec Corp., Thomson Reuters Corp. and Trican Well Service Ltd.
Thursday
It's called Super Thursday in Britain for a reason: It's the day when the Bank of England releases its rate decision, meeting minutes and inflation report, possibly with a key added bit this time out.
"This is expected to be a historic decision, with the first increase in bank rate since the financial crisis," RBC said.
"Bank Rate should go up by 25 basis points to 0.5 per cent. Nonetheless, the market is unlikely to dwell on the significance of the first move, but instead quickly look ahead to what happens next."
A rate hike isn't a certainty, though, given different opinions among policy makers, said BMO senior economist Jennifer Lee.
"I am still of the view that the BoE should not raise rates as the extended period of uncertainty caused by Brexit is weighing on some businesses' long-term spending plans, wage growth remains weak (and is negative in real terms), and the latest retail sales survey showed spending falling at its fastest pace in eight years," Ms. Lee said.
"Households are already struggling and now they could face higher borrowing costs," she added.
"However, given the consistent run of strong hints of a rate hike in coming months, 5- 1⁄2-year high inflation, and a slight pick-up in economic growth in Q3, the BoE will likely seize this opportunity to take back last year's emergency rate cut."
And you ready for this? Earnings: American International Group Inc., Alibaba Group Holdings Ltd., Apache Corp., Apple Inc., BCE Inc., Baytex Energy Corp., Berkshire Hathaway Inc., Bombardier Inc., CBS Corp., Cenovus Energy Inc., DowDuPont Inc., Enbridge Inc., Fairfax Financial Holdings Ltd., Gildan Activewear Inc., Great-West Lifeco Inc., Interfor Corp., IGM Financial Inc., MacDonald Dettwiler and Associates Ltd., Martinrea International Inc., SNC-Lavalin Group Inc., Saputo Inc., Starbucks Corp., Western Forest Products Inc. and Westshore Terminals Investment Corp.
And that's a trimmed-down list.
Friday
A big day, this, with duelling jobs and trade reports.
Economists expect to see that anywhere from 5,000 to 20,000 jobs were created in October, with unemployment holding steady at 6.2 per cent or possibly ticking up or down a notch.
"The composition of job growth will likely skew towards services and private employment after an outsize gain in public sector employment last month," said TD.
"The full/part-time split is likely to favour the latter given the underperformance so far this year, but we hope that outsized swings are in the past after the 100,000 swings in the last two reports."
Economists also generally expect to see job creation in the U.S. of more than 300,000 positions, with unemployment steady at 4.2 per cent.
Statistics Canada is also expected to report a slightly narrower trade deficit of just below $3-billion.
"It's been an ugly run for Canadian export volumes but we're forecasting (maybe even hoping) that September brought with it some respite," said CIBC's Mr. Exarhos.
In the U.S., a fatter deficit of more than $43-billion (U.S.) is forecast.
And earnings reports slow down, but there's still Cara Operations Ltd., Duke Energy Corp., Fortis Inc., GMP Capital Inc. and a few others.
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