Top of the Morning
Reuters’ Andrea Hopkins provides another example of how Canada’s housing market appears very fragile to those on the outside looking in:
[Morningstar equity analyst Dan] Werner said the reason why a collapse is inevitable include: home prices are rising faster than personal income; low mortgage rates are unsustainable; household debt levels are at historic highs; and builders have erected so many houses that there will soon be oversupply…
But Canadians, from policymakers to bank economists to homebuyers, are confident that a solid banking system, more conservative borrowing and steady demand will provide a soft landing for a market that is already slowing.
On the Homefront
TSX 60 futures are trading to the downside ahead of the open after the composite index gave back ground on Wednesday. “Another day of weaker global bonds and higher yields continued to weigh on investors’ sentiment on Wednesday,” writes Adrian Miller, director of fixed income strategy at GMP Securities.
The loonie is drifting lower this morning, falling below 0.909 against the U.S. dollar. As Bank of Montreal chief economist Douglas Porter observes, the loonie’s decline relative to the greenback in Q3 is far from unique. In fact, of the major currencies, the Chinese yuan is the only one that has appreciated against the U.S. dollar in the second half of the year.
Dollar chain reports in-line earnings. Dollarama (DOL), Canada’s largest dollar store chain, released its quarterly results before the market opened. Adjusted earnings per share of $1.03 met analysts’ expectations, though revenues of $572 million were about $7 million below the consensus estimate. Management also announced a two-for-one stock that will take effect on November 17. Despite the fierce battle brewing south of the border, with two mammoth deep-discount chains looking to acquire Family Dollar, CIBC analyst Perry Caicco doesn’t believe the Canadian company is an attractive takeout target. Any suitor “would be pilloried by investors for leaping into the land that ruined Target,” he asserts. Shares of Dollarama are up a little more than 7 percent year-to-date.
Insight on Target Canada’s turnaround plan. After losing about $1 billion in its first year of operations in Canada, and another $400 million in the first half of 2014, Target has developed a new strategy that it hopes allows it to thrive in the Great White North. New CEO Brian Cornell tells The Wall Street Journal that in general, he is looking to prioritize certain segments, namely baby/children’s products (diapers, clothes and toys), wellness products, and “design and style,” which includes mid-tier fashion and furniture offerings. Target’s primary problem north of the border has been that Canadians were familiar with its U.S. locations, and the ones set up in Canada didn’t live up to those high standards.
Kinross in talks to sell mine to Lundin family. The Globe and Mail’s Rachelle Youngai reports that Kinross Gold’s (K) year-long attempt to rid itself of its Fruta del Norte project in Ecuador may be coming to an end. The company is allegedly in talks with management of the Lundin Group regarding a sale. Youngai writes that it is uncertain which Lundin entity would acquire this asset, however, in our opinion, Lundin Mining (LUN) and NGex Resources (NGQ) appear to be the two most likely destinations.
Empire posts solid beat on earnings. In its latest quarterly results, Empire Company (EMP.A), the parent company of Sobeys, reported adjusted profits well above analysts’ expectations on revenues roughly in-line with the consensus estimate. Same-store sales at Sobeys rose 1.3 percent, while the bulk of its 35-percent jump in revenues compared to the same period in 2013 was due to its acquisition of Canada Safeway. The company will hold its annual general meeting of shareholders in Nova Scotia today, and a host a conference call to discuss these results early this afternoon.
Federal government to reduce EI premiums. On Thursday, Ottawa will announce that it is lowering Employment Insurance premiums paid by employees and workers, according to The Globe and Mail’s Bill Curry. This measure will be called the “Small Business Job Credit,” and the cut will be “significant,” a senior government official told The Globe. Last year, the Parliamentary Budget Officer claimed the government was keeping premium rates artificially high in order to make progress on deficit reduction. Stephen Gordon, professor of economics at Laval University, points out that the program currently has a larger operating surplus than it did during the period preceding the financial crisis. The Parliamentary Budget Officer’s 2014 economic forecast projected that on a cumulative basis, this program would have a balanced budget in 2015.
Volatility is creeping back into the markets. “We have, after what has seemed like an eternity, volatility and trends occurring in the forex market, with the JP Morgan volatility index moving up 44 percent from the July low,” writes IG chief market strategist Chris Weston. We are also seeing implied volatility in the bond market at the highest since March, although the index (I have looked at the Bank of America MOVE index) is still only 7 percent above the year’s average. The equity market is still seeing fairly limited intra-day ranges, but that may well change soon.”
Australia’s August jobs report was the mirror image of Canada’s. The country’s Bureau of Statistics reported that the economy added a net 121,000 jobs over the course of the month – more than ten times what economists had expected. The agency recently changed its methodology, writes Business Insider’s Paul Colgan, which has prompted some economists to conclude that this print has been skewed by statistical noise.
The Royal Bank of Scotland said it will move its headquarters to London if the independence movement prevails in the upcoming referendum. Credit Suisse believes an autonomous Scotland would plunge into recession, and points out that the nation’s banking assets are 1,200 percent of GDP – far more the comparable measures for Iceland, Cyprus, or the United States prior to the Great Recession.
There’s very little inflation to speak of in Europe. The final CPI reading confirmed that German inflation remained mired at its lowest level since February 2010 in July, with the headline rate up 0.8 percent year-over-year. Meanwhile, annual inflation in France is even lower, running at just 0.4 percent. Persistent disinflation spurred the European Central Bank to enact more aggressive monetary policy, however, it will take time before the effects of this stimulus manifest themselves in the real economy.
Chinese inflation moderated in August, falling three tenths of a percentage point to 2 percent. This rate of price increases was below what economists had anticipated. “Clearly there is little inflation pressure in China at present, leaving room for more stimulus if growth looks to be coming in below target,” writes Bank of Montreal senior economist Benjamin Reitzes.
An update on the health of the American labour market is due out at 8:30am (EDT), with last week’s initial jobless claims expected to come in at 300,000, virtually unchanged from the previous reading. This metric is sitting at pre-recession lows, an indication that the jobs market south of the border continues to firm.