BNN Bloomberg's mid-morning market update: Nov. 14, 2019
Canada’s economic outlook isn’t exactly flashing green but you wouldn’t know it by looking at the stock market, fresh off Wednesday’s record high.
The Bank of Canada has begun to consider lowering borrowing costs as growth starts to sputter and corporate profits come in below expectations. Yet the country’s stock market has reached a new peak amid its longest winning streak since January as tensions over trade and Brexit ease.
David Rosenberg, chief economist at Gluskin Sheff + Associates Inc. was quick to note the dichotomy between current macro conditions and market sentiment.
“I can understand how less uncertainty is a good thing, but it’s not as if all uncertainty is gone -- but that is how investors, at the margin, are behaving,” Rosenberg said in a research note. “When it comes to data, ‘less bad’ is also being treated as ‘good’. “Oh, yes, earnings are declining but at least they’re beating expectations!”
The nation’s economy is nowhere near peak growth. Economists surveyed by Bloomberg expect the economy to decelerate to a yearly pace of 1.5 per cent in 2019 and 2020, in line with expectations for slower global growth. The Bank of Canada has also revised down its forecast for Canada GDP in 2020.
Even so, the current environment is better than it has been recently, which is driving sentiment and asset prices higher, according to Bank of Montreal Chief Economist Doug Porter.
“Growth has been good enough so that recession concerns have died down a bit from where they were a couple months ago,” Porter said.
Below, we look at the current business landscape.
The MLI Leading Indicator, an index that detects early trends in the Canadian economy, rose 0.2 per cent in September, the weakest in six months.
“Meager economic growth continues to be the norm,” said Philip Cross, a senior fellow at the Macdonald-Laurier Institute in Ottawa. “While the leading index points to continuing growth in the second half of the year, it is a slow growth that is not likely to bring widespread benefit.”
Last week, Canadian jobs, housing starts and trade reports missed economist expectations while the Citi Economic Surprise Index has resumed its downward trend. Still, on a global scale, Canada’s economic data has come in better-than-expected relative to most of its peers.
It’s not just disappointing economic data that markets appear to be largely ignoring. About 80 per cent of companies listed on the benchmark S&P/TSX Composite Index have reported results and show profits growing at the slowest pace since 2015.
Still, investors remain optimistic as full-year earnings estimates for TSX companies have not changed, according to data compiled by Bloomberg. “Investors are clearly looking through a poor H2/19 environment to focus on an expected 2020 rebound, and positioning as such,” Bank of Nova Scotia analyst Hugo Ste-Marie said in a report.
So what’s behind the disconnect between the economic data and soaring stocks?
While the S&P/TSX Composite Index may be a “decent leading indicator” of the Canadian economy, Porter said its necessary to look at global financial and economic conditions, commodity prices and changing interest rates.
With a deal on trade between the U.S. and China inching forward and an election likely to clear some of the fogginess surrounding the U.K.’s exit from the European Union, Canada is joining the global upswing in stocks.
Rosenberg puts the dichotomy down to a familiar culprit. Central bank rates in most parts of the world are at zero, close to zero or below zero because growth is slow. And that’s pushing up global asset prices.
-- With assistance by Erik Hertzberg