Our reports: Economic Impact

The latest financial news made simple. Here’s everything you need to know, thanks to our experts Stéfane Marion and Martin Gagnon. 

Economic Impact - Central banks on shaky  ground

September 20, 2022        Transcription

All eyes are on central banks. Will rate hikes have the desired effect? What will be the impact of financial stress as it starts to weigh on the global economy?

Economic Impact – Finally, a break for inflation

August 15, 2022        Transcription

Martin Gagnon and Stéfane Marion sit down to talk about the global economic situation and its impact on the Canadian market.

Economic Impact – Recession is not inevitable

July 19, 2022        Transcription

Martin Gagnon and Stéfane Marion sit down to talk about the global economic situation and its impact on the Canadian market.

Economic Impact – Inflation persists: What will central banks do?

June 16, 2022        Transcription

Martin Gagnon and Stéfane Marion sit down to talk about the global economic situation and its impact on the Canadian market.

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Little details that matter

Hello, everyone, and welcome to this economic impact video. Today is September 15, 2022. As usual, I am with Stéfane Marion, our chief economist.

Hello, Stéfane. Hi, Martin.

Today we're going to break protocol and I'm going to let you, Stéfane, tell the story. There's a lot of content, there's a lot of volatility. It's difficult to make a forecast at this point. I'll let you go for seven or eight minutes, and we'll recap.

Yeah. Thanks for allowing me a monologue, Martin. So I just want to start that yes, it's not easy to make a forecast. I will present our baseline forecast, however, and the challenges that central banks are facing. I know many financial institutions are now calling for policy mistake recession call. We still assume that the central banks do want to actually want to avoid such a policy mistake. But let's speak to this scenario. One thing is clear, central banks are determined to bring inflation down. And the reason for that is that inflation is above 2% pretty much everywhere across the planet. It ranges from 3% in China to 12% in the Netherlands, and that is well above the 2% target normally set by central banks. So, what central banks are doing with inflation is above 2% everywhere. Well, they're all reacting by raising interest rates at the same time. What are the challenges we have if everybody drains the economic pool at the same time? The water level will come down much faster than if you do it on your own. So, the central banks keep arguing that raising interest rates now will only impact inflation 18 well, 12 to 18 months down the road. Well, maybe that's a traditional model when there's only one person doing it or just a few, but if everyone does it? The lead lags might be quite different, so that's why they have to be careful. Slippery slope for central banks right now. Now, the rise in interest rates is actually having a big impact on growth. Growth is decelerating and you can see that manufacturing activity, Martin, it's above 50, it's still growing, but it's a lot less vibrant than it was a few months ago. So clearly there's the impact of higher interest rates on global growth and the other thing from a central bank perspective. Let's not forget that inflation is a lagging indicator. Inflation today reflects the growth that we had last year and now with interest rates rising, we're going to get very slow growth in the coming months and that will translate into inflation that could come down much sooner than a year from now because everyone's doing it at the same time as I said before. And Martin, we spoke to this before, and you've been a proponent for that. The supply constraints are still a big explanatory factor of why inflation is so high at this point in time. Case in point, if you take this study made by the US Federal Reserve, San Francisco, they look at the green portion of that, the green section of that chart, of that bar chart, you can see that roughly half of US inflation right now is due to supply driven inflation. So that's the global supply chain that has yet to normalize. China still has the 0 COVID policy in place, impacting its manufacturing output quite significantly. So yes, there are still structural factors that are at play and that might be receding quite significantly in the coming weeks, coming months. So, the issue for central banks right now is if you do too much straightening, you get too much financial stress. Too much financial stress is normally confirmed with a U.S. dollar that is really strong, too strong normally. And if you go, if you breach a certain level, then it turns into a recession. Recession is a policy mistake. Again Martin, our scenario is that central banks will want to avoid a policy mistake. At some point they need to pause their tightening cycle. Right now, when you look at the performance of the US dollar. Well, it's the highest in the generation. So clearly the US dollar is at a very elevated level that is adding financial stress. So, we don't want to go too much higher than this level at this point in time. At the same time, we can't forget that higher interest rates mean higher mortgage rates, which means a negative wealth effect for many households because home resell activity is coming down quite significantly from a Canadian perspective, we're now back below the 10 year average in terms of home resales. Now, fear not, from a Canadian perspective, demographic factors are still quite supportive. There might be a little bit more downside from current levels, but we don't think it's the same downside as 2008, 2009 or the worst of the pandemic just because the growth of the population growth that we're experiencing right now in Canada is the best since 1993. So that means more household formation. So, there's a limit to the downside on home resale activity for Canada. But of course, interest rates need to pause at some point in time and we hope they pause in October. The reason why we think there's a resilience for the Canadian economy versus others is because real disposable income, that's after adjusting for inflation, is still on the pre COVID trend, which is the red line on this slide. Not the case in the US and certainly not the case in Europe. Both countries are also raising interest rates, so obviously, you're going to get a slowdown that will be more significant in US and in eurozone and that will depress global economic growth and obviously bring down inflation, which is our scenario at this point in time. So, the other thing is central banks are looking at, I say we're going to hike until we see a slowdown in the labor markets. Well, it is true that total employment growth is strong in the US, however it's mostly part time jobs. If you look at full-time employment both in Canada and the US. You can attest on this slide that it has stabilized. It's actually stalling for the past three to four months. So, corporations are saying, well, you know, I'm not going to hoard labor right now, full time jobs, full time employees cost a little bit more and I'm not sure about the outlook. So that slowdown in the pace of hiring is what the central banks are looking for to take a pause on their tightening cycle. So, at this point in time, I think it's really important to look at the dynamics of full-time employment. And again, I stressed the point that central banks are not really interested in seeing massive layoffs. So that's why it's important to take a pause with the tightening cycle. Our view, Martin, for the next few months as we assume that the pace of inflation deceleration will be much faster than what we saw in July. I think it starts in August. If we are right that puts a ceiling on the overnight rate in both Canada and the US. That ceiling in our current forecast is that on under just 4%. But the markets are not sure. That's what brings the volatility, Martin, because they're saying if inflation doesn't come down then they're going to push above 4% and it's even a more slippery slope for the global economy. So, inflation under in the current forecast goes down to 3% about to start next year and that will put inflation in a much more comfortable zone for the central banks. But again, I think that we should start seeing this already in October if commodity prices stay where they are right now. In essence, what it means for the Canadian economy growth next year, still growth, that's good news, but slow growth of 1%. Slow growth of 1% is well below potential growth, which means that inflation will decelerate. But in the meantime, Martin, we have to be careful. We have yet to confirm that inflation is coming down faster and that's why we’ve seen that the second quarter was not good for financial assets. The third quarters turning out to be OK so far, so far so good. We're near the end of the third quarter, it's positive return, the blue bars on this slide are all positive. Year to date, still challenging. The issue that we have, Martin, going into the fourth quarter, we're still uncertain about the banks. This decision process as to whether or not they will take a pause after October. I need to confirm my inflation data for the next few months, which makes it a little bit challenging and therefore maybe for our investor base to be a little bit more prudent under these circumstances.

So, Stéfane, very interesting. We rarely hear about the structural part of inflation. So, what are the central banks dealing with? They're protecting their credibility versus the core part, the structural part of inflation.

I think they're in catch up mode. They've been frustrated that they weren't able to predict the upsurge in inflation. And it's as if they have abandoned the storyline where, you know, a good proportion might be to supply forces. And in a sense, it makes sense because you know, they've been frustrated by the supply chain. And is opening its economy, closing it, opening, closing it. So, to the extent that the Chinese economy stays open a little bit more after October, I think this is where we will see the structural component of the supply side component that will bring inflation down.

And 1% growth is very close to a contraction of the economy and that's why it's a very volatile situation.

Well, you could say it's stall speed. Yeah, 1% is not much. We're coming down from 4%, but it's still positive growth. The point, Martin, is that you don't have to go into economic contraction or recession to get inflation down at 1%. It will come down.

And so more than ever, I think it's important to tell our investors to talk to their advisor. We recommend to be prudent at this point and you know there's a lot of different outcomes in our scenario. We didn't talk about geopolitics, but there's a lot going on.

Yeah, moving the overnight rate about 4% in both Canada and the US will become very challenging for the global economy and for the domestic economy, obviously, Martin. So that's why prudence is probably the name of the game for the next few weeks, next few months, we have to confirm that downtrend on inflation, which has begun, Martin, but it's just not happening fast enough to calm the central banks. They need to pause after October. If not, it gets a bit more challenging.

Thank you very much, Stéfane. Thanks for listening to us. Please send us your comments and we will see you in one month. Take care.

Hello, everyone, and welcome to this Economic Impact video. Today is August 11, 2022. As usual, I am with our Chief Economist Stéfane Marion.

Hello, Stéfane. Hi, Martin.

Stéfane, it's never easy to do economic predictions but, we have to say that this time is particularly hard. There are a lot of many conflicting signs, and it's deep grey.

Yeah, and there's no summer vacation for the economy and financial markets, and we're seeing this again and it brings volatility. We spoke to volatility last time, so not a big surprise. We're seeing a deceleration in the global economy, so it's a slowdown. It's a tangible slowdown. But, Martin, the good news is you can see on this slide is that even though it's a slowdown, it's not yet a contraction. So, it doesn't mean that some regions of the world are not experiencing a contraction, but for the global economy right now, it's still slower growth as opposed to recession.

And, indeed, talking about conflicting signs, we've got Europe versus China, for example.

Yeah, and the complication when you look at these things, these regions, is that Europe is clearly about to enter recession. Their GDP was good, but the summer months are going to be more difficult and that has to do with cyclical factors as well as the geopolitical backdrop is not conducive to strong growth in Europe facing a significant supply shock on the energy front. So, that region of the world is in contraction. However, there's a significant offset with China opening, or partially reopening, its economy. Given the size of the Chinese economy, it can be an offset to a European contraction. So, what we've seen in recent months is that, recent weeks I should say, better growth from China. They had a dismal quarter in Q2, but the third quarter looks a little bit more solid.

Let's talk about the U.S. where this time the conflicting story is around the building up of inventories.

Yeah, people have claimed that the U.S. is in recession because they've experienced 2 consecutive quarters of negative GDP growth. That's too simplistic a definition. It's actually not the one being used by the NBR which is the official agency that calls recessions, Martin. To confirm a recession, you need to see a significant drop in employment revenues, which means less jobs, right, historically. What we've seen in the U.S. is negative GDP, but it was accompanied by a deceleration in inventories at the corporate level because there's a lot of inventories out there, Martin. Corporations were scared about the supply chain and the inventory level is at levels that we have not seen since 1984. So, clearly, as you accumulate less inventories, therefore, your GDP slowdown in Q2. So, it was a technical movement in certain components of GDP that led to this contraction.

And this has all kind of repercussions on companies, earnings and inflation.

I kind of like GDP contracting when it's a move in inventories, because that will mean potentially less inflationary pressures down the road. Let me explain, Martin. As inventories are stop accumulating, supply delivery times are coming down, the backlog of orders is coming down, and input prices are coming down. So, it's actually good news, given where we are in the cycle, because we're all concerned about inflation. And we can see how the CPI relief surprised us in July, surprised markets, with the inflation for goods, consumer goods, coming down from 12% at the start of the year to roughly 8% where we are right now. So, it's a tangible deceleration.

So, it is a deceleration, but it's still high and, therefore, central banks still have to act.

Yeah, 8%, unfortunately. So, well above the 2% that the central banks are targeting, so we're seeing more monetary tightening. Expect more, Martin, in September. And now, the good news is that with the speed at which inflation is decelerating probably means that there's light at the end of the tunnel to stop the central banks later this fall, and that would be good news. Currently, the policy rate on both sides of the border stands at 2.5% and, you saw Canada how aggressive they were, the Bank of Canada back in July, 100 basis points, a full percentage point increase in the overnight rate, something we had not seen since 1998. So, they're moving aggressively. They'll move again in September, but perhaps, with this inflation acceleration, they'll stop at 3, like we have in the forecast instead of going to 4%, which they advertised earlier this year.

Excellent, and actually markets, especially the bond market, is lowering expectations.

Yeah, starting to warm up to a scenario where they stop sooner rather than later, but, Martin, again we have to confirm that there is still deceleration endures for a few more months.

Lots of questions from our viewers on the real estate market, Stéfane, worries about this important part of the economy. What's your take?

Yeah, well the overnight rate has increased quite dramatically, and the mortgage rate is well above the overnight rate. The 5-year mortgage goes to you know above 4% nowadays. So, that's been a significant increase and we've seen the impact on Canada, a significant deceleration in home sales, down below their decade average, coming down in every market. No one has been spared by a slowdown. Consumers are nervous about the outlook for interest rates. So, until we stabilize interest rates, I think activity is going to be on the soft side. And, from a Canadian perspective, the main uncertainty or the main concern is that there's a lot of people that took variable-rate mortgages in recent years. And, they could be impacted quite significantly, and how big a supply shock, and will that lead to big home price declines because people can't afford homes or people are forced to sell their homes.

Martin, our colleagues have made a very interesting analysis in recent days. And, I think it's important to remind people that, yes, there are people that have taken variable rate mortgages --- it's about 1/3 of the overall mortgage market --- but 67% of the variable rate mortgages have fixed payment in Canada, which enables consumers to absorb a certain increase in interest rates. That's really important. This is not the U.S. back in 2005-2008, so I encourage you to have a look at this study. And it's not just the variable rate mortgage versus fixed mortgage that we have to look at. We also have to look at the number of people that actually have a mortgage, right, Martin? And it's 35% of Canadians that have a mortgage. A lot of people are homeowners that don't have, or have very little, or don't have mortgages in Canada. So, we have to take that into account. It's different from the U.S. back in 2005 or 2006, 2007. So, when you combine the two factors as we do in our special report, we have a special, we come to the conclusion that the payment chart, there is one, Martin, but it's between 0.5 to 1% of disposable income. Yes, it's annoying. It's a tax on consumption. But, however, if your labour markets continue to hold the line like they are right now, it's a lesser bad. You are able to absorb that. So, we're going to get deceleration, continued deceleration, but a massive contraction like we saw in the U.S. back then? Unlikely.

So, it gets very technical, but you mentioned it, Stéfane, there is a special report available on our website with much more details. Also going into the demographics supporting the real estate sector in Canada. So, please take a look if you want more details. But, if we conclude, Stéfane, lots of uncertainties, there's still a supply shock, there's still Ukraine, there's still high inflation despite a deceleration. Markets did well recently, but we're not out of the woods yet, and we need to remain prudent.

Yeah, expect volatility to endure over the coming weeks. And, we have yet to see, confirm that the great news on inflation needs to be confirmed again in the coming months to stop the Central bank. So, the good news, Martin, is that the central banks are still normalizing monetary policy. What we want to avoid is for them to move into restrictive territory when it comes to monetary policy and the only way to avoid this is we have to keep inflation on the downtrend that we've seen in recent weeks. It needs to be there with us later this fall. So, we're going the right direction. Now, it's just a matter of keeping that trend going.

Excellent. So, our main thesis is still not for recession, but we have to watch it.

I think it's avoidable if you keep these central banks away from restrictive monetary territory.

Excellent. Thank you very much, Stéfane. Thank you for listening. We'll be back in a couple of weeks. Take care.

Hello, everyone, and welcome to this economic impact video. Today is July 15. As usual, I am with our chief economist, Stéfane Marion.

Hello, Stéfane. Good morning, Martin.

Lots happening with inflation, Stéfane. What's going on?

Still a challenging environment, Martin. We spoke to that a few weeks ago and, unfortunately, inflation remains on an uptrend reaching more than 9% in the U.S. With the low unemployment rate, clearly the central banks are becoming more aggressive. They can no longer tolerate higher inflation. So, they're moving in quickly to try to limit any further upside.

Yeah, so they are being somewhat bulldozed by those numbers, right? Yeah, and we can see that the reaction function has been quite aggressive in Canada. Even prior to seeing the next inflation print, the Bank of Canada hopped to take, make a little bit more room to maneuver on that front, and they hiked interest rates by 100 basis points, something that had not been seen since 1998. So, I've never seen this since I've started working at National Bank, but clearly an aggressive move. Here's an easy forecast, Martin. The next move will also be aggressive, and the Federal Reserve will also probably show a full percentage point increase, or slightly below, as soon as the end of July. Again, the importance for central banks is to get in front of inflation as opposed to trending inflation going forward.

And, Stéfane, some people are asking us if this is looking like the 70s all over again.

Well, you saw in the previous slide that clearly the last time we saw inflation running well ahead of the jobless rate was the 1970s, which were a period that was also characterized with supply shocks. And, we do have supply shocks to deal with. We have war in Ukraine, and we also have the Chinese situation with a zero-COVID policy strategy which is impacting the global supply chain. So, there are similarities, Martin, and that's important to keep in mind because if you're dealing with a supply shock like you did in the 1970s, it's important for central banks to be able to make the difference with what comes from demand versus supply. So, hopefully as the global supply chain normalizes in the coming months, which we hope it will, then that would certainly help on the inflation front. So, there are similarities with the 1970s, Martin.

And Stéfane, obviously the stock market reacting and remaining in bearish territory.

Well, if you can't predict the central banks nowadays, obviously it's not great for equity markets and equity markets were down more than 20% towards bear market territory if you look at global equities. And we've, recouped some of the losses, Martin, and, as we speak, we are close to, we're still close to the lowest. We're not lower than we were back in June. So, that's good news, Martin. So, people will tell me, "OK, why is this happening if inflation is accelerating?" That's because you have to look at expectations. Never forget that inflation is a lagging indicator on the economic cycle. What we're seeing now, Martin, quite interestingly, is that inflation expectations are actually coming down. So, as inflation is coming out officially with higher, right now, forward-looking indicators or market expectations is for deceleration. And inflation expectations for the next five years now are at the lowest we've seen in over a year. So, I think that's a positive development that helps support the stock market so far.

And that's a very important point, Stéfane, and probably our main message today. But let's look at some of what's behind these lower inflation anticipations. And, you know I like Doctor Copper, so, not looking good.

No, so it's counter-intuitive to see why inflation expectations are coming down while inflation is still accelerating. And, it has to do with exactly what you're saying, Martin. Commodity prices are decelerating. We already know that there's been a significant increase in interest rates globally in recent months, and clearly that is leading to slower global demand and that's impacting commodity prices. Oil is down 20%. Doctor Copper is down 25% or so. So, that in itself will feed into the inflation numbers later this Summer. So, maybe we are near a peak on inflation. That's, obviously, our forecast at this point in time, and if we are near peak on inflation, that means the scope for super aggressive central banks in the months ahead is significantly less and so that is a very important development that we see these commodity prices coming down.

And also, the price of transportation is a key indicator of what's happening with supply chains.

Yeah, so on that front I would say that there's been a partial reopening of the Chinese economy, so the price of shipping a container from China to the U.S. West Coast is down by more than more than 50%, Martin. So, that in itself, should also translate into lower consumer goods inflation, since a large component of that are imported goods from China in the coming months. And, Martin, we're actually already seeing it, so that's important. That's how you stabilize inflation. And one of the reasons why we think these consumer goods might come down, Martin, is because less demand due to the fact that the very big increase in the energy and food prices that we've seen in recent quarters has meant that U.S. consumers have been forced to redeploy a massive amount of their disposable income towards spending on food and energy --- $500 billion, Martin. So, obviously that means less money for discretionary spending. So, if you spend less on discretionary items, obviously, you'll bring down your inflation.

And this, obviously, should have an impact on our enterprises and an impact on their earnings.

Yeah, so everyone's concerned, and you mentioned the 1970s previously, Martin, so everybody's concerned that will we get a rapid increase in wage inflation due to this increase in food and energy prices. And the way to avoid this, Martin, is what will be the reaction function of corporations in the coming months after a very solid hiring pace over the past year or so. So, what we're seeing right now, Martin, is with the deceleration of discretionary spending, there's less upside for corporate profits in the months ahead. And in the U.S., only 35% of corporations are guiding up in terms of their earnings per share for the coming year. That's not the type of diffusion you normally see. It's lower than usual. And that would suggest a slowdown in the hiring pace already this summer. And, if you slow down, the hiring pace, and it doesn't necessarily mean layoffs, Martin, but if you slow down the hiring pace, say from 400,000 people a month to something closer to 100 or slightly below 100, that's key to avoid a wage inflation spiral. So, that's really important. And the indicators that we have right now, the forward-looking indicators, do already suggest a tangible slowdown in hiring pace this summer. So again, if you want to bring down inflation, Martin, you've got to slow down the hiring pace, you got to cool demand for consumer goods, and commodity prices must come down. So, it seems that the planets are aligned now for a peak on inflation, and I think that will be supportive to markets, if we could confirm that inflation slowdown in the coming weeks.

Yeah, very interesting, Stéfane. And again, to reiterate you're talking about a more modest growth, but still in growth territory and Canada done different path.

Well, that's partly the reason why the Bank of Canada was so aggressive this month, with a 100 basis point increase. The Canadian economy is doing well. The labour markets are solid. We have the lowest jobless rates since the 1970s, below 5%. We've seldom seen this, Martin, and people are concerned because they ask me when they see this, are we going to see a wage spiral in Canada? Are we facing these massive labour shortages? What's going to happen? Does that mean that the Bank of Canada is going to have to up the ante on rate hikes? Martin, I do recognize that the jobless rate is the lowest since the 1970s. These are tight labour markets, don't get me wrong, but at the same time the immigration policy is quite supportive right now for domestic growth and for replenishing of the pool of available workers. And you can see that the population aged 25 to 54 is growing at a blistering pace, right now --- 220,000 individuals per year, something we haven't seen since 1993. That's 98% driven by immigration, Martin. So, clearly our corporations in Canada, unlike the U.S., are accessing a pool of available workers that is still growing. So, that limits your upside on wage inflation. And obviously if you can do that, then that will limit the potential for monetary policy to be pushed into restrictive territory on this side of the border.

And Stéfane, it should also provide some support to the real estate market.

Well, that's an interesting question. We've seen a significant drop in home resell activity in this country with the higher mortgage rates, but at the same time, yes, home resell activity will be slowing. But, home starts, home construction will have to remain relatively high just to support these demographic components. So, there's an offset to lower home resell activity through higher or resilient home starts, I should say, in the coming quarters.

So Stéfane, in conclusion, we are not in the recession camp. We are counting on a deceleration of inflation in the coming weeks and months. That's really the main message. What about interest rates?

Well, we see them topping near 3%, Martin, not the 4% that the central banks are advertising right now. We're really encouraged by the fall in commodity prices that we've seen recently. Also, the drop in inflation expectations and the potential reopening of the Chinese economy. All that argues for a peak on inflation. We need to confirm it, Martin, but if we can stop the central banks at around 3% on their policy rates, I doubt that this would imply restrictive monetary policy and topple the economy into recession. So, again, stabilizing inflation is key. The next few weeks will be very telling as to whether or not the central banks are forced to push monetary policy into restrictive territory. That's not our baseline forecast. We're encouraged by the inflation dynamics. Now, it's just a matter of confirming our forecast.

Excellent, thank you, very much, Stéfane. Thank you, everybody, for listening to us. We will be back in about a month and enjoy the summer. Take care.

Hello, everyone, and welcome to this Economic Impact video, June 14. Very timely. The markets are volatile and there's a lot of pessimism out there. As usual, I'm here to discuss many interesting topic with our Chief Economist, Stéfane Marion.

Hello, Stéfane. Good morning, Martin.

So, Stéfane, we're now in bear territory pretty much everywhere around the globe. Yes, bear market territory, which means that stock markets are down 20% from peaks. Emerging markets are down more than that. Technology stocks, NASDAQ close to 30% and the S&P 500 joined the rest of the club earlier this week, down 20%. Note, Martin, however, that the S&P TSX continues to show resilience, down 10%. So, again, we've said many times before that if you were concerned about the slowdown, stagflation fears, Canada was a way of being more defensive, and that's still the case. Even though the Index is down, the relative outperformance is still quite significant.

So, Stéfane, earnings usually drive the stock market, but now it's really about, all about interest rates.

Yeah Martin, we get a lot of questions as to, you know, is what's driving the market down... Is it a contraction in earnings? This hasn't been the case. In fact, globally, profits are still rising. But what's happening is that long term interest rates are rising, and normally there's a trade off before between investing in the stock market versus the bond market. And, with bond yields on a significant uptrend, what's happening, Martin, is you have this compression and price earnings multiples. So, it really is the stock markets that are trying to find their fair value according to the level at which long term interest rates will stabilize.

And what's behind this, obviously, is much more resilient inflation than what we believed a couple of months ago.

Well, stabilizing the bond market means you have to stabilize inflation, Martin, and unfortunately inflation is proving to be more resilient than we thought. Headline inflation, the blue line on the slide, running at close to 9% every year, and even when you exclude food and energy, we're still talking about 6%. So, under these circumstances the market is saying that, obviously, central banks will have to be a lot more aggressive and, perhaps even more, even provoke a recession to bring inflation down. That's the concern that we see in the markets right now.

And we're not only talking about typical economic cyclicality here. We still have some pretty important impact from the pandemic.

Well, the issue I have about the scenario where central banks are dumb and they're just going to raise interest rates to kill the economy, is the fact that we still have supply side components that are impacting inflation and one of the key points is China. Martin, you know, the pandemic is not behind us. China has shut down its economy over the recent weeks. And, if they would start to reopen, and I believe they will later this summer or in the next few weeks, that would bring significant relief to the global supply chain and help bring down inflation. To give you a sense on how much these pressures are still very much present on the global supply chain, you can look at this slide of the pressure slide from the New York Fed. You can see that we're almost as elevated as we were back in 2020. So, clearly a reopening of the Chinese economy would certainly help bring down inflationary pressures, particularly on the good segments. So, I'm hopeful that we're likely to see this reopening and deceleration in inflation. So, again, there's more than demand side components. Supply is still very much at play, Martin.

Something that we don't hear a lot about is the state of the consumer and, you know, that's one of the key components of our thesis. The consumer is feeling the pinch right now.

Yeah, and that's where I'm a bit surprised that the markets are so aggressive in anticipating Fed tightening. It's as if there's no slowdown on the horizon and, Martin, if you look at consumer sentiment right now, the blue line on this slide, it's at an all-time low going back to the 1950s. So, clearly, the consumers are feeling the pinch from higher food prices, higher energy prices. Rents are moving up in terms of inflation and also debt financing with mortgage rates on the rise are also impacting the purchasing power of consumers. So, to me, Martin, that chart suggests that we will see a slowdown. Will it be a contraction? I don't think so. You can see the red line, labour markets are still quite strong in the U.S., but I think there's a tangible slowdown around the corner. And if you get this tangible slowdown, which doesn't mean contraction, by the way. It doesn't mean recession, necessarily, but the slowdown will help stabilize inflation. So, that's why we're a bit less aggressive in terms of rate hikes than what the market currently expects.

Now let's talk about Canada faring a little bit better than the United States.

Well, not a bad place to be when you consider that our economic surprises are clearly outpacing the rest of the world. So, economic surprise in Canada is showing up tremendous resilience, and that has to do with the economic structure of our economy. Profits are still growing. And, what that means, Martin, it also translates in the job market that is the best we've seen since 1974.

And, purchasing power for Canadians?

Well, that's a big difference between the two countries, because the labour markets are strong and, at the same time, real wages, so wages adjusted for inflation, are rising more rapidly than we see in the U.S. where it's been stable for the past, well actually, since the start of the year, Martin. So, this gap between Canada and the U.S. argues for a Bank of Canada that is likely to prove slightly more aggressive than the Federal Reserve. So, this differential in interest rates that favors Canada, and that could lead to currency appreciation, is still, I think, it's still in place for the next few months. Again, this resilience in labour markets argues for a Central Bank that will be a little bit more aggressive in raising rates in Canada, but I don't think that will move into an environment where we create a recession in Canada. But, yes, you could argue that there's more room to raise interest rates in Canada in the U.S., at this point in time.

And our listeners, Stéfane, keep reading and hearing that this is going to have a negative impact on real estate in Canada. Any thoughts on this?

Martin, it will slow, okay. Let's not kid ourselves with the higher mortgage rates, this sector will cool. Will the sector collapse? I don't think so because we still have the best demographics in generations. If you look at the population growth from people aged 25 to 54, it's up roughly 200,000 individuals on a year-to-year basis, and that's the best we've seen since 1974. Obviously, this reflects our immigration policy which has benefitted the country and helped supports the residential sector. So, Martin, I'm very open a cool-down in the residential market. Yes, prices will also slow or might decline a little bit, but a collapse is unlikely given the very good demographics, and you will offset the impact of higher rates with these demographics. So, I think the slowdown will be more temporary than permanent, given our demographics. So, cool-down to be expected. Collapse? That's not a baseline forecast.

Excellent! Thank you, Stéfane. So, in conclusion, I think it's fair to say that monetary policies around the globe have not stabilized yet. We're still fighting inflation worries around the globe. We now believe that interest rates could go a little higher, around 2.5% in the United States, 3-3.5% in Canada. But, Stéfane, stock market - a lot of negative is priced in?

Martin, tremendous pessimism is priced in, at this point in time. So, the issue at this point in time is do we get the stabilization and inflation in the coming weeks? Will the Chinese economy reopen? I believe it will happen. I believe we're going to see a slowdown in the hiring pace in the U.S. that will also help cool consumption. And inflation, when it stabilizes, Martin, you get this stabilization in long term rates and then your stock market will find its proper level, its balance, it's neutral level. So, our view is that a lot of people fear a recession call, right now, recessions, and our view is that the central banks will raise interest rates but are unlikely to push it in restrictive territory as to create a recession. So, slowdown is our baseline forecast - not a recession. I think the combination of higher long-term interest rates, with the Chinese reopening will cool the inflation backdrop in the coming weeks. So, our baseline forecast remains for an economic slowdown, but not a recession and we should get better news in the coming weeks on the inflation picture.

Excellent! Thank you very much, Stéfane. Thank you for listening. And, if you have any questions or comments, don't hesitate to reach out to your advisors and stay safe. Take care.

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