Our reports: Economic Impact

Welcome to the economic impact. Once again, a lot of news and a lot of new variables in the in the economic environment. Stéfane, can you tell us a bit more about what's going on?

I just want to come back to what you said last month that the US debt default was unlikely, and you were absolutely right on that. But with this uncertainty having lifted, the central banks are back in action, and we saw the Bank of Canada - surprising markets early in June with a another rate hike after a pause of roughly 4-5 months, right. So Denis, best guess - is that they won't be alone hiking rates in the next few months. So expect the central banks to continue to you know bring interest rates a little bit higher. I don't think - The increases might be modest Denis, but there's more in store and more importantly, rate cuts are not going to happen this year, which the market was actually pricing just a few weeks ago, right?

Yeah, it's a totally new environment with what the Bank of Canada just did a few days ago, but at the same time the economy is going quite well in Canada if you compare it to the US and it's maybe one of the reasons why the Bank rate hikes.

Yeah, you can justify it like that to me and clearly I won't dismiss the data. The data is the data - it's up 3% growth in Canada actually outperforming the US after a mediocre performance of previous quarter. But still it was an unexpected rebound. Consumer spending was super strong - 6% and that was on the back of a significant depletion of the savings rate. So, the savings rate is suddenly back to its pre-COVID level. So this is how consumers were able to support the economy depleting their savings rate and at the same time the inflation keeps going up, but it depends how you look at it.

Yeah, you're right. But yeah, of course. But one thing is sure, if you deplete your savings rate to spend more, obviously prices are not going to come down. Then what we're realizing on both sides of the border is that the price level for core inflation, those are the level of prices is still well above it's 2% trend on both sides of the border, particularly in the US, but you could argue the same thing from a Canadian perspective, so clearly the Bank of Canada was frustrated by this resilience on the inflation front and it's a global phenomenon.

Yeah. And there is new variable that is hitting the market that we're not expecting is that, you know, residential sales are popping up.

Yeah, well, historically when you raise interest rates, residential sales go down. But they've been surprised by the surge in recent months, the upturn and home prices are no longer falling and they thought they were going to follow a little bit more. So, it's putting more pressure on inflation. But Denis, there is not much the Bank of Canada can do at this point in time because this is essentially driven by surging population growth. This year again, Denis, we're looking at you know adding 1,000,000 people to the economy. You know, unless supply increases dramatically, you're going to have upward pressure on prices, hence the Bank of Canada's, decision that we need to hike a little bit more and see what happens thereafter.

The man is there, but I don't think the construction is there. This is the interesting thing, interesting part of where we are in the economy right now. Builders are kind of scared about the future interest rates and then they're just slowing down, you know the, what we call the "Mise en chantier",

You know, housing stats are just not there. You're absolutely right, Denis. But just to give you a sense of how bad it is, the first quarter was the 4th consecutive quarter where we had a double-digit decline in residential investment or home construction. That's the worst performance since 1995. So the man is super strong, but supply is just not there. So you know we need to do a better job of matching supply and demand and until that's done, well the Bank of Canada is in tightening mode.

Yeah. And then also price increase, inflation increase and then in a spiral, you know, going up. But at the same time, we have the stock market that is saying that the economy is going well.

Well, what's just surprising right now is with the debt ceiling uncertainty having lifted, the stock market saying, well, the world has gone whole, the economy's going to do well and the stock market's actually up 6%, 7% since the debacle of some U.S. banks back in March. So it's a surprising increase in equity markets,

But it's very concentrated.

Diffusion is bad, Denis, you're right and it's all in IT or communication services, anything that's associated with artificial intelligence, AI is benefiting from a very substantial increase in PE expansion.

That's why we need to be careful about the economy. If we just look at, you know, the stock market because that doesn't represent the real economy.

Don't be fooled. Yeah, you're absolutely right. Diffusion is not good. And just maybe to come back on when we started working together and at the end of the 1990s. There was a time back then where people were saying that the TMT sector is insensitive to higher interest rates, so anything related to a technology will do well in the higher interest rates environment. And back then, the valuations surged to levels that had never been seen before. Right now, all we can say is that we're back to valuations at 36 times forward earnings or 38 times, something we had not seen since interest rates were at 0% during COVID. So clearly this multiple expansion despite the rise in interest rates needs to be watched carefully.

Yeah, the price earning on those stocks is high, but the revenue is not there. It's not following.

It's interesting to see that the valuation is rising. So the IT sector now accounts for roughly 33% of the valuation.

If you go back then 2000, what was the comparison?

44 percent, 44%

We're not that far.

We're at 32. Yeah. So there's still some upside if you want to bring back the 1990s. So I can't say that speculation can't go higher, but you're absolutely right, Denis. As this valuation share, the valuation is rising, the share of earnings that is generated by this sector is actually declining. Other sectors actually doing better in terms of earnings generation than the IT sector. So this is something that needs to be watched carefully. There was a time back then and they're saying this sector, the new technology will be deployed very quickly in the economy. I don't dismiss that the deployment will happen, Denis and will help productivity down the road. I'm just not sure that it can happen within 12 to 18 months and that higher interest rates won't hit the sector.

Yeah. But also on the flip side of that we're seeing that the global factory are not at the level that we should expect considering what we see in the in the stock market and then. You have a slide that reflect that,

Yeah. And that I think that's a cautionary tale because the impact of previous rate hikes is already starting to impact the more interest rate sensitive sectors. Manufacturing is actually in contraction right now. It's a global phenomenon by the way. It's US, it's Canada, it's Europe and it's even China. So clearly, if global activity slows because of higher interest rates, there's going to be less earnings going forward. So this is why we have to be careful with the multiple expansion purely driven on the assumption that AI will be quickly deployed in the economy, those valuations are not cheap, Denis. I think we have to be careful. Plus Denis, I want to come back on something you said last time with the debt ceiling story now behind us, the US government will be issuing a massive amount of government bonds in the second-half of this year. I think it's 1000 billion dollars. That's $1 trillion. Yeah, yeah. And I don't know for you, but I doubt that the market is fully pricing the overall impact.

I think we can't. I think they have a sense of - yes that volume will hit the market, but that dollar value will hit the market when they will issue. Then we will see the impact. And you know in the past I think we're kind of fooled by the Central Bank buying all the paper. Now, they are in the QT, they are not in the QE. Then they won't buy that paper. That means it's everybody, all the institutional - will have to buy it - the pension funds and the insurance companies this is a lot and that will have an impact and probably the yield curve will get steeper because of that.

And you mentioned QT, but with China slowing down, they're also going to be less aggressive in buying U.S. Treasuries given the complex geopolitical backdrop. So maybe that argues for more volatility because a 10-year treasury yield could rise again back above 4% in the coming months. So I think we have to be very careful on that front. So yeah, it's a complex environment and it gets a backdrop where the valuations are definitely not cheap for the stock market. So yeah, we have to be careful out there.

Thank you for being with us and we'll see you next month.

Hello, everyone, and thank you for joining us for this economic impact with our Chief Economist of National Bank, Stefane Marion. Thank you, Stefane, for joining us again this morning.

Thank you, Denis.

Well, you know since the last time there was a few news again in the in the economic environment - a lot of things happening. Some are a bit of the same, but others are different. And today, we will chat a little bit about economic news, but also variables and data that will help you probably understand a little bit more what's going on out there. But first let's see what happened since the last time about the return on the equity across the planet and also in the bond market that as far of so far what we can see is that all the, the, the return on those assets are in the positive sector, but the second quarter was kind of tough and can you explain that please, Stefane?

So, it is true that on the right-hand side of you know the red bars on that chart shows a positive return across the board for financial markets. But you're right to say that the second quarter is a little bit more difficult, a bit more volatile. Uncertainty versus, with respect to the geopolitical backdrop, the banking sector in the US, but note that it's encouraging to see that the Canadian index continues to play a defensive role. The S&P TSX is up almost 3% this quarter and that reflects the fact that it's more defensive index and particularly the gold sector has done relatively well given the current uncertainties. So year to date, positive performance, but it's a bit more complicated in Q2. I think that the second half of the year is going to be volatile. Again, a little bit more complicated, Denis, because we still must deal with the ramification of the interest rate cycle, which is probably coming to an end. But the impact of previous rate hikes has yet to be felt on the economy, both in Canada and the US.

Talking about interest rate, what do we see from the Fed and the Bank of Canada? So far, it seems that we've reached a plateau. What do you think?

I would say that when we look at it, Denis, I mean we've never seen a tightening cycle as impressive as what we've seen over the past year and both sides of the boarder. Good news is that the Fed is now talking about pausing and the Canada has done so since last January. And I think the argument for pausing now, I'm not talking about rate custody that's going to take a while to come, but in terms of pausing it can be justified on the fact that inflation is decelerating quite rapidly on both sides of the border, below 5% in the US. It's close to 4% in Canada. So central banks are justified to take a pause given the inflation backdrop.

Yeah, thank you for that. And you know, we're always looking at the bank sector. I think it's in the newspaper almost every day. How does it look so far? You know, a few weeks passed since the last, you know, impact economic, video that we did. What's happening here? Can you tell us more?

Well, there's still stress, on the regional banks in the US and one way to illustrate this, we had yet another failure at the start of the month with First Republic. So, we have 3 US regional banks that have failed so far this year and the assets that were associated with these failures are roughly $550 billion. Compare that with 2008, 2009, 2011 during the period of the great financial crisis. There were more than 400 bank failures in the US back then, Denis, but the assets that were impacted were at roughly $680 billion. It's just to say that we don't have as many failures this time around, but they've been bigger, so that is clearly a point of contention for the Fed and that's also part of the reason the Fed is saying “I need to pause,  I need to assess the impact on financial markets, on the banking sector of what I've done so far”. So again, these failures will mean that there will be more regulations coming on regional banks in US. More tightening and lending standards, less credit available the second-half this year and probably less economic growth. So again, things are not as bad as what they were back in March, but we are still now out of the woods with respect to the impact of these failures on credit availability for the US economy for the second-half this year.

Thank you, Stefane. That slide is kind of shocking when you compare you know those two periods and you see the numbers of failures versus you know the amount is. it's unbelievable. Another story that now is popping up you know and almost daily is the debt ceiling and once again you know almost every 10 years, we had you know that debt ceiling that is coming back and haunting, and you haunting us. How does it look? People are more concerned than they were in 2011. If you look at the CDS the cost of insuring against the default of the sovereign government, US sovereign government, you can see that you know the price of insuring against the default is much higher than it was in 2011 and that has undermined the US dollar. That is creating some uncertainty for markets. Denis, to be honest this chart looks quite impressive, but nonetheless. The probability associated with a default is at no more than 5%, so I don't think it should be a baseline scenario. This is something that is making markets nervous at this point in time, but I doubt very much I'm going to see a default. A potential D-rating is still possible later during the year, but default, although the fears are greater than they were 2008, and 2011. I think is quite low in terms of probability. So, we put in that 5% at this point in time.

Yeah. Anyway, we're okay. Joe Biden says this morning there will be no default and he must know he's the guy in charge of the country. Then hopefully he's right and and we'll see how it ends up. But usually it's always that you know five before midnight that things are approved and we're good for another 10 year then. We'll see. Back to Canada, I know the banking sector once again, you know a lot of questions around it. You know I think we have a few data to give you and to picture how the banking sector in Canada, sector in Canada looks like, deposit, the name of the game. Is there any change on deposit, Stefane?

Oh, listen, from a Canadian perspective and by the way, then you're absolutely right to say that for a president that's trying to be reelected, defaulting on your debt will be a total nightmare. So I agree with you that they'll find a solution. But in the meantime, in Canada, we haven't seen contagion. To the banking sector, we spoke about this last time, the Canadian environment is much different from the US. It's a system that is less available to outsiders, the payment system is more closed, there's no leakage from money market funds. And at the same time, Denis, what kind of benefits from that other countries are not benefiting from is this continued surge in the working age population, and this is an update and when you consider that 81% of the working age population has a relationship with a financial institution versus only 66% in the US, the population, the demographics will impact the deposit base. So, 81 percent of a rising population, working age, population big impact, Denis, and now I'm going to give you the number on population growth for the first four months of the year: 270, close to 280,000 individuals. So, 81% of that having a relationship with the financial institution is just putting a boost on the deposit base. So this is something that other countries do not benefit from. I understand that surging population growth is having an impact on the availability of absorption when it comes to the housing sector, but from a financial institution backdrop or perspective, this is a main positive to boost the deposit base that is unavailable in other countries. So again this is where demographics has a huge impact on the financial system in Canada.

Yes. And you're truly right and you can see that also when you compare the profits from Canadian bank versus the US bank and I think you have a, you know a bit of data on that and that can give you confidence. Also how strong is the banking sector in Canada?

Well, it's funny, Denis, because when you speak to investors internationally, say where are the Canadian banks finding their deposit base or where, how are they finding new clients? Well that has to do with the surge in population. And at the same time with this surge in population increase in deposit base also allows the economy to have a more, a healthier credit cycle than what we see elsewhere. And that obviously is having a big impact on earnings per share for the financial sector which is. Nearly tripled since 2006 in Canada and while US it's up 40%. So, you can see that this divergence between Canada and US in terms of EPS, it's not because Canadian banks are taking more risks, Denis. It's the net positive coming from this population surge that is increasing the demand for deposits. Lending conditions, household formation and obviously a stronger economy.

Well, thank you Stefane and thank you for those very interesting comments about the first the US economy and the Canadian banking sectors. I think it can give us you know kind of a comfort about what type of environment we are hopefully it's helping you try to take your decisions of investment. For the future. And once again, thank you for joining us for this economic imact. And we'll see you next time. Thank you, Stefane

Bonjour à tous et bienvenue à notre rendez-vous Impact économique du 30 mars 2023. Alors, comme à l'habitude, notre invité Stéfane Marion va aborder un sujet d'actualité comme vous le savez tous, le problème des banques qu'on a connu dans 2 dernières semaines. S'il vous plaît, Stéfane, à toi le micro.

Oui, bonjour Denis. Effectivement un stress bancaire comme on n'avait pas vu depuis longtemps, qui pour le moment est surtout concentrée aux États-Unis, bien que c'est en train de s'apaiser. Vous constatez dans la première diapo, puis Denis, ça nous rappelle des souvenirs de la crise financière, Denis aux premières loges de tout ça à l'époque-là. Le total des actifs sous pression au niveau bancaire a atteint la coquette somme de 320 milliards alors qu'une ou 2 institutions qui étaient touchées alors qu’à l'époque, c'était beaucoup plus généralisé, mais le montant était similaire. Heureusement, la Réserve fédérale, il s'agissait surtout d'un problème d'appariement de certaines banques, avec la forte remontée des taux, mais la Réserve fédérale a répondu avec des mesures ou le déploiement de mesures qui aidaient à faciliter remettre de la liquidité dans le système. Denis, peut-être certaines observations de ta part.

En fait ce qu'il faut vraiment remarquer cette fois-ci, c'est que c'est hyper concentré dans un secteur d'activité très déterminé, donc c'est pas quelque chose qui a pris de l'expansion là. Comme on a vu même dans « Savings and Loans », à l'époque, dans la fin des années 80 où là aussi c'était la cause première qui avait provoqué ces faillites-là c'était les hausses des taux d'intérêt. C'est la seule similitude qu'on peut avoir aujourd'hui. C'est vraiment la hausse des taux d'intérêt. Alors qu'en 2008 c'est vraiment un problème de crédit, donc faut pas comparer la période 2008 à la période 2023 où là, les gens essaient de faire des comparaisons. C'est 2 situations totalement différentes, donc faut faire attention là dans le comparatif. Ça faut revenir très longtemps dans le temps-là, les « Savings and Loans », il y a beaucoup de monde qui n’ont jamais connu ça, mais fin des années 80 où les taux d'intérêt se sont mis à monter beaucoup, c'est là qu'on a vu les « Savings and Loans » aussi qui ont eu des problèmes d'appariement. C'est la même situation là.

Puis je pense que Denis, ça reflète aussi qu'au niveau des banques centrales, lorsqu'on a monté les taux de façon aussi agressive, à un moment donné il faut peut-être prendre un peu de recul, prendre une pause puis voir quel est l'impact capacité d'absorption du système. La bonne nouvelle, et je pense un des éléments déclencheurs de ce qui s'est passé aux États-Unis, c'est l'érosion des dépôts. Puis comme vous pouvez constater, pour la première fois depuis les années 70 en fait, les dépôts étaient en contraction, sont en glissement annuel. Mais remarquez que là-dedans il y a une érosion des dépôts qui est due aussi à un retour à la normale après l'augmentation subite pendant la COVID où plein de compagnies qui avaient des profits déposés au niveau des banques. Donc je pense que cette érosion des dépôts a amené certains problèmes d'appariement au niveau des banques.

C'est là qu'il faut faire très attention dans le comparatif parce que présentement, ce qu'on regarde beaucoup, puis probablement toutes les banques à travers la planète, regardent le comportement des consommateurs envers leurs dépôts. Et puis oui, on peut voir une érosion, mais une érosion qui devrait - semble toute être naturelle, compte tenu que la pandémie est venue totalement changer les datas qu'on a sur les dépôts. Donc ce n’est pas parce qu'il y a une érosion des dépôts, puis souvent ce qu'on va voir, c'est les comptes qu'on appelle « cash » qui s'en vont dans du plus long terme à cause des taux d'intérêt, donc on va voir les balances de dépôt en argent dans les banques diminuer. Ce n’est pas quelque chose de mauvais en soi de présentement, c'est juste un comportement du consommateur. Donc faut faire vraiment attention dans les comparatifs qu'on fait, puis surtout pas tirer de conclusions là. Parce que là on va avoir la tendance à revenir à la normale.

Oui avec l'épargne excédentaire qui se résorbe.

Exactement.

La bonne nouvelle, c'est qu'avec le déploiement des mesures de facilité qui ont été déployés par la Réserve fédérale, vous pouvez remarquer que le marché boursier tend à se replacer et en date d'hier, en fait du 30 mars, on est même revenus en territoire positif. C'est certain qu'il y a un stress sur le secteur bancaire qui demeure pour l'instant parce qu’il y a lieu de penser qu'il y aura un certain resserrement au niveau de la réglementation auprès de plusieurs banques américaines au cours des prochains mois.

Oui, puis cette réglementation-là va surtout être pour les banques régionales, qui avaient eu un assouplissement à l'époque de Monsieur Trump où il avait changé vraiment la réglementation pour ce genre de type de banque-là. Je pense qu'on va revenir à où on était auparavant. Puis en même temps aussi, ce qu'on se rend compte, c'est qu’avec Crédit Suisse, qui est un autre problème totalement à l'écart de ce qu'on a connu aux États-Unis. Mais c'est sûr que tout le secteur de l'équité a souffert dans les dernières semaine-là et surtout le secteur financier par ailleurs.

Mais ça se replace.

Oui.

Puis plus près de nous, au niveau des banques canadiennes, puis ça c'est important parce que les gens craignaient la contagion. La bonne nouvelle, c'est que les banques américaines demeurent en baisse de 14% depuis le 8 mars, donc l'éclatement de SVB. Remarquez que les banques canadiennes surperforment les autres banques au niveau mondial avec une baisse relativement modeste dans le contexte actuel. Une baisse de 6% qui reflète, je pense Denis, la gestion plus prudente des actifs des banques canadiennes par rapport à ce qu'on voit dans les autres régions du monde.

Effectivement.

Meilleure diversification des dépôts, meilleure diversification de la « business » en général, du modèle d'affaires et puis naturellement un régulateur qui est très au fait de ce qui se passe là au quotidien. Donc une surveillance accrue de tous les mouvements, comme on disait tantôt, du consommateur canadien. Même que jusqu'à présent, il ne se passe strictement rien. Ça n'a rien à voir avec ce qu'on a connu aux États-Unis, dans en fait pour le SVB, on n'a rien, rien à avoir avec ça présentement. Donc c'est une situation qui, qui n’est pas plaisante parce qu'on ne veut jamais voir le marché de l'équité perdre de la valeur, mais présentement c'est juste par sympathie que je dirais qu'on suit tout ce qui se passe à travers la planète. Donc pas tant de problèmes que ça quand on est une valeur comparative.

Puis ce qui milite contre une contagion trop dramatique pour les banques canadiennes c'est le fait que la croissance des dépôts est encore au rendez-vous. Et ça, c'est important. J'ai une épargne excédentaire qui demeure plus élevée au Canada qu'ailleurs dans le monde. Puis, comme vous pouvez le constater, les banques canadiennes ne font pas face à une érosion de la base des dépôts, comme on l'a vu aux États-Unis et dans certaines juridictions en Europe. Et je pense que Denis, c'est important de rappeler aux gens pourquoi les banques canadiennes peuvent espérer conserver cette tendance haussière au niveau des dépôts. Puis, on l'oublie souvent, mais la croissance démographique.

Ça été ton cheval de bataille depuis plusieurs années-là, parler de démographie au Canada, donc on le voit vraiment encore une fois, et même encore plus là. Les chiffres sont absolument exceptionnels quand on compare et on se compare même aux Américains. Toutes proportions gardées, c'est absolument incroyable la croissance de la population au Canada. Donc définitivement, encore de l'argent sonnant qui va rentrer dans les banques, donc encore une bonne diversification des dépôts. Donc difficile de penser qu’une situation problématique pourrait survenir dans les prochaines semaines, prochains mois au Canada, compte tenu de la démographie.

Mais en fait ce n’est pas les mêmes facteurs, donc au niveau de la démographie Denis a raison. Pour vous donner des chiffres par rapport à ses propos, on parle d'une croissance de la population canadienne l'année passée de plus d'un 1,000,000 d'individus. C'est sans précédent. Pour vous donner une base de comparaison, la croissance annuelle de la population en France, c'est 100,000 personnes par année. Au Royaume-Uni, c'est 200,000 personnes par année. Le Canada à 1,000,000 excède ces 2 pays-là combinés, une population de 100,000,000 et plus. Donc c'est important parce que ça veut dire que j'ai une croissance de la démographie qui aide les banques canadiennes à pouvoir avoir cette croissance de dépôt à plus long terme qui demeure sur une tendance haussière. Donc c'est la meilleure démographie de tous les pays de l'OCDE, de loin. Donc dans ce contexte-là, encore une fois la contagion du système bancaire canadien elle est plus limité dans un contexte de croissance démographique qui aide à soutenir le cycle du crédit. Puis l'autre chose, c'est que la Banque du Canada, Denis, elle semble être plus pragmatique, a eu la capacité de prendre une pause autour de ces taux d'intérêt dans un contexte où l'inflation diminue, somme toute plus rapidement qu'attendue. Et ça, je pense que c'est une bonne nouvelle pour aider à soutenir le secteur bancaire canadien.

Maintenant, avec toute cette toile de fond là, qu'est-ce qu'on fait? Où mettre notre argent ? Dans quoi on investit ?

Mais Denis, on a parlé que la contagion pour le secteur des financières canadiens est moins propice dans le contexte actuel. Cela étant dit, c'est certain, qu'il y aura moins de disponibilités au niveau du crédit bancaire aux États-Unis dans les prochains mois, ce qui présage d'un ralentissement économique plus important. Donc. Pour le moment, Denis, plus défensif, des encaisses légèrement au-dessus des recommandations normales. Puis aussi, nous avons augmenté notre exposition au niveau du secteur obligataire dans les dernières semaines, encore une fois pour refléter le fait qu'avec moins de crédit disponible il y aura un ralentissement économique. La bonne nouvelle, c'est que l'inflation va baisser et on espère que la Réserve fédérale sera en mesure d'arrêter de monter ses taux au cours des prochaines semaines.

Ou à tout du moins les baisser vers la fin de l'année.

Peut-être même, oui.

Bravo, merci. Alors merci Stéfane, encore une fois pour ces précieux conseils. Merci d'avoir participé à cette capsule économique. Très heureux de cette première avec vous aujourd'hui. En espérant que ça l'a mis un peu en lumière les situations qu'on a connu dans les dernières semaines ont été quand même assez volatiles, donc s'il vous plaît, on reste calme. Et puis le soleil va se lever encore demain matin. Merci beaucoup, à la prochaine.

Hello everyone and welcome to this February 20th Economic Impact video, which will actually be my last one as I will soon be a new retiree from National Bank. But do not worry, the production of these videos will continue with our star, our chief economist, Stéfane Marion. Hello Stéfane.

Hi Martin.

So, Stéfane, we've talked about it, but we are now seeing it, definite deceleration of inflation. As we had expected. What do you think?

Well, some people actually noticed that we see deceleration in inflation Martin, and we're at 6.4% down from 9%, so clearly going in the right direction, we've been claiming this for many months. However, some people thought it would be decelerating faster at this point in the cycle, which has yet to be confirmed. But notwithstanding the fact that central banks continue to say that they might continue to hike interest rates, the bond market doesn't believe it anymore, Martin.

No. And we're watching this very, very carefully, this famous fed fund versus 2 years, what's going on?

Well, the 2-year Treasury yield in the US and same thing in Canada, Martin, is below the overnight rate or the policy rate of the Central bank. So clearly what the market is saying right now, central banks have gone far enough. You could, you might expect even a pivot in the coming months and if we're lucky, perhaps a rate cut by the end of the year.

And what happens when we see this inversion?

It's market expectations. Never forget that the financial markets run on expectations. And once you see this inversion, which has happened last December, December 15th to be more precise, Martin. Historically, the stock market does well during the period where you see the inversion of the curve until the first rate cut. And historically there's a delay of seven months and over those 202 days to be more precise, the stock market tends to deliver positive returns around 8% Martin.

So, we did in about 60 days, what we usually do in about 200 days.

Well, that's the thing, let's not be too greedy at this point in time. What is quite peculiar in this rebound is that we've done it really, really quickly. So, people are expecting the Fed to pivot really quickly, and the Fed has yet to commit to that pivot. So, in my opinion, it is normal to see that the markets are becoming a little bit more nervous until you confirm that the Fed is changing its forecast, which it has yet to do.

And the market is anticipating what kind of earnings?

Positive and that's troubling because if you think you're going to get a significant deceleration of economic growth, you should be bracing yourself for negative profit growth. But at this point in the cycle, and the reason we did so well, is that the market saying we're going to get significant deceleration, but profits are going to remain positive on a year over year basis. However, Martin, we're seeing an erosion of profit margins on both sides of the border and that will be critical with respect to the reaction functions of corporations in the face of an erosion in their profit margins, which means Martin - what will they do on the hiring cycle? That's critical.

So, employment is the key, and we're already in stagnation for full time employment in the States.

Employment is always key in determining whether or not there's going to be a soft landing or recession. And yes, US job market has surprised with its resilience in recent months. But Martin, full-time employment has been stagnating for the past few months, so already you're seeing corporations being a little bit more nervous on the hiring pace. So. In Canada, we've stagnated. We've done really well over the past 2 months. But I do believe that we'll also be stagnating because we're starting to see an erosion in the profit margin. So, at the end of the day, that will determine the shape of the economic cycle.

And Stéfane, what's the relationship between the stock market and recessions?

The stock market is in asymmetric in terms of leading indicator for the economy or stock market. So basically, Martin, the stock market is very good at predicting the end of recession, but it never calls a recession. So, basically the stock market always calls a soft landing. And when they see the first rate cut, they say, hey, wait a minute, why are rates being cut, what's happening here? And then it gets a little bit more volatile. So, this time around, I think the volatile could come even faster just because of the geopolitical backdrop.

Yeah, we're actually in the first year anniversary of the war in Ukraine. So, lots of uncertainty there.

And the uncertainty comes, Martin, from the fact that if there is a very specific infrastructure that are destroyed in the coming weeks related to food production or energy production, you could see global inflation turn a corner and start accelerating again. So again, let's not be too greedy at this point in time. Let's play defense because we have yet to see what happens at the end of the month on the Ukraine-Russia conflict, which is still very important from a global perspective.

Excellent. So, in conclusion, we're remaining prudent. We're going to see the impact of higher rates in the coming months. And we've already priced a lot in the last two months. Lot of good news. Yeah.

Yeah, lots of good news

So, thank you very much, Stéfane. Thank you everybody for having been listening to us for the last couple of years. It was a pleasure to be doing this. We learned a lot in communication. And let's remember Doctor Weiss telling us in October 2020 that we would be back to normal in 2024. So, it's been a great ride. Thank you for listening and there will be more of these short videos. Do not worry. Thank you. Take care. Bye, bye.

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