(Bloomberg) — Markets have been trading as if the end of the world is at hand – but what most participants see, behind the recent financial turmoil and contagion fears, is a still-strong US economy, the MLIV Pulse survey shows.
The collapse of three US banks and the scramble to rescue others, including Europe’s Credit Suisse Group AG and First Republic Bank, sent stocks and bond yields plunging. Bets on Federal Reserve monetary tightening got dialed back, swap contracts reflect expectations for rate cuts within months, and recession warnings are ramping up.
Yet the world foreseen in those trades is hard to square with the one outlined by 519 investors, retail and professional, who took part the MLIV survey between March 13-17. Most respondents believe that a hard landing will be averted, with about two thirds predicting that the economy is either heading toward a soft landing, accelerating or cruising.
Most lean toward a scenario in which the Fed ekes out some more rate hikes, to bring inflation closer to target.
The survey findings suggest a mismatch between what investors see see as the likely economic outcomes, and the direction that trades have taken — driven by market momentum and concern that banking troubles could snowball.
‘Irrational Fear’
“The thing about contagion risk is, it’s really about the spread of irrational fear,” said Greg Peters, co-chief investment officer of fixed income at PGIM.
The Swiss National Bank’s pledge of support for Credit Suisse helped calm the chaos. And the European Central Bank, which went ahead as planned with a half-point increase in interest rates on Thursday, suggested inflation-fighting hasn’t moved to the back burner for central banks – even though the ECB avoided signaling what comes next.
This week it’s the Fed’s turn. The US central bank still enjoys investor confidence, according to the MLIV survey. More than 60% of retail and professional investors alike said it hasn’t lost credibility.
Investors see the March 22 decision as being between a pause – on financial stability concerns — and a quarter-point hike to continue the inflation-busting campaign.
One key question is how much of the Fed’s desired financial tightening will now happen as a result of banks turning cautious. Credit spreads are an important channel through which market distress affects the real economy. So far, they haven’t widened to a degree that implies a significant slowdown.
Goldman Sachs Group Inc. economists estimate the likely impact from tighter lending conditions at up to 0.5% of US gross domestic product – a significant hit, but not commensurate with the degree of alarm on markets. The Goldman team continues to predict a soft landing, consistent with MLIV survey respondents.
‘Long-Run Path’
The banking turmoil has clearly had a psychological impact, as well as shifting the Fed outlook. Almost half of MLIV respondents said a 50-point hike next week, the base case not long ago, would add to financial-system risks after the collapse of Silicon Valley Bank — the biggest US bank failure since the 2008 aftermath.
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“The Fed is still on a long-run path of tightening policy to bring inflation down,” said Darrell Duffie, a Stanford University finance professor. “The most likely path for the Fed is that there’s a temporary pause in rates, maybe just until the next meeting after this coming one, and then the Fed would resume as dictated by data on inflation concerns.”
For the Fed, a big real-economy shock stemming from this month’s financial events is a risk, not a foregone outcome or even a likely one – while persistently high inflation is a fact, one that policymakers have battled against for a year with little progress to show so far.
So even if the US central bank chooses to pause this week, it could be a hawkish pause, one that allows markets to stabilize but increases the risk of more hikes to come.
Last Jenga Block?
Fed officials have flagged the hiring boom and rising wages as one of the main inflationary threats. A majority of MLIV respondents said the jobs market is either softening already or will do soon. Roughly one-third said that the shortage of workers means there may not be much cooling this year, and that higher rates will instead compress profit margins.
The Bloomberg Economics view is that a soft landing remains an outside bet, with a 75% chance of recession in the third quarter of this year. Fed hikes have in the past mostly ended up breaking things, and this cycle is likely no exception.
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That’s broadly the signal sent by plunging yields in the past week, according to Matthew McLennan, co-head of the global value team at First Eagle Investment Management.
“The bond market is telling you that the last block has been taken out of the Jenga stack by the Fed,” he said. After all the banking stress, “lending growth will probably slow — which raises the probability that nominal growth slows. You can see how this could translate to a recession.”
MLIV Pulse is a weekly survey of readers of the Bloomberg Professional Service and website, conducted by Bloomberg’s Markets Live team, which also runs a 24/7 MLIV Blog on the terminal. To subscribe to MLIV Pulse stories, click here.
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
