The key question in front of investors these days is simple: When – if ever – will the recent surge in interest rates begin to slam the brakes on the economy?
The Bank of Canada has boosted its policy interest rate by nearly five percentage points in little more than a year. That constitutes the most rapid and overwhelming set of rate hikes in four decades. Yet, to most experts’ shock, the economy is still powering ahead despite the galloping increase in borrowing costs.
The jobs market remains robust, home prices have resumed rising and the recession that everyone expected to materialize around now is missing in action.
What’s not so clear is what to make of this surprising resilience. It could be a fool’s paradise – an illusion that will vanish as higher interest rates begin to bite and drag the economy into recession. Alternatively, it could be the real deal. Perhaps inflation will continue to painlessly fade away and the economy will keep on chugging along.
In announcing its latest rate hike this week, the Bank of Canada came down on the side of the optimists, boosting its outlook for economic growth this year. It also predicted that growth would slow next year but remain at least decent through the end of its forecast window in 2025.
Investors are looking on the bright side, too. The S&P/TSX Composite Index has gained a solid 4.4 per cent so far this year. The market apparently doesn’t see any big reason for worry.
Neither do consumers. Canadians may not be increasing their spending at quite the same rate as earlier this year, but we are still spending freely, according to a report this week from Carrie Freestone, a Royal Bank of Canada economist. We’re travelling, we’re going out to restaurants, we’re celebrating in bars.
Our collective nonchalance in the face of rapidly rising interest rates reflects a job market that continues to hum along. It also reflects the amount of liquid (or easily tapped) savings that households accumulated during the pandemic years.
These “liquidity buffers,” as the Bank of Canada quaintly calls them, have soared for three out of every four households. A household of average income now has liquid savings equal to about eight times its monthly expenditures. Before the pandemic, it had liquid savings of only about twice its expenditures.
This increase in savings is genuinely good news. But before concluding that a soft landing for the economy is in sight, investors may want to consider what history has to say.
Policy-makers have delivered an interest-rate jolt of the current size only twice in the past half century. The biggest shock came at the start of the 1980s, when the central bank hiked rates more than 10 percentage points in a little more than a year to rein in runaway inflation. The other came at the end of that decade, when the bank boosted rates more than six percentage points between 1987 and 1990.
On both occasions, the economy toppled into recession. The stock market swooned.
Rolling in cash
Households accumulated liquid assets – cash and similar easy-
to-access wealth – during the pandemic. The richest three
quarters of Canadian households now have far more liquid
assets relative to their monthly spending than they did before
the pandemic.
Median ratio of liquid assets to monthly expenditures
Lowest earning
quarter of
households
Second lowest
earning quarter
of households
Second highest
earning quarter
of households
Highest earning
quarter of
households
john sopinski/the globe and mail, Source: bank of canada
Rolling in cash
Households accumulated liquid assets – cash and similar easy-
to-access wealth – during the pandemic. The richest three
quarters of Canadian households now have far more liquid
assets relative to their monthly spending than they did before
the pandemic.
Median ratio of liquid assets to monthly expenditures
Lowest earning
quarter of
households
Second lowest
earning quarter
of households
Second highest
earning quarter
of households
Highest earning
quarter of
households
john sopinski/the globe and mail, Source: bank of canada
Rolling in cash
Households accumulated liquid assets – cash and similar easy-to-access wealth – during the pandemic.
The richest three quarters of Canadian households now have far more liquid assets relative
to their monthly spending than they did before the pandemic.
Median ratio of liquid assets to monthly expenditures
Lowest earning
quarter of
households
Second lowest
earning quarter
of households
Second highest
earning quarter
of households
Highest earning
quarter of
households
john sopinski/the globe and mail, Source: bank of canada
It seems reasonable to think something similar may happen this time around.
A few warning lights are already flashing yellow. The most worrisome is the stubborn refusal of core inflation to fall. While headline inflation has plummeted in recent months, its decline owes a lot to falling gasoline prices. Core inflation, which excludes more volatile elements, has not been so obliging.
Measured over three-month intervals, it has remained stuck in the 3.5-per-cent to 4-per-cent range since last autumn, well above policy-makers’ 2-per-cent target. “All this suggests increased risk that the progress toward price stability could stall,” the Bank of Canada’s Monetary Policy Report warned this week.
At the very least, persistently high core inflation increases the chance that interest rates will remain elevated for some time – not good news for the growing number of people who have fallen behind in payments on instalment loans, car loans and credit cards. While overall delinquency rates remain low, “the share of borrowers moving from 60 to 90-plus days late on any credit product has risen and is now close to a historical high,” the central bank noted.
That isn’t the only ominous sign. Consider the yield curve, a measure of how short-term bond yields compare with longer-term ones. It is inverted, meaning that we are in an unusual situation in which short-term bonds are paying more than long-term ones. In the past, such inversions have been an excellent indicator of economic downturns to come.
What does all this mean for investors? National Bank of Canada suggests it’s time to get cautious. The bank’s equity strategy team this week reduced the weight of Canadian stocks in its model portfolio to 18 per cent from the previous 20 per cent.
The trim reflected the bank’s dour outlook for oil prices and the loonie, as well as its glum assessment of the North American economy. Its model mix is now 51 per cent invested in fixed-income securities and 9 per cent in cash.
It is a stodgy mix, to be sure, but one that should do well if, as National Bank expects, U.S. and Canadian growth hits the skids in the months ahead.
TORONTO – Roots Corp. may have built its brand on all things comfy and cosy, but its CEO says activewear is now “really becoming a core part” of the brand.
The category, which at Roots spans leggings, tracksuits, sports bras and bike shorts, has seen such sustained double-digit growth that Meghan Roach plans to make it a key part of the business’ future.
“It’s an area … you will see us continue to expand upon,” she told analysts on a Friday call.
The Toronto-based retailer’s push into activewear has taken shape over many years and included several turns as the official designer and supplier of Team Canada’s Olympic uniform.
But consumers have had plenty of choice when it comes to workout gear and other apparel suited to their sporting needs. On top of the slew of athletic brands like Nike and Adidas, shoppers have also gravitated toward Lululemon Athletica Inc., Alo and Vuori, ramping up competition in the activewear category.
Roach feels Roots’ toehold in the category stems from the fit, feel and following its merchandise has cultivated.
“Our product really resonates with (shoppers) because you can wear it through multiple different use cases and occasions,” she said.
“We’ve been seeing customers come back again and again for some of these core products in our activewear collection.”
Her remarks came the same day as Roots revealed it lost $5.2 million in its latest quarter compared with a loss of $5.3 million in the same quarter last year.
The company said the second-quarter loss amounted to 13 cents per diluted share for the quarter ended Aug. 3, the same as a year earlier.
In presenting the results, Roach reminded analysts that the first half of the year is usually “seasonally small,” representing just 30 per cent of the company’s annual sales.
Sales for the second quarter totalled $47.7 million, down from $49.4 million in the same quarter last year.
The move lower came as direct-to-consumer sales amounted to $36.4 million, down from $37.1 million a year earlier, as comparable sales edged down 0.2 per cent.
The numbers reflect the fact that Roots continued to grapple with inventory challenges in the company’s Cooper fleece line that first cropped up in its previous quarter.
Roots recently began to use artificial intelligence to assist with daily inventory replenishments and said more tools helping with allocation will go live in the next quarter.
Beyond that time period, the company intends to keep exploring AI and renovate more of its stores.
It will also re-evaluate its design ranks.
Roots announced Friday that chief product officer Karuna Scheinfeld has stepped down.
Rather than fill the role, the company plans to hire senior level design talent with international experience in the outdoor and activewear sectors who will take on tasks previously done by the chief product officer.
This report by The Canadian Press was first published Sept. 13, 2024.
VANCOUVER – Mediated talks between the union representing HandyDART workers in Metro Vancouver and its employer, Transdev, are set to resume today as a strike that has stopped most services drags into a second week.
No timeline has been set for the length of the negotiations, but Joe McCann, president of the Amalgamated Transit Union Local 1724, says they are willing to stay there as long as it takes, even if talks drag on all night.
About 600 employees of the door-to-door transit service for people unable to navigate the conventional transit system have been on strike since last Tuesday, pausing service for all but essential medical trips.
Hundreds of drivers rallied outside TransLink’s head office earlier this week, calling for the transportation provider to intervene in the dispute with Transdev, which was contracted to oversee HandyDART service.
Transdev said earlier this week that it will provide a reply to the union’s latest proposal on Thursday.
A statement from the company said it “strongly believes” that their employees deserve fair wages, and that a fair contract “must balance the needs of their employees, clients and taxpayers.”
This report by The Canadian Press was first published Sept. 12, 2024.
MONTREAL – Travel company Transat AT Inc. reported a loss in its latest quarter compared with a profit a year earlier as its revenue edged lower.
The parent company of Air Transat says it lost $39.9 million or $1.03 per diluted share in its quarter ended July 31.
The result compared with a profit of $57.3 million or $1.49 per diluted share a year earlier.
Revenue in what was the company’s third quarter totalled $736.2 million, down from $746.3 million in the same quarter last year.
On an adjusted basis, Transat says it lost $1.10 per share in its latest quarter compared with an adjusted profit of $1.10 per share a year earlier.
Transat chief executive Annick Guérard says demand for leisure travel remains healthy, as evidenced by higher traffic, but consumers are increasingly price conscious given the current economic uncertainty.
This report by The Canadian Press was first published Sept. 12, 2024.
