Top of the Morning
Natural gas might be the new oil, writes The Globe and Mail’s Jeffrey Jones:
There’s no mauling yet, but beware: Bears are eyeing the natural gas market.
Last winter, they hibernated as frigid weather in the United States and Canada drove up demand and drained gas inventories to levels not seen in years. The result was a price spike, and hefty gains in the stock market for long-suffering producers.
By April, the end of the industry’s heating season, the thinking was: Oh-oh – it will be almost impossible for companies to refill underground facilities by the time the winter of 2014-15 rolls around. The stage was set more high prices.
We’re almost there. The thinking was wrong.
On the Homefront
The TSX has suffered its first correction in more than two years, dropping more than 10 percent from its record close on September 3. Canada’s benchmark index fell nearly 200 points on Tuesday to trade at levels not seen since February, as strength in the miners was not enough to offset continued weakness in energy stocks. The capped Energy index is well into bear market territory, lingering more than 25 percent below its mid-June peak. WTI crude oil futures continue to sink this morning, moving quickly towards $80 per barrel, a signal that more pain could be in store for stocks that tend to move along with the underlying commodity. TSX 60 futures are moving firmly lower ahead of the open.
This turmoil has linkages to the real economy. It’ll be tough to realize the desired rebalancing of growth towards business investment if oil breaks and stays below $80 per barrel. According to the International Energy Agency, a quarter of new Canadian oil projects wouldn’t be profitable enough to pursue at that level.
The Canadian dollar is also getting slammed. The loonie dipped below 88 cents against the U.S. greenback this morning after plunging to a five-year low on Tuesday. The pair is down more than two cents since Thursday, as broad U.S. dollar strength pushes one half up while the other is weighed down by its petrocurrency status. Ken Veksler, chief investment officer at Accumen Management, says the the Canadian dollar now presents itself as a vehicle for traders who want to go long the U.S. dollar.
UPDATE: Crude oil found some support while the U.S. dollar hit the skids. As such, the Canadian dollar is now up nearly a full cent against the greenback.
But housing’s still flying high. At 9:00am (EDT), the Canadian Real Estate Association will release its figures on home sales and price growth for the month of September. The Bank of Montreal is calling for home sales to rise 6 percent year-over-year (but fall on a monthly basis), with the MLS Home Price Index rising 5.3 percent compared to September 2013. “Early fall looks like it was favourable for Canada’s housing market, as sales perked up through much of the country,” writes senior economist Benjamin Reitzes. “Low mortgage rates, still-favourable demographics, and a lack of supply in some cities continue to drive sales and prices.”
UPDATE: Canadian home sales snapped a seven-month streak of gains in September, but price growth remained robust.
Sears Canada appoints new interim leader. Struggling retailer Sears Canada (SCC) announced that Ronald D. Boire will become Acting President and CEO effective today. He previously served as an Executive Vice President for the parent company, which recently sold the vast majority of its position in its Canadian subsidiary.
CP Rail’s target probably just got more pricey. After the market closed on Tuesday, CSX Corp., the company that Canadian Pacific Railway (CP) would reportedly like to merge with, published its latest set of quarterly results. The railway posted a solid beat, with volumes rising across the board.
Canadian confidence wanes. The Bloomberg Nanos gauge of consumer sentiment dropped last week, with the percentage of Canadians who believe the economy will be weaker six months down the road exceeding the share of those who think it will improve for the first time since March, according to Bloomberg’s Theophilos Argitis.
Inflation in China is anything but hot. The latest reading showed the consumer price index was up 1.6 percent year-over-year in September, a tick below the consensus estimate and well shy of the previous reading of 2 percent. As Walter Kurtz, author of financial blog Sober Look, points out, this reading pushes annual headline inflation in China below the level it’s running at in the United States (1.7 percent). This reading will likely raise fears of a global disinflationary – or even outright deflationary – environment, but also underscores that Chinese authorities have room to add monetary stimulus if they so desire.
Inflation in Germany is considerably cooler. Annual inflation is up just 0.8 percent year-over-year in September. That’s the third consecutive reading below 1 percent, and matches the nation’s lowest print since mid-2010.
An ugly number out of Japan: the revised reading of industrial production for August came in well below the preliminary print, falling 1.9 percent month-over-month to more than fully erase the advance seen in July. The Japanese economy remains rather fragile as it struggles to cope with the sales tax hike implemented in April, while the sluggish global economy certainly isn’t doing the island nation any favours.
The United Kingdom’s unemployment rate improved to 6 percent for the three month period ending in August, a tick better than the consensus estimate and its lowest level since the financial crisis. However, despite the drop-off in inflation, real wages are still negative, which will keep the Bank of England on the sidelines for the time being.
A spot check on the health of the U.S. consumer is coming at 8:30am, when retail sales figures for September are due out. Economists are calling for sales to inch down by 0.1 percent month-over-month.
The Federal Reserve’s Beige Book, an account of economic conditions in each district, is slated to be released at 2:00pm. “While the new release should show continued growth and progress in labour markets, it might also capture rising business concerns about geopolitical events, global economic weakness and the higher dollar,” writes Bank of Montreal senior economist Sal Guatieri.
QE4? John Williams, president of the San Francisco Fed, warned that he would not hesitate to embark upon another round of bond purchases – commonly known as quantitative easing or QE – if the U.S. is facing a “sustained, disinflationary forecast.” The Federal Reserve is winding down QE3 this month.