This week, Cut the Crap Investing founder, Dale Roberts, reviews the week’s financial headlines and explains what they mean for Canadian investors.
What a week—the wrap
It felt like déjà vu on the rate-hike front. Federal Reserve Chair Jerome Powell signalled that the Fed may slow the pace of rate increases as policy approaches a restrictive level, noting that moderation could begin as soon as the December meeting. Markets responded positively to that clarity.
Equity markets rallied: the NASDAQ Composite surged, the S&P 500 gained strongly, and the Dow also posted solid gains. Bond yields drifted lower and Canadian equities finished the day modestly higher.
Canadian GDP growth stronger than expected
Canada’s economy expanded more than anticipated in the third quarter, with GDP rising at an annualized rate of 2.9% from July through September. Much of that momentum came from higher energy and agricultural exports. At the same time, housing investment and consumer spending weakened, signalling that higher interest rates are starting to slow parts of the economy.
A resilient economy creates a dilemma for the Bank of Canada (BoC): strong growth and steady employment make it harder to bring inflation down. That resilience increases the likelihood that interest rates may need to rise further and remain elevated well into 2023. Employment figures on both sides of the border remain firm, and while that is good for workers, it can be unwelcome in the central banks’ fight against inflation.
Canadian employment ekes out gains. Unemployment rate falls. Wage gains above 5% again, as well.
Bank of Canada records a loss for the first time
For the first time in its history, the Bank of Canada recorded a loss in the third quarter, posting a $522 million shortfall. The central bank’s interest expense on settlement balances has risen faster than interest revenue on its assets amid a rapid increase in policy rates. With further rate hikes anticipated in the near term, this accounting loss could persist or even grow.
BoC officials have described the loss as largely an accounting matter, but the result is nonetheless notable: higher policy rates have made the central bank’s operations more costly.
Canadian banks report earnings
All of Canada’s major banks reported quarterly results this week. Overall, the sector delivered a solid quarter. Rising interest rates improved net interest income for most banks by widening the spread between lending and funding costs, though wealth management and capital markets divisions saw pressure from lower investment returns and trading activity. Given economic uncertainty and housing risks, banks raised provisions for potential loan losses, a conservative step that reduces current earnings but strengthens balance sheets.
Most of the big banks increased their dividends, reflecting confidence in payouts despite slowing growth. The quarter’s theme was steady profitability with slower growth and a precautionary increase in credit provisions.
The following summaries and data are presented in Canadian dollars.
Scotiabank
Scotiabank reported earnings per share of $2.06 and revenue close to $8.0 billion. Results slightly beat expectations on earnings and were roughly in line on revenue. Year over year, revenue was largely flat while earnings showed mid-single-digit growth and return on equity ticked up marginally. Notably, Scotiabank did not raise its dividend this quarter, unlike most peers.
Royal Bank
Royal Bank of Canada beat on both revenue and earnings, with revenue topping projections and EPS modestly ahead of estimates. On a year-over-year basis, both revenue and earnings were slightly lower than the prior year. RBC announced a small dividend increase and continues to expand its Canadian footprint through acquisitions of select assets. The bank also introduced a dividend reinvestment plan that allows investors to reinvest at a modest discount.
TD
TD Bank delivered one of the stronger quarters among the big banks, beating expectations on revenue and earnings. Year over year, TD showed solid revenue and earnings growth and announced a healthy dividend increase.
CIBC
CIBC’s quarter was mixed: revenue was roughly in line with forecasts, but earnings per share missed expectations by a significant margin. Year over year the bank saw revenue growth but a decline in EPS. CIBC enacted a modest dividend increase.
BMO
The Bank of Montreal posted revenue well above expectations and reported earnings near analyst forecasts. Year over year BMO reported gains in both revenue and earnings and also increased its dividend.
National Bank
National Bank missed estimates on both revenue and earnings for the quarter but still recorded strong year-over-year growth in each metric and raised its dividend.
Overall picture for Canadian banks
In sum, Canada’s major banks reported a resilient quarter with increased precautionary loan-loss provisions and generally higher dividends. Quarter-over-quarter increases in provisions for credit losses were notable across the sector:
- BMO: 84%
- CIBC: 79%
- TD: 75.7%
- RBC: 12%
- Scotiabank: 28.3%
Dividend increases this quarter varied by institution, with most banks lifting payouts modestly. Keep in mind several banks typically adjust dividends on a semi-annual schedule, so annualized increases may be larger than the quarterly change.
China’s zero-COVID policy falters
China’s continued strict COVID-19 controls have dampened domestic economic activity and created social unrest as citizens push back against prolonged restrictions. The country’s vaccination approach and stringent lockdown measures have weighed on manufacturing and consumer demand. Major multinational manufacturers have warned of production shortfalls tied to disruptions in China’s supply chain.
There are signs Beijing may recalibrate policy in response to mounting public pressure and economic strain. Any relaxation of restrictions would carry significant implications for global supply chains and markets, making this a key story to monitor in the coming weeks.
Walmart shines on Black Friday
U.S. holiday shopping activity was robust over Black Friday, and Walmart emerged as a notable winner. Retailers that focus on value tend to perform well when consumers prioritize lower prices during economic uncertainty. Defensive names—consumer staples, healthcare, utilities and select retailers—often hold up better when growth slows.
On a personal allocation note, defensive U.S. stocks like CVS Health, PepsiCo and Colgate-Palmolive can complement Canadian defensive sectors such as telecoms, pipelines, grocers and utilities to build a resilient portfolio during market stress.
Quite a surge for beaten-down parts of market; Tech & Comm Serv outperformed while Energy was clear underperformer … NASDAQ outperformed peer indexes today and still has lots of work to do to get out of -27% hole YTD
Energy stocks have been a major contributor to market leadership this year despite oil prices trading near levels seen earlier in the year. For long-term income-focused investors, energy dividends have been a noteworthy performer.
Twitter, Apple and Tesla drama continues
The turmoil at Twitter has continued to generate headlines. Recent public disputes between Twitter’s owner and major tech companies have raised concerns about advertising pullbacks and app distribution. Reports and comments from the parties involved suggest tensions with large platform partners, and regulators in regions such as the European Union have warned that platforms must strengthen content controls or face penalties.
Brand fallout for Tesla
Public confrontation and erratic communications can damage a company’s brand, and Tesla has felt some of that reputational fallout. Consumer sentiment on social media and in surveys has shown increasing wariness among certain groups of potential buyers. The market—and consumers—will be watching how these tensions evolve and whether they affect demand for Tesla products.
Dale Roberts advocates for low-fee investing and writes at cutthecrapinvesting.com. Follow him on Twitter @67Dodge for regular market updates and commentary.