Canadian large retailers are unlikely to see holiday sales disrupted by global supply chain issues, mainly because many planned ahead, found different ways to ship their goods, and have plenty of inventory. Smaller retailers might see more of a disruption. The loonie was the top-performer among its G10 peers this month, buoyed by rising energy prices and a monster jobs report that ensured further tapering by the Bank of Canada. Meanwhile, rising costs pressure stemming from labour and supply chain issues and higher energy prices may bring down profit margins from a record high level reached last quarter, halting the S&P500’s remarkable run, with earnings per share in the third quarter seen sliding more than 7% from the previous quarter.

Scotiabank analysts weigh in on what the pandemic means for retail, currencies and equities.

Retail

  • Global supply chain disruption and the impact on retailers’ ability to source was a prominent theme in media reports last week as we head into the holiday season. For the most part, Canadian retailers already have inventory for holiday shelves, but being holiday ready may be more of an issue for smaller, independent retailers lacking scale.
  • Labour shortages and port congestion drive disruption. In the early days of the COVID-19 pandemic, disruptions were tied to business shutdowns but are now linked to labour shortages, congestion at ports, delivery delays, and soaring freight rates on the main shipping routes between China, the US, and Europe. A shortage of transport workers resulted in further delays not only in shipping but also in the offloading of goods once they arrived in ports, pushing a return to normal in supply chains until some time in 2022.
  • A perfect storm is brewing in overseas factories. In the apparel and footwear sector a shutdown of factories in Vietnam due to rising COVID cases has exacerbated the supply chain challenges, with one-third of textile and garment factories halting operations. Vietnam accounts for nearly a third of US footwear manufacturing and a fifth of US apparel manufacturing, according to the American Apparel and Footwear Association. Meanwhile, a struggle in China with a severe shortage of electricity, which in part can also be blamed on the pandemic, is hampering production at Chinese factories.
  • Canadian retailers seem reasonably well positioned for the coming holiday period, based on Scotiabank analysts’ recent discussions with several companies. One reason may be that in a bid to keep shelves stocked large retailers such as Canadian Tire, Wal-Mart, Costco, Home Depot, and Target have made the decision to charter their own ships. Others, including Aritzia and Roots, have shifted some movement of goods to air freight.
  • Consumers may be willing to pay the sticker price this season. In the context of rising inflation, possible consumer concerns over product availability, and with many retailers passing on rising costs in the form of higher prices we anticipate seeing a larger proportion of goods being sold at full price this holiday season. 

—  Patricia Baker, Director, Retailing, Global Equity Research

Foreign Exchange

  • The CAD has been the top-performing G10 currency over the past month, rising nearly 2% against a generally strong US dollar and putting in some handy gains against major currency peers, climbing 4% against the euro (EUR), 5% against the Japanese yen (JPY) and nearly 6% against the Mexican peso (MXN). The surprise is, perhaps, that the gains versus the USD have not been sharper. 
  • In broad terms, the USD is trading in firm fashion as investors anticipate the US Federal Reserve announcing the start of its tapering (of asset purchases) shortly. Markets were unfazed by last Friday’s weaker than expected gain in US non-farm payrolls because the details of the release (strong private sector jobs gains, wage growth and a lower unemployment rate) were quite robust. Bullish sentiment is strengthening, according to CFTC positioning data released Friday, and we expect the USD to retain a firm tone in the weeks ahead, particularly against those currencies — EUR, JPY, the Swiss franc — whose central banks are far from reducing policy accommodation. 
  • Canada’s monster jobs report released last Friday all but seals a further tapering in Bank of Canada asset purchases later this month. Short-term interest rates here have risen further and yield spreads over similar US instruments have widened. Two-year bond spreads reached 40 basis points, the biggest yield premium for the CAD over the USD since 2015-16 (when spot was trading nearer 1.16). The CAD has also benefitted from another rise in energy prices, with WTI reaching $80. The last time crude was trading at this price, USDCAD was changing hands nearer 1.10. Wide spreads and high crude oil prices are at least cushioning the CAD from the robust USD but we think there is a chance the CAD will strengthen a little more in the next few weeks to perhaps reach 1.22/1.23. 

—  Shaun Osborne, Managing Director, Chief FX Strategist, and Juan Manuel Herrera, FX Strategist 

Equities

  • S&P 500 Q3/21 Preview. Bottom-up consensus expects S&P 500 earnings per share (EPS) to slip 7.4% to US$48.37 from the previous quarter. Still, this sequential drop would be coming off an all-time high reached in Q2/21, with year-over-year growth rate normalizing from a record 92% in Q2/21 to a still impressive 28% in Q3/21. Sales per share (SPS) are expected to extend their sequential climb, adding 1.0% from the previous quarter and 14% year-over-year.
  • The third quarter could be the end of a remarkable run of several quarters of large-scale beats. To provide some context, actual EPS exceeded forecasts set at the beginning of the reporting season by an average of 19% from Q2/20 to Q2/21. That compares with an average beat of +2.4% from 2010 to 2019. Rising costs pressure stemming from labour and supply chain issues and rising energy prices, may bring down profit margins, from a record high level reached last quarter (13.6%). Still, we believe pricing power is underestimated and we remain optimistic that Q3 earnings will comfortably exceed consensus. Of the 22 companies that have reported so far, 77% beat estimates with a median EPS beat at 4.3%.
  • Sectors. According to bottom-up forecasts, Industrials, Materials, and Tech should sport the greatest quarter and year EPS growth. Financials, Discretionary, and Communications could face more headwinds in Q3/21. Finally, Financials, Utilities, Staples, and Discretionary should see weaker year over year EPS and SPS trends.

—  Hugo Ste-Marie, Director Portfolio & Quantitative Strategy; Jean-Michel Gauthier, Associate Director, Portfolio & Quantitative Strategy; and Simone Arel, Research Associate, Global Equity Research

 

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