Canadian home sales and prices continued their adjustment downward last month in response to changing market and policy conditions. Since March, when the Bank of Canada began to hike interest rates, national sales have fallen 31%. The S&P 500 has recouped more than half the losses incurred this year, but by no means is it a sign the bear market is over. If the macro backdrop keeps deteriorating, eventually, fundamentals will reassert themselves. Meanwhile, the loonie’s performance among the currencies of its G10 peers continues to be second only to the U.S. dollar, with European energy security continuing to weigh on the euro. Expect to see the Canadian dollar nudge higher toward year-end as domestic growth and interest rates are expected to outpace those of the United States through next year.
Scotiabank analysts and economists weigh in on how economic indicators and trends are influencing home sales, equities and currencies right now.
- Housing markets in Canada continued their adjustment in response to changing market and policy conditions in July. Canadian home sales fell for the fifth straight month, down 5.3% in June after seasonal adjustments. Listings followed suit, declining 5.3% (seasonally adjusted month-over-month). As a result, the sales-to-new-listings ratio, an indicator of how tight the market is, was unchanged at 51.7%, which is below its long-term average of 55.1%. This easing in conditions brought about another decline in the composite MLS Home Price Index (HPI), which edged down 1.7% (sa) in July, a small deceleration from June’s 1.9% decline.
- Since the Bank of Canada began hiking its policy rate in March of this year, national sales have declined 31%, bringing them closer to pre-pandemic levels. The average selling prices fell 17% from its February 2022 peak as of July 2022. This still leaves the average selling price 22% higher than in February 2020, right before the pandemic started. The average selling price can overestimate movements in the market as more people shift to smaller, more affordable, units. The MLS House Price Index (HPI), which accounts for differences in house type and size, has dropped by 6% from its February 2022 peak, and is 43% above pre-pandemic levels.
— Farah Omran, Economist
- S&P 500 erases half of its 2022 losses in a few weeks — now what? The equity rally has been impressive so far, with the S&P 500 rebounding 16.7% to 4,280, from its June 16 low. The index has recouped 54% of the losses incurred this year. Equities were overdue for a bounce and signs that the worst of U.S. inflation could be over boosted equity prices further.
- In all recent bear markets, the S&P 500 re-tested its 200-day line at some point, at times generating powerful rallies. Closing the gap with the 200-day moving average (4,328) would not be unusual, nor would it be an indication the bear is over. In addition, strongly exceeding the 200-day line (resistance) could be challenging given the emergence of overheating conditions.
- Valuations return to the high side. The bounce has lifted the S&P 500 forward price-earnings (P/E) ratio by almost 3 multiple points to 18.2x. That’s a tad below the valuations peak seen in 2018 and pre-pandemic. For reference, the 10-yr average forward P/E ratio is 17.2x and the long-run average 15.5x. With Fed fund futures discounting an additional 125 basis points of tightening, quantitative tightening (QT) shifting into higher gear in September, and U.S. banks tightening credit conditions, it’s hard to envision P/Es going back into the 20-plus zone seen when authorities were pumping cash into the economy/markets.
- The energy crisis is far from over in Europe. Power prices in Germany (and Europe) ended July at/or near record highs. Still, German power prices have climbed an additional 27% since the start of the month. Current prices are 10 times above the 2019 annual average. Euro-zone industrial production rose for a third straight month in June, but winter could be harsh for consumers and businesses if prices keep rising and rationing is implemented. A European recession (rising odds) would likely weigh on the U.S. economy and earnings of U.S. multinationals, especially if the USD remains strong.
- Overnight data out of China shows the economy is still struggling under Covid restrictions. Retail sales, industrial production, and fixed assets investment all missed consensus forecasts and decelerated further in July. New home prices also fell for an 11th consecutive month in July.
- The strong momentum could potentially extend, but if the macro backdrop keeps deteriorating, eventually, fundamentals will reassert themselves.
— Hugo Ste-Marie, Director Portfolio & Quantitative Strategy; Jean-Michel Gauthier, Associate Director, Portfolio & Quantitative Strategy
- It’s looking like the U.S. dollar will remain strong for the rest of the year. Inflationary pressures in the United States — and around the world — remain intense (notwithstanding a softer than expected July Consumer Price Index report). This is entailing sustained upward pressure on U.S. bond yields despite gross domestic product (GDP) data suggesting the economy is experiencing a mild recession. Policymakers pushed back against the notion of a recession in view of strong labour markets, with the July non-farm payroll report showing a 528,000 gain in jobs. We expect the Federal Reserve to push ahead with rate hikes as it targets a soft landing. Our forecast anticipates a target of 3.25% by year-end but market pricing currently suggests investors expect the hikes to extend to 3.50% to 3.75% through the first half of 2023.
- The Canadian dollar continues to outperform G10 currencies other than the USD. A resilient economy and a hawkish central bank plus firm commodity prices constitute strong supports for the CAD, even if it has struggled to reflect those factors against the USD. We expect domestic growth and interest rates to outpace those of the U.S. this year and next, limiting the USD’s ability to advance beyond its recent peaks against the CAD and, and nudging the CAD modestly higher into year-end, especially if the broader risk backdrop improves. We expect the Bank of Canada to raise the overnight rate to 3.50% by year-end and hold that level through 2023.
- There is less appeal for the euro right now. The fallout from the ongoing Ukraine conflict and other challenges are curbing scope for higher rates in Europe, despite surging prices. European energy security remains a key consideration for the outlook over the next few months. The European Central Bank raised interest rates 50 basis points in July, but markets expect only modest rate hikes over the balance of the year. Meanwhile, Japanese policymakers see no urgency to alter domestic policy settings, ensuring the yen (JPY), which is the weakest performing major currency this year, remains soft. and yield differentials will curb the appeal of the euro for now.
— Shaun Osborne, Managing Director, Chief FX Strategist
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