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Earnings have been in recovery mode since the start of the year and even if earnings per share in the second quarter on the Toronto Stock Exchange are projected to slip, soaring commodity prices, continued rising employment and strong manufacturing activity all point to positive earning surprises for a fifth consecutive quarter. Concerns over the spread of the Delta variant in the US lifted the greenback, but it will likely trade cautiously ahead of the Fed’s policy decision next week. In Canada, the Consumer Price Index paper released Wednesday redefined inflation based on pandemic spending patterns and will inform next week's CPI adjustment, which isn’t expected to hold back the loonie. The CAD should still outperform its peers near to mid term.

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


  • Earnings recovery is in full swing. TSX Q2/21 EPS is projected to slide 2.4% from the previous quarter to C$294. Year-over-year growth is also set to moderate to +90% y/y in the second quarter; from +127% y/y in the first quarter. Still, digging into the details does paint a more positive picture. Q2/21 EPS are coming off most the profitable quarter ever for the TSX in Q1/21. Moreover, base effects account for most of the drawdown in year-over-year growth as TSX quarterly EPS bottomed in Q1 last year (not in Q2). In our view, soaring commodity prices, a steady pickup in employment levels and strong manufacturing purchasing managers indices (PMIs) are all pointing to positive earning surprises for the fifth consecutive quarter (average of +12% in the last four quarters). Overall, we see a high probability that TSX Q2/21 EPS will exceed Q1/21, setting a new record.
  • Top line (SPS) is rebounding. Sales per share are expected to jump by 5.9% sequentially to $2,311. While revenues remain down 1.7% y/y, and well off the Q3/19 high ($2,658), consensus implies that revenues will continue to trend up for the rest of the year, carrying the earnings recovery higher as they normalize.
  • Beat or miss? We expect positive earnings surprises for Financials, Energy, Materials, and Industrials, while Discretionary seems likely to be more in line. As seen in the US so far, consensus provision for credit losses (PCL) numbers are heavily conservative. We believe small builds or even outright releases are highly likely. Further, high M&A activity should more than offset trading revenue normalization. Some headwinds do remain, however, as US banks have shown a tendency toward lower net interest margin (NIM). In Energy, the WTI rally and a strong recovery in production levels at exploration and production companies should lead to easy beats, as well. In Materials, consensus lagging spot commodity prices also bodes well for base-metals miners, while paper products and gold miners are looking more in line. Industrials could join the positive beat party as airlines initiate their recoveries (rebound in airport passenger traffic), supported by decade-high global manufacturing PMIs. Meanwhile, despite strong retail sales, the outlook for Discretionary is tempered by auto parts makers suffering from the global chip shortage.
— Hugo Ste-Marie, Director Portfolio & Quantitative Strategy; Jean-Michel Gauthier, Associate Director, Portfolio & Quantitative Strategy; and Simone Arel, Research Associate, Global Equity Research 

Foreign Exchange

  • The US dollar touched its highest mark since late-March this week as market concerns over the spread of the Delta variant provided support for the greenback in haven-related flows. The Japanese yen also benefitted, touching a seven-week high, and investors turned to the protection of US debt with the yield on 10-yr Treasury notes falling under 1.20%. Positioning adjustments in the USD may also still be playing a part as investors continue to trim the sizeable net short in the USD that had accumulated in early-June.
  • We think the USD’s bearish run since the height of the market’s pandemic fears last year has reached an inflection point and additional losses from here are limited, with the possibility that investors instead choose to carry a stronger dollar into next year — when Fed rate-hike speculation will figure more prominently in trading strategies.
  • What to expect next week. The Federal Reserve’s policy decision on Wednesday will be the key focus for markets, which are looking for clarity on the Fed’s stance regarding transitory or not inflation pressures. The USD is likely to trade cautiously ahead of the announcement. In Canada, the release of CPI on Wednesday will also inform expectations around the Bank of Canada’s tightening cycle, which we expect will continue with another end-of-quarter pace reduction in October and rate hikes in H2-22. The BoC’s relative hawkishness should see the CAD outperform its major peers near to medium term.

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


  • Canadian inflation is being officially redefined. The pattern to date will likely be reprofiled higher as Statistics Canada began the conversion to new spending weights that reflect pandemic-era spending trends Wednesday morning with the release of a paper titled “An Analysis of the 2021 Consumer Price Index Basket Update, Based on 2020 Expenditures.” The information is important to efforts to bring inflation readings inline with pandemic realities and focuses on how the basket weights have changed in accordance with changed spending patterns during the pandemic. This may enable translating changed weights into revised CPI inflation estimates up to May of this year. Next week’s release of June CPI will convert from CPI figures to date that are based on pre-pandemic spending weights to the new spending realities.
  • Inflation adjustment was last addressed by Statistics Canada in April, and predictably the weights on housing, food, home furnishings, health and personal care all went up while the weights on transportation, clothing and footwear and recreation/education/reading all fell. It’s uncertain whether this reprofiling of inflation to date with updated basket weights will only represent a level adjustment to overall prices that should shake out as an influence on inflation rates going forward, or whether the composition of spending in this cycle will evolve in a way that drives persistently rapid gains in the soon-to-be-higher weighted categories, or somewhere in between. There is also the issue of whether basket weights will go through another material adjustment on the biennial schedule should the composition of spending patterns return fully or partially toward pre-pandemic realities.

—  Derek Holt, Vice-President and Head of Capital Markets Economics 

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