(en anglais seulement)

Hello and welcome to our latest video Macro Memo. And this week we'll be covering off banking stress and just how that's evolved over the last six weeks or so. We'll talk more about China's economic recovery. And it's been kind of a hot and cold and hot again story, but I'll explain that in a moment. Labor supply has increased quite impressively.

We've talked so much in the last year about hiring being fast. We haven't quite acknowledged the parallel development, arguably a neutralizing development. On the other side of the ledger. So more on that. I will spend a moment on emerging market debt distress because some of the world's poorest countries are having a very hard time paying their debt right now.

We'll will touch on what yield curves are saying. We'll touch on inflation cooperating. We'll spend a moment evaluating whether Canada's housing market is bottoming or not. And we'll also take a look at fiscal matters, because I say that list. I'm regretting it already. But we'll work our way through and hopefully find some useful things in there. But it is a big long list.

Okay. Let's start with banking stress. And so I guess the story is one in which, of course, in early March we had several prominent mid-sized US banks fail. And there's been a measure of concern ever since. And bank deposits have been outflowing from the smallest banks in particular. We see some measure of stabilization happening right now, bank deposits or at least outflowing less quickly right now.

When we look at the amount of liquidity banks are demanding from the central bank, which is another measure of stress, we see that those are now starting to fall to some extent. So still stress, but a bit less stress. When we look at credit spreads measuring, I suppose the guess as to how endangered the remaining banks are whose credit spreads have come down quite significantly.

In fact, more than half of a retracement back to normal. So there's still an acknowledgment that banks are under more stress than usual. But the fear that this could result in a cascade of defaults has really diminished quite significantly over the last few weeks, which is which is quite a good thing. Maybe the main message I would just share is that it's likely that there will be repercussions that last for a number of years from all of this, and it will simply be a harder go for smaller American banks.

They will be less profitable due to higher rates because it costs them more to fund themselves to to pay for deposits and so on. They have suffered losses due to the higher rates on the lending side as well. It's fairly clear that heavier regulation is now coming in. The regulatory advantage for smaller banks in the US, that's likely going to significantly go away.

And history shows whether you look at the savings and loan crisis of the late eighties and early nineties or elsewhere, history to show this is normally a multi year process. And so we are budgeting for somewhat tighter credit conditions, not just for the next month or the next week or the next quarter, but potentially in various ways for the next few years.

And so there are economic implications that last from that. Okay. On to topic number two, Let's talk about China's economic recovery. It's been underway since late in 2022. It's still very much happening, but feels like every time we revisit the subject, the story is a little different. And so February was looking really zippy. In March, it was looking rather sluggish.

In April, it's looking pretty good again. So sort of waffling back and forth. We did get some better GDP and trade data and a few other indicators recently. We'll still stick with a middle of the road interpretation though, which is we still think it will be a moderate economic recovery for China. They were not completely locked down for three years.

They were in fact rather open for most of those three years. Yes, households have saved money, but it's actually no more money than a lot of developed countries have. Say, in fact, the US had saved a whole lot more, has spent much of it and still has about as much money as a share of GDP saved by households as China has right now.

Canada has even more and no one's talking about Canadian consumers unleashing a huge amount of money. So the recovery should continue, which is a nice thing, but won't be an important one. I will say though, that the IMF meetings recently revealed that the thinking at the IMF at least is that the multiplier from China to the rest of the world might lower right now.

And so normally, if China grew a percentage point faster, that would map on to the world with about a third of a percentage point of extra growth these days, an extra percentage point of Chinese growth might only add point one to global growth. And so we can say that we celebrate that China is recovering. It is a nice counterbalance to weakness that we anticipate elsewhere in the world, but it may not be as big a counterbalance as some people are assuming.

Okay, onto labor market supply. So we know hiring has been fast in much of the developed world over the last year. What has gone less acknowledged is that the supply of labor has also increased quite robustly. Now, maybe the starting point to this discussion is to acknowledge the supply of labor really fell quite a lot in the initial phases of the pandemic and some people were sick and others were afraid of getting sick and child care wasn't available and there were generous government subsidies and people at least temporarily got rich off the stock market and the rising home prices.

And so the list went on and we saw many millions of people simply exit the US labor force in a smaller number, but significant fractions leave in Canada and elsewhere. And for a couple of years those people just weren't coming back. And so the question was would we get these people back? And the answer belatedly appears to be yes, because in 2022 and in early 2023, we are starting to get more people looking for jobs and indeed working as well.

And so when we tracked something like the labor force participation rate, it has now almost fully recovered from before the pandemic. In fact, it's actually almost all the way back to where it was before the global financial crisis as well. And that was something that's been a long time coming. And so the point being, we've seen big hiring in the last year.

We've seen a lot more people willing to work over the last year. That significantly explains why we haven't ended up with an economy that's even hotter than a year ago. It's actually it's a tight economy, but it's not obviously any worse than it was a year ago. And that's why we're not getting inflation that's accelerating further. And those sorts of problems.

Okay. On from there to emerging market debt distress. And so certainly no shortage of newspaper magazine expert research articles have caught my eye highlighting that many of the world's poorest countries are having problems with their debt right now. And that makes sense. Interest rates have gone up quite a lot. These countries are indeed poor as per their description.

And so this is proving to be quite a burden for them. And some are not able to service their debt and some are in danger of not being able to service their debt in the future. Now, this is clearly not good for their economies. The world's poorest economies are going to have a rough ride as a result of this.

I think the other question, though, that emerges, particularly for investors, is what does this mean for emerging market bond investors? You would think there would be a big impact in practice. The impact seems to be somewhat smaller. Emerging market bond index tends to be skewed towards the wealthier emerging market countries, towards the larger emerging market countries that just aren't having these sorts of problems.

And so if you want to be generous or I should say pessimistic, you can tally up the total value of the debt that that is running into trouble and that is coming from these poor countries. It's not even 3% of the total emerging market bond portfolio. And it's something that's well understood by markets. It's it's more than compensate, aided by the risk premium in the emerging market bond index already.

And so it's worth saying let's keep watching this. There is real distress here. The Economist magazine called it the biggest debt problem in the world since the late 1980s. But the more relevant comment for investors is that it's actually less directly linked into emerging market bonds than you would think. It tends to be countries even smaller than that who don't necessarily play in that space.

Okay, yield curve. Let's let's move to this one. And so we use the yield curve quite heavily when trying to predict recession. And so the classic rule of thumb is when the yield curve is flattened so much that it's inverted, that's a recession prediction that indeed has happened. And so we've been predicting recession in part due to that.

Recently, though, the yield curve has been steepening somewhat it's been becoming a little bit less inverted. And the question is, does that mean, therefore, that a recession is less likely or recession isn't going to happen? And I would answer by simply saying no, we still think a recession is quite likely. In fact, when the yield curve inverts, that's a good predictor for recession from something like a year out.

However, right before a recession, you do tend to see the yield curve steepening up again, often as people are pricing in rate cuts at the short end of the curve. And so when the curve is steepening and yields are simultaneously flattening, which is happening now, that actually if anything makes the recession, we think more likely. And so don't lose sight of that.

A steepening yield curve isn't actually undermining some of the classic recession arguments. We still think there's about an 80% chance of recession. On the subject of inflation, inflation has been mostly cooperating. We have now gone from 9% US inflation to 5%. We've gone from 8% Canadian inflation to 4% Eurozone. It's been 11 down to 7%. These are significant amounts of process of progress, rather, if not all the way to 2%.

When we forecast US and Canadian inflation over the next three months, we actually think we'll be looking at 3% type readings when it comes to the June data. And so we think that progress will continue with reasonable assumptions. Now, 3% isn't normal. It will take significantly more time, we suspect, to get from three back to a more normal two.

But I think the point is there's been some real progress here. Some significant progress is likely. We are feeling pretty confident in our forecast, not just that inflation falls, but that it falls a little faster than the market's assuming. And that's quite a good thing. Okay. Housing, housing in Canada. And so the Canadian housing market has stage something of a revival in the last couple of months.

We now see home prices rising. We see the level of home resales rising slightly. And so the question is, was that it or is there still more weakness to comment? I won't pretend to have all the answers here. It could be that that was it. That's certainly the way the market is behaving. We are, I guess, a little more cautious, though, just because it's not unusual to see a seasonal effect where in the spring housing markets revive, that's when people like to move.

And so some of it is likely that we still know that housing affordability is quite poor and mortgage rates are high and people are still just rolling into the higher mortgage rates and will continue to do so for several more years. Our suspicion is there will still therefore be some weakness after this little blip higher, but maybe not on the scale of what we've seen.

We saw home prices fall by about 15% in just over a year. I don't think that's a realistic forecast for the future. It might be more of a flat home price environment. Now that's still a decline on inflation adjusted terms. It is still an effort to normalize the housing market. But but again, maybe not a decline on the part of what we've seen.

And that's because immigration is running very hot right now. And and housing supply just isn't coming close to keeping up. So we we realistically can't predict a complete return to normal affordability. So housing has turned but again, dubious that there is a full on revival afoot at this juncture. And my last subject, finally, if you've stuck with me, here is the fiscal front.

And so just fiscally, I guess two comments. One would be that from a global perspective, we are still in a world of fiscal drag. Governments are spending less money than they did in 2020 and 2021. That's subtracting from economic growth. This year. It actually subtracts particularly notably from Canada for what it's worth this year. And so that's that's the first thought.

This is still a drag. Even though governments are spending a fair amount of money. It's just not as much as before. The other thought, though, is that when you look almost across the board, the great majority of countries are still running deficits. Many of them are running fairly large deficits. Now, Canada isn't, by the way. Canada has a small deficit.

It's in better shape than most. But when you look at the US and the U.K. and quite a range of other countries, these are big deficits on the order of 5 to 7% of GDP. And it's manageable for the moment. But as interest rates rise and bonds reset and roll over, and as the bond market becomes more acutely aware of some of these challenges, our suspicion is we're going to have to see other governments reining things in to some extent.

And so we're assuming some measure of fiscal drag in the years to come ahead. Some measure of austerity may be necessary. All right. That was almost certainly much too much for me. But thanks for sticking with me. Hopefully you found some of that interesting. And I wish you well with your investing. And please tune in again next time.