The stronger-than-expected U.S. payrolls report for September left the economy on track for a “soft landing,” and reduced urgency for the Federal Reserve to repeat a 50-basis point rate cut in November or December. Downside risks remain, but there are several reasons to think the U.S. economic slowdown next year will be contained, including an exceptionally wide government budget deficit that continues to support growth. The Fed will likely pause its rate-cutting cycle at 4 to 4.25% if that soft landing materializes. Canada’s economy continues to underperform with below-trend growth rate and rising unemployment rate. With inflation already within the target range and expected to head lower still, there’s little in the way to stop the Bank of Canada from making faster and larger rate cuts. As a result, we updated our forecast to expect two back-to-back 50 bps reductions in the overnight rate in October and December before a return to slower 25 bps cuts at every meeting after. RBC expects the Canadian overnight rate will reach 2% by July 2025.

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Portfolio Notes

(+) indicates a positive development, (-) indicates negative, and (~) indicates neutral

(-) Alphabet (GOOGL-US) The DOJ’s high-level remedies framework in GOOG’s search commercial agreements trial were broadly in line with expectations, but lacked specific terms given the final proposed remedies are not due until Nov 20. The DOJ’s key remedies included: 1) limiting/prohibiting default search deals; 2) changes in Chrome, Play, & Android; 3) opening up of APIs & ranking signals; 4) curbing AI training to drive ads & monetization; and 5) licensing Google Search ads to competitors. While this framework contained no major surprises, we believe concerns on potential separation and/or structural changes to their search business will remain an overhang on GOOG in the near-term. Ultimately, we believe GOOG will be able to successfully navigate these near-term headline risks. We note that any onerous new regulatory requirements are likely to be challenged by GOOG, potentially resulting in lengthy appeal processes. Long-term, we continue to believe GOOG is well positioned to be a primary beneficiary of AI given its massive data, scale, and years of investments. The stock is trading at a discount to its historical average (20x vs. 23x forward PE). We would continue to own and the shares and be buyers at the current levels. Owned in Core, ESG+, and US Portfolios.

(-) First Solar (FSLR-US) The solar stock dropped over 10%, after Jefferies cut its price target on the stock and said it expects First Solar’s third-quarter report to disappoint. Jefferies maintained its buy rating on the stock but said near-term challenges such as ongoing supply chain and labor shortages should continue into 2025. Owned in ESG+ Portfolio.

(+) JP Morgan (JPM-US) reported a top and bottom-line beat. The outperformance was notably driven by better-than-expected net interest income (NII), non-interest income, and strength across the Investment Bank/Market segments. Nonperforming loans were in line, but provision for credit losses were higher. On the forward outlook, management’s F’Q4 guide on net interest income (NII) came in above expectations, and they raised FY24 guide on NII by $0.5b and lowered FY24 adj expense by $0.5b. CEO Jamie Dimon said the company will maintain a “modest pace of buybacks” given “market levels are at least slightly inflated”. JPM is up +25% YTD outperforming the S&P 500 (+21%). It is trading at 1.7x forward P/B, above its historical average of 1.5x. Long-term, we continue to like JPM for its leading scale, strong capital position, and resilience during economic downturns. Owned in US Portfolio.

(new) South Bow Corporation (SOBO-T) TRP completed its Liquids spin-out into South Bow Corporation. 88% of SOBO’s cash flows are under long-term contracts (8-year average length), which should provide stability in cash flows and dividends. The underlying assets are of high-quality (Keystone Pipeline) and play a key role in supplying U.S. refineries with long-life, low decline WCSB crude oil, with a 3% production CAGR outlook through 2030E. SOBO comes with a sustainable yield of 9%, but we do not expect much dividend growth in the medium-term while the capital allocation priority remains on debt reduction. The stock has had a strong start, but does not have a long trading history, and there could be some volatility as it finds a sustainable level. New position in Cash Flow Portfolio.

(-) Tesla (TSLA-US) This week, Elon Musk showed off a sleek-looking silver Robotaxi — also referred to as Cybercab — and a Robovan capable of seating 20 passengers. Musk said the Robotaxi has no steering wheel or pedals, nor does it have a charging plug. Instead, it relies on inductive charging, which replenishes the vehicle’s battery by driving over a wireless chargepoint. Musk expects it to be in production sometime before 2027 and have a price tag of less than $30,000. Then came the dancing humanoid robot, Optimus. Musk said it would be the "biggest product ever, of any kind" and would cost $20,000 to $30,000. The robots, Musk said, will be able to complete various tasks, including — as demonstrated at the event — mixing drinks. Musk has been trying to position Tesla as a technology company first, and an EV company second. Musk’s message is this: Tesla is not like traditional automakers. It’s a company with aspirations of leading the industry in artificial intelligence, robotics, and autonomous vehicles. However, Musk failed to provide a clear timeline for when the company would receive the necessary regulatory approval to operate the vehicle on public roads. Following the event, Tesla shares fell. Owned in ESG+ Portfolio.

Company of the Week

TESLA ROBOTAXI EVENT - WE, ROBOT

 

Weekend Reading

Buying a home gets a tad more affordable as interest rates drop Mortgage payments, property taxes and utilities fell as a share of median household income in Canada to 59.5% from 61% in Q1 and 63.7% in Q4 2023. RBC ECONOMICS

New home listings continue shooting higher in most major markets Canada’s most expensive markets (Vancouver and Toronto) are still seeing modest fluctuations—keeping activity relatively stagnant since the spring. Easing supply-demand pressures are keeping prices in these markets on a downtrend too. RBC ECONOMICS

What happens to the capital gains tax changes if the government falls? Legislation to implement the hike to the capital gains inclusion rate has yet to be passed. INVESTMENT EXECUTIVE

What would the impact have been on Warren Buffett’s wealth if he had paid such a tax on unrealized gains all his life The US presidential election is just around the corner. During the election campaign, one of the presidential candidates raised the idea of taxing unrealized capital gains of wealthy people with assets exceeding USD 100 million. Today, taxes are normally paid on realized capital gains. This means that tax liability arises only upon the sale of assets. A tax on unrealized gains would mean that even without selling anything a person could still be liable to taxation. VLTAVA FUND

This economist predicts that AI is vastly overhyped and that “a lot of money is going to get wasted.” Daron Acemoglu, who is possibly the world’s top economist right now, has been one of AI’s fiercest critics. He and Simon Johnson wrote a whole book arguing that AI would increase inequality and that its development needs to be controlled. NOAH OPINION

Money Electric: The Bitcoin Mystery | Official Trailer | HBO In the future of money, who holds the power? Claims they will unmask Satoshi. TRAILER

The Genius Design of Mount Rushmore Have you ever wondered how Mount Rushmore was actually sculpted? In this video, discover how Gutzon Borglum and his team carved the iconic 60-foot faces of U.S. presidents into the granite of South Dakota’s Black Hills. YOUTUBE

Are We Too Impatient to Be Intelligent? There are things in life where the value is precisely in the inefficiency, in the time spent, in the pain endured, in the effort you have to invest. Rory Sutherland Vice Chairman of Ogilvy