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‘Sharp correction’ ahead for Toronto and Vancouver home prices

A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the Web

Royal Bank of Canada, like CIBC before it, reported strong profits and a dividend increase Friday morning,

"Toronto-based RBC is the second straight lender to post a stronger-than-expected profit as well as a dividend increase this earnings season, bucking a sluggish Canadian economy to report strong earnings across its four largest divisions. RBC earned $3-billion in profit, or $1.97 a share, for the quarter that ended January 31. That was up 24 per cent from nearly $2.5-billion, or $1.58 a share, a year earlier."

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"RBC boosts payout, shuffles executives as profit jumps 24%" – Report on Business

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Reuters has been helpfully polling Canadian economists lately and today released the results for the national housing market,

"Most economists polled said there was a risk of a sharp correction in Toronto and Vancouver, two of the country's most expensive markets, though they were divided on the likelihood that Canada as a whole would see a painful pullback … 'There's no doubt interest rates are feeding cheap credit to homebuyers. But there's also an element of increased investment in the market, both domestic and foreign,' said Sal Guatieri, senior economist at BMO Capital Markets."

"Rising Canadian home prices make new regulations more likely" – Reuters
"@greg_bonnell Fitch Ratings sees Vancouver & Toronto housing as overvalued, at heightened risk of rapid slowdown/outright correction. @bnnhousemoney @BNN ' – Twitter
"Fitch Ratings: Canada's housing markets 'unsustainable'" – (video) BNN

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Here's an example of how writing this daily post presents dilemmas and can, in part, kinda suck some days.

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The oil price is bumping up against the $55 mark where it has fallen back previously and most analysts have 2017 price targets in the $55-$70 range.

However, ABN Amro, a research source Canadians rarely hear about, is warning that crude could easily fall back to $30 and this outlier view is getting all the attention because negative news gets more attention.

The extent to which I decide to contribute to this pessimism-get-page views strategy is my dilemma.

"Oil Slips From 19-Month High as OPEC Cuts Amid Plentiful Supply" – Bloomberg
"Oil futures suggest bullish funds' big bet on price may pay off' – Reuters
"Five Things We Learned This Week: Back to $30 Oil?" – Bloomberg
"Most energy firms in Canada's Alberta to further cut costs: survey" – Reuters
"U.S. Crude Exports Surge to a Record" – Bloomberg

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The best media story yesterday was by FT Alphaville's Izabella Kaminska, in my opinion.

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Ms. Kaminska cites research showing a new economic phenomenon whereby goods inflation does not, as it did previously, lead to higher wages but a wage recession which slows overall growth. The post goes on to argue that technology is now replacing white collar jobs instead of blue collar jobs, and this is also depressing wages,

"BCA Research's weekly report tackles the strange situation wherein price inflation is paradoxically bringing about deflationary effects for European consumers due to there being no feedthrough from price inflation to wage inflation… "In outlining the argument Dhaval Joshi, senior vice president, refers to an observation he made in an older report called The Superstar Economy: Part 2, "Many of the jobs that AI will destroy – like credit scoring, language translation, or managing a stock portfolio – are regarded as skilled, have limited human competition and are well-paid. Conversely, many of the jobs that AI cannot (yet) destroy – like cleaning, gardening, or cooking – are relatively unskilled and are low-paid.""

"AI's inflation paradox" – Kaminska, FT Alphaville (free access with registration)

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Tweet of the Day: "@business These are the world's best equity markets ...since 1900 bloom.bg/2lQtN12 " – (chart) Twitter

Diversion: "How banks are using Watson" – (hint- it's by giving IBM your banking information) Digiday

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More

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