Macklem: There might be a soft landing
For the third time in a row, the Bank of Canada (BoC) has decided to chop rates of interest. The reduction of 1 / 4 of a percentage point means a drop within the bank’s key rate of interest to 4.25%.
Perhaps the more vital news than the widely expected rate cut was how aggressive BoC Governor Tiff Macklem sounded in his prepared remarks. Macklem declared: “If we need to make a bigger move, we are prepared to make a bigger move.” That sentence will attract the eye of economic markets, which will likely be trying to price in larger potential cuts in the approaching months. On Thursday, financial markets forecast a 93% Probability of an additional rate of interest cut of 0.25% in October. Several economists expect rates of interest to fall to around 3% by next summer.
Describing a possible soft landing after the bumpy, pandemic-induced inflation flight we’re currently experiencing, Macklem stated, “The runway is in sight, but we have not landed yet.” It seems that the true debate isn’t any longer whether the BoC should cut rates, but whether it should cut them, and whether a 0.50% cut is on the cards sooner moderately than later.
With unemployment rising, inflation in labour-intensive services is prone to proceed to fall. Lower variable-rate mortgage rates may even mechanically have a deflationary impact on housing costs across Canada.
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Will Couche-Tard operate globally?
Last week we reported on the planned acquisition of 7-Eleven parent company Seven & i Holdings Co. by Alimentation Couche-Tard (ATD/TSX). If the acquisition goes through, ATD would not be Canada’s 14th largest company to fight for the title of the third largest company. That is a giant if: On Friday morning, just just a few hours before the editorial deadline, said it refuses ATD’s $38.5 billion money offer was rejected on the grounds that it was not in one of the best interests of shareholders and would likely face significant antitrust challenges within the U.S. (All figures on this section are in U.S. dollars).
It is interesting to notice that 7-Eleven has been far more successful in operating convenience stores in Japan (where it has a 38% profit margin) in comparison with outside Japan (where it has a 4% margin). That’s partly because locations outside Japan sell large volumes of low-margin gasoline. However, Couche-Tard has been in a position to achieve margins within the 8% range in similar locations where gasoline dominates, suggesting significant growth potential. With 7-Eleven’s total return lagging far behind its Japanese benchmark index over the past eight years, there’s clearly a business case for current shareholders.
The political dimensions of the takeover are much harder to quantify than the business case. Although Japan has modified its laws in 2023 to permit foreign takeovers, classified corporations as “core,” “non-core,” and “protected” under the Foreign Exchange and Foreign Trade Act. Logically, it could seem that a convenience store company would fit the textbook definition of “non-core.” However, Seven & i Holdings has asked the federal government to alter its company’s classification to “core” or “protected.” This would virtually eliminate any possibility of a serious takeover.
The deal also has an American legal aspect. The Federal Trade Commission (FTC) would have to choose whether ATD’s resulting 13% US market share could be too dominant. Barry Schwartz, Chief Investment Officer and Portfolio Manager at Baskin Wealth Management, speculated The most certainly end result might be a sale of 7-Eleven’s overseas assets to ATD, while the corporate would retain its Japan-based assets.
