National Bank to Acquire CWB, U.S. Inflation and Rate Decision

What's happening in the Canadian Banking Sector?

The Week in Review

Weekly Market Recap: U.S. and Canada

Great week for the Nasdaq and S&P 500 again, with both indices touching new highs, finishing up 3.5% and 1.6% respectively. Both also have now finished up in seven of the past eight weeks. As has been the case recently, the market’s advance was very narrow, with tech leading the way. The Dow fell slightly over the week, ending down 0.5%.

Here at home, the TSX was down 1.62%, as we saw commodity prices drop, especially in the materials and energy sectors. Major players like Suncor and Vermilion Energy contributed to the declines.

Week ending June 14, 2024

S&P 500 Week At-a-Glance

Week ending June 14, 2024 | Market Cap >$100B

TSX Week At-a-Glance

Week ending June 14, 2024 | Market Cap >$10B


Most of our top economic news come out of the U.S. this week. Let’s take a look at the key stories here:

🏦 U.S. Consumer Price Index

In May, both the U.S. Consumer Price Index (CPI) and Producer Price Index (PPI) inflation readings came in lower than expected, which is a welcome shift after several months of hotter-than-anticipated inflation data. The CPI saw declines in key areas such as food, energy, new car prices, and airline fares, contributing to a slight decrease in the overall inflation rate.

U.S. Inflation Trends:

  • Headline CPI inflation was 3.3% year-over-year, down from 3.4% in April.

  • Core inflation, excluding food and energy, fell to 3.4%, below the forecast of 3.5%.

📈 U.S. Fed Decision

Federal Reserve's Rate Decision and Projections:

  • The odds were overwhelmingly in favor that for the seventh meeting in a row the U.S. Federal Reserve would maintain the fed funds target range at 5.25%-5.50%, and that’s exactly what happened on Wednesday.

  • The updated dot plot now indicates only one rate cut in 2024 and four in 2025, a reduction from the March projection of three cuts in both 2024 and 2025.

📉 Consumer Sentiment Hits Lowest Level in 7 Months

Interesting survey results out Friday. We’ve seen resilient growth of the US economy, and yet despite this, consumer sentiment took a hit in June. The latest University of Michigan survey revealed sentiment dropping to its lowest point in seven months, with the index at 65.6, down from 69.1 in May and falling short of what economists had expected.

United States Michigan Consumer Sentiment | June 2024

I’ll cover each of these leading economic reports in more detail below.

(Results in Next Week’s Newsletter)

A big story this week is National Bank’s announcement that they will be acquiring the smaller Canadian Western Bank. This type of deal seems to be a developing trend. Do you feel this is a positive or negative trend for the sector?

Take a second to answer this week’s poll question, and leave a comment while doing so!

Royal Bank bought HSBC Canada and how National Bank is buying Canadian Western Bank. Are these deals good or bad for the Canadian banking sector?

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POLL COMMENT OF THE WEEK (Had to go with both sides of the story this week, just to be fair!)

Being Greedy
“There’s genuine fairness in allowing them profit but when does that morph into excessive greed? Prices overall have increased but to justify a 40% increase in rents HELL NO” - lancasterjake

Keeping Up With Costs

“I have a rental property and the cost of capital outweighs the return you get from rents, so unless you can cover the extra cost and hopefully get the return through appreciation of the asset it doesn't make sense.” - storierod

From the Center

“In truth, it's probably both. Costs are definitely up but so is demand.” - gjdublyou

Most Overbought Stocks

The Relative Strength Indicator (RSI) can provide a signal that suggest a stock is either overbought or oversold. A stock that has an RSI over 70 is considered to be in “overbought” territory. This might suggest that the stock is due for a pullback, however it is not a recommendation to sell. Always perform your own due diligence.

Week ending June 14, 2024 | Most Overbought Stocks, based on 14-Day RSI

Most Oversold Stocks

A stock that is trading with an RSI below 30 is considered to be in “oversold” territory. This might suggest that the stock is due for a recovery, however it is not a recommendation to buy. Always perform your own due diligence.

Week ending June 14, 2024 | Most Oversold Stocks, based on 14-Day RSI

National Bank is Buying Canadian Western Bank for $5 Billion

National Bank of Canada announced this week it would be acquiring Canadian Western Bank in an all-share deal worth about $5 billion. National Bank has traditionally been focused on Quebec, but now it's branching out, and this deal will go a long way to boost National Bank's presence in Alberta and British Columbia, adding 39 branches and around 65,000 new clients.

"This transaction will accelerate National Bank's strategic plan and pan-Canadian growth."

Laurent Ferreira | National Bank CEO

📈 Market Consolidation

This news comes on the heals of RBC’s $13.5 billion purchase of HSBC Canada, and shows a trend towards more market concentration. With this deal, National Bank, currently the sixth-largest bank in Canada, aims to become a stronger national competitor.

💼 Benefits for Clients and Communities

National Bank says it plans to use this acquisition to enhance its services across Canada. Ferreira emphasized,

"We will create a stronger full-service, coast-to-coast competitor, providing more choices to individuals, entrepreneurs, and businesses across the country."

Laurent Ferreira | National Bank CEO

Looking at the particulars of the deal, each CWB share will be exchanged for 0.45 of a National Bank common share, valuing CWB shares at a 110% premium over their recent closing price. The total value of the transaction is $4.7 billion, excluding shares already owned by National Bank. Additionally, the Quebec pension fund, CDPQ, has invested $500 million in National Bank, becoming its second-largest shareholder.

🏢 Keeping CWB’s Presence

Interestingly, at least for the near term, National Bank plans to keep CWB’s headquarters operational. Two CWB nominees will join National Bank's board of directors, aimed at ensuring continuity and integration of both institutions' expertise and client bases.

💰 Cost and Savings

The deal is projected to cost $400 million to execute, with National Bank aiming to achieve $270 million in annual cost savings within three years post-acquisition.

The acquisition is subject to regulatory and shareholder approval, with a meeting of CWB shareholders expected in September. If all conditions are met, the deal is expected to close by the end of next year.

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U.S. ECONOMY, Part 1
May Inflation Dips Below Expectations

May’s U.S. inflation numbers came in lower than expected, with the Labor Department reporting that the Consumer Price Index rose by just 3.3% year-over-year in May, down from April’s 3.4% and lower than the predicted 3.4%. On a monthly basis, the CPI stayed flat, despite expectations of a 0.1% increase.

This data is pretty solid evidence that the Federal Reserve's efforts to combat inflation are working. Progress has slowed recently, but this latest dip is a welcome relief.

📊 What's Driving the Numbers?

Even though the overall inflation rate dropped, some areas are still stubbornly high.

  • Core inflation, which excludes food and energy, rose by 0.2% month-over-month and 3.4% year-over-year, slightly below the expected 3.5%.

  • Energy prices fell by 2% monthly but were up 3.7% over the year, while shelter costs continued to climb, increasing by 0.4% from April and 5.4% from last year.

📉 Future Rate Cuts?

With this latest CPI data now in the books, the chances of the Fed cutting interest rates by the end of the year have gone up. The market now sees a 99.9% chance that the Fed will hold rates steady in the short term, but a 73.2% chance of a rate cut by September.

“Both the FOMC and markets expect interest rates to decline over the next year. This is supportive of both economic growth and equity valuations.”

Nicholas Colas | Co-founder of DataTrek Research

Jerome Powell, Fed Chair, has emphasized the need for continued patience, and says “We need to be patient and let restrictive policy do its work.”

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U.S. ECONOMY, Part 2
Fed Holds Rates Steady, Indicates Only One Cut Coming This Year

The Federal Reserve decided to keep its key interest rate unchanged on Wednesday.

Instead of the two rate cuts previously indicated, the Federal Open Market Committee (FOMC) is now signaling just one cut expected before the year ends.

📊 Optimism Amid Inflation

The Fed's new forecasts from their two-day meeting show cautious optimism that inflation is on track to hit the 2% goal, which could allow for some policy loosening later this year.

"Inflation has eased over the past year but remains elevated. In recent months, there has been modest further progress toward the Committee’s 2 percent inflation objective."

Federal Reserve Statement

The Fed’s “dot plot” of rate expectations suggests a more aggressive cutting path in 2025, with four reductions totaling a full percentage point anticipated. This would bring the federal funds rate benchmark to 4.1% by the end of next year. Interestingly, the long-run interest rate projection increased to 2.8% from 2.6%.

🔮 Return to 2% Target

The FOMC’s Summary of Economic Projections raised the 2024 inflation outlook to 2.6%, or 2.8% excluding food and energy. Both figures were 0.2 percentage points higher than in March.

The Fed’s preferred inflation gauge, the personal consumption expenditures price index, showed readings of 2.7% and 2.8% for April. Inflation is expected to return to the 2% target by 2026.

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Consumer Sentiment Hits Lowest Level in 7 Months

Despite the resilient growth of the US economy, consumer sentiment took a hit in June. The latest University of Michigan survey revealed sentiment dropping to its lowest point in seven months, with the index at 65.6, down from 69.1 in May and falling short of what economists had expected.

📊 Key Factors Driving the Decline

Joanne Hsu, Survey of Consumers director, explained her take on what’s going on.

"Assessments of personal finances dipped due to modestly rising concerns over high prices as well as weakening incomes."

Joanne Hsu | Survey of Consumers director

🔮 Inflation and Economic Disconnect

The decline in consumer sentiment has been sticky, even as inflation cools and the labor market remains strong.

"People experience what they experience... We've got an economy that's growing at a solid pace. We've got a very strong labor market with unemployment at 4%."

Jerome Powell | Federal Reserve Chair

He emphasized the Fed's efforts to restore price stability, noting that while inflation has come down significantly, achieving the 2% target remains a priority.

📉 What does this bring for the Future?

The continued decline in consumer sentiment shows, or at least suggests, that the labor market's strength and easing inflation have not fully alleviated concerns over high prices and economic stability.

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RV Sales Picking Up: A Positive Signal for the Economy

Feeling the itch to hit the open road in an RV this summer? You're not alone. RV sales and rentals are seeing a shift that might just be a good sign for the economy. Let's break down what's happening in the world of RVs and why it matters.

💸 Sales Telling a Story

RV sales are picking up again, despite some consumer hesitancy. Michael Hicks, an economics professor, noted, "People don’t make these large, luxury purchases unless they’re actually feeling better about the economy."

The industry is sensitive to interest rate changes but, despite the lack of material rate cuts, is showing signs of recovery, hinting at a broader economic bounce-back.

 🔄 Creative Solutions at Chill RV

High borrowing costs led Chill RV Rentals in L.A. to get creative. They're renting out RVs from private owners who aren't using them anymore, and this is helping to keep their fleet running smoothly.

A lot of RVs from the pandemic #vanlife craze are now available for rent, helping meet current demand without new purchases.

 📈 Industry Trends

  • After a peak in 2021, RV shipments dropped but are now climbing again. The forecast for 2024 is promising, with expected shipments between 329,900 to 359,100 units.

  • RV shipments are a good economic barometer, with rising numbers suggesting optimism for the economy's direction.

So, if you're considering that RV trip, it might just be the perfect time to get on the road!

Market Movers

Top 10 Weekly Gainers

TSX, NYSE & Nasdaq Exchanges | Market Cap >$10B | Week ending June 14, 2024

Top 10 Weekly Losers

TSX, NYSE & Nasdaq Exchanges | Market Cap >$10B | Week ending June 14, 2024

The views expressed herein by Beavis Wealth regarding a particular company, security, industry, or market sector should not be considered as an indication of trading intent of any investment funds managed by BMO Global Asset Management. Any reference to a particular company is for illustrative purposes only and should not be considered as investment advice or a recommendation to buy or sell nor should it be considered as an indication of how the portfolio of any investment fund managed by BMO Global Asset Management is or will be invested. This social media network is an independent organization and is not affiliated with BMO Global Asset Management.

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