Everything You Need to Know on Friday: BMO Notes Canada's Job Market Continues to Loosen

Good morning mooers! Here are things you need to know about today's market:

● S&P/TSX 60 Index Standard Futures are trading at 1,363.20, up 0.63% from previous close

● Bank of Canada's rate cut: modest relief for small businesses amid challenges

● BMO notes Canada's job market continues to loosen

● Canadian miners probe limits of anti-China investment rules

● Lululemon pulls Breezethrough line; JPMorgan cuts estimates

Today, the Canadian dollar is trading at 72.38 cents US, a gain from previous close.

The Bank of Canada's recent 25 basis point cut to a 4.5% key policy rate offers some support to small businesses, but experts warn of ongoing economic hurdles. Financial analyst Daryl Ching believes the reduction is a step forward but suggests small businesses still face high borrowing costs, noting the importance of a robust debt market for growth.

Ching explains that small businesses, often reliant on credit lines tied to the prime rate, are sensitive to interest rate changes. Pre-pandemic, firms could borrow at 6-7%, a figure that has since risen to between 9.25 and 10.25%. He warns of significant decisions ahead for businesses, including potential shutdowns due to the strain of additional interest costs.

Simon Gaudreault from the Canadian Federation of Independent Business views the rate cut as a positive move that could boost consumer demand and aid businesses with pandemic debt or investment plans. Yet, he acknowledges the persistent challenges for SMEs, such as inflation-driven operational costs and reduced demand due to previous rate hikes.

With many small businesses hesitant to hire and borrowing costs impacting loan qualifications, Ching observes a shift towards equity financing. While selling shares can provide necessary capital, it often requires time and comes with trade-offs like reduced control and lower valuations.

Canada's job vacancy rate fell further to 3.1% in May, matching the lowest level in over six years, noted Bank of Montreal (BMO).

That's also the low end of the pre-COVID range, and reflects the fact that broad job-market tightness has fully unwound, said the bank.

Indeed, labor demand has flattened, with the level of job vacancies now sitting at 560,000, versus more than one million at the 2022 high. At the same time, labor force growth continues to run at a robust 3% y/y pace.

The softness is also becoming more widespread, with vacancy rates in 12 of 20 major industries now below their 2019 average; and a further five within 0.5 ppts of that level.

Health care is really the exception, where the job vacancy rate still sits 1.7 ppts above 2019 amid some clear structural issues, pointed out the bank.

From a cyclical perspective though, the job market continues to loosen and the Bank of Canada (BoC) has noticed, added BMO.

Canadian mining companies are exploring the boundaries of the 2022 regulations designed to limit foreign investment, specifically from Chinese state-owned entities. The government's restrictions aimed to curb China's influence in the critical minerals market but have left smaller mining firms struggling to secure essential funding.

At least nine proposed mining deals with Chinese involvement have emerged since the crackdown, with industry players watching for the government's reaction to these transactions to gauge the framework for future investments. Canadian junior miners, often reliant on Chinese funds for long-term, capital-intensive projects, now face uncertainty due to the lack of precise guidelines on permissible foreign investment levels.

Braden Jebson, a partner at Torys LLP, highlighted the government's broad discretion and the ambiguity surrounding specific cases. Canada's Ministry of Innovation, Science and Economic Development, responsible for reviewing such deals, has not commented on its approach. Montage Gold Corp's recent tentative deal with Zijin Mining Group, securing a 9.9% investment without government review, and Yintai Gold's planned acquisition of Osino Resources Corp., are current examples testing the investment limits. Conversely, SRG Mining Inc. considered relocating to avoid Canadian oversight before abandoning the plan.

While Canada's policy has become stricter, barring foreign takeovers of critical mineral companies except in rare cases, past decisions, like Saudi Arabia's investment in Vale SA's nickel operations in Ontario, show some inconsistencies.

The Canadian government, aligning with Western allies, is prioritizing the strategic value of minerals to reduce reliance on China's supply chain dominance, with a more accommodating stance for non-critical mineral investments.

After issues with its Breezethrough collection, Lululemon has halted the line, causing JPMorgan to reduce its 2024 earnings forecast and remove the stock from its focus list. With the current share price at $272.06, the new target is now $338.00, down from $457.00.

The collection, designed for low-impact workouts, received poor reviews for its unflattering design, prompting the pause. This setback has raised concerns over Lululemon's product execution, affecting growth expectations for its women's leggings range and leading to a lowered revenue growth estimate of 8% for the second half of 2024, below the 13% market consensus.

JPMorgan also predicts a drop in operating margins to 22.8% and has adjusted the full-year EPS forecast to $13.90, below the consensus of $14.34. Lululemon's recent product challenges suggest potential market volatility ahead.