As we close out a historical first quarter in 2020, we see the economic and financial data that illustrates the economic impacts of measures to mitigate the spread of Covid-19. Our partners at the National Bank Economics team offer a detailed review of many of these indicators in their recent April report.
Declining Oil Exports Will Slow Canada’s Covid Recovery
A recent economic forecast from RSM Canada sees Canada’s corona virus recovery evolving at a more modest pace than the U.S. In a recent article in Investment Executive Canada, RSM projects a ‘V’ shaped U.S. decline and bounce back as Canada is slower with a ‘U’ shaped, softer landing and slower climb out of recession. The difference is due to Canada’s export reliance, particularly in the oil and gas sector, which is also expected to decline significantly as a result of Covid-19. RSM argues that more fiscal stimulus is required as Canada’s current package amounts to 3% of GDP as the U.S. has offered 10% of GDP to date.
Residential Housing Market Will Be Impacted
Not surprisingly, according to the Canadian Real Estate Association (CREA), seasonally adjusted home sales fell 14.3% from February to March. The decline was broad based, with decreases reported in all 26 of the major markets surveyed. A National Post article echos the predictable change in what was a very robust real estate market.
Great news for the Canadian economy as a record number of full-time jobs was declared in April 2019 with 107,000 added. Our partners at National Bank Financial, Economics offers a balanced view of this one month surge.
Interpreting recent economic signals in the first quarter of 2019 is challenging. Housing markets in main urban centers are cooling. This is generally interpreted as a good sign and potentially averting a housing bubble. It appears that the new rules on speculation, foreign ownership and increasing mortgage rates have had a positive impact on a heated marketplace. As BDC.ca indicates the cooling will continue, “Research shows it takes between three and five years for changes in central bank interest rates to fully work their way through the economy. When they do, a one percentage point change in interest rates can have a three-to-five percentage point impact on home prices.”
Business Confidence Stabilizes In April
The Canadian economy is in transition. Our partners at NBF Economics remind us, there is a positive outcome. The benefit is that interest rate hikes are not likely in the future as the Bank of Canada Governor Poloz indicates.
“As financial conditions had eased, the Bank believed the current interest rate level to be consistent with its positive economic outlook going forward. If we assumed the Bank’s forecast to be right, Poloz’s view was that the policy rate was more likely to go up than down, though there was “no rush to get back in the saddle in terms of hikes.”
Happy 2019! While December 2018 for investors may have felt more like coal in your stocking than a Santa Claus rally, we believe a return to normalized financial markets and interest rates in North America is beneficial in the longer run. What are your New Years ‘Investing’ Resolutions for 2019? Mercer offers a few to consider.
Sustainability Expands for Risk and Return Considerations
Uncertain times can require a more active approach to investment strategies. We look forward to an exciting 2019. We are grateful for the privilege to serve and support the clients and families as we embark on the next journey!
Canadians, whether borrowers, lenders or savers have been attuned to rising interest rates in 2018. Rates are on the rise and where they go depends upon external forces such as exchange rates with trading partners and equity markets.
The Canadian economy had a solid month with positive employment figures, settlement of the US NAFTA 2.0 (USMC agreement) and the large liquid natural gas (LNG) project announcement. Looking forward, our partners at National Bank Financial (NBF) Economics offer investors insights on pace and and timing of interest rates which include:
The Bank of Canada (BoC), as widely expected, raised the overnight rate 25 bps to 1.75% on October 24, 2018
NBF continues to see the Bank (BoC) taking a long pause at 2.5% bank rate
NBF outlook for 10-year U.S. Treasuries is trading around 3.50% and 10-year Canadas around 3.10%, a year from now in October 2019
NBF sees the Canadian central bank overnight rate at 2.5% and the upper bound of the target fed funds range at 3.0% at year-end 2019
Enjoy a detailed outlook for Canadian, US and Global Fixed Income Markets from our partners at NBF Economics HERE.
After months of negotiations and looming tariffs, Canada finally agreed to a revamped trade deal with the U.S. and Mexico. The “United States-Mexico-Canada Agreement” (USMCA for short) will replace NAFTA. Financial markets were indifferent to the new NAFTA, as Canada averted deepened trade wars and was able to protect the essential auto industry from steel and aluminum trade impacts “NBF Economics Canadian GDP growth forecast for 2019, which had assumed a deal would be reached, is unchanged at 1.9%. But with this earlier than-expected agreement, we’ve brought forward the timing for C$ appreciation, now expecting USD:CAD to reach 1.25 by the first quarter of next year. While the trade deal is good news, that’s not to say the job of the Canadian government is done. There are competitiveness issues to tackle.”
Despite Tariffs, Business Remains Optimistic As Bond Yields Rise
Our partners at NBF Economics offer a remarkably detailed view of current economic conditions in the U.S., Canada and the Emerging Markets. Much of the outlook remains positive, lead by the “hot” U.S. economy.
Rising protectionism with emerging trade wars and tariffs are moving from the rhetorical to the possible over the summer. Concerns over protectionism have cast a financial funk over global markets despite record earnings in many cases. Downside risks to the Canadian economy have arguably increased amidst an apparent deterioration in the trade relationship with the U.S., the latter not only imposing tariffs on steel and aluminium imports but also threatening to slap additional ones on the crucial auto sector.
Our partners at National Bank Financial has outlined their revised expectations below, with a detailed
Canada’s GDP (Gross Domestic Product) has rebounded in February 2018 with the largest surge since May 2017 due primarily to a recovery in energy prices complemented by a broad sectorial surge. Canada’s economy beat estimates by growing 0.4 percent. The breadth of increases is encouraging, particularly the observed bounces in the agricultural, mining, oil and gas, retail, arts/recreation, professional and information services industries. Of the twenty industrial sectors, fifteen registered increases in output during February. As a result, industrial production jumped 1.4%, the biggest increase since May last year. Q1 growth may well end up topping the Bank of Canada’s estimate of 1.3%.
The Bank of Canada (BoC) announces to stay the course on April 18th as the Canadian economy manages mixed signals. As widely expected, the Bank of Canada (BoC) left the overnight rate unchanged at 1.25% today. The central bank acknowledged rising core inflation, saying this is “consistent with an economy operating with little slack”. The central bank sees total inflation averaging 2.3% this year.
Today, BoC Governor Poloz maintained its target for the overnight rate at 1¼%. The Bank Rate is correspondingly 1½% and the deposit rate is 1%. Inflation in Canada is close to 2% as temporary factors that have been weighing on inflation have largely dissipated, as expected. A reminder that these interest levels still remain low with interest rates averaging 5.90% from 1990 to 2018 (Source: Trading Economics).
Based on today’s message, a May rate hike looks unlikely at this point. That said, should the “data-dependent” Bank of Canada see upside economic surprises before the meeting of May 30th, e.g. monthly GDP, wage, employment and inflation, a change of stance remains possible. Recall that while the economy is currently at capacity, the overnight rate remains 175 basis points below the estimated neutral rate of 3%.
Welcome to the newest year of disruption – its challenges, risks, rewards and investment opportunities! But how different this time compared with a year ago when hopes for the U.S. and its freshly-triggered animal spirits were heavily outweighed by generally sobering forecasts.
The graphic from the Globe and Mail succinctly illustrates the ‘Animal Spirits’ in the 2017 North American stock markets. Enjoy the detailed discussion by Dr. Michael Graham, Ph.D. 2018 Challenge, Disruption, Opportunity.
Disclaimer: The information contained in the preceding link has been obtained from sources that we believe reliable but Hampton Securities Limited cannot guarantee its accuracy or completeness. The report is for information purposes only and does not constitute an offer to buy or sell any of the securities mentioned therein. Hampton Securities Limited and/or its directors, officers, employees and affiliated companies may at times have a position in the securities mentioned therein.