Canadian Corona Recession in April 2020

With the economy in lockdown during March and April, Canada’s GDP dropped a record -18.2% due to the COVID-19 pandemic. Although not surprising, when compared to the Spanish Flu period and an economy that was much smaller in 1919, the impact of shutting down a consumer driven economy is stark. The good news is that while there are challenges to restarting carefully, it appears Canada has begun to recover, although many economists expect it to be a slower process.

Enjoy the full breakdown from our partners at NBF Economics HERE.

Does The Jobs Report Signal A Slowdown?

The Jobs Report for December was in-line with expectations.  “This is the worst performance in three years but it’s a pace we should get used to in the context of a tight labour market and a slowing economy,” indicates our partners at NBF Economics. Hiring plans continued to be widespread according to the Bank of Canada’s Business Outlook Survey published late in December. Canadian economic conditions have weakened. The jobless rate remained unchanged at a record low of 5.6% as the participation rate remained unchanged at 65.4%.

What does this mean for your investment portfolios?

This could translate into some cautiousness among employers early in 2019.  Does the more normalized growth and interest rates mean a decline in expected equity returns? December’s 2018 NBF report on business sentiment displays a divergence in expectations. The major decision is your belief about recent economic news. Do you view December’s volatility 2018 as the beginning of a slow period? If so markets may be fairly valued. If you believe with the lowered P/Es (price earnings ratio) equities are a buy within the extended late Bull market, then you will look to buy quality and have specific price targets. Regardless, it is a time in our economic and market cycles where active management and advice is required. Contact our seasoned Investment Advisors for a fulsome discussion on next steps for your portfolio.

https://www.nbc.ca/content/dam/bnc/en/rates-and-analysis/economic-analysis/economic-news-jobs.pdf

Will They Or Won’t They Increase US Interest Rates?

Today is an important day for investors as it will provide a window into the economic outlook for the US economy and future interest rates increases. Our partners at NBF Economics have forecasted that the ‘Fed’ (US Federal Reserve) is seen as likely to take the Fed funds rate higher looking further down the road. NBF economics has projected their base case scenario for the target Fed funds range at year end 2019 remaining at 2.75% to 3.0%. This is more aggressive than what the Fed funds futures market is pricing in at this writing earlier in 2018 (see graph).

A recent CNBC consensus estimates a range to 2.25 to 2.50 percent and to remove language in its post-meeting statement that says it will continue with “gradual” rate increases. This may mean the US economy is slowing and no further rate increases to quell inflation concerns may occur.

As for the NBF Economic forecast, we continue to expect a US GDP growth rate of 2.3% on average in 2019 with no runaway inflation. This environment, in our view, would support further policy normalization. Enjoy a detailed discussion of the economic forecast and interest rates outlook from our partners at NBF Economics here:

Monday Monitor: Inflation Watch

Sometimes disappointing economic news on jobs can be a positive outcome for the inflation watch. Investors seemingly shrugged off the 7,000 Canadian job losses for the May 2018 employment report. This disappointing economic news instead focused headlines away from the decade-low jobless rate of 5.8% and acceleration of wage growth. Indeed, the 3.9% year-on-year increase for average hourly earnings is the highest in nine years. As the chart below indicates, the job market is tightening and with it wage growth since mid 2016 have rose.

Read the full ‘Hot Charts’ here 

Job Statistics

Big buzz around U.S. job statistics as Canada’s Bank Rate stayed the same for the first week in June 2018. The establishment survey showed rising at 233,000 jobs in May. The private sector added 218,000 jobs in the month, buoyed by cyclical sectors like construction and manufacturing.

The outlook for Canada’s job rate also looks positive according to our partners at NBF.

Enjoy the Full economic outlook from National Bank Financial (NBF) Economics group.

Monday Monitor: Global Economy Results

The global economy continued to expand in the first quarter, albeit at a more moderate pace. The persistence of low inflation should limit the extent of monetary policy tightening by major central banks this year, while fiscal policy is also expected to remain stimulative in both advanced and emerging economies. As such, we expect world GDP to match last year’s growth print of 3.8%, although that assumes world governments successfully manage risks posed by trade protectionism and record debt levels.

Global Economy Highlights include:

  • U.S. economy firmly on track to grow about 2.8% in 2018. Solid fundamentals suggests an acceleration of growth after Q1. But protectionist policies threaten to disrupt an otherwise promising economic outlook
  • Persistence of low inflation should limit the extent of monetary policy tightening by major central banks this year,
  • We expect world GDP to match last year’s growth print of 3.8%, although that assumes world governments successfully manage risks posed by trade protectionism and record debt levels
  • A weaker-than-expected start to the year prompts us to downgrade our 2018 forecast for Canadian GDP growth from 2.5% to 2.2% We have also pushed to July the timing of an expected interest rate hike from the Bank of Canada
  • For a detailed report from our Partners at National Bank Financial Economics HERE.

Portfolio Perspective

As interest rates rise in a very managed way, our partners at National Bank Financial (NBF) Economics offer a portfolio perspective. What are the impacts of a strong economy amid trade wars and geopolitical shuffling? Recall that Canada, as well as other trading partners have experienced an exceptionally low interest rate environment since 2008.

How do the Central Banks tread water to control inflation, yet facilitate growth? The neutral rate is the policy rate consistent with full employment, trend growth and stable prices. It is an important concept, yet the Bank of Canada (BoC) is having a difficult time defining the range for the future bank rate. NBF Economics expect monetary normalization to proceed slowly. It will take an accumulation of good news to prompt policy action. In this regard, the strong headwinds felt by the economy in early Q1, with GDP reported to have contracted 0.1% in January, have left the central bank with room for patience.

Where is the Bank Rate Going?

While financial markets are giving 31% odds of the Canadian overnight rate reaching at least 2.0% (three more BoC rate hikes) in 2018, the fed funds futures market gives 80% odds of the effective fed funds rate trading at or above 2.125% by year end. Consider that NBF expects that 10-year BoC bonds will be at 2.63% by the end of 2018. What does this mean for your portfolio? Enjoy the Fixed Income Monitor from National Bank Financial for a fulsome discussion on interest rate trends here.

https://www.nbc.ca/content/dam/bnc/en/rates-and-analysis/economic-analysis/monthly-fixed-income-monitor.pdf

Canada GDP Rebounds with Energy

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%.

For a detailed discussion, enjoy the report by National Bank Financial Economics for the February Economic Results HERE.

 

Markets Digest the Possibility of US Protectionism

Global financial markets are attempting to determine the probability and the implications of the rhetoric and status of negotiations of various trade agreements. Most recently the implications of a trade war with tariffs has contributed to a 4% decline in valuations. At this point, while the protectionist probabilities increase the reality of increased costs globally is already being forecasted as the U.S. stock markets have experience some of their largest daily point drops in its history. Regardless of the outcome, increased volatility is assured. Our partners at the National Bank Financial (NBF) Economics offer a detailed exploration of the increased world protectionism for Canadian industries.

Canadian industries according to a protectionist threats March 2018
Canadian industries according to a protectionist threats March 2018

Enjoy the special report from our partners at National Bank Financial on Canadian exposure to U.S. protectionism: Click here.

Economic Monitor Dec 2017

“Employment rose a massive 80K in November according to the Labour Force Survey, a gain that led to a four- tick drop of the unemployment rate to 5.9%. The participation rate remained unchanged at 65.7%. Job gains in November were concentrated in the private sector which added no less than 72,000 jobs, the largest monthly increase in 3 years.” Our partners at National Bank of Canada (NBC) Economics group clearly state the significance of the strong labour market and the expectation for a revised GDP estimates.The stronger-than-expected Q3 GDP and solid labour market could have the Bank of Canada reconsider its dovish stance (towards interest rates) sooner rather than later.

Economic Expectations for 2018

The economic news in North America continues to be strong. Both Canada and the U.S. are on a strong track. One benefactor of the tightening job market is the first signs of wage increases since 2008. Read more details of the economic expectations for 2018 from NBC here

 

 

 

 

https://www.nbc.ca/content/dam/bnc/en/rates-and-analysis/economic-analysis/weekly-economic-watch.pdf