Do investors have a realistic view of risk and return? As we recently pass the 10th anniversary of the Financial Crisis of 2008 with significant volatility in the financial markets, insights about investor sentiment were surveyed. Why is sentiment important? Simply put, it can move markets. Here are some of the highlights of the research by the Investment Managers at Natixis.
How Do Investors Feel About Risk And Their Investments In 2018?
Some of the highlights that reveal myths and realities of investing from the recent survey include:
71% feel more financially secure than they did during the financial crisis
63% say index funds are less risky (they’re not)
70% don’t think the world itself is a more secure place
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
Although the Canadian (and U.S.) job and employment numbers announced on Friday July 6th were positive, the trends in each country are contrasting. The Canadian job numbers have not done well in comparison to strong U.S. employment. These differences will create contrasts in our interest rate and economic policies. As our partners at National Bank Financial Economics (NBFE) team states, “Total employment registered its worst start of the year in the current expansion due to the 48K drop in private-sector jobs. Major cities were not immune to the slump. Vancouver is down 45K jobs this year and Toronto has seen a pullback of 24K.”
What to look for in this week’s Bank of Canada meeting?
In Canada, the highlight of the week will be the central bank’s report. “With its three core inflation measures close to two percent, it could be said that the Bank has a green light to proceed with further policy normalization. However, the deterioration of the international trade outlook since the central bank’s last meeting ought to give pause to the BoC.” What direction will interest rates take in Canada?
NBFE surmises that “with the U.S. threatening to instigate a trade war with China, and with NAFTA negotiations stalling, we don’t see conditions as supportive of further monetary policy normalization.”
For a detailed report on this week’s economic outlook here.
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.
The core inflationary outlook is closing in on the estimates the Bank of Canada (BoC) has projected. While the target rate of 2% annual inflation may sound modest, overall inflation measures are running above the Bank of Canada mid-point target on a 6-month annualized basis (CPI-Trim at 2.3% and CPI-median at 2.2%). We believe this recent trend will persist reflecting a strong economy and labour market.
Yield Curve Changes in 2018
Sustained low inflation is self-reinforcing. If businesses and individuals are confident that inflation is under long-term control, they do not react as quickly to short-term price pressures by seeking to raise prices and wages. This helps to keep inflation low. Are we in a period of sustained low inflation? It appears as bond market spreads have flattened at the long end of the curve with less than 25 basis points separating 10 years from 30 years maturities a transition is underway. This should alert investors to transitions in the economic cycle.
For a detailed analysis from our partners at National Bank Financial Economics, enjoy this review: https://www.nbc.ca/content/dam/bnc/en/rates-and-analysis/economic-analysis/economic-news-cpi.pdf
We hope everyone is enjoying their last gasp of summer over the Labour Day Weekend. The good news is that the Canadian economy is robust and growing in sync with the world economy. Remember that news headlines tend to be negative but there are a lot of reasons to be optimistic including:
Canada’s GDP (Gross Domestic Product which measures overall economy health) expectations are near 3.0% for 2017. More importantly this represents an increase of 4.6% in the 12 months leading up to the end of May.
Canadian’s disposable income (after expenses) has surged 6.6% which has increased overall domestic demand. Canadian consumers are confident.
The U.S. Economy is also on solid footing the Bureau of Economic Analysis revised up from 2.6% to 3.0%, the highest quarterly rate in two years.
While trade agreements such as NAFTA renegotiations loom large and interest rates will likely increase in the next week or quarter, the Canadian Conference Board Index climbed to 122.9 from 120.0 in July. This was well above its 12-month moving average of 114.7. The details of the report showed the present situation tracker jumping 5.8 points to a 16-yearhigh of 151.2. It appears as labour markets tighten and most financial markets achieve new highs the Fall of 2017 looks promising.
The Teranet–National Bank National Composite House Price IndexTM rose 2.6% in June, the largest increase for that month in the index’s 19-year history. The table below breaks it down metropolitan areas:
Year over year, the national index up a record 14.2%. The hottest markets are Toronto (+29.3%—a record), Hamilton (+25.6%—also a record) and Victoria (+17.4%).
The June stats show that the Ontario government’s Fair Housing Plan intends to put a damper on Toronto house prices. Real new residential construction expenses and housing starts had not yet had a bearing in this regard. Given the plan’s effect on home sales and listings, the impact on prices should be felt soon enough.
The implications of these trends impact the net worth of approximately 75% of Canadian households. Residential real estate as an asset class is often the largest holdings within their overall net worth.
First Interest Rate Increase In Seven Years
The Bank of Canada (BoC) hiked its policy rate for the first time in seven years, raising the overnight rate 25 basis points to 0.75%. The BoC acknowledged that inflation remains low. The latest reading showed common core Consumer Price Index (CPI) rising only 1.3% on an annual basis. CPI weakness is considered “temporary”. National Bank Financial Economics continues to project inflation close to 2% by the middle of 2018.
Positive Economic Growth for Canada
This increase couples today’s forecast from the Conference Board of Canada (CBoC) anticipating an increase in GDP (Gross Domestic Product) growth in Canada from July 2017 forward. Housing is a key driver. The CBoC expects the Canadian economy to grow by 2.6% this year, before slowing to 1.9% in 2018. Enjoy the complete Economic Report and Forecast from our partners at National Bank Financial Here.
A big week coming up for the Bank of Canada (BoC) after a strong June jobs report coupled with a stronger Canadian dollar will focus attention on the BoC statement on monetary policy due on Wednesday July 12th. For the first time in seven years, the central bank could actually raise interest rates.
The broad-based improvement in business sentiment reported in the summer edition of the BoC Business Outlook Survey, leads us to expect the Bank to raise its policy rate 0.25% to 0.75%. A hike that should be replicated in October, bringing the policy rate to 1.00% at year-end.
It is a busy week in the U.S. as Janet Yellen, the Federal Reserve’s Chair, will deliver her semi-annual report on the economy and monetary policy before the House of Representatives Financial Services Committee. In addition, Friday is the inflation rate announcement in the U.S.
What Do Higher Interest Rates Mean for Consumers?
Let’s remember interest rates in Canada, the U.S. and globally have been historically low since the 2008 Financial Crisis. Increasing rates are not a negative for many and a sign of a solid economic environment. Enjoy the break down on what the increase means for Canadian households.
In light of the converging Canadian and U.S. long weekends due to national birthday parties, we have summarized a strong economic start to the summer below.
Internationally, despite the negative headlines overall growth is solid:
The global economy is picking up steam buoyed by both advanced and emerging economies. We expect global GDP growth to be close to 3.5% both this year and next. That, however, assumes policymakers are able to minimize downside risks such as mounting trade protectionism, elevated debt levels and the impacts of Brexit.
United States economy readies for more potential rate hikes due to strong job growth:
The improving U.S. economy explains the Fed’s decision at its June meeting to upgrade slightly its growth forecasts and tighten monetary policy further. Industrial output and real consumption spending are on track to grow in the second quarter at a much faster pace than in Q1 and the labour market remains rock solid. But while we remain comfortable with our view that U.S. GDP growth will accelerate to more than 2% both this year and next. That’s not to say we share the Fed’s optimism on inflation and hence interest rates for 2018 and 2019.
Canadian economic data has largely surprised on the upside this year:
Growth has been strong and so has the labour market, the latter creating jobs in numbers not seen since 2013. The housing market has surged as a result. So much so that the Bank of Canada signalled an upcoming policy change. Dovish rhetoric has been replaced with an explicit statement that it is now assessing whether the current considerable stimulus is still required. We have brought forward by one quarter to October 2017, the timing for an increase in the overnight rate.
Statistics Canada ends this week by issuing its labour force survey for the month of June. Last month, the agency’s report for May showed a surprisingly strong 54,500 net new jobs — including 77,000 full−time positions.
Canada’s consumer price index (CPI) which measures inflation fell 0.2% in May in seasonally adjusted terms. The year-on-year inflation rate to drop three ticks to 1.3%. This is historically below the target inflation rate of 2% to 3%, yet job or unemployment figures are strong and we look forward to April 2017 GDP results this week at the end of June.
Inflation And Oil: What Is The Link?
Recall that oil prices impact approximately 75% of the Consumer Price Index (CPI). Since the financial crisis, oil prices and inflation expectations have been highly correlated (See chart below). Oil prices declining 20% since the spring suggests the relationship between inflation and oil is intensifying. WTI is West Texas Intermediate and is a standard price measure for western oil. But what is more surprising is that underlying inflation remained weak in May.
Inflation in Canada was below expectations for a fourth month in a row. Dropping gasoline prices restrained the progression of the headline figure and this should continue to be the case in June as excess supply is putting downward pressure on global oil prices. Enjoy the entire report and READ the outlook here.