February 2016

Hightlights

February 5, 2016

We would like to share the highlights that we deem relevant on various issues related to the economy, financial planning, stock markets, etc. You will find below an article about the state of the global economy, Canada and the US and the likely rise in interest rates in the United States. Good reading !

Some perspective on recent events!

Interest rates

• Given our downwardly revised forecasts for U.S. growth (2.0%, previously 2.3%) and core inflation (1.9%) in 2016,we think the FOMC will deliver only two rate hikes this year, one in June and one in September. In that light wesee 10-year Treasuries trading at 2.36% by year end and 2-year Notes at 1.42%.

• In Canada, in the light of our downwardly revised growth forecast and of expectations that headline inflation willaverage 1.7% this year, we have lowered our interest-rate projections. We now see 2-year Canadas trading ataround 0.66% and 10-years around 1.73% by year end, compared to 0.98% and 2.05% a month ago.

- Paul-André Pinsonnault -

Currencies

• China is learning, the hard way, about the impossible trinity. You just cannot have free capital flows, a fixed exchange rate and independent monetary policy all at same time. The People’s Bank of China can either continue to run down its currency reserves or allow the yuan to float freely which would give back control of monetary policy to the central bank. A more yuan-friendly option perhaps is to temporarily impose capital controls, at least until investor confidence returns.

• With its inflation forecasts slated to be revised down yet again, the European Central Bank is poised to add stimulus at its March meeting, something that could weigh on the euro over the near term. The Bank of Japan, also struggling to hit its inflation target, took a page from the ECB’s book in January by pushing the deposit rate on excess cash balances held by financial institutions at the central bank into negative territory.

• Given the above, the USD is in a strong position to add to last year’s gains. But we remain hopeful the Fed will be as concerned as we are about the situation. Not only is a strengthening greenback hurting growth and keeping inflation low in the US, but it’s also raising risks of disorderly deleveraging in emerging markets considering the massive amount for USD-denominated debt in those economies. The threat of a global financial crisis and recession may be enough to convince the Fed to back down and tone down its tightening bias, something that could help take some steam out of the USD.

• We have lowered our forecasts for oil prices this year, expecting WTI to hit $40 by year-end ($50 previous forecast) and have accordingly downgraded our Canadian GDP growth forecast and C$ targets. Our call for USDCAD to hit 1.36 by year-end hinges not only on rising oil prices but also on a large enough fiscal stimulus from the federal government which would negate the need for the Bank of Canada to cut interest rates.

- Stéfane Marion/Krishen Rangasamy -

Markets

• The beginning of 2016 has turned out to be extremely testing for investors. Global equities plummeted in January after ending 2015 on a promising note. A number of indexes have fallen into bear market territory, rekindling fears of a global recession. China, Fed action and the widening of corporate bond yield spreads remain the focus of attention.

• At the halfway point of the U.S. fourth-quarter reporting season, the news has been encouraging despite the challenges posed by a surging currency. Though aggregate Q4 earnings are still expected to come in lower than a year earlier, much of that decline is concentrated in commodity-related industries.

• Prospects for a sizeable fiscal stimulus from Ottawa, coupled with an accommodative monetary policy and fairly strong U.S. consumer demand, are likely to help the Canadian economy get out of its funk. The outlook for overall earnings in 2016 is still one of improvement.

• Our asset allocation is unchanged this month. Since we don’t think global growth is compromised, we are maintaining our recommendation to overweight equities relative to our benchmark. We continue to expect some softness in the USD, implying some lift for commodity prices in the coming months.

- Stéfane Marion / Matthieu Arseneau -

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Economic

February 22, 2016

news Retail

Slump in December

It was not a Merry Christmas for Canadian retailers. December’s volume slump was the worst in seven years. Auto sales were weak as we had expected, but so were ex-auto categories. In fact discretionary sales, i.e. retail sales less spending on groceries, gasoline, health/personal care items, fell 2.5% in December, more than erasing the prior month’s gains. So, taking the two months together, the retail performance wasn’t particularly good. Interestingly, the weak demand from consumers didn’t stop retailers from raising prices. So much so that the year-on-year retail price increase is now over 2%, the highest in four years (middle chart). Retailers could be adjusting prices to reflect higher import costs, courtesy of a much depreciated Canadian dollar. And based on the hotterthan- expected core CPI for January (Data released friday february 19th), it seems that adjustment didn’t end in 2015. The decrease in retail volumes will offset some of the earlier-reported gains in manufacturing and wholesaling, perhaps restraining real GDP growth to about 0.1% in December. The quarterly picture is also not that great considering retail volumes grew in Q4 at a much slower pace than in the prior quarter (bottom chart). All told, the data is much in line with our view Canadian GDP was close to flat in the final quarter of 2015.

-Krishen Rangasamy-Senior Economist