**June 19th Issue of The JMRD Market Observer**
In This Week’s JMRD Market Observer
- Martin Lefebvre, NBF’s Investment Strategist, is coming to London!
- NBF Economics and Strategy Report – Fed Policy Monitor – Still on track for rate hike this year
- Seasonality in markets: Myth versus reality
- NBF Economic Monitor – July/August 2015
- JMRD Basket Corner
- Retirement Corner
- Week at a Glance
- Reads of the week
- Economic Calendar
- Earnings Reports
Martin Lefebvre Coming to London
We are pleased to announce that once again, Martin Lefebvre, NBF’s Asset Allocation and Chief Investment Officer, will be coming to the London Club on Thursday July 16th. With the recent market volatility around the proceedings in Greece and the potential for higher interest rates in the US this September, his market update should be very well received. Please see the attached invitation for more details. Martin Lefebvre Invite
If you wish to attend, please reply to email@example.com to reserve a seat.
NBF Economics & Strategy: Fed Policy Monitor – Still on track for rate hike this year
As widely expected, the Fed left monetary policy unchanged at its June meeting. Although the statement was largely unchanged, the Fed recognised that the underutilization of labour resources has diminished somewhat (tighter labour markets). That said there are still concerns about exports and softness in business investment. On the inflation front, the Fed seems to imply that a trough is in sight since energy prices have stabilized. There were no dissenters with regards to this decision.
Fed’s new projections:
The central tendency forecast for GDP growth (Q4/Q4) is now 1.8 to 2.0% for 2015 (versus 2.3 to 2.7% previously), 2.4 to 2.7% for 2016 (versus 2.3 to 2.7% previously), 2.1 to 2.5% for 2017 (versus 2.0 to 2.4% previously). The central tendency projections for the unemployment rate were raised a touch: 5.2 to 5.3% for 2015 (5.0 to 5.2% previously), and left largely unchanged for 2016 (4.9 to 5.1%), and 2017 (4.9 to 5.1%). Inflation forecasts were largely unchanged.
The FOMC presented information about how participants feel about the pace of policy firming going forward. No participants (compared to 4 last March) see rates above 1% in 2015. But like last March, there are still eleven members that see rates remaining below 2% by the end of 2016. There are now nine participants that see rates remaining below 3% by the end of 2017 (compared to 6 last March). Participants’ view of the “equilibrium interest rate” hasn’t changed much, with the majority of participants still seeing the fed funds rate in the 3.00-4.25% range over the longer term.
Fed Chair Yellen’s press conference:
As expected the thrust of Chair Yellen’s press conference was that monetary policy is data dependent. Accordingly, the pace of policy normalization will be adjusted depending on incoming data as well as on the evolution of financial conditions. In order to minimize market volatility, the FOMC is trying to explain as best as possible its assessment of the economic conditions and what its intentions are. Chair Yellen pointed out on many occasions that market participants should not overstate the importance of the timing of the first rate rise, but focus on the entire path of the policy rate. According to Chair Yellen, the Summary of Economic Projections and the dot plot are consistent with her view that the process of normalization will be gradual and rate increases will be appropriate later this year if the economy evolves as expected. Chair Yellen expressed the view that Greece and its creditors are faced with difficult decisions. She hopes that solutions will be found. If not, there could be spillover effects on international financial markets as well as on the Eurozone economic outlook. The US has limited direct exposure to Greece according to the Chair.
The Fed kept monetary policy unchanged despite downgrading its 2015 growth forecasts. The statement’s language remained largely unchanged, with the Fed saying it will continue to look at a wide range of information including financial and international developments. In other words, future monetary policy decisions remain data dependent. There seems to be a consensus among the FOMC that the tightening cycle will begin this year (the dot plots show there are still 15 out of 17 participants that see at least a hike this year). That said, the tightening path is less aggressive than before and more in line with our view that the pace of tightening will be gradual. Indeed, there are now nine participants that see rates remaining below 3% by the end of 2017 compared to 6 last March. We continue to call for a first rate hike in September (that call was priced by markets with an 80% probability before the announcement).
(Full report attached)
NBF Research: On Topic – Seasonality in markets: Myth versus reality
You don’t need to be an economist to appreciate that there’s tremendous seasonality in many measures of economic activity. Everything from personal consumption, industrial production, construction activity to retail/wholesale prices exhibit meaningful
seasonal fluctuations. On this, there’s little debate.
But what of financial markets? There’s a tendency to see financial market risk and volatility as also highly seasonal. Equity investors long-ago coined to the adage “sell in May and go away” to capture the penchant of their market to underperform from May to October. And feedback from a string of recent meetings suggests there are plenty of seasonality disciples out there, investors seeing late spring/summer risk aversion giving way to a healthier appetite for risk in the final months of the year.
One can be forgiven for embracing this notion of seasonality in markets. Indeed, past studies have identified a seasonal effect in select markets over certain timeframes. And the clustering of highs and lows for a variety of financial market indicators looks
compelling enough (Table 1, page 3).
But be careful about projecting traditional concepts of seasonality onto today’s market. Seasonal trends aren’t as deep-rooted as you may think. Indeed, statistical analysis reveals that, since the global economy began to recover, there’s little compelling evidence of identifiable seasonality in rates, credit, currencies, commodities, equities or even volatility. It’s not that markets behave uniformly throughout the year, but rather that seasonal patterns are oftentimes and increasingly irregular.
(Full report attached)
NBFM Monthly Economic Monitor – July/August 2015
- The global economy is set for a challenging second half of the year. Markets are already starting to position themselves for the first tightening of Fed monetary policy in nine years, with the resulting surging greenback pressuring USD borrowers outside America. In Europe, the Greek situation is concerning more so after Athens made clear it cannot meet its debt repayment obligations. So, there will be either a bailout or a default, the latter opening the door for Greece to leave the Eurozone. Our call for the world economy to grow roughly 3.5% this year and next assumes those downside risks are contained.
- After a difficult start to the year, the US economy is now bouncing back. While trade will remain under pressure from the strong dollar, domestic demand should strengthen enough to boost overall growth. Indeed, fundamentals are excellent for the driving force of the US economy, namely consumers, thanks to a strong labour market, low pump prices, and high confidence. The pressure to improve productivity amidst a strengthening currency will also fuel business investment spending. We continue to expect the world’s largest economy to register above-potential growth of around 2.6% this year and next.
- The poor start to the year prompted a downgrade to our Canadian GDP growth forecast for 2015 to just 1.6%. The bad news is that the main driver of Q1 weakness namely business investment could persist for a while as the impacts of the oil shock continues to be felt particularly in the energy patch. More encouraging, however, is that part of the Q1 slump was due to temporary factors that will reverse in subsequent quarters. Consumption spending, for instance, which was hindered by atypically bad weather should bounce back, helped by a resilient labour market. Exports should also perform better in synch with a resurgent US economy.
(Full report attached)
JMRD Basket Corner
All Cap Basket
Stella Jones (SJ) – Stella-Jones announced that it has signed a definitive agreement to purchase the shares of Ram Forest Group Inc. and Ramfor Lumber Inc. The signature of a non-binding letter of intent in respect of the proposed acquisition was reported by Stella-Jones on April 29, 2015. Through its wholly-owned subsidiaries, Ram Forest Products Inc. and Trent Timber Treating Ltd., Ram Forest Group manufactures and sells pressure treated wood products and accessories to the retail building materials industry. Ramfor Lumber is a lumber purchasing entity serving Ram Forest Products and Trent Timber Treating. The definitive share purchase agreement provides for a purchase price of $58.0 million which includes $15.0 million of working capital and is expected to close in October 2015
Sun Life Financial (SLF) – On June 15, SLF announced an agreement to acquire, for Cdn $560M, the Bentall Kennedy Group, a real estate investment manager operating in Canada and the United States, providing specialized real estate investment management and real estate services. As at March 31, 2015, Bentall Kennedy had assets under management of $27 billion and provided real estate services across 91 million square feet of properties. SLF disclosed that the transaction will be immediately accretive to earnings and return on equity (ROE), contributing $0.04/share to f2016 EPS while adding 12 bps to that year’s ROE. The acquisition of Bentall Kennedy follows SLF’s purchase of Ryan Labs Asset Management, a firm specializing in LDI and total return fixed income strategies with AUM of $7 billion. SLF has now added two, reasonably sizable platforms to enhance its capabilities in the LDI space. (Full research note attached) Sun Life Financial
U.S. Growth Basket
CVS Health (CVS) – “Target selling its pharmacies to CVS Health for $1.9 billion”
Celgene (CELG) – Celgene Corp. on Wednesday said its board authorized the repurchase of up to an additional $4 billion in stock, on top of the $5.2 billion remaining from previous authorizations. The new program is effective immediately and is open-ended, the biopharmaceutical company said. Since 2009, Celgene has bought back about $12.3 billion in shares.
- “How best to draw income from your retirement savings” (Globe and Mail)
- “How to keep your kids from blowing the family fortune” (Financial Post)
- “Four unexpected events that can derail your retirement” (Globe and Mail)
Week at a Glance
(See attached Week at a Glance report)
Reads of the Week
- NBF Hot Chart – Canadian first-time homebuyers: no sign of recklessness – Some pundits consider Canadian first-time home buyers to be as reckless as Americans were a decade ago. How reckless are we? A recent report published by CAAMP titled “A profile of home buying in Canada” takes a look at this. In today’s Hot Chart, several indicators are showing that the vast majority of first-time homebuyers are rather cautious. In the shopping process of their home, 72% ended with a transaction price below their initial maximum target. A whopping 94% provided a down payment higher than the 5% minimum threshold with virtually all of this amount not coming from leverage elsewhere. Moreover, the decline of the amortization limit for insured-mortgage is bearing fruit: 84% had an amortization period of 25 years or less. Even more importantly, new buyers seem aware that the current period of historically low mortgage rates could come to an end: 75% opted for a fixed mortgage rate and a significant share most likely locked their monthly payment for some time as 73% had a term 5-years or longer. Canada is very far indeed from the U.S. circa 2005 when a massive 40% of U.S. mortgage loans were interest-rate-only or with a negative amortization. NBF Hot Chart
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Monday June 22nd – US Existing Home Sales
Tuesday June 23rd – US Durable Goods Orders; US New Home Sales
Wednesday June 24th – US GDP
Thursday June 25th – US Personal Income, US Initial Jobless Claims
Friday June 26th – U. of Michigan Consumer Sentiment
Monday June 22nd – None
Tuesday June 23rd – Blackberry
Wednesday June 24th – Monsanto
Thursday June 25th – Nike Inc., Micron Technology
Friday June 26th – None
Have a good weekend!