**April 29th Issue of The JMRD Market Observer**
In This Week’s JMRD Market Observer Market
- NBFM Forex – Fed can wait
- Fed Policy Monitor
- Retirement Corner
- JMRD Basket Corner
- Retirement Corner
- Insurance Corner
- Week at a Glance
- Reads of the Week
- Economic Calendar
- Earnings Reports
NBFM Forex (May 2016) – Fed can wait
- In light of the still soft global economic picture and risks to US growth and employment, we have pushed to Q4 the timing for Fed action. We have, accordingly, revised our forecasts to reflect the persistence of USD weakness over the short term, although we continue to expect the greenback to perk back up later in the year as the Fed finally delivers the rate hike it’s been warning about and which are currently not priced in by markets.
- With the Fed in pause mode, the euro can find some stability for now. But extra stimulus from the European Central Bank should cap the euro’s progress against the USD in the second half of the year. Similarly, the yen should be under pressure as the Bank of Japan opens the money taps further. But the dwindling amount of bonds available to purchase suggest QE may lose effectiveness and as such we have pared down yen depreciation over the forecast horizon.
- The Canadian dollar has momentum, buoyed by a soft USD, rising oil prices, and portfolio inflows. But as we’ve mentioned before, Canada’s dependence on short term capital flows to finance its large current account deficit leaves the loonie vulnerable to a negative turn in sentiment. So, while we adjusted our currency forecasts to reflect the improved near-term outlook for the C$, we expect the loonie to lose some steam towards year end coinciding with tighter Fed policy.
Fed Policy Monitor – Fed tries to keep alive its option to hike
As widely expected, the Federal Reserve left monetary policy unchanged at its April meeting. The fed funds rate remains between 0.25% (lower bound) and 0.50% (upper bound). The FOMC acknowledged that economic activity appears to have slowed and household spending has moderated but highlighted fundamentals that have improved, e.g. labour market conditions, real household income has risen, and consumer sentiment remains high. The message about inflation is unchanged, i.e. while it continues to run below target, the Fed expects it to rise to 2% over the medium term. This time the Fed did not point out risks relating to international developments but instead said that it “continues to closely monitor inflation indicators and global economic and financial developments.” The FOMC is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. For the second meeting in a row, Esther George was the lone dissenter on the FOMC. She wanted a rate hike to 0.50-0.75%. Bottom line: The Fed couldn’t avoid talking about the current economic slowdown, but tried to keep alive its message that it intends to hike interest rates this year by not sounding too dovish. It highlighted positive fundamentals such as the strong labour market, rising real household income and consumer sentiment. It also put more emphasis on the domestic economy and removed the sentence relating to risks posed by international developments (although it mentioned global economic and financial developments will be monitored closely). So, the Fed left the door half open for a June rate hike. Do we believe a hike is possible so soon? Corporate profits and investment spending have been weak and historically those have resulted, albeit with a lag, to weaker employment creation. In light of the still soft global economic picture and risks to US growth and employment, we now believe odds are tilted towards just one rate hike late this year.
JMRD Basket Corner
Northland Power (NPI) – “What a windfall: Toronto firm seeks to harness the North Sea” (article attached) What A Windfall
All-Cap Growth Basket
Uni-Select (UNS) – Reported a strong quarter in a seasonally weak quarter with EBITDA and EPS beating estimates. Sales were slightly better than expected as organic growth of 3.2% was higher than NBF’s 2.6% forecast. EBITDA of $22mm beat NBF and consensus at $20mm and margins improved to 8.2% v. NBF at 7.7%. (Full update attached) UNS
U.S. Growth Basket
Waste Management (WM) – Waste Management on Thursday posted better-than-expected results for its first quarter, aided by better pricing and increased volume. The Houston-based company’s revenue increased 4.5%, propelled by the positive yield and volume in the company’s collection and disposal business. And its core price–which consists of price increases net of rollbacks and fees other than the company’s fuel surcharge–grew 5.3%, up from 4.4% in the first quarter of 2015.
1) “Are you suffering from sudden retirement syndrome?” (Globe and Mail)
New legislation will impact the tax benefits of life insurance
The government has introduced new tax legislation to update the tax exempt testing of life insurance. The legislation is a reflection that people are living longer and that their insurance policies will pay out later. This will come into effect January 1, 2017. In particular, changes will be affected in corporate insurance strategies, typically used to provide tax-preferred transfer of corporate assets.
Week at a Glance
Full report attached.
Reads of the Week
NBF Hot Charts – Market Watch: TSX has room to run The TSX is comfortably topping the developed world’s stock markets with a 7.1% advance so far this year. International securities transactions data show foreigners ramping up purchases of Canadian equities which are helping boost the index. So why are Canadian equities so attractive to foreigner investors? Investors may be realizing that there’s more to Canada than oil and that the economy is far from imploding. The stabilization of oil prices has helped, but so has the federal government’s plan to support economic growth through significant stimulus. Perhaps investors expect the TSX to catch up after the Canadian stock market lagged many major bourses last year. Indeed, after last year’s collapse, Canadian equities look relatively cheap based on PE ratios. As today’s Hot Charts show, if one excludes the depressed resources sector, the difference between US forward PE’s and Canadian ones is high by historic standards. That suggests the TSX has room to run. (Chart attached) Hot Charts
- Forecasters Keep Trying to Predict the Future (Bloomberg)
- Why it’s time to shift from “Sell in May and go away” (Globe and Mail)
- “Five ways companies can combat short sellers” (Financial Post)
Monday May 2nd – Canadian Manufacturing PMI, U.S. ISM Manufacturing, U.S. Construction Spending MoM
Tuesday May 3rd – U.S. Total Vehicle Sales
Wednesday May 4th – U.S. ADP Employment Change, U.S. Trade Balance, U.S. Factory Orders, U.S. Durable Goods Orders, U.S. ISM Non-Manufacturing Composite
Thursday May 5th – Canadian Building Permits, U.S. Initial Jobless Claims
Friday May 6th – Canadian Net Change in Employment, Canadian Unemployment Rate, U.S. Change in Nonfarm Payrolls, U.S. Unemployment Rate
Monday May 2nd – None
Tuesday May 3rd – Agrium, Cineplex, Gibson Energy, Parkland Fuel
Wednesday May 4th – Gildan Activewear, Home Capital Group, Loblaw Cos, RioCan REIT
Thursday May 5th – CCL Industries, Chartwell Retirement REIT, Cominar REIT, Magna, Manulife Financial, Pembina Pipeline, TELUS
Friday May 6th – Vermilion Energy
Have a good weekend!