In This Week’s JMRD Market Observer
- ASSET ALLOCATION STRATEGY – AUGUST 2017
- ECONOMIC NEWS – JOBLESS RATE LOWEST SINCE 2008
- HOT CHARTS – CANADA: THE KIDS ARE NOT ALRIGHT
- JMRD BASKET CORNER
- RETIREMENT CORNER
- READS OF THE WEEK
- ECONOMIC CALENDAR
- EARNINGS REPORTS
Asset Allocation Strategy – August 2017
- Following the rebound in Q2 US GDP growth and job creation in 2017 on target to match the 2016 pace, we still expect another hike by year end with some form of balance sheet reduction unless there’s a negative surprise on inflation numbers.
- In Canada, as expected, the BoC increased its overnight rate by 25 basis points, which was largely expected. The tone however was very optimistic with the central bank projecting the output gap to close at the end of the year while reaching its inflation target of 2% by mid-2018.
- Our positioning in fixed income doesn’t change compared to last month, we keep a neutral exposure but with a short duration twist. As the BoC is now in comeback mode regarding removal of accommodative policies, we believe US fixed income products will outperform their Canadian counterparts.
- In light of recent speculative positioning changes and our technical indicators showing the Canadian dollar being in overbought territory, we think being proactive regarding our currency hedges is the best course of action and suggest reverting back to neutral.
- For oil prices, recent OPEC internal tensions put into light the possibility for the agreement to fail or break down, thus increasing the risks to the downside. However, we think compliance will remain high, for now. As such, we still expect a slow and gradual price appreciation by year-end.
- We maintain our Europe overweight given that monetary conditions remain loose, economic momentum is picking up and growth potential remains attractive.
- We also keep our bias in favor of Canadian equities in light of attractive relative valuations, better risk/reward profile and improving macro conditions.
Economic News – Jobless rate lowest since 2008
Latest (monthly change): +10.9K (Actual);
+12.5K (expected) Previous: +45.3 K
FACTS: Canadian employment rose 11K in July according to the Labour Force Survey. That was a touch below consensus expectations. The unemployment rate dropped two ticks from 6.5% to 6.3% (the lowest since October 2008) as the participation rate fell two ticks to 65.7% (top chart). Job gains in July were mostly for so-called “self-employeds” (+13.2K), while public sector gains were minimal (+0.8K). Those gains offset declines in the private sectors (-3K). Good sector employment was up just 2K as gains in manufacturing and resources were offset by declines in construction, agriculture and utilities. The services sector created a net 9K jobs, with strength in trade, health care, info/culture, transport/warehousing more than offsetting sharp declines in education (-32K). Full-time employment jumped 35K while part-time employment was down 24K. That allowed total hours worked to rise 0.6%. On a regional basis, July job creation was driven by gains in Ontario (+25.5K, but largely outside of Toronto) and Quebec (+4.7K) which more than offset declines in British Columbia (-5.1K) and Alberta (-14.4K).
OPINION: The Canadian job gains were not only lower than expected, but the composition of the gains were tilted towards self-employment, which is not necessarily a good thing. The drop in construction and the private sector in general is also not good news. But July’s soft employment report has to be looked at in context, coming after massive job gains in earlier months. So, a moderation in job growth should not be surprising, more so considering that Canadian GDP growth in the current quarter (Q3) is set to soften after a very hot first half of 2017 ─ recall that GDP growth and employment growth are contemporaneously correlated. On a 12-month average basis, a more reliable measure for a survey such as the LFS, job creation is still running at a solid pace of 32K/month (mostly full-time), more than half of which is in the private sector (middle chart). Not surprisingly, the bulk of the job gains are in Ontario, Quebec and BC, although the uptick in Alberta is also encouraging (bottom chart). All told, the Canadian labour market remains in good shape, something that should be encouraging the Bank of Canada to move towards normalizing monetary policy.
Hot Charts – Canada: The kids are not alright
Canada Watch the 2016 Census data released this morning showed that the share of Canadian adults aged 20-34 living with their parents has climbed to 34.7%, the highest on records. According to Statistics Canada, the share is even higher in Ontario, with Toronto (47.4%) topping the list of 35 census metropolitan areas. The statistical agency says that could be “the result of cultural preferences, or a strategy adopted by young adults and their parents to deal with low employment earnings or the high cost of living in some areas of the country.” You bet. As today’s Hot Charts show, there is a negative correlation for Canadian cities between home affordability (be it for purchases or rentals) and the share of young adults living with their parents. So, depending on how you feel about living with your boomerang kids, you may want to thank (or curse) the Bank of Canada for the extended period of low interest rates which has allowed average home prices to more than double over the last 12 years thereby pricing many young adults out of the housing market.
JMRD Basket Corner
There were a slew of earnings reports in both the All Cap and DIG Baskets this week, which explains the number attachments in this email. The companies in question are listed below. For those companies on NBF’s coverage list, the analyst report is attached.
- Restaurant Brands (QSR) – See the full article
- Open Text (OTEX) – See the full article
- SNC Lavalin (SNC) – See the full article
- Veresen (VSN)
- BCE Inc. (BCE)
- Canadian Natural Resources (CNQ)
- Industrial Alliance (IAG) – See the full article
All Cap Basket
- Parkland Fuels (PKI) – See the full article
- CGI Group (GIB.A) – See the full article
- Sleep Country Canada (ZZZ) – See the full article
- Shopify (SHOP) – See the full article ; What worries Shopify’s CEO? Five questions with Tobi Lutke
- Innergex Renewable Energy Inc. (INE) – See the full article
U.S. Growth Basket
- MSCI Inc. (MSCI) – See the full article
- Arista Networks (ANET) – Arista Surges 14%: Q2 Beats, Q3 Rev View Crushes Consensus (up 20% at the time of writing on Friday)
- Microchip Semiconductor (MCHP) – Microchip Technology Announces Record Net Sales and Earnings for First Quarter of Fiscal Year 2018
Reads of the Week
Monday August 7th – Canadian Markets Closed for Civic Holiday;
Tuesday August 8th – None
Wednesday August 9th – Housing Starts (CAD) Wholesale Trade Sales (US)
Thursday August 10th – New Home Price Index (CAD) Initial jobless Claims (US)
Friday August 11th – CPI-July (US)
Monday August 7th – Canadian Markets Closed for Civic Holiday;
Tuesday August 8th – Hydro One Limited, Kinaxis Inc., Valeant Pharmaceuticals Intern., EnerCare Inc.
Wednesday August 9th – Agrium Inc., Just Energy Group Inc., Keyera Corp., Manulife Financial Corporation, New Flyer Industries Inc., Northland Power Inc., Sun Life Financial Inc., WSP Global Inc., Michael Kors Holdings Limited, Wayfair Inc. Class A,
Thursday August 10th – Chartwell Retirement Residences, Canadian Tire Corporation LTD, Savaria Corporation, Spartan Energy Corp., Blue Apron Holdings Inc. Class A, Canada Goose Holdings Inc. Subordinate, Snap Inc. Class A, NVIDIA Corporation,
Friday August 11th – Magna International Inc., Marathon Gold Corporation, TELUS Corporation
Enjoy the long weekend!