JMRD Market Observer for March 18, 2016

**March 18th Issue of The JMRD Market Observer**


In This Week’s JMRD Market Observer


  • Market’s Review – February 2016
  • Fed Policy Monitor – Fed on slower normalization path
  • JMRD Basket Corner
  • Retirement Corner
  • Week at a Glance- Attached
  • Reads of the week
  • Economic Calendar
  • Earnings Reports



Markets’ Review – February 2016


Global equities were caught between a rock and a hard place in February, saddled in large part by oil price instability, mounting cynicism over central bank credibility and further destabilization in the world’s second largest economy, China.

In this unsettling context, the flight-to-safety that persisted during the most part of January extended well into February. To the detriment of riskier asset classes, gold had a stellar month, soaring more than 10% in February as investors propped up its price on safe-haven demand. In this environment, investors also turned to the Japanese yen, which gained nearly 7% relative to the U.S. dollar (despite weakening after the Bank of Japan announced its negative interest rate policy at the end of January).


On the commodity front, West Texas Intermediate (WTI) oil fell to nearly $26 a barrel midway through February before staging a rebound and ending the month over $33 a barrel (slightly above its January close). Waning hopes that the Organization of Petroleum Exporting Countries (OPEC) would strike a deal with non-OPEC countries in order to curb the global oversupply of crude oil weighed heavily on the price of the commodity in the first half of the month. However, contributing in part to its upside in the second half of February was a tentative agreement between Saudi Arabia, Russia, Qatar and Venezuela over a production freeze at January levels (on condition that other oil producers also impose production controls). Signs of a decline in U.S. crude oil output at the end of the month also provided somewhat of a lift to prices, as did a weakening U.S. dollar. Regarding other commodities, silver, platinum and steel prices also rallied during the month.


Uncertainty over the U.S. Federal Reserve (Fed) and the possibility of a second round of interest rate hikes at its next policy meeting in March hampered overall sentiment, despite the attempt of some policymakers to eliminate doubts during the month. Although a decision to hike rates would be data-dependent, Chair Yellen implied the Fed would not feel pressured to hike rates if market instability persists


Here at home, tempering prospects of a potential monetary policy change at the Bank of Canada’s next meeting was inflation, which ticked up to an annual rate of 2% in January (its highest level since the fall of 2014). Prices in Canada rose in large part because of gas and food prices. Though some experts believe the gas price increase is temporary, a weakening loonie could perhaps have a more sustainable impact on food costs, given the fact that much of what Canadians eat is imported. In other news, the Liberal government projected an $18.4 billion deficit for next year (this amount does not include the new spending promised by the Liberals during the last election campaign).

Overseas, investors will also keep watch on the European Central Bank (ECB) and its meeting in mid-March. During the period, ECB President Mario Draghi reiterated that the central bank could consider another rate cut at its next meeting and will do whatever it takes to strengthen the euro zone economy and help induce inflation.


Meanwhile in Asia, the situation in China continues to make markets uneasy. Notwithstanding other sluggish economic data releases over the course of the month, factory activity was the most recent hindrance on sentiment. China’s manufacturing purchasing manager index in February continued to trend below the threshold of 50, indicating further contraction.

(Full note attached including a good note on keeping an investor’s emotions in check, staying diversified and focusing on the long term)


Markets’ Review



Fed Policy Monitor – Fed on slower normalization path


As widely expected, the Federal Reserve left monetary policy unchanged. The fed funds rate remains between 0.25% (lower bound) and 0.50% (upper bound). The FOMC acknowledged the progress on the labour market but pointed to softness in business investment and net exports. It also cautioned that global economic and financial developments continue to pose risks to the US economy. The Fed says inflation should remain low in the near term but expects it to rise to 2% over the medium term “as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further”. The Fed 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. Esther George, a known hawk on the FOMC was the lone dissenter. She wanted a rate hike to 0.50- 0.75%.


Fed’s new projections:

The central tendency forecast for GDP growth (Q4/Q4) is now 2.1 to 2.3% for 2016 (versus 2.3 to 2.5% previously), 2.0 to 2.3% for 2017 (unchanged), and 1.8 and 2.1% for 2018 (versus 1.8 to 2.2% previously). The central tendency projections for the unemployment rate were left unchanged for this year at 4.6 to 4.8% but lowered marginally for 2017 to 4.5 to 4.7% and to 4.5 to 5.0% for 2018. PCE inflation forecasts were nudged down quite a bit for this year (median forecast of 1.2% compared to 1.6% in last December’s projections) but left largely unchanged for 2017 and 2018.


The dot plot shows how participants feel about the pace of policy firming going forward. There are now no participants seeing rates above 1.5% by the end of 2016 (previously three participants). Nine of the 17 participants see rates at the end of 2018 at 3.00% or above (versus 11 previously). Participants’ view of the “equilibrium interest rate” has fallen marginally. Twelve of the 17 participants see the nominal fed funds rate between 3.00% and 3.25% in the long run.


Press conference:

Chair Yellen pointed out that many forecasters including international agencies such as the IMF have revised down their global growth forecast for 2016. In that context and in light of the tightening of financial conditions in the US, FOMC participants now believe that a slower path of policy normalization is required to achieve their forecast for US GDP growth. That explains the downward revision to the dot plot. As in January, the FOMC decided not to provide an assessment of the balance of risks to its economic and inflation projections. But Chair Yellen made clear the risks were not necessarily all on the downside. That’s because actions taken by monetary and financial authorities abroad may provide positive surprises for growth. Moreover, a stabilization of oil prices could help oil-levered economies and, on the domestic front, to narrow corporate spreads (i.e. improve financial conditions). So, according to Chair Yellen, while some FOMC members believe the balance of risks are on the downside, others take a more positive view. She pointed out that the Committee still sees the economy improving and expects further rate hikes will be appropriate. In that context, the possibility of negative rates in the US was not considered. She again reiterated the Fed is data dependent and hence the policy stance could be adjusted at any meeting.


Bottom line:

The Fed highlighted downside risks provided by international developments to support its decision to stand pat on interest rates. The FOMC also lowered its growth and inflation forecasts for this year. While the Fed didn’t explicitly state how it views the balance of risks, it clearly said that global economic and financial developments “continue to pose risks.” The FOMC also continues to monitor inflation closely in light of the current shortfall to its 2% target. But in the press conference, Chair Yellen made clear that the risks were not necessarily all on the downside given potential upside surprises in the aftermath of measures taken by monetary and financial authorities abroad. All in all, the press release was more dovish than what the market had anticipated, but still consistent with our view that there will be at most two rate hikes this year.


(Full note attached)


Policy Monitor



JMRD Basket Corner


Diversified Income & Growth Basket


TransCanada (TRP) – “TransCanada’s Perfectly Canadian Deal”


All-Cap Growth Basket


Stella-Jones (SJ) – Stella announced a 25% dividend increase this week along with Q4 results


U.S. Growth Basket


Nike (NKE) – Nike unveiled sneakers with self-lacing technology that it plans to sell later this year as the sportswear company looks to one-up rivals in an increasingly tech-driven athletic market. In place of traditional laces or Velcro straps, the HyperAdapt Trainer 1.0 has a sensor in the heel that adjusts the sneaker’s fit. Two side buttons allow the user to tighten or loosen the grip. Pricing for the shoe, which will be available for the 2016 holiday season, hasn’t been determined, a Nike spokesman said. The battery-powered sneakers, which have been in development for years, were unveiled as part of a two-day Nike event in New York City to introduce the company’s newest products and technology. Nike also displayed a new app that will function as a combined workout-and-shopping destination. The world’s largest sportswear maker last fall outlined plans to achieve $50 billion in revenue by 2020, more than a third of which it hopes to achieve in sales direct to consumers, up from around a fifth in 2015.



Retirement Corner






Week at a Glance


Full report attached.

Week At a Glance



Reads of the Week




  • Oil Investors See $7.4 Billion Vanish as Dividends FallThe price of oil has slumped four times in the past several decades. Each time it’s been because there’s been way more supply than demand. In this short video Bloomberg explains how the price oil dropped and why it took its time climbing back up again. (Bloomberg)


  • “Would It Help?” You can’t control most outcomes but you can control your reaction to them. (A Wealth of Common Sense)




Economic Reports


Monday March 21st– Existing Home Sales

Tuesday March 22nd– Finance Minister Bill Morneau Delivers Federal Budget

Wednesday March 23rd – None

Thursday March 24th – Initial Jobless Claims

Friday March 25th – None



Earnings Reports


Monday March 21st– None

Tuesday March 22nd– NIKE Inc

Wednesday March 23rd– Power Corp of Canada, New Flyer Industries Inc, Concordia Healthcare Corp, General Mills Inc

Thursday March 24th – None

Friday March 25th – None



Have a good weekend!

By | 2016-04-19T18:11:45+00:00 March 18th, 2016|JMRD Updates|0 Comments

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