JMRD Market Observer for September 1, 2017 – Canada: Booming economy in first half

In This Week’s JMRD Market Observer



  • Canada: Booming economy in first half

  • Monthly Economic Monitor- September 2017

  • Pipelines, Utilities & Energy Infrastructure: NGL Midstream: Propane rail cars take pole position

  • JMRD Basket Corner

  • Reads of the Week

  • Economic Calendar

  • Earnings Reports



Canada: Booming economy in first half


Real GDP (Q2)

Latest: 4.5% (actual); 3.7% (expected);

Previous: 3.7% (unrevised)


FACTS: Canada’s GDP expanded a consensus-topping 4.5% annualized in the second quarter of 2017 (top chart). Trade contributed to growth as exports rose faster than imports. That was complemented by continued strength in domestic demand ─ healthy gains for consumption spending (thanks to real disposable incomes surging 6.6% annualized), government expenditures and business investment more than offset drag from residential investment. Inventories also contributed to growth again. Nominal GDP grew 2.9% annualized (i.e. lower than real GDP growth) which means that the GDP deflator was negative for the first time since 2016. Monthly GDP data showed output increasing 0.3% in June. That was due to a 0.5% jump for goods sector output which was complemented by a 0.2% increase in services-producing industries. Looking at Q2 as a whole, oil & gas were the major drivers of growth in the goods sector, while retailing led services-producing industries (middle chart).


OPINION: Another quarter of solid growth for Canada, which means that the economy grew a stunning 4% annualized in the first half of the year. One has to go back to the second half of 2011 to see such a strong semester of growth. And it could have been even stronger had Canadians not saved as much ─ recall that the savings rate jumped three ticks to 4.6%. The 6.6% annualized increase in real disposable incomes, the biggest increase in 7 years (bottom chart), explains the consumption and savings surge. The latter will help support spending in the second half of the year. The solid handoff from June (month in which GDP grew 0.3% unannualized) suggests a decent Q3 as well. Even then, we expect a moderation in Q3 GDP growth after the blistering pace set in the first half of 2017 because the torrid pace of employment creation seen in the first semester and related gains in household incomes are unlikely to be repeated so soon. The housing wealth effect is also expected to fade as home price gains soften after the first half surge in prices. Despite the expected moderation in the second half, consumption spending and housing will both end up as major contributors to this year’s GDP growth, the latter also boosted by exports and inventory rebuilding after last year’s destocking. The stronger-than-expected first half of the year prompts us to upgrade our Canadian GDP growth forecast for 2017 to 3.0%.


See the full article



Monthly Economic Monitor- September 2017




  • After a dismal performance in 2016, advanced economies are now bouncing back nicely. The OECD surge complemented by continuing strength for emerging economies mean that global GDP growth is on track to accelerate to about 3.5% this year. While we expect a similar performance in 2018, that assumes governments around the world are able to successfully navigate risks posed by the rise of trade protectionism, elevated debt levels, and geopolitical uncertainty.
  • The U.S. economy continued to expand in the third quarter. July data on employment creation and retail spending were strong, confirming the main driver of growth, i.e. consumers, remain in good shape. Industrial production is also ramping up as businesses replenish inventories and increase investment spending. While hurricane Harvey may subtract of few ticks from Q3 growth, a subsequent rebound led by reconstruction efforts is in the cards. We remain comfortable with our view that U.S. GDP growth will accelerate to more than 2% both this year and next. That should encourage the Fed to further reduce monetary accommodation despite the absence of inflation pressures.
  • A stronger-than-expected first half of the year prompts us to upgrade our Canadian GDP growth forecast for 2017 to 3.0%. Solid growth is being complemented by a healthy labour market, the latter creating jobs in numbers not seen in 7 years. That, coupled with the housing wealth effect ─ consumer credit growth is surging thanks in part to home equity lines of credit ─ is boosting consumption. We have also raised our 2018 GDP growth forecast to reflect provincial fiscal stimulus in Ontario, Quebec and British Columbia. The improving outlook and growing financial stability risks associated with housing and household debt arguably take precedence over the problem of low inflation, and hence warrant tighter monetary policy from the Bank of Canada.
  • In light of the more bullish call on Canada, we now expect the Bank of Canada’s overnight rate to end 2017 at 1.25% and 2018 at 2.00%, both higher than in our previous forecasts. As such, we are a bit more optimistic about the Canadian dollar, expecting USDCAD to trade in the 1.20-1.30 range over the next 12 months.


See the full article



Pipelines, Utilities & Energy Infrastructure: NGL Midstream: Propane rail cars take pole position


Energy Infrastructure Analyst Pat Kenny published a thematic note focused on propane, with the ultimate takeaway being that prices should see some meaningful upside above the recent rally. This should be a benefit to KEY, PPL, SPB, and TWM. There are more details on company specific upside to increased propane prices in the note, which can be found here. We have outlined the highlights from the report below. The bottom line is that the midstreamers/marketers will be a more material way to capture this pricing upside than the few select producers with material propane production. We would rank the exposures to this theme as SPB, PPL, TWM, and KEY.


  • Summer propane prices spike +25%. With U.S. propane inventories of 72 mmbbls currently sitting ~8% below the five-year average, North American benchmark propane prices have rallied ~25% since Q2/17 levels – i.e., Conway, KS and Mt. Belvieu, TX propane prices currently at 65-70% of WTI compares to the five-year average range for this time of year of 35-45%, signaling concerns among market participants with respect to insufficient inventories heading into crop drying season followed by the winter heating season;


  • Inventories struggle to keep pace with exports. U.S. propane exports have increased ~140% since 2014 (33% CAGR) from ~375 mbbl/d to 2017 average levels of ~900 mbbl/d. Assuming flat exports through the winter heating season Y/Y, we forecast ending withdrawal season with U.S. inventories of 32 mmbbls, ~30% below normal end of March levels. As such, we would expect further upside to propane pricing as a % of WTI through the winter months should exports meet or exceed last year’s levels;


  • Will old man winter 2014 come out of hibernation? Despite a warmer than normal 2016/2017 winter heating season, propane inventories exited the winter heating season ~10% below the five-year average, and have yet to make up the deficit despite just four injection weeks remaining. Contrasting this to 2014 when inventories began the withdrawal season ~20% above five-year average levels, before plummeting to ~30% below normalized levels in January thanks to the polar vortex, this caused Conway propane prices to spike to ~130% of WTI. Bottom line, although unpredictable, current inventory levels appear grossly unprepared to absorb any potential cold snap this winter, which would likely cause significant pricing volatility, and present attractive arbitrage opportunities for propane marketers with rail infrastructure;


  • The propane marketing line-up. Following a lackluster Q2/17 reporting season for the NGL Midstream players, we recommend taking advantage of recent stock price weakness ahead of what appears to be shaping up as a relatively strong Q4/Q1 winter heating season for propane marketing contributions;


See the full article



JMRD Basket Corner


DIG Basket

Algonquin Power (AQN) – AQN has entered into a definitive agreement to acquire St. Lawrence Gas Company, Inc. (SLG), which is a regulated natural gas distribution utility located in northern New York State, from Enbridge. SLG’s operations consist of a local distribution business which serves about 16,000 customers, a natural gas appliance rental business and a recently completed 48 mile gas distribution expansion into Franklin County. The EV of the transaction is US$70 mln (approximately US$10 mln of debt assumed) and should be financed using cash on hand and existing credit facilities. Closing of the acquisition is subject to regulatory approval and other conditions, and is expected to occur sometime in 2018E (potentially mid 2018E). With an experienced team at SLG, we believe AQN should retain the employees (approximately 50) after closing the transaction.


See the full article


Capital Power (CPX) – CPX announced it has secured a 12-year fixed price contract and will proceed immediately with development of the 99 MW New Frontier wind project in North Dakota, representing a C$182 mln (US$145 mln) capital investment through the project’s targeted completion in December 2018. The facility has a 12-year fixed price agreement with an investment grade U.S. financial institution covers an estimated 87% of project output, while allowing CPX to secure renewable energy tax equity financing (i.e., similar to Bloom Wind).


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SNC Lavalin (SNC) – Context for share price underperformance. The very poor U.S. E&C earnings season (with Fluor and CBI being the most glaring laggards), continued lackluster WTI tape, lack of long-awaited infrastructure contract announcements and $1.2bln of SNC equity that the market had to absorb in order to finance the WS Atkins transaction, are incremental technical / sentiment explanatory variables. In the report we try to address some of the questions / concerns we are fielding now from investors. Namely: a) What is happening with Kentz’s Australian LNG projects; b) Champlain Bridge delays / potential repercussions; c) Why does SNC retain its conglomerate structure? (See full report for an in-depth look at SNC)


See the full article


Toronto-Dominion Bank (TD) – TD reported Q3/17 core cash EPS of $1.51 vs. NBF $1.33 and consensus $1.36. The beat was broad based, coming from revenues (+12c, half of which was in capital markets), lower core expenses (+4c) and lower PCLs (+3c). Impact: Positive 1) double-digit earnings growth in both of TD’s Retail businesses; 2) consolidated efficiency ratio improved 120 bps Y/Y and 5% positive operating leverage, on a net insurance revenue basis; and 3) TD upsized its NCIB to 35 mln shares from 15 mln shares. TD is the top holding in JMRD’s DIG Basket with an 8.2% basket weighting. National Bank raised its target price on TD Thursday night to $74.00 from $69.00.


See the full article


All Cap Basket


Shopify (SHOP) – Shopify’s E-Commerce Empire is Growing in Amazon’s Shadow

U.S. Growth Basket


MSCI Inc (MSCI) If you can’t beat ’em: Stockpickers targeting index-provider MSCI



Reads of the Week















Economic Reports


Monday September 4th – North American Markets closed for Labour Day holiday

Tuesday September 5th Labour productivity (CAD)

Wednesday September 6th – MBA mortgage applications (US

Thursday September 7th – Initial jobless claims (US)

Friday September 8th – Unemployment Rate (CAD)




Earnings Reports


Monday September 4th – None

Tuesday September 5th – Hudson Bay Company

Wednesday September 6th – Dollarama

Thursday September 7th – None

Friday September 8th – None



Enjoy the long weekend!

By | 2017-09-05T14:50:16+00:00 September 1st, 2017|JMRD Updates|0 Comments

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