In This Week’s JMRD Market Observer
- BoC Policy Monitor – Bank of Canada stays put but shows concerns about trade
- NBFM Monthly Fixed Income Monitor – September 2016
- NBFM Forex – Fed on track to hike this year
- JMRD Basket Corner
- Retirement Corner
- Reads of the Week
- Economic Calendar
- Earnings Report
BoC Policy Monitor – Bank of Canada stays put but shows concerns about trade
As widely expected, the Bank of Canada left the overnight rate unchanged at 0.50%. The central bank acknowledged that global growth in the first half of the year was softer than what it had anticipated last July, in part due to the United States. For Canada, after last quarter’s GDP contraction, the BoC expects “a substantial rebound in the second half of this year” as oil production recovers, rebuilding in Alberta commences and consumers benefit from Canada Child Benefit payments. The BoC expects Q4 growth to also be above potential “as federal infrastructure spending starts to have more impact”. But not all is rosy. The central bank said that exports remain disappointing “even after accounting for weaker business and residential investment in the United States, adjustments in the resource sector, and cutbacks in auto production”. While it was encouraged by the export rebound in July, the BoC thought that “the ground lost over previous months raises the possibility that the profile for economic activity will be somewhat lower than anticipated in July”. Perhaps that explains why the central bank now sees risks to the profile for inflation to have tilted somewhat to the downside. The BoC remains concerned about elevated financial vulnerabilities associated with household imbalances. On a positive note, the BoC said that “global financial conditions have become even more accommodative since July”. Bottom line: While the Bank of Canada suggested the economy will grow above potential in the second half of the year, it maintained a cautious tone. Exports have been weaker than what the BoC had expected, even considering the headwinds in the United States. That’s a problem because it questions the Bank’s narrative that export growth will be a major driver of growth next year. Also concerning is the fact that risks to the inflation profile have tilted to the downside. The message is therefore getting more dovish. Does that mean the BoC is about to cut interest rates? Unlikely in our view. The central bank expects “a substantial rebound in the second half of this year” driven by fiscal stimulus which is already in motion (based on Q2 GDP results), and which is expected to accelerate into 2017. We continue to expect the central bank to keep rates unchanged until late next year.
Full note attached.
NBFM Monthly Fixed Income Monitor – September 2016
• We expect the outlook for the U.S. economy over the remainder of the year (2.0% growth in Q4) to support a 10-year Treasury yield at the upper end of a range of 1.44% to 1.74%, for a year-end close around 1.70%.
• In a world where the notion of secular stagnation seems to resonate and more stringent financial regulations have been put in place following the financial crisis, we think demand for safe assets will remain high relative to supply. This is an environment favourable to Canada AAA bonds. We accordingly see the Bank of Canada staying on the sidelines until late 2017 and 10-year Canadas trading around 1.16% by the end of 2016, compared to 1.06% at the market close September 2.
Full note attached.
NBFM Forex (September 2016) – Fed on track to hike this year
• The Fed’s tightening bias is now being promoted more forcefully by FOMC members including Chair Yellen. In light of her speech at Jackson Hole and earlier hawkish signals by other prominent voting members of the Fed, we have brought forward the timing for a Fed rate hike to December this year. That should maintain the US dollar on an upward trajectory over the balance of the year as markets eventually get to price a full hike, more so considering monetary policy is heading the other way in other major economies. • The European Central bank seems poised to move from the sidelines to assist a weak Eurozone economy saddled with weak growth and below-target inflation. With interest rates already deep in negative territory, the ECB may instead opt for an enhanced asset purchase program and targeted loans to rekindle credit growth. Such stimulus should keep bond yields low and the euro under pressure. We are leaving unchanged our end-of-year target of 1.08 for EURUSD. Similarly, the Bank of Japan is under pressure to act to kick-start a weak economy and stem resurgent threats of deflation. Further monetary stimulus could push USDJPY to 110 by the end of 2017.
• While the Canadian dollar has shown resilience in recent months, the currency nonetheless remains highly vulnerable. The large current account deficit remains the loonie’s Achilles heel, more so considering it is being financed primarily by short term foreign capital flows which can reverse on a whim. We are reiterating our call for USDCAD to be in the 1.30-1.40 trading range over much of the next 12 months.
Full note attached.
JMRD Basket Corner
Whitecap (WCP) – On Thursday, Whitecap posted a new corporate presentation, which included material changes to the company’s preliminary 2017 guidance. Under the revised outlook (unchanged WTI price assumptions), Whitecap will look to utilize its strong FCF position to increase 2017 E&D spending by 46% to $300 million (from $205 mln) to drive production 6% higher to an annual average of 57 mboe/d (was 53.9 mboe/d previously). Under this scenario and including Strip commodity price assumptions, Whitecap’s capitalization remains strong (and virtually unchanged) at an estimated D/CF ratio of 1.8x and the company further differentiates itself from peers by way of its self-funded (89% forecasted payout), peer-leading growth trajectory (estimated DAPPS growth of 18% (from 13%) and vs. the group average of 3%). The efficiency behind Whitecap’s revised growth profile is reflected in the compression of its 2017e EV/DACF multiple to 9.2x, which provides visibility to ~5% share price upside on a re-rate back to 9.6x. (Full note attached) WCP
All Cap Growth Basket
Parkland Fuel (PKI) – We are resuming coverage of PKI following its ~$230 mln sub receipts offering (+9.4 mln shares (~10% dilution) priced @ $24.50), the proceeds used to help fund the acquisition of the majority of the Canadian assets of CST Brands (CST) as part of its planned takeover by Alimentation Couche-Tard Inc. (ATD.B, V. Shreedhar, Outperform, $77 target price). (Full note attached) PKI
U.S. Growth Basket
Visa (V) – Visa filed an 8K with proforma financials including Visa Europe, adjusted for both US GAAP and other adjustments. Overall, these financials are supportive for our estimates for Visa Inc. overall, including Visa Europe. (Full note attached) VISA
- “Seven tax-smart ways to educate your kids” (Globe and Mail)
Reads of the Week
- “The problem with dividend stocks” (Wall Street Journal)
- “How Twelve and a Half Cents Changed History” (The Irrelevant Investor)
- “Looking For Signals” (The Irrelevant Investor)
Monday September 12th – None
Tuesday September 13th – None
Wednesday September 14th – Canada Teranet/National Bank Home Price Index
Thursday September 15th – US Retail Sales; US Empire State Manufacturing Index, US Philadelphia Fed Index, US Initial Jobless Claims, US Industrial Production
Friday September 16th – Canada Manufacturing Sales; US Inflation, US Consumer Sentiment
Monday September 12th – Performance Sports Group
Tuesday September 13th – None
Wednesday September 14th – None
Thursday September 15th – Gluskin Sheff, Oracle, Student Transportation
Friday September 16th – None
Have a good weekend!