THE BI-WEEKLY DIGEST The Economics Research Team Crescent School Investment Team
Jake Erdman, Chief Economist Josh Limpert, Deputy Chief Economist Ronald Chow, Chief Strategy Officer
Sunday, January 17th, 2016
ECONOMIC STATISTICS
OIL… AND DOWN WE GO!
THE SLIDE OF THE CANADIAN DOLLAR
Crude oil fell on Friday by about 5 per cent to well below the $30-a-barrel mark; the prospects of new crude supplies from Iran has added new pessimism to the vastly oversupplied global oil market. At below $30-abarrel, the price of crude oil is flirting with those in 2003.
The Canadian dollar recently reached a decade low of 69 cents U.S. (a drop of 16% over the past year), due to plummeting oil prices and the slump in commodity prices.
After closing higher for the first time in eight sessions on Thursday, oil fell to record an 18% loss since the new year, and 20% losses in oil futures. These losses usher in a decline on-par with that observed in the 2008 financial crisis. As a result, the breathtaking rout of stock markets around the world continues. The Shanghai Composite has fallen from its recent high reached in December 22 by 20% - it’s officially in a bear market.
Low prices have hurt by raising import prices, such as food and foreign travel. Typically lowering interest rates increases inflation, however, inflation has remained at a low 1.8%.
Tick tock, tick tock… Around and around we go again…
Typically, a lower dollar increases the appeal of Canadian exports, and would help expand the export sector. Recent data has shown that this is not so; with the sliding dollar, growth in agriculture exports is down 19.5%, growth in metal and mineral exports is down 5.7%, and growth in auto parts exports is down 2.7%. These examples are demonstrative of a trend of little to no growth, while the dollar slides. Canada is no exception; as currencies have devalued the value of exports have only risen negligibly. If exports do not rise with a decrease in the value of currency that begs the question, is there any benefit to lowering the value of the dollar?
- Ronald Chow, Chief Strategy Officer
- Josh Limpert, Deputy Chief Economist
“Expect oil to stick around at $25-$35 a barrel over the subsequent months” – Ronald Chow, December 20, 2015. It is with great dismay that I say “I told you so” again; the rout of oil continues! And with that, affirms “the trend is my friend”, or in this case, “the trend is my enemy” if you’re hoping for a bull market. It’s too early to right off the price of oil for the future; only time will tell if this forecast stands.
RATE CUT CAUSES CANADIAN BOND YIELDS TO REACH ALL-TIME LOW On Thursday, the benchmark 10-year bond yields dramatically decreased, which resulted from the market believing that the Bank of Canada will cut interest rates due to the oil crash. The chart reveals that it has flattened, which show signs of fear of the Canadian economy. Since the US dollar currency exchange to Canadian has been high for Canadians, the Bank of Canada is projected to stimulate our economy in response to the oil crash (it was below $30 a barrel before rebounding), which will be cutting interest rates by 50% from 0.5% to 0.25%. Interest rates have not been set that low since 2009 in the financial crisis. In 2016, a short period of time thus far, we have seen that the Chinese markets have stalled twice, and have been declining at an alarming pace, causing significant losses in our natural resource-based Canadian equity markets and economy. - Jake Rakusin, Economist Analyst
THE BI-WEEKLY DIGEST
Sunday, January 17th, 2016 at 8:00am
US RETAIL: A FALL EVEN WITH CHRISTMAS! Holiday times generally provide a boost to the retail market. However, this past year the American retail went down in December, which to say the least is abnormal. It is believed that the drop in retail was due to the very mild-weathered December. Consumers did not purchase winter goods such as coats and boots, as they were waiting until the weather got colder. Retail in the U.S went up by 0.4% in the month of November, but went down by 0.1% in December. The fall would have been much more drastic without the holiday season. Sales of sporting good/hobbies were up 0.9%, dining out was up 0.8%, congratulations to furniture and building materials for similar performances. Removing the impact of cars, building materials & garden equipment, and gas stations, core sales were down 0.3% - the largest decline since last February. And for all of Q4, core sales rose just 1.5% annualized, down from 4.6% in Q3. - Jake Erdman, Chief Economist, and Ronald Chow, Chief Strategy Officer
CANADIAN MERCHANDISE: A TRADE DEFICIT! Canada’s merchandise trade balance decreased an unexpected amount in November, from 2.5 billion to 2 billion dollars in trade deficits. Imports dipped 0.7% overall with large declines in the energy and metals/minerals sectors. While the dip in the CAD negatively affects these sectors, industrial machinery rose 2.5%, but electrical equipment fell 2.9%. Export volumes rose 0.6%, as exports other than energy had their first increase in over 3 months. Although there are signs of strength in export volumes, import volumes continued its weak trend with a 1.4% decline. Import volumes are down 3% y/y and are at a 15% compounded annual growth rate in the three months leading up to November. These two values, the near-neutral revisions for export volumes, and negative revision for imports imply that trade will be a value between neutral and positive for GDP growth in the fourth quarter. While the November report points to a more positive contribution from trade, we’re still waiting to see consistent gains from exports. - Cole Walderman, Economic Analyst, and Ronald Chow, Chief Strategy Officer
THE UPCOMING NEWS RELEASES Canadian International Securities Transactions - November Tuesday, January 19, 2016 at 8:30am
U.S. Consumer Price Index – December Wednesday, January 20, 2016 at 8:30am
Bank of Canada Monetary Policy Report Wednesday, January 20, 2016 at 10:00am
Canadian Consumer Price Index – December Friday, January 22, 2016 at 8:30am
U.S. Existing Home Sales – December Friday, January 22, 2016 at 10:00am
Canadian Survey of Employment Payrolls and Hours – December Thursday, January 28, 2016 at 8:30am
U.S. Real GDP Friday, January 29, 2016 at 8:30am
U.S. Employment Cost Index – Q4 Friday, January 29, 2016 at 8:30am
UPCOMING EVENTS – CRESCENT SCHOOL INVESTMENT TEAM Investment Team Meeting Thursday, January 21st, 2016 at 3:30pm in Room 303
Investment Team Meeting Thursday, January 28th, 2016 at 3:30pm in Room 303
DISCLAIMER This report was prepared by the Economics Research Team, Crescent School Investment Team. It is for informational and educational purposes as of the date of writing. The views and opinions expressed may change at any time based on the market or other conditions. The information contained in this report are not first-hand reports; they have been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. The Crescent School Investment Team, the Economics Research Team and its affiliates and related entities are not liable for any sources of error or omissions contained in this report, or for any loss or damage suffered.
THE BI-WEEKLY DIGEST
Sunday, January 17th, 2016 at 8:00am