THE BI-WEEKLY DIGEST The Economics Research Team Crescent School Investment Team
Ronald Chow, Chief Strategy Officer Jake Erdman, Chief Economist Josh Limpert, Deputy Chief Economist
Sunday, March 13th, 2016
ECONOMIC STATISTICS
THIS MARKS THE END: THANK YOU!!! I joined the Investment Team in Grade 11, in a somewhat different position than normally expected – Chief Economist. Day 1 (September 2 2014) on the job saw the first issue of The Weekly Economic Report published. I’m mildly surprised that today The Weekly Economic Report has evolved from a one-paragraph economic update written by one person to The Bi-Weekly Digest, a multi-page economic summary churned out every two weeks by a very capable team. It’s been a great learning experience for everyone, especially me! I was truly blessed to have been a part of all 36 issues of The Weekly Economic Report and the first seven Bi-Weekly Digests. This eighth issue is really a piece of work, and a testament to how far the Investment Team has come in educating its members! It’s no longer a meager paragraph with a lack of depth; it is a piece of art for each member to dig their teeth into and refresh himself of the latest news. While the eighth issue shows the degree of success of this report, it also marks the end for me. After 44 issues across two years, I can proudly say that the Economics Research Team is in a strong place to produce high-quality economic reports. It’s no longer a report produced by a single person, as was the first issue of The Weekly Economic Report, it is now labored and developed by a strong team. I wish the team continued success in the future. I’d like to thank the Investment Team for their patience throughout the process. Additionally, thank you Mr. Muranaka, Mr. Stephens and Ms. Bhattacharyya, for your unwavering support. It’s been a great run for me, and I’m sure that the team will continue to make us all proud! To pay homage to the humble beginnings, this eighth and my final issue will be a “single-author production”. - Ronald Chow, Chief Strategy Officer
EUROPEAN CENTRAL BANK ROLLS A BOLD STIMULUS PACKAGE – AN ASSULT ON DEFLATION The ECB’s new stimulus package is an all-out, and perhaps final, assault on falling inflation rates and weak economic growth. Many economists believe that the ECB has run out of ammunition. The new stimulus comes one year after a largely ineffective quantitative easing program, which ended up putting more pressure on the ECB to act aggressively. As expected, they cut all three of their main interest rates; deposit rate (the rate banks receive to store cash) now stands a minus-0.4 percent (a drop of 10 basis points), the interest rate on marginal lending fell five basis point to 0.25, and the interest rate on main refinancing operations was (surprisingly) trimmed by five basis points to zero. The ECB also expanded the size of the quantitative easing package. The monthly asset purchases under the program will rise to €80-billion ($118-billion) a month from €60-billion, and will also be expanded to purchase investment-grade corporate bonds. They also announced four new long-term refinancing programs to flood the banks with cheap liquidity. While the ECB in the past has listed their possible instruments step-by-step, their employment of all of them simultaneously is basically an all-out assault to get the economies moving again. The ECB’s decision immediately impacted the stock markets – they rallied on the rate cuts, additional bond purchases and cut-price loans.
THE BI-WEEKLY DIGEST
Sunday, March 13th, 2016 at 8:00am
CANADIAN EMPLOYMENT REPORT… UH OH! Employment fell 2,300 in February, opposite of the consensus call (+5,000). To make matters worse, full-time jobs plummeted by a catastrophic 51,800. Most of the decline was reported in Ontario, and was partly offset by solid gains in private-sector payrolls (+15,200). The drop translates to an unemployment rate of 7.3%, which is the highest since late 2012. Average hourly wages remain strong, picking up to a 3.3% y/y pace from a 2.8% y/y gain last year. The goods-producing sector is adding jobs, while the service sector is showing weakness. Goods-producers added 42,200 positions, with construction (+34,600) and manufacturing (+7,600) leading the charge. Alberta’s unemployment rate climbed 5 ticks to 7.9%, now registering above Quebec and the highest outside of Atlantic Canada. Alberta actually added 1,400 jobs last month though…hmm. Regardless, the jobs report pounds home the underlying economic weakness.
AMERICAN BUSINESSES MARCH ON Nonfarm payrolls bolted 242,000 in February, much higher than the general-expectation for 190,000. But there’s more good news: revisions tacked on an extra 30,000 jobs in the prior two months too. The three-month average 228,000 is in line with last year’s healthy pace, implying no signs of slowing down. Household survey employment added 530,00 positions, the most since the tech boom in 2002. The labor force grew faster as well – participation rate edged up two-tenths to 62.9%. Average hourly earnings retraced some of the prior month’s sharp 0.5% gain, partly due to minimum wage hikes in many states. The only material weak spot was a full-sized retracement in aggregate weekly work hours (-0.4%). Average hourly earnings repeated some of the previous month’s sharp 0.5% gain. Amidst global headwinds, financial turbulence and political uncertainty, American business’ enthusiasm for hiring continued, allaying recession fears.
THE RALLYING LOONIE!
IMPERIAL OIL SELLS ESSO GAS STATIONS Imperial Oil has reached a deal to sell to five distributors their 497 remaining Esso-branded retail gas stations at a price of $2.8-billion. Alimentation Couche-Tard will purchase 279 stations in Ontario and Quebec for $1.7-billion, and 7-Eleven Canada will acquire 148 sites in Alberta and British Colombia. Parkland Fuel Corp (17 stations), Harnois Groupe pétrolier (36 stations) and Wilson Fuel Co. (17 stations) will pick up the remaining sites.
The loonie was among the world’s worst performing major currencies in 2015, and the start of 2016 saw the continually poor performance. But since the loonie fell to 68.95 cents against the American dollar, it has rallied strong and is now trading well above 75 cents. Why? The bounce has been fueled by the recent reversal in oil, which in turn got other resources prices to climb as well. Brent crude’s current price over $40 is noticeably higher than the $30/barrel price it traded at for a chunk of the year. The recent weakness has also played a role; Bloomberg’s U.S. Dollar Index edged lower this year, indicating a lower international value of the greenback. To top it all off, the divergent paths by the Bank of Canada and Federal Reserve has aided the loonie in its rise.
Imperial, which is majority owned by Exxon Mobil Corp, has been working towards a deal since January 2015. Imperial has not specified how they are planning to spend their newly-acquired cash, but it does come on the heels of a $8.9-billion expansion phase at its Kearl oil sands mine in northern Alberta and its recently-started crude oil pumping at its $2-billion development near Cold Lake. Nearly two-thirds of the 1700 Esso stations currently operating in Canada have been operated by wholesalers for about 15 years; this new deal will allow the remainder to follow the same model. Under the newly-announced deal, stations would be owned and operated by the distributors, while Imperial Oil continues to supply fuel. For Imperial though, this move is a sign of their efforts to preserve cash as crude prices remain at “low” prices.
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, March 13th, 2016 at 8:00am