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, December 20th, 2015
ECONOMIC STATISTICS
THE FALLEN LOONIE Last week, the Canadian dollar dropped to 72 cents (USD) for the first time since 2004 as a result of a very strong American dollar and the current oil crisis. As a result, consumer prices are going to rise drastically. Some expect consumer prices to be 1.5 percent higher than they would be with a striving Canadian dollar; often, Canadian companies need to buy their products from American companies, and to make a profit they need to sell their product at a higher price. Although the struggling Loonie is not great for consumers, it could potentially boost the manufacturing sector. Canadian producers can produce their goods at an effectively cheaper price, and sell it at a higher one. Overall, the struggling Loonie is not great for the Canadian economy, however there are positives in the situation. - Jake Erdman, Chief Economist
OIL PRICE CRASH: WILL IT KEEP GOING? July 2014: Oil was valued at over $100 per barrel. And today? – oil is worth a jaw-dropping $34 per barrel! Crude oil has had a catastrophic 18 months – a dramatic 68% plunge. The reason for the ridiculous price crash is due to OPEC’s massive supply flood. Apply some basic economics and one would predict that with greater supply, the price for oil would fall… and it did! But have we finally reached the bottom? Let’s stroll down memory-lane, shall we?: October 2014 - $90/barrel. Analysts and economics proclaim that oil will not fall below $80 a barrel in the near-future. November 2014 - $80/barrel. The experts revise their projected prices; they assure the community that price will not fall below $70 per barrel. December 2014 - $66/barrel. Once again, the financial community revises their predictions and affirms that prices will not fall below $55. January 2015 - $53/barrel. We are pretty sure this time that oil will stabilize at $50. And today? At $34 a barrel, we have truly fallen below the predictions. Did anyone see this large of a fall coming? Only one major corporation foresaw this day for $30 a barrel: Goldman Sachs. At the start of 2014 Q4, Goldman Sachs recognized that the price of oil was falling and warned that it could fall as low as $30 a barrel. Goldman Sachs would probably like to say “I told you so”, but the low oil price does not look favourably on the economy so… it sucks to be right! For me though, I also inferred a similar stance in one of last year’s issues of the Weekly Economic Report; maybe I was lucky?... but I will gladly champion the phrase “I told you so!” The big question: have we finally reached the end? Many “experts” believe that prices will rebound in late 2016; some predict $51 in the third quarter and $56 in the fourth quarter. Goldman Sachs wagers that crude oil will average $38 a barrel over the next few months, but also reasons that oil may tumble to around $20 a barrel if Saudi Arabia and OPEC remain committed to driving out American shale-gas producers. Only time will tell who is right this time. But this time I’ll throw my ring in the hat too: it’s certainly not going to return to $100 any time soon; a return to $50 would take multiple quarters, but I think we should settle in and expect oil to stick around at $25-$35 a barrel over the subsequent months. - Ronald Chow, Chief Strategy Officer
THE BI-WEEKLY DIGEST
Sunday, December 20th, 2015
CANADIAN HOUSING: A SUBTLE INCREASE Canadian Existing Home Sales – November Canadian housing has increased from 197,700 annualized units in October, to 211,900 units. It is clear that oil has had a negative impact on residential construction in Canada, as the cities with the most stable residential construction are those non-affected by the declines in oil prices. Multi-family starts received the highest increase in November, rising to 137.9k, while single-family starts plunged to a miserable 57.2k. Surprisingly, the prairies had a good month in November, which was led by Alberta’s increase in starts to 43.1k from 32k in October. Saskatchewan fortunately reached its best level of the year, while Ontario experienced a short-lived pullback in October. However, Ontario was able to turn things around in November, as starts rose to 87.4k units. Quebec didn’t have a very good month, as starts had over a 2000 unit decline from the previous month. BC had a great month in October, but things seemed to go downhill since then after a near 8000-unit declination in housing starts in November. Overall, the homebuilding activity in Canada remains strong. - Cole Walderman, Economic Analyst
FEDERAL RESERVE RATE HIKE: A GOOD SIGN FOR CANADA United States Federal Open Market Committee (FOMC) Rate Decision Janet Yellen and the U.S. Federal Reserve signaled its confidence in a resurgent U.S. economy, as they raised its key rate Wednesday by a slimquarter of a percentage point to a range of 0.25 percent to 0.50 percent. The world’s most powerful central bank promises that it will proceed cautiously as it embarks on a transition from massive monetary stimulus toward more normal policies. The Fed had kept its benchmark target rate at a record low near zero since late 2008, as it battled to revive the battered U.S. economy and stabilize the country’s tattered financial system. The long-expected increase marks an important shift in monetary policy that puts the Fed on a divergent track compared to other major central banks. While the Fed embarks on its first tightening cycle since 2004 to 2006, its counterparts are either loosening their own policies or treading in the midst of a deep commodities slump, falling investment, deteriorating trade and slower economic growth across much of the world. Stephen Poloz and the Bank of Canada has cut interest rates twice this year to cope with a dramatic slowdown in the resource-producing provinces. However, the Fed’s policy reversal spells good news for Canada, if the U.S. economy is indeed strengthening. This would mean a boost to Canadian exports, which would be further helped by a stronger U.S. dollar, as more foreign money will pour into the U.S. bonds bearing higher interest rates. - Harrison Hui, Economic Analyst
THE UPCOMING NEWS RELEASES Canadian Real GDP at Basic Prices – October Wednesday, December 23, 2015 at 8:30am
Canadian Retail Sales – October Wednesday, December 23, 2015 at 8:30am
U.S. Durable Goods Orders – November Wednesday, December 23, 2015 at 8:30am
U.S. Personal Income & Consumption – November Wednesday, December 23, 2015 at 8:30am
U.S. New Home Sales – November Wednesday, December 23, 2015 at 10:00am
U.S. Same-Store Sales – December 26, 2015 Tuesday, December 29, 2015 at 7:45am
U.S. Consumer Confidence Index – December Tuesday, December 29, 2015 at 10:00am
U.S. Pending Home Sales – November Wednesday, December 30, 2015 at 10:00am
HAVE A GREAT HOLIDAY! 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 has 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, December 20th, 2015