Major News this Week: March 13, 2012

The news over the last few weeks has been chock full of economic data, political decisions and stories on escalating tensions in certain Middle Eastern countries. We have therefore provided a summary of the latest news affecting markets and its impact on our dollar in our section on `The Loonie.` On the European front, 85.8% of the Greek bondholders “voluntarily” agreed to reduce the value of their bonds, thereby saving 100 billion Euro Greek debt.

Canada
The little economic news that is expected in Canada this week will have only a minimal effect on the currency market. The only statistic worth mentioning is Foreign Securities Purchases for the month of January, to be released on Friday.

United States
The agenda of U.S. news is very full this week. On Monday we will have the monthly reading of the Federal Budget Balance and on Tuesday, Retail Sales and the Federal Reserve’s interest rate decision. Given the encouraging news over the last few weeks (GDP up to 3%, 227,000 jobs created last month, as well as positive revisions of around 61k the previous two months), a third round of quantitative easing appears increasingly unlikely. We can expect that, once again, the markets will respond to Ben Bernanke’s speech. Like last time, he will use his new method for communicating the expectations of FOMC members. On Wednesday, Mr. Bernanke will give another speech, this time at the Independent Community Bankers of America convention in Nashville. On Thursday, the Producer Price Index will be released, while on Friday the annualized Consumer Price Index for the month of February will be revealed; analysts expect it to remain unchanged, at 2.9%. Also being released on Friday is the important University of Michigan Consumer Sentiment Index.

International
The week’s international news begins on Sunday with the volume of loans granted by China. Analysts expect this amount to be up 12 billion in support of the Chinese economy, which seems to be growing more slowly than it has over the last few years. China has reduced its growth outlook to 7.5%, the lowest level since 2004. On Monday, Japan will release its Consumer Confidence index, followed on Tuesday by the decision on its key interest rate. Also on Tuesday, we will learn Germany’s ZEW Economic Sentiment Index. It will be interesting to see German sentiment following the outcome of the Greek saga and the aggressive approach taken by the European Central Bank. On Wednesday we will know the Eurozone’s Consumer Price Index. Have a good week!

The Loonie

«Things alter for the worse spontaneously, if they be not altered for the better designedly. » Francis Bacon

Last week several central banks were to announce decisions on monetary policy in their respective countries. The Bank of Canada, the Bank of England and the European Central Bank confirmed expectations by maintaining their key interest rates at current levels. The risk of contagion of Europe’s debt crisis appears to have subsided primarily as a result of measures implemented by the ECB’s President through longer-term refinancing operations (LTROs). Despite this small ray of hope, the banks remain extremely vigilant, holding down their key interest rates and standing ready to intervene if necessary to prevent the modest economic recovery from being compromised.

Employment market and residential construction figures for the last several months suggest that the U.S. has been experiencing a modest economic recovery. The favourable conditions created by the Fed (a key interest rate of 0% to 0.25% and successive rounds of quantitative easing) have paid off. The goal was to stimulate a fragile economy by offering abundant liquidity so that businesses and households could borrow at low cost and spend. The following graph shows how the employment market has gradually expanded since the bottom of the recession in 2008.

However, the economic recovery could still go off the rails should geopolitical tensions between Iran and the West grow. A higher price for crude would reduce consumers’ purchasing power, obliging them to make up the difference from disposable income. Due to the uncertainties in the Eurozone and the pressures pushing oil prices higher, we believe that this year the USD/CAD pair will consolidate in the 1.00-1.0350 range. However, we recommend that you capitalize on opportunities if it should break from this range.

Technical Analysis: MACD Indicator (Friday, March 9, 2012)
USD/CAD: The first complete week in March saw an abrupt change from the relatively calm in the market in February. After China announced a much reduced growth outlook at the beginning of the week, the Canadian dollar returned to levels of resistance at around 1.0025 established in February (the upper red line). Then the CAD returned to its general trajectory of the last few months. The MACD (moving average convergence/divergence), a major indicator, suggests that the USD/CAD pair could continue to decline on a path that began mid-week. When these two lines cross, it is taken as a sign. As the graph shows, each time the red line crossed over the green line while moving upward, the USD/CAD exchange rate increased. Conversely, a downward cross signals the start of declining exchange rates. At this writing, the red line was poised to give this signal. The coming week should confirm whether a crossover has taken place and, as a result, whether we can expect the CAD to rise in the short term.

Fixed Income

US and Canadian bond rates increased last week, as investors found reassurance from the debt deal in Greece and the latest macroeconomic data from the United States.

Stakeholders in the Greek debt restructuring won more support from private-sector bondholders than necessary to make the deal go through. Investors seemed surprised and reacted by adding riskier positions to their asset mixes, effectively adding upward pressures on bond yields.

The Bank of Canada kept its rate unchanged on Thursday as expected, with no immediate impact on rates. On Friday, Canadian job numbers were released lower than expected, but the US February performance combined with a strong revision of the January number encouraged investors, and supported stock prices and bond yields further up north.

For the week ahead, we will focus on the releases of the US retail sales on Tuesday, as well as CPI numbers from Europe and the US, respectively Thursday and Friday. Enjoy your week.

Commodities
Energy prices climbed again last week following acceptance by Greece’s creditors of the debt restructuring plan and the release of good economic statistics in Germany and the U.S. From a technical point of view, prices broke through major resistance levels and another bullish movement appears to be in the works. The situation between the West and Iran remains prickly. There are signs of impatience in Israel, while President Barack Obama leans more toward a diplomatic approach. The upcoming elections in the U.S. could also push Obama toward drawing on strategic reserves to hold down prices. While this tactic could have an impact in the short term, it could eventually lead to higher prices. Global inventories of oil are below their five-year average, and this reduced cushion only feeds fear among investors. Have a great week!

Last Week at a Glance

Canada – In February, Canadian housing starts edged up to 201K units, roughly in line with consensus expectations. Urban starts sprang 6.0K, or 3.4%, to 182.8K. Rural starts fell 3K to 18.3K. Urban singles jumped 2.3K, or 3.5%, to 67.4K while multiples rose 3.7K, or 3.3%, to 115.4K. On a regional basis, starts in Quebec rebounded to 47.2K from an unusually low level of 35.4K in January, but this was offset by a 12.8K decline to 66.5K in Ontario. Otherwise, a moderate increase in the Prairies and B.C. more than counterbalanced a small drop in the Atlantic Provinces. Starts were up in 5 of 10 provinces. In the past nine months, housing starts have fluctuated around the 200K mark. We doubt this trend will persist through the rest of the year. The 12.3% slump in building permits in January suggests residential construction will moderate in the coming months. While not indicating overbuilding as yet, the number of unoccupied new multiple dwellings rose in January for a second month in a row. In our view, escalating prices will probably knock some potential buyers out of the game and thus contribute to some slowdown in the multiples segment. As the presale levels needed to trigger starts will become harder to achieve, some projects could be delayed. Still, we expect new housing starts to reach a respectable 185K in 2012. However, housing starts will not be a significant contributor to economic growth in 2012. As widely expected, the Bank of Canada left its overnight rate unchanged at 1.00%. The BoC acknowledged that uncertainty surrounding global growth had diminished somewhat as Europe's financial markets showed signs of stabilizing. It would have been hard not to do so in light of the fact that the yield spread between Italian and German bonds had narrowed substantially since last November. However, according to the BoC, the recent oil price spike could become a threat to global growth if it persisted. Regarding the domestic inflation outlook, the BoC saw a somewhat firmer profile for core and total CPI than previously anticipated as a result of reduced economic slack and higher oil prices. With considerable monetary policy stimulus in Canada, households were expected to add to their debt burden. Although Governor Carney had indicated the mounting household debt situation as a risk concern in the past, this was the first time it was explicitly referred to as the biggest domestic risk in a press release regarding the rate-setting decision. This raises the question whether the Bank was not acknowledging that we were drawing nearer to the point where a monetary policy intervention would be required to preserve financial stability. For now, we continue to expect the BoC to resume the normalization of policy rates by mid-2013. This said, the extent of the fiscal drag deriving from the federal and provincial budgets (especially Ontario) remains unknown at this point. The gradual reduction in monetary stimulus over time will need to be paced accordingly. In January, Canada’s merchandise trade surplus narrowed to C$2.1 billion from C$2.9 billion the prior month. This was in line with consensus expectations. Exports fell 2.3%. Declines were broad based and included an 11.9% drop in both machinery/equipment and industrial goods/materials, which more than offset a 6.1% increase in auto exports. Imports sank 0.6%, as gains in autos (+7%) were more than offset by declines in other categories, including machinery/equipment (-1.7%). In real terms, exports sagged just 0.2% (not too bad after increasing 5.9% the prior month) while imports rose 0.9%.

In February, 2.8K jobs were lost in Canada according to the Labour Force Survey. This flew in the face of consensus expectations for a 15K gain. However, given the drop in the youth participation rate, the unemployment rate slipped two ticks to 7.4%. For the fourth month running, goods-producing industries (+17.8K) outdid the services sector (-20.7K) on the labour front. The goods sector was buoyed by a comeback in construction and further gains in manufacturing. Full-time employment advanced 9.1K after receding for two months while part-time employment retreated by 12K. Private-sector employment shrank (-1.7K) for the first time in four months. Employment creation was weak across much of the nation, with Ontario, Alberta and Saskatchewan registering losses and Quebec essentially treading water. Elsewhere, Canadian labour productivity rose 0.7% in Q4 as real GDP grew while hours worked decreased. However, those who worked made more money as hourly compensation rose 1.5%, its highest quarterly increase in over two years. Labour productivity in the prior quarter was revised up two ticks to 0.6% (not surprising given the upward revision to Q3 GDP).

United States – The U.S. economy is definitely the bright spot in global economic activity these days. In February, the U.S. labour market added 227K jobs, easily topping consensus expectations for a 210K gain. This was the third over-200K print in a row. The cherry on the cake was the upward revision to the prior two months, which added another 61K jobs to the tally. The private sector saw employment expand by 233K jobs on the month. Manufacturing expand payrolls (+31K) once again, but gains were broad based across several more sectors. Government, however, continued to shed jobs (-6K). Average hourly earnings rose 0.1%, while hours worked per week were flat at 34.5. The unemployment rate held steady at 8.3%. Separately, non-farm business sector labour productivity increased 0.9% annualized in 2011Q4 while unit labour costs grew 2.8%. Again in January, factory orders fell 1%, which was better than the 1.5% drop consensus expected. Moreover, the prior month was revised up three ticks to 1.4%. Durable goods orders decreased 3.7%, which was slightly better than the 4% drop in last week's advance report. Non-defence capital goods orders excluding aircraft slid 3.9%, which was also better than the 4.5% decline initially reported. Total factory shipments rose 0.9% on impulse from non-durables, after increasing 0.8% the prior month. Shipments of non-defence capital goods exaircraft (a proxy for investment spending) fell 3%, roughly unchanged from the initial estimate. The U.S. nonmanufacturing ISM index for February rose to a consensus-topping 57.3 driven by higher new orders, which climbed two points to 61.2. After surging the previous month, the employment subcomponent gave up two points to 55.7. The composite ISM (which takes into account both the non-manufacturing and manufacturing sectors), rose two ticks to 56.7, its highest mark in months. In January, the trade deficit widened to $52.6 billon. This represented a 4.3% increase over the $50.4-billion deficit recorded in December. Exports swelled 1.4% to $180.8 billion while imports grew 2.1% to $233.4 billion.