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Weekly Trends

Ryan Lewenza, CFA, CMT, Private Client Strategist

April 17, 2015

Canadian Economy – Down But Not Out


This week the Bank of Canada (BoC) released its quarterly Monetary Policy
Report (MPR) outlining their updated economic views while also announcing
their interest rate decision to keep the benchmark rate unchanged at 0.75%.

Equity Market YTD Returns (%)
S&P/TSX Comp

S&P/TSX Small Cap

3.6

S&P 500

1.4

The material decline in oil prices is providing a significant headwind to the
Canadian economy. The BoC expects the hit to the economy from low oil prices
to be “front-loaded” with zero growth in Q1/15, down from their earlier
estimate of 1.5% growth. However, they expect economic activity to improve in
Q2 to 1.8%, followed by 2.8% and 2.5% for Q3 and Q4, respectively.

Russell 2000

4.6

MSCI World

4.5

MSCI Europe

We share a similar view with the BoC expecting 2015 GDP growth of 2% (in line
with the BoC) and for growth to improve in H2/15. We see our economy
gradually improving in the H2/15 on the back of a stronger US economy, weaker
Canadian dollar, and rebounding oil prices (see Chart of the Week).

19.9

MSCI EAFE

The BoC sees a stronger H2/15 and 2016 on the back of a stronger US
economy, rising net exports, and easing financial conditions.
Our assessment of the MPR was of a more upbeat BoC, with the central bank
expecting an improvement in economic activity in the coming quarters. Given
this view we believe another rate cut is unlikely, with the next BoC move likely
to be a hike sometime in 2016.

4.6

7.7

MSCI EM

10.0
-5 -3 0 3 5 8 10 13 15 18 20 23

Canadian Sector

TSX Weight Recommendation

Consumer Discretionary

6.3

Overweight

Consumer Staples

3.6

Market weight

Energy

22.1

Market weight

Financials

34.6

Market weight

Health Care

5.1

Underweight

Industrials

8.1

Overweight

Information Technology

2.5

Overweight

Materials

10.7

Underweight

Telecom

4.6

Market weight

Utilities

2.2

Underweight

Level

Reading

Technical Considerations

Chart of the Week

30%

15,299.3

50-DMA

15,081.1

Uptrend

200-DMA

14,922.7

Uptrend

65.8

Neutral

RSI (14-day)

WTI Oil Could Gain In H2/15 Providing A Boost To The Canadian Economy
40%

S&P/TSX Composite

Average Return After 40% WTI Declines ('85, '91, '98, '01, '09)
WTI Return For Current Cycle (2014-15)

16,000
15,500

20%

15,000

10%

14,500

0%

14,000

-10%

13,500

-20%

13,000

-30%

12,500

-40%

12,000

-50%

11,500

-60%
-70%
Jul-14

S&P/TSX
50-DMA
200-DMA

Oct-14

Jan-15

Apr-15

Jul-15

Oct-15

11,000
Jul-12

Jan-13 Jul-13

Jan-14 Jul-14

Source: Bloomberg, Raymond James Ltd.
Source: Bloomberg, Raymond James Ltd.

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Jan-15

Weekly Trends

April 17, 2015 | Page 2 of 4

Bank of Canada Update
This week the Bank of Canada (BoC) released its quarterly Monetary Policy Report
(MPR) outlining their updated economic views while also announcing their interest
rate decision to keep the benchmark rate unchanged at 0.75%. In this week’s
publication we summarize the key findings from the MPR, and provide our outlook
for interest rates and the Canadian economy.
BoC Govenor Stephan Poloz took a lot of heat a few weeks back after he warned to a
Financial Times reporter that Q1/15 GDP growth was likely to be “atrocious.” While
Poloz’s terminology may have been a bit superlative, we believe his concern over the
Q1/15 weakness was on the mark. Below we highlight the key findings from the MPR
which overall signals a weak start to the year for the Canadian economy:

No surprise, the material decline in oil prices is providing a significant
headwind to the Canadian economy. The impact of lower oil prices is being
felt in a number of ways including lower capital spending and investment,
weaker job growth and incomes, and declining corporate profits. The BoC
expects the hit to the economy from low oil prices to be “front-loaded” with
zero growth in Q1/15, down from their earlier estimate of 1.5% growth.
However, they expect economic activity to improve in Q2 to 1.8%, followed
by 2.8% and 2.5% for Q3 and Q4, respectively.

The BoC sees a stronger H2/15 and 2016 on the back of a stronger US
economy, rising net exports, and easing financial conditions. With respect to
financial conditions the BoC noted in the MPR that government bond yields
have declined following their surprise 25 bp cut in January and that credit
conditions have eased over the past three months. The BoC expects real
GDP to average 1.9% in 2015 and 2.5% in 2016.

The BoC expects headline inflation to ease in the coming months before
rising to their 2% target in 2016. They expect core inflation to remain near
the 2% level until the end of 2016 “as the economy reaches full capacity.”
Benign inflation pressures will allow the bank to maintain their
accommodative stance; however, we believe the likelihood of another
interest rate cut this year is unlikely.

Overall, our assessment of the MPR was of a more upbeat BoC, with the central bank
expecting an improvement in economic activity in the coming quarters. Given this
view we believe another rate cut is unlikely, with the next BoC move likely to be a
hike sometime in 2016.
BoC Is Forecasting Stronger Growth In H2/15
4.5

10.00

Canada GDP Q/Q Annualized
3.8

4.0
3.5

We Believe Another Rate Cut Is Unlikely In 2015

3.2
2.7

2.9

7.00

2.8
2.5 2.5 2.5

2.4

2.5
2.0

2.0

8.00

3.2

3.0

Bank of Canada Overnight Lending Rate

9.00

Bank of Canada Forecast

2.3

1.8

6.00
2.1

5.00

4.00

1.5

3.00

1.0

2.00

1.0

1.00

0.5
0.0

0.00

0.0
Q1/13

Q3/13

Q1/14

Q3/14

Source: Bloomberg, Raymond James Ltd.

Q1/15

Q3/15

Q1/16

Q3/16

'92

'94

'96

'98

'00

'02

'04

'06

'08

'10

'12

'14

Weekly Trends

April 17, 2015 | Page 3 of 4

Our Outlook
We share a similar view with the BoC expecting 2015 GDP growth of 2% (in line with
the BoC) and for growth to improve in H2/15. Key supports for a stronger second
half include:

We believe the US economy will begin to show better momentum following
the slowdown in the first quarter. As we’ve highlighed in recent reports, the
US economy has exhibited a clear and consistent trend over the last few
years of decelerating in the early months of the year, before improving in
the second half. Below we illustrate this trend with the Citigroup US
Economic Surprise Index, which measures actual economic results relative
to expectations. This index has declined in each of the last four years early
in the year, then accelerated in the second half. We expect this to playout
again and with the Canadian economy having a 0.90 correlation with the US
economy, we believe this should bode well for stronger Canadian economic
activity in the H2/15.
As we outlined in our February 27, 2015 Weekly Trends report, we believe
oil prices are set to trough in H1/15 setting the stage for a second-half
recovery. This view is predicated on the belief that US oil production is set
to decline, and that WTI oil prices would follow its typical price pathway
following major (40%+) oil declines. In the accompanying chart we overlay
the current WTI oil price pathway with the average of the last five major oil
prices declines. The current pathway is closely tracking the average or
typical pathway, suggesting a bottom soon, and higher prices later this year.
We are sticking with the call, and believe the recent positive price action is
the first step in this recovery.

Historical Oil Trading Patterns
Suggests Price Gains In H2/15
40%

Average Return After 40% WTI Declines ('85, '91, '98, '01, '09)
WTI Return For Current Cycle (2014-15)

30%
20%

10%
0%

-10%
-20%

-30%
-40%

-50%
-60%
-70%
Jul-14

Oct-14

Jan-15

Apr-15

Jul-15

Oct-15

Source: Bloomberg, Raymond James Ltd.

Finally, we believe the weak Canadian dollar will be supportive of increased
exports, particulary non-resource based exports such as industrial
machinery and autos. Below we illustrate the tight relationship between the
CAD/USD dollar (inverted on chart) and Canada’s real trade balance. As the
Canadian dollar depreciates this should lead to increased exports and rising
real trade balances.

As a result of the low oil prices, the Canadian economy has clearly downshifted. But,
we see our economy gradually improving in the H2/15 on the back of a stronger US
economy, a weaker Canadian dollar, and rebounding oil prices.
US Economy Looks Set To Improve In H2/15

A Weaker CAD Dollar Suggests Stronger Net Exports
13,000

150

Real Trade Balance (mls, volume, LHS)
CADUSD (Inverted, RHS)

Citigroup US Economic Surprise Index
11,000

100

0.55

0.65

9,000

50

7,000

0

5,000

-50

3,000

0.75

0.85

1,000

0.95

-100
-1,000

-150
Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Source: Bloomberg, Raymond James Ltd.

Jul-13

Jan-14

Jul-14

Jan-15

1.05

-3,000
'97

'99

'01

'03

'05

'07

'09

'11

'13

'15

Weekly Trends

April 17, 2015 | Page 4 of 4

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