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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%.
3.6
S&P 500
1.4
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
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
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
Jan-15
Weekly Trends
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
4.0
3.5
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
9.00
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
Q1/15
Q3/15
Q1/16
Q3/16
'92
'94
'96
'98
'00
'02
'04
'06
'08
'10
'12
'14
Weekly Trends
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:
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
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
150
100
0.55
0.65
9,000
50
7,000
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
Jul-13
Jan-14
Jul-14
Jan-15
1.05
-3,000
'97
'99
'01
'03
'05
'07
'09
'11
'13
'15
Weekly Trends