Canadian Key Rates May Rise Shortly

Transcription

1 JUNE 15, RETAIL RATE FORECASTS Canadian Key Rates May Rise Shortly #1 BEST OVERALL FORECASTER - CANADA HIGHLIGHTS ff Positive signs for the global and Canadian economies. ff The Bank of could initiate monetary firming in the coming months. ff The U.S. dollar suffers from scepticism over future U.S. interest rate hikes. ff Canadian equities have short-term potential. Global growth should reach a 6 year peak in. Overall, economic figures continue to paint a promising picture for the global economy. Confidence and activity indexes remain high in most economies and growth was solid in a number of major economies in the first quarter of. The start of the year was more difficult for the United States, but all signs indicate that growth rebounded in the second quarter. Accelerated international trade is another sign that the global economy is picking up (graph 1). The Federal Reserve (Fed) continues to tighten its monetary policy. The Fed announced another.5% increase to its key rates at its June 14 meeting. This is the third consecutive quarterly increase to U.S. key interest rates and the fourth since the start of the monetary firming cycle. U.S. monetary authorities also clearly signaled their intention to begin shedding their bond holdings while continuing to gradually raise their key rates. s economic performance is particularly impressive. The Canadian economy recorded the highest level of growth among G7 countries with an annualized surge of 3.7% in real GDP for the first quarter of (graph ). Domestic demand was particularly strong due to major contributions by households and businesses. The relaunch of business investments and the return to an upward trend for Canadian exports are especially encouraging. However, after three consecutive quarters of very strong growth, the GRAPH GRAPH 1 Accelerated international trade is another sign of increased activity Economic growth was particularly strong in Real GDP growth in the first quarter of Volume of international trade 3-month moving average Quarterly annualized variation in % Quarterly annualized variation in % Germany Sources: CPB - Netherlands Bureau for Economic Policy Analysis and Desjardins, Economic Studies Euro zone France Italy United States United Kingdom François Dupuis, Vice-President and Chief Economist Mathieu D Anjou, Senior Economist Jimmy Jean, Senior Economist Hendrix Vachon, Senior Economist Desjardins, Economic Studies: or , ext desjardins.economics@desjardins.com desjardins.com/economics NOTE TO READERS: The letters k, M and B are used in texts and tables to refer to thousands, millions and billions respectively. IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. The data on prices or margins are provided for information purposes and may be modified at any time, based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. The opinions and forecasts contained herein are, unless otherwise indicated, those of the document s authors and do not represent the opinions of any other person or the official position of Desjardins Group. Copyright, Desjardins Group. All rights reserved.

2 Canadian economy should soon resume a slightly more moderate pace of growth. The Bank of (BoC) appears to be preparing to raise its key interest rates. s strong economic growth in the last few quarters has greatly diminished the Canadian economy s excess capacity. As the labour market also continues to send encouraging signals and household debt remains a concern, the BoC has adopted a more optimistic tone in the last few months. In its last statment, the BoC noted that the adjustment of the Canadian economy to lower oil prices was essentially over. We now expect that the BoC will begin its own monetary firming in October, and we could even see an increase in rates as soon as July. Heading for a rise in retail rates. Dropping North American bond yields have enabled retail rates to remain very close to their historic lows for the last few months. However, recent events, particularly the noticeable change in the BoC s tone, have reinforced our belief that a gradual rise in rates should begin shortly. The resilience of the bond market may be nearing its end. Despite the positive economic figures and key rate increases by the Fed, bond yields have been slipping since the start of. The lack of strong inflationary pressure and the presence of a certain amount of political uncertainty seem to have buoyed demand for North American bonds. In our opinion, bond yields should resume an upward trend shortly to better reflect the economic situation. TABLE 1 Forecasts: Retail rate DISCOUNT RATE IN % Realized (end of month) Dec. January February March April May June 14, Forecasts End of quarter : Q : Q3 : Q4 18: Q1 End of year TERM SAVINGS1 MORTGAGE RATE PRIME RATE 1 year 3 years 5 years 1 year 3 years 5 years Non-redeemable (annual); NOTE: Forecasts are expressed as ranges. Source: Desjardins, Economic Studies JUNE

3 Exchange Rate The U.S. Dollar Suffers from Scepticism Over Future U.S. Interest Rate Hikes The U.S. dollar has fallen against most of the other major currencies since the start of the year (graph 3). This trend seems to go hand-in-hand with a reduction in bond yields and in expectations about monetary firming in the United States. After the rate hikes in June, the markets are hesitant to count on further increases before the end of the year or even next year. Donald Trump s promises of reforms and tax cuts raised expectations of monetary firming and helped the greenback s rise in late. It now appears much less certain that these promises will be kept, at least in the short term. GRAPH 3 The U.S. dollar had a difficult first half of the year Variation in the U.S. dollar since the start of the year Brazil Turkey Indonesia China Norway United Kingdom New Zealand Sweden Australia Switzerland Thailand India Denmark Euro zone Russia Korea South Africa Mexico The Canadian dollar has only appreciated slightly against the U.S. dollar since the start of the year, primarily due to low oil prices (graph 4). However, the more optimistic tone adopted by the Bank of (BoC) has served as a buoy. The loonie recently approached US$.76 (C$1.3/US$) amid raised expectations regarding monetary firming in. This rise was also facilitated by reduced fears over U.S. protectionism In % GRAPH 4 Weak oil prices hurt the Canadian dollar, but the Bank of starts to help the loonie The euro performed well in the last few months, thanks to allayed political fears in Europe and greater optimism on the part of the European Central Bank. The pound sterling took a hit after the poor results for the Conservative Party in the recent elections in the United Kingdom. US$/C$ US$/barrel Forecasts: The U.S. dollar should rebound against most currencies in the short term, thanks to adjusted expectations of monetary firming in the United States. Nevertheless, the Canadian dollar may fare better against a new surge of the greenback due to the increasing likelihood that the BoC will soon tighten its monetary policy. The loonie may also benefit from an uptick in oil prices between now and the end of the year Canadian exchange rate (left) Oil prices WTI (right) WTI : West Texas Intermediate Determinants Short-term Long-term Oil prices Metals prices Interest rate spreads TABLE Forecasts: Currency END OF PERIOD US$/CAN$ CAN$/US$ CAN$/ US$/ US$/ 18 Q3 Q4 Q1 Qf Q3f Q4f Q1f Qf Q3f Q4f f: forecasts JUNE 3

4 Asset Classes Return Canadian Equities Have Short-Term Potential With spring came a number of challenges. In addition to the unpredictable nature of the U.S. administration, investors had to contend with the presidential election in France, a surprise election in the United Kingdom and weak performance by the U.S. economy in the first quarter. Stock markets held up very well given the circumstances (graph 5). France s rejection of populism reassured investors. The bet lost by British Prime Minister Theresa May did not have a significant negative impact on the stock markets, while some hold out hope for a less severe break with the European Union during Brexit negotiations, which are set to begin shortly. While growth was disappointing in the United States, the job market continued to perform well overall and corporate profits were solid. Growth was also promising in several other developed countries, including in Europe and. With allayed political fears and the improved economic situation, we have upgraded our target returns for international stocks, and now anticipate a 16% gain for the year. The recovery in U.S. profits slightly lifted the pressure on valuations. The surge of the S&P 5 observed in the spring was not accompanied by an additional hike in the valuation multiple, while operating profits posted an annual increase of more than % in the first quarter, according to figures by Standard & Poor s. The return to positive territory for energy sector profits was a major determinant, but in most sectors profits rose or were stable over the previous year (graph 6). These trends compensated for lower expectations for economic reform in the United States. It should be pointed out that foreign sales account for some 46% of the revenues of S&P 5 companies. Even without stimulus measures at the national level, an acceleration in global economic growth is beneficial for profits. Furthermore, disenchantment with Donald Trump s policies was reflected in the U.S. dollar, which erased all the gains it had posted since the election, thereby mitigating a penalizing factor for foreign profits. Given the resilience observed recently and expectations of a rebound for U.S. growth in the second quarter, we have raised our target return for the U.S. stock market to 13%. Our target for the end of the year for the S&P 5 index is,475 points. For, spring was marked by suspicion. The difficulties facing mortgage lender Home Capital attracted much media attention and led some international investors to adopt a negative bias toward Canadian stocks. Financial securities took a major blow despite the fact that banks presented very solid results in the first quarter. The energy sector also faced major difficulties as a direct consequence of dropping oil prices in the last few months. Production GRAPH 5 A strong first half of the year for several stock markets Stock market indexes Jan. = JAN. FEB. MAR. MSCI Emerging Markets APR. MAY. MSCI Europe JUN. S&P/TSX S&P 5 GRAPH 6 Most S&P 5 sectors posted increased profits Operating profits per share Utilities Telecommunication services Materials Information technology Industrials Healthcare Financials Energy Consumer staples Consumer discretionary S&P 5 Q1 Q In US$ 5 3 Sources: Standard & Poor s and Desjardins, Economic Studies GRAPH 7 Canadian consumption pulls ahead Growth in real consumption Annual variation in % U.S. U.K. Australia Germany France JUNE 4

5 by Canadian oil companies was abundant, but the price of Canadian oil has fluctuated between US$35 and US$4 limited profitability. Meanwhile, consumer discretionary and consumer staples posted significant gains. In the first quarter, real consumer spending grew 4.%, its largest increase in seven years. Canadian consumption has been among the strongest in developed countries (graph 7). Despite the recent difficulties, we are maintaining our target return at 6.5% for the S&P/TSX. In our opinion, the troubles facing Home Capital reflects governance shortcomings rather than the type of risky mortgage practices that led to the decline of the U.S. housing market. In addition, accelerated global demand should help oil prices recover slightly. return of %, which primarily reflects the gains made in the first half of the year. Bonds continued to record gains despite improved global growth and decreased political risks. Investors focused heavily on the inflation outlook. Donald Trump s promises had helped increase implicit inflation expectations, but lowered hopes for reform caused a certain amount of retracement in the spring. Nevertheless, short-term yields continued to rise, as the Federal Reserve (Fed) tightened its monetary policy for the third time in as many quarters. The Fed continues to signal additional firming this year, including taking steps to shrink its balance sheet. In a surprising change in tone, the Bank of is following in the Fed s footsteps by suggesting that we could see a hike in the overnight rate sooner than previously anticipated. We have adjusted our forecast for the first hike in s policy rates to October, which is six months earlier than under our previous scenario. Bonds should post a relatively modest TABLE 3 Asset classes percentage return CASH END OF YEAR IN % (EXCEPT IF INDICATED) f range BONDS CANADIAN STOCKS U.S. STOCKS INTERNATIONAL STOCKS EXCHANGE RATE 3-month T-Bill Bond index1 S&P/TSX index S&P 5 index (US$) MSCI EAFE index (US$) C$/US$ (variation in %) target:.6 to.7 target: -. to 4. target: 6.5. to 1. target: to 17. target: to. target: -. (.76 $ US) -5.8 to. 1 FTSE TMX Bond Universe; Dividends included; 3 Negative = appreciation, positive = depreciation; f: forecasts JUNE 5