Thursday, September 17, 2015

Canadian Perspective (excerpt)

Greetings from Toronto! I am visiting our accounts here on Wednesday and Thursday, and going to see our accounts in Cleveland on Friday. I guess I should have stayed home to watch Yellen’s press conference today. However, I figured I might learn more on the road. Yesterday, the chief investment officer of one of our accounts observed that today’s FOMC meeting might be one of the most important in history. Then again, what if they decide to do nothing? That could be important too!

I had lunch with my CIO friend yesterday in a restaurant with a spectacular panoramic view of downtown Toronto. I observed lots of building cranes, as were just as plentiful during my previous visits over the past few years. I asked whether they were all being used to construct more condominium towers with apartments that are purchased mostly by Chinese investors who leave them mostly vacant. Interestingly, he said that may be partly an urban legend and that more likely residents are young Canadian professionals, who prefer to live in town near their jobs. No houses, no cars, no kids for them.

Toronto is bustling. The finance industry continues to prosper. The annual Toronto film festival is thriving. The rest of Canada is facing some challenges. Consider the following:

(1) Technically in a recession. Canada has been hard hit by the bursting of the commodity super-cycle bubble. Real GDP fell -0.5% (saar) during Q2 following a -0.8% drop during Q1. Just yesterday, the OECD cut its forecasts for the country’s economic growth by -0.4ppts to 1.1% for 2015 and by -0.2ppts to 2.1% for 2016. Canada received the second-largest haircut for 2015 next to Brazil in the lineup of economies included in the OECD’s forecasts.

There is some debate about whether Canada is in a recession. Weighing on real GDP have been commodity-related gross fixed capital formation and exports. On the other hand, household consumption in real GDP has remained relatively strong.

By the way, the OECD also lowered its world forecast for real GDP by 0.1ppt to 3.0% for 2015 and by 0.2ppt to 3.6% for 2016. The OECD is concerned that the slowdown in China’s trade is depressing many emerging market economies (EMEs). On the bright side, the OECD noted the strength of the US, but also suggested that a US rate hike could worsen the prospects for EMEs.

(2) Another commodity currency. The Canadian dollar, which is down 20% y/y, is highly correlated with the CRB raw industrials spot price index. That should boost Canada’s exports, which account for 31% of the country’s nominal GDP versus 13% in the US. The problem is that manufacturing accounts for only 10% of Canada’s economy. So commodities account for a much bigger share of exports than do manufactured goods. As a result, the weaker currency isn’t likely to stimulate Canada’s economy.

Today's Morning Briefing: North of the Border. (1) 100% sure thing. (2) The Fed will do nothing or something. (3) Sentiment remains very bearish, which is bullish. (4) Misery Index is depressed. (5) Urban legend in Toronto. (6) Canada is in a recession, technically speaking. (7) Canadian dollar is a commodity currency. (8) Canada is rich with less valuable resources. (More for subscribers.)

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