Lost in Translation: Global Performance is Muddled by the Strong U.S. Dollar


By Rob Edel, CFA

 HIGHLIGHTS THIS MONTH 

READ THIS MONTH’S COMMENTARY IN PDF FORMAT
 

The NWM Portfolio

Returns for NWM Core Portfolio increased 0.7% for the month of November.  The NWM Core Portfolio is managed using similar weights as our model portfolio and is comprised entirely of NWM Pooled Funds and Limited Partnerships. Actual client returns will vary depending on specific client situations and asset mixes.

The Canadian yield curve continued to back up and flatten slightly last month, with 2-year Canada yields increasing from 0.57% at the beginning of the month to 0.63% at the end of the month, while 10-year Canada’s rose from 1.54% to 1.57%.  The U.S. yield curve acted similarly and flattened even more, with 2-year treasuries starting the month at 0.72% before finishing at 0.93%, while 10-year treasury yields ended the month at 2.21%, up only 6 basis points.  NWM Bond performed well in this environment, up 0.3%, with all our alternative managers in positive territory.  The PH&N Short Term Bond Fund was flat, which was a decent result given the increase in yields.

High yield bonds were down in November, with NWM High Yield Bond -0.5%.  Higher interest rates likely contributed to the decline, but most of the damage was due to widening credit spreads, particularly in issuers with exposure to the energy sector.  Offsetting some of the decline was the weakness in the Canadian dollar, which was down over 2% last month.

The weak Canadian dollar also helped the global bonds, with NWM Global Bond up 1.9%.

The mortgage pools continued to deliver consistent returns, with NWM Primary Mortgageand NWM Balanced Mortgage returning 0.2% and 0.5% respectively in November.  Current yields, which are what the funds would return if all mortgages presently in the fund were held to maturity and all interest and principal were repaid and in no way is a predictor of future performance, are 4.4% for NWM Primary and 5.8% for NWM Balanced Mortgage.

If fully invested, NWM Balanced Mortgage’s current yield would be 5.9%.  NWM Primary Mortgage repaid its bank loan and again has a positive cash position, ending the month $2.7 million.  NWM Balanced Mortgage had 2.9% in cash as five new loans for a total of $19 million were added last month.

In the preferred share market, rate resets gave back some of their gains last month, losing 1.3%, while NWM Preferred Share was down 1.5% for November.

Three new issues came to market during the month with a combined value of $475 million, although most of the downward pressure came from tax-loss selling with NVCC bank issues and Enbridge taking the brunt of the selling.

For several weeks from mid-October to mid-November, buyers came back to the market and aggressively bid on blocks. However, in the last two weeks, the market has reverted back to the retail oriented poor liquidity sell-off.  We anticipate additional volatility during the first few weeks of December as investors continue tax-loss harvesting prior to the Christmas holidays.

Canadian equities were marginally weaker in November, with the S&P/TSX down 0.2% (total return, including dividends).  NWM Canadian Equity Income (former Strategic Income Fund) and NWM Canadian Tactical High Income gained 0.3% and 1.0% respectively last month.  NWM Canadian Equity Income has benefited from being over-weight in financials and under-weight in health care and commodities.

We continue to look for ideas levered to the U.S. and global economy. We sold our position in CCL Industries because it reached (and exceeded) our price target, and added to our existing positions in Element Financial, Gildan Activewear, Prairiesky Royalty, and Ag Growth International.  We also switched out of Encana and bought Canadian Natural Resources.  As for NWM Canadian Tactical High Income, no new positions were added, but we increased our holdings in Ag Growth, Diversified Royalty, KP Tissue, and Guardian Capital while trimming CCL Industries.

Foreign equities were stronger in November, with NWM Global Equity up 1.7% compared to a similar 1.7% increase in the MSCI All World Index and a 2.4% advance in the S&P 500 (in Canadian dollar terms).  Of our external managers, new manager Value Invest led the way, up 3.2%, followed by Lazard Global Small Cap +3.0%, Edgepoint +2.4%, Pier 21 Carnegie +1.0%, while BMO Asia Growth & Income was flat.

NWM U.S. Equity Income was up 0.6% in U.S. dollar terms and NWM U.S. Tactical High Income was flat versus a 0.3% increase in the S&P 500 (all in U.S. dollar terms).  There were no new purchases or sales in NWM U.S. Equity Income.  The fund benefited from an overweight position in financials and an underweight position in utilities.  Strong gains in Weyerhaeuser, Aercap, CBS and Valero also helped performance.

Going forward, we continue to focus on quality companies, looking for growth while being sensitive to valuations.

As for NWM U.S. Tactical High Income, U.S. Silica and Valero Energy were top long stock performers, while short put position in Microsoft and Blackrock also benefited the Fund in November.  No new long positions were added during the month, however a short put position in global label company Multi-Color was added.

Real estate was weaker in November, with NWM Real Estate up 0.1%, but the iShares REIT ETF down 1.1%.

NWM Alternative Strategies was up a strong 2.8% in November (these are estimates and can’t be confirmed until later in the month).  Of the Altegris feeder funds Winton, Brevan Howard, and Millenium were up 5.7%, 4.9%, 3.2%, and 2.5% respectively.  The sharp appreciation of the Euro in early December will likely hurt performance, especially for trend followers like Winton.  Offsetting some of the impact, however, will be the continued decline in the Canadian dollar.

As pointed out last month, all the Altegris managers are priced in U.S. dollars.  This does not mean that they only hold U.S. dollar assets, though it is likely the performance of the U.S. dollar does impact the performance of these managers when translated back to Canadian dollars.

The performance of our other alternative managers was mixed in November, with RP Debt Opportunities +0.8% and MAM Global Absolute Return Private Pool +0.5%, while RBC Multi-Strategy Trust was -0.7% and Polar North Pole Multi Strategy -0.3%.

Precious metals had a disappointing month, with NWM Precious Metals down 5.4%, with bullion losing 4.8% in Canadian dollars.  With the Federal Reserve likely to raise interest rates in December, interest in gold has waned.

November In Review

Following up on a strong October, global equity markets were generally favorable in November, with the S&P 500 up 0.3% and the MSCI World Index +0.4% (both in U.S. dollar terms).  Asian markets were particularly strong, with China’s Shanghai Composite up 1.9% and Japan’s Nikkei 225 Index +3.5% (both in local currency terms). This is not, however, meant to imply all financial assets had a good November, far from it.

For starters, when translated into U.S. dollar terms, most financial assets ended the month in the red.  Put another way, because the U.S. dollar was so strong, even financial assets with positive returns in their local currency, delivered a negative return when quoted in U.S. dollars.  Japanese, Chinese, German, and American stocks managed to deliver positive returns in U.S. dollars, but pretty well every other asset, be it equity, fixed income, commodity, or foreign exchange, ended the month in negative territory.

Canadian equities were no exception, down 0.2% in Canadian dollars, and -2.3% in U.S. dollars (though unless you are an American investor holding Canadian stocks, we are not sure why you would care what the return was in U.S. dollars). Particularly hard hit were commodities, bonds, and foreign currencies.  We would suggest this is not a good thing.

 

 

The price action of commodities, for example is worrisome. A lot has been written about oil and the current excess supply that is driving crude prices lower, but what about copper?  Nicknamed Doctor Copper because of its widespread use in most sectors of the economy and its ability “diagnose” a recession, copper has plummeted to levels not seen since early 2009.  Down nearly 27% on the year, copper is having its third worse year, ever.  And it’s not alone.  Fellow metals, aluminum and nickel are in the midst of their second to worse year in history, as are the food commodities cattle and wheat.

Amongst commodities, in fact, only cocoa, and cotton are in positive territory.  Sure, shale oil and gas has helped transform the North American energy sector and created a global supply/demand imbalance, but surely this new “fracking” technology isn’t also producing more cattle or wheat?  So why are commodity prices weak?  If the problem is demand related, the implications for the global economy are, shall we say, problematic.

November 2015 - New York Copper Futures

Part of the answer lies with the strength of the U.S. dollar.  Because most commodity prices are quoted and traded in U.S. dollars, we associate their price in relation to the greenback.  All things being equal, if the only change that occurs in a commodity market (meaning the supply and demand dynamics for the commodity are unchanged) as the U.S. dollar increases in value, the commodity price in U.S. dollars should decline.

Quoted in U.S. dollars, a commodity might appear to plummeting, but in another currency, the decline might not appear so severe.  For example, copper maybe 27% cheaper year to date in U.S. dollars terms, but it’s down only 17% for us Canadians.

November 2015 - Copper Prices YTD

 

The Chinese Economy

Of course, currency is not the only factor impacting Doctor Copper.  Top of the list remains concerns that the Chinese economy will suffer a hard landing.  As the global leader in commodity consumption, a Chinese recession is bad news for commodity demand, as well as global economic growth in general.

 

It’s well documented that China’s economy is slowing, and likely more than Chinese officials would like to admit.  Some of the slowdown is planned and part of a general plan to shift the Chinese economy away from investment and exports and towards domestic consumption, but a weak global economy is also hurting growth given China has a large export oriented manufacturing sector.

Adding to the problem is the fact China has taken the high road when it comes to its currency.  While American politicians like to label China a currency manipulator, the fact remains that on a trade weighted basis, the Chinese Yuan has been on an upward trajectory since 2005.

In combination with rising labour costs, a stronger currency has resulted in China no longer being the world’s low cost manufacturer.  Chinese wages in China, in fact, are estimated to be nearly 70% higher than in Vietnam and 25% above wages in Malaysia.  Even Mexico is estimated to have lower hourly manufacturing wages than China.  It’s no wonder manufacturing indices are pointing towards a contraction in China, with excess capacity putting downward pressure on prices and margins.

It’s a tough spot, and why many forecasters believe a devaluation of the Chinese Yuan is all but inevitable with the 3% decline in the Yuan on August 15th a mere preview of a bigger move downward in the coming months.

The IMF recently bestowed upon the Chinese Yuan reserve currency status, with the Yuan joining an elite group that includes the U.S. dollar, the Euro, the British Pound, and the Japanese Yen.  This was deeply coveted by Chinese leaders and it’s likely they were on their best behavior leading up to the decision.  Could they more aggressively devalue the Yuan now that they’re in?

November 2015 - Redback RisingPossibly, though the Yuan has remained pretty stable since the August decline.  In fact, while the move in August has been commonly described as a devaluation, we would characterize the -3% as more of a fine tuning adjustment.

The real news on August 11th was China’s move towards a more market driven system for setting its exchange rate.  Most market strategists feel the Yuan will continue to depreciate in 2016, with a recent J.P Morgan client poll finding 70% believe the Yuan will fall further, but only another 2 to 5%.

Bank of America Merrill Lynch, however, is predicting a 10% decline in 2016 which, if it happens, would be the largest drop in the Yuan since 1994 – the year China decided to peg their currency against the dollar.  From the Chinese perspective, a weaker Yuan would be justified since the Yuan has appreciated over 20% against the dollar over the past 10 years, and even though it has depreciated against the U.S. dollar the last few months, the decline has been much more muted versus other currencies.

A weak currency has its downside, however.  China wants the Yuan to become used more in international trade and a sharp depreciation would not help their cause. With Chinese corporate profit margins already under pressure, higher import prices (from a weaker currency) would hardly be a welcome sight.  Nor would it be in China’s best interests to effectively raise consumer prices (through higher import prices) if it’s their objective to increase consumer spending.

China has to also be wary that a weak Yuan doesn’t scare capital out of the country.  Already foreign exchange reserves have been falling, with the People’s Bank of China recently reporting $87 billion left State coffers in November, leaving a mere $3.395 trillion.  It sounds like a lot, but this is the lowest China’s foreign exchange reserves have been since February 2013, and while October saw an $11 billion increase, the recent trend has not been China’s friend.

November 2015 - Chinese Yuan/USD

China will probably strike a happy medium, namely continue to let the Yuan depreciate, but only gradually.  Really, they have no choice.  Everyone else is depreciating their currency against the U.S. dollar so just staying level versus the dollar means China’s currency is appreciating.

Case in point, the Euro-zone has been desperately trying to drive the Euro lower by furiously buying back government debt and cutting interest rates as low as possible.  In fact, the European Central Bank (ECB) has been so intent on using lower interest rates to stimulate the Euro-zone economy that they set deposit rates at negative 0.2%.  This means any financial institution wishing to leave deposits at the central bank had to pay 0.2% for the privilege.  But the market wanted more.

Despite the ECB setting deposit rates in below zero and buying €60 billion a month in bonds, the Euro spent most of the summer and early fall drifting higher.  In mid-October, ECB President Mario Draghi intimated the central bank would do more and markets took him for his word and drove the Euro lower in anticipation of even lower deposit rates and more bond purchases.

On December 2nd, Mr. Draghi made good on his comments and lowered the deposit rate to -0.3% and pledged to keep the €60 billion a month bond buying program going until March 2017, an extension of six months.  Apparently the market was expecting a €10 to €25 billion a month hike in the bond buying program and the disappointment resulted in a 3% surge in the Euro, its largest single day increase in six years.  Perhaps the market is getting a little greedy, given economic numbers from Europe have been trending higher of late?  Regardless, a higher Euro is not part of the playbook and the ECB will be under pressure in the coming months to engineer a weaker currency.

November 2015 - Euro/USD Exchange Rate

Also under tremendous pressure is any country where commodities represent a major source of income.  As mentioned above, commodities have been in a downward spiral all year, putting tremendous pressure on commodity oriented currencies.  One only has to look at our own Canadian dollar to see the dramatic haircut the decline in oil prices have had on the loonie.

It’s a different story for Saudi Arabia, however, as the Riyal is pegged to the U.S. dollar and the Kingdom has been spending dollars like water lately in order to maintain the peg.  Like China, the Saudis have a pretty big rainy day fund, but at some point, something has to give.

Rather than agreeing to cut back oil production, the Organization of the Petroleum Exporting Countries  (OPEC) recently raised its production quota by 1.5 million barrels a day to reflect what members are actually producing.  OPEC is effectively dead, or at least in hibernation.  With no signs of production cuts coming any time soon and Iran poised to dump even more oil on an over supplied market once sanctions are lifted next year, oil could fall further in the short term and remain lower for longer.  Eventually, Saudi Arabia will have to either cry “uncle” and agree to cut back production, or devalue a Riyal that has remained fixed at 3.75 to the dollar since 1986.

Of course Saudi Arabia is not the only country feeling the pain of low oil prices. However, it is in fact in better shape than most OPEC members, it’s just that, like China and the Euro-zone, a weaker currency could help alleviate some of the pressure.

 

November 2015 - Saudi Riual vs USD

So a strong U.S. dollar is helping to put downward pressure on commodity prices, which has hurt the currencies of commodity producing countries, which in turn has put pressure on everyone else to devalue their currency.  And so what is the U.S. planning to do?  Well, increase interest rates, of course!  This would appear counterintuitive given conventional wisdom would lead one to believe higher interest rates would strengthen the dollar even more, which would be bad for the U.S. economy.

History, however, paints a different picture, as only two of the past five Fed rate tightening cycles resulted in a stronger dollar.  Monetary policy, as it turns out, is only one of many factors that impacts the direction of currencies.

As for the stock market, Ned Davis Research recently pointed out that the S&P 500 only falls during a tightening cycle if the Fed moves rapidly, while a more gradual path has historically resulted in an average 10.8% increase in the S&P 500.

While Fed funds futures are indicating the odds of an increase on December 16th are very high at 83%, future rate increases are not expected to come as easily.  Also, while  5-year treasury yields have traded higher, longer dated maturities have been falling, resulting in a flattening of the yield curve.  Typically a flat yield curve is a sign interest rates could fall in the future, not rise.

In theory, the Federal Reserve will only increase interest rates if they have confidence the U.S. economy has strengthened enough to warrant an increase.  Failure to increase rates at this point would be interpreted as a very negative comment on the outlook for the U.S. economy.  For this reason, we expect the Fed to increase interest rates on December 16th, and again in either March or April, for a total increase of 50 basis points. Unless the prospects for global economy brighten considerably, we think they will stop there.    

November 2015 - Probabilities from Current Fed funds target

As for the global economy, commodities are telling us the recovery is failing to gain traction, and yet the U.S. is on the verge of normalizing their monetary policy.  Who is right?  Is the global economic recovery just a few years behind the U.S. and the Federal Reserve’s playbook of starting to increase interest rates now makes sense?  Or, is the world on the verge of a currency war, and the divergent path of the Federal Reserve is pre-mature and ill advised? We are not sure anyone really knows the answer, including the Fed.  We think they will hedge themselves by increasing rates, but very cautiously.  Like the Fed, we advise investors to be cautious in 2016, and avoid taking undue risk in their portfolios.

The U.S. Economy

November 2015 MMC Economic Growth Table

 

A strong dollar and weak energy sector is likely hurting growth, but Pantheon Macro-economics’ Ian Shepardson believes the worse is behind us and capital spending should resume the upward trend it was on before the oil sector pulled back.  In addition, an El Nino induced warm winter could result in a strong first quarter.  Of course, we would never bet on the weather, and so far the oil sector continues to be in survival mode, with cap ex budgets still in the process of being ratcheted even lower. Third quarter GDP growth was revised up to +2.1% in November from an initial estimate of +1.5%. Despite the upward revision, year over year growth in the third quarter was the slowest quarterly advance since the first quarter last year.  Manufacturing continues to be a concern, with the ISM Manufacturing Index falling five months in a row and dipping into contraction territory in November for the first time since late 2012.  The November reading, in fact, was the lowest the Index has hit since June 2009, the final month of the great recession.

November 2015 - Annualized quarterly change in U.S. GDP

Consumer spending was a little lower than expected in Q3, and has generally lagged previous post-recession recoveries, but recent trends have been encouraging and continued progress on the job front should provide support.  We have some concerns with trends in certain retail segments that we will discuss in more detail below, but overall spending has been fairly consistent.

As mentioned above, it is capital spending and business investment that has really disappointed. Corporate America is hesitant to spend money.  Share buybacks, industry consolidation, and expense reduction has generally driven earnings growth.   Uneven consumer demand, an overbearing regulatory environment, and a weak global economy are likely causes, as is the rapid decline in oil and gas capital spending mentioned above. A recovery in business spending would signal that the current cycle still has legs.  Without it, we are not sure if the consumer is strong enough to continue doing all the heavy lifting.

November 2015 - Business Investment

MMC Table2

With job growth again exceeding 200,000 in November, a December rate hike by the Federal Reserve is all but assured.  Wage inflation ticked down slightly, but is still above the 2% average recorded over the past five years.  Job and wage growth are both being driven by the service sector as the domestic U.S. economy has outperformed the global economy.
November 2015 - Wages

MMC Table3

The core Consumer Price Index (CPI) remains just below the Federal Reserve’s 2% target, but headline inflation and producer price inflation remain weak.  As with employment and GDP growth, the more domestically oriented service sector is experiencing greater inflation than the goods producing sector.  This makes sense given the strength of the U.S. dollar and weakness in the energy sector.  The Federal Reserve generally believes these factors are transitory and continues to believe inflation will gradually gravitate back to the 2% level, especially given the unemployment rate, at 5%, is essentially at full employment.  Inflationary expectations continue to trend lower, however, this could make it more difficult for policy makers to engineer 2% inflation rates once longer term expectations of low inflation become ingrained.

November 2015 - 10-year inflation expectations

MMC Table4

We saw a split decision in November.  The University of Michigan’s Consumer Confidence Index was up from October’s reading, but the Conference Board’s Index took a big hit, with concerns about the job market weighing on consumer’s minds.  We don’t have the same concerns when looking at the latest numbers, but consumers appear uneasy.

MMC Table5

 

The “uneasiness” being expressed in the Conference Board Consumer Confidence Index may not be evident in the current employment numbers, but it sure is in certain segments of the retail sector.  Overall consumer spending is ok, but retail spending remains lackluster and the personal savings rate has moved higher.

Profit warnings in November came from a wide range of retailers, including department stores like Macy’s, Dillards, and J.C. Penny, as well as specialty retailers like Dick’s Sporting Goods, Lululemon, and Signet Jewelers.The “uneasiness” being expressed in the Conference Board Consumer Confidence Index may not be evident in the current employment numbers, but it sure is in certain segments of the retail sector.  Overall consumer spending is ok, but retail spending remains lackluster and the personal savings rate has moved higher.

Investors could be tempted to blame the misses on growing income gap in the U.S., pointing to the lack of wage growth in the middle class versus the top 1% of earners who continue to do very well.  That was, however, until upscale department store Nordstrom and high end jewelery store Tiffany’s also reported slower sales, indicating that even the wealthy are putting away their wallets.  Nordstrom, in fact, said business had slowed across all regions, categories, and channels. Yikes! All of this is particularly troubling given a stronger job market and lower energy prices should mean discretionary income has increased and consumers have more cash to do what they do best, which is spend money.

With consumer spending comprising nearly 70% of the U.S. GDP, any signs of a retreating consumer are bad news for the U.S. economy, and the world for that matter.

 

November 2015 - S&P Retail ETF

There are a number of theories on what is happening in the retail landscape, and not all of them are bad.  First off, consumers are buying more goods online, both from online specialists like Amazon, and from the websites of traditional retailers, like Walmart and Target. This has resulted in a shift in the retail landscape and resulted in a drop off in foot traffic in bricks and motor stores and malls.

Second, consumers, not surprisingly, like a good deal and have been shifting their attention to off–price retailers like TJ Max (Winners, for all of us Canadians) and the Dollar Store (think Dollarama in Canada).  The department stores have been fighting back, opening their own discount outlets, like Nordstrom’s Rack and Saks OFF 5th , which has helped growth, but perhaps has been overshadowed by the strong U.S. dollar, especially in big markets like NYC, as fewer tourists make their way to America.

Apparently millennials have also proven to be a tough and fickle customer, preferring “fast fashion” apparel retailers like H&M, Uniqlo, and Zara to traditional department stores, or even Gen-X favorites like Abercrombie & Fitch.  That’s if they’re buying clothes at all.  Spending trends appear to have shifted towards buying “experiences”, such as travel and eating out, versus a new sweater.  Big ticket items like cars and homes are also taking precedence, especially given how low interest rates are.

And finally, there is the weather, which is our favorite.  When in doubt, blame the weather, right?  While it’s true, temperatures have been warmer than normal, the U.S. is experiencing their warmest October since 1963 and consumers might be delaying the purchase of their new winter wardrobe. We would also point out that, only last year, colder than normal weather was being blamed for slower sales,  and if consumers aren’t buying a new fur coat, likely they are shopping for garden furniture at Home Depot (well, likely not, but you get the point).  Regardless, weather is likely at least partially responsible, as are all of these factors.

As long as the consumer is spending, the economy will be fine.  So far, if looks like consumers are just spending their money in different places and this is having an impact on certain merchants –  bad for them but not the economy in general. We are a little un-nerved by the news from some retailers, however, especially upscale retailers like Nordstrom, who indicated even online sales declined.  In conjunction with weaker consumer confidence and a higher savings rate, there are a few red flags to keep our eye on.  Which we plan to do.

 

November 2015 - Retail Sales Revenue MMC Table6

Overall, the housing market continues to be a good news story for the U.S.  economy with prices nearly back to pre-recession levels.  It’s taken longer than we would have hoped and new home construction has failed to gain as much traction in 2015 as anticipated.

Household formation remains an issue, with young adults choosing to stay at home with their parents rather than getting married and having children.  Credit also remains headwinds, as potential homeowners find it harder to secure financing and existing homeowners are unable to refinance or move up to a more expensive home.  As a result, the housing market is not packing the same punch it once did in the U.S. economy, with construction representing a smaller portion of the overall economy, and homeowners more conservatively leveraged.

Before the financial crisis, it was common practice for homeowners to take advantage of loose bank lending practices by using home equity loans to fund extravagant purchases they couldn’t afford.  According to Corelogic, only 8.7% of homeowners now owe more on their mortgages than their homes were worth versus 21% at the end of 2011.  According to Fannie Mae, however, 27% believe they are still under water.  This is all good as consumers needed to deleverage, but it does mean the economic recovery has been a little slower in developing.

 

November 2015 - Housing variation and leverage ratiosMMC Table7

The U.S. trade deficit widened in October with both imports and exports declining.  A weak global economy and strong dollar will likely continue to put pressure on U.S. economic growth as export demand remains subdued.  Fortunately, exports represent only 12% of U.S. economic output.

The trend is clear, domestic economy = good, anything associated with the global economy = bad.  The U.S. economy continues to grow, but at a sub-normal rate compared to other post recession recoveries.  Unless the global recovery lends a hand and companies start spending money, we don’t know how long the domestic U.S. economy and consumer can go at it alone.  We can’t depend on irresponsible lending practices and over spending to drive growth forward, like the good old days. 

The Canadian Economy

MMC Table8

Third quarter Canadian GDP rebounded to an annualized 2.3% on the back of strong household consumption and export growth.  Prospects for the fourth quarter dimmed, however, as September GDP contracted 0.5% and the continued decline in oil prices has some economists predicting growth could come in under 1% in the fourth quarter. Strong auto sales and the weak Canadian dollar should help offset some of the weakness in oil revenue and capital investment.

MMC Table9

Canada lost 36,000 jobs in November but most were the temporary election workers added last month.  On the positive side, wage growth, at 3.1%, remains strong, and the manufacturing industry added 17,000 new jobs, the most since May.  As expected, Alberta continues to bleed jobs, with the unemployment rate in the province hitting 7%, the highest level in five years.  Overall, however, the Canadian job market remains in decent shape with the unemployment rate remaining steady.  Not bad given what’s happened in the energy sector and the shellacking the loonie had endured.

MMC Table10

In a world paranoid of deflation, Canada’s October core CPI inflation reading of 2.1% is looking pretty good.  Of course, the weak Canadian dollar is playing a major role in elevating prices, especially food, which was up which was up 4.1%.  The good news is with the loonie continuing to fall, Canadian consumers can expect even higher prices in the coming months.  Hip, hip hurray!  Three cheers for the Bank of Canada!  Prices are going up and we can’t afford to travel!  What’s wrong with deflation again?

MMC Table11

Canadians apparently like higher prices as consumer confidence remains strong, and even though retail sales fell in September, they were up four months in a row previously.  Low interest rates and a strong housing market continue to let the Canadian consumer punch well above their weight class.  Yes, we are worried that an over-leveraged consumer could stumble in the coming months, but we don’t see interest rates moving meaningfully higher, and the job market appears to be steady.

MMC Table12

Talk about punching above your weight class!  The housing market in Canada continues to defy gravity.  Yes, Vancouver and Toronto are the main drivers, and yes, prices can’t go up forever, or can they?  The increase in housing starts in November was shocking.  Canadians are overleveraged and increasingly at risk if interest rates rise and unemployment rises.  It’s good news for the economy for now, however, and provides a nice offset to the weakness in Alberta.

MMC Table13

Lower commodity exports contributed to the widening in Canada’s trade deficit in October and provide further evidence of the challenge Canada is facing with fourth quarter GDP growth.  Still, a weak dollar and stronger U.S. economy will help and we should see export growth pick up in 2016.

Oil and gas prices continue to fall and will continue to provide a headwind for economic growth in early 2016.  The loonie, however, is falling with it, and along with a stronger U.S. economy, should make up for some of the weakness in the energy sector.  Housing and consumer debt remain a concern and Canada will likely pay the price down the road, but for now consumer spending and construction are what we Canadians do best.  Oh, and maybe play hockey.  

What did you think of November’s economic activity?  Let us know in the comments below!

This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information presented here has been obtained from sources believed to be reliable, but not guaranteed. NWM fund returns are quoted net of fund level fees and expenses but before NWM portfolio management fees. Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value.