Weekly Commentary – August 10, 2015
Alfred Lam, MBA, CFA
Senior Vice President,
Sean May, MA, CFP, CIM, FCSI
Richard J. Wylie, MA, CFA
Vice President, Investment Strategy
Canadian job market sees flat growth
Yet another employment report from Statistics Canada revealed unimpressive results for July. The 6,600 job gain was sufficient only to erase the prior month’s 6,400 decline. Losses in full-time positions (17,300) were concealed by gains in part-time jobs (23,900). This is a reversal of the recent trend as, on a year-over-year basis, full-time jobs have increased by 1.8% while part-time jobs have fallen 2.7%. Overall employment has increased by only 0.9% on the same basis. In addition, the participation rate (the percentage of the working-age population that is either working or actively seeking employment) fell for a third straight month to 65.7%–its lowest level since July, 2000. It remains clear that plenty of untapped potential remains in the domestic labour market.
U.S. continues steady job growth
The U.S. Bureau of Labor Statistics reported another 215,000 advance in non-farm payrolls during July. In addition, the report revealed upward revisions to the two previous months totaling 14,000. U.S. job growth has shown remarkable consistency of late, with annual growth ranging between 2.0% and 2.3% since July of 2014. It currently stands at 2.1%. Growth in average hourly earnings posted the same year-over-year 2.1% advance and the unemployment rate was unchanged on the month, remaining at 5.3%. In line with the steady state of the labour market, there is virtually no evidence of inflation-inducing constraints.
Spain turns a corner
The latest economic data from Spain’s Instituto Nacional de Estadistica revealed a dramatic 1.0% quarter/quarter gain in the country’s GDP. This is the best quarterly performance in eight years and was sufficient to raise the year-over-year growth rate to 3.1%. The momentum is expected to hold as the International Monetary Fund’s latest forecast shows Spain’s economy growing by 3.1% for 2015 as a whole, the fastest rate in the euro zone. Consumer spending has been a significant contributor since the recession ended here in mid-2013 as retail sales rose for an 11th consecutive month in June. Nevertheless, even though the country’s unemployment rate fell from 23.8% in the first quarter to 22.4% in the second, it remains among the highest in the euro zone. This may remain a challenge for the current government as it faces a national election before the end of the year.
Following several years of a general expansion in the price-earnings ratio of equities, we believe returns from this asset class will moderate somewhat and become more closely tied to the rate of growth in company earnings. Also, we anticipate that after an extended period of declining yields in the bond market and therefore increasing bond prices, interest rates will likely rise, which would detract from bond performance. We continue to favour stocks over bonds as they have greater expected growth potential than bonds and are less sensitive to changes in interest rates. Having a professional advisor who can provide a diversified portfolio that takes into consideration your risk tolerance can help protect your investment returns from rising interest rates.
▲ The U.S. Census Bureau reported that factory orders increased 1.8% in June. This followed a downwardly revised 1.1% decline in May. Excluding transportation, new orders increased 0.5%. These results match market expectations. The orders data indicate how busy factories will be in coming months as manufacturers work to fill those orders.
▲ Statistics Canada announced that Canada's merchandise exports increased 6.3% in June while imports declined 0.6%. As a result, Canada's merchandise trade deficit with the world narrowed from $3.4 billion in May to $476 million in June. Since the market was looking for another substantial deficit in June, these results are considerably stronger than expected. They suggest that trade will be less of a drag on overall GDP in Q2/2015.
▼ The U.S. Census Bureau announced that the country's international trade deficit in goods and services widened to $43.8 billion in June, up $2.9 billion from $40.9 billion in May, revised. June exports were $188.6 billion, $0.1 billion less than May exports. June imports were $232.4 billion, $2.8 billion more than May imports. The trade deficit was in line with consensus expectations. The weaker trade results will likely result in a minor downward revision to GDP growth for Q2/2015.
▲ The Institute for Supply Management announced that its Non-manufacturing Index recorded a 60.3 reading in July, the highest reading in the history of the index (started 2008). It jumped 4.3 points from the 56.0 level registered in June, and remained above the key 50.0 (generally expanding) level for a 66th consecutive month. This figure is well above consensus expectations. This result indicates continued growth, and at a faster rate in the non-manufacturing sector.
▲ The U.S. Department of Labor announced that initial jobless claims totalled 270,000 (seasonally adjusted) in the week ending August 1, an increase of 3,000 from the previous week's unrevised level of 267,000. The four-week moving average was 268,250, a decrease of 6,500 from the previous week's unrevised average of 274,750. These results are in line with consensus estimates.
▲ The U.S. Bureau of Labor Statistics reported that non-farm payrolls increased by 215,000 in July, and the unemployment rate was unchanged at 5.3%. June’s payroll gain was also revised higher from 223,000 to 231,000. July job gains occurred in retail trade, health care, professional and technical services, and financial activities. The data in this report matched consensus estimates. This is the most closely followed set of U.S. statistics as it indicates the relative health of the various sectors of the economy and is highly suggestive of consumer spending.
▲ Statistics Canada announced that overall employment levels gained a modest 6,600 in July while the unemployment rate remained at 6.8% for the sixth consecutive month. These figures were in line with market expectations for virtually no change. The employment data reflects the strength of the broader economy and individual sectors. As well, it is indicative of consumer spending trends.
▲ Statistics Canada reported that the value of building permits rose 14.8% to $7.7 billion in June, following a 13.9% decrease in May. The increase in June was mainly attributable to higher construction intentions for multi-family dwellings in Quebec, Alberta and Ontario, as well as institutional buildings in Alberta and commercial buildings in British Columbia. These results are in line with market expectations for another wide swing in the data. Permits are an indicator of the future level of activity in the construction sector.
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