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Thursday, May 25th, 2017
Contributors: J.Price, C.Basinger, D.Benedet, C.Kerlow, D.Mak, S. Obata


Market results are mixed this morning around the world, and looking to open that way when the bell rings here.  Canadians will be shifting their focus from monetary policy to bank earnings this morning as 3 of the big 6 report their quarter (See below).

Loonies had a strong day on the back of Governor Poloz’s comments yesterday that the “current degree of monetary stimulus is appropriate at present”.  Translation:  rates are not going lower.  He also mentioned that recent economic data has been encouraging.  While we agree, it is beating our expectations, we would note that the economic surprise index has been slipping – meaning that most expectations have been improving.  Canada has been the whipping post for international press when it comes to consumer debt and real estate pricing, so our belief is that expectations have been unreasonably low.

While short term yields moved up yesterday, we would note that the ever-important 5 year Canada remains below 1%, and we are seeing some pretty phenomenal rates in the mortgage space again (speaking as a borrower!).
This one ought to spark a debate or two:  Why do people insist on balanced budgets?  Historical evidence might suggest, if you spin it right, that budget deficits are good for the overall quality of life of citizens.  Now that we’ve dropped that bomb, we will stand back and watch!  Cullen Roche expands on Joe Weisenthal’s original question – well worth a read.
Last September Real Estate broke away from the broader Financials sector. Here is one of the first studies we’ve seen that assess the impact on REITs following this event. Not to jump right to the last page, but U.S. REITs experiences higher trading volume prior to the event, overall trading volume was not really impacted.

Interesting article from The New Yorker, the world is running out of sand. Sure it’s used in fracking, but it also has many other commercial application. Some industrial, others more for recreation such as beach volley ball courts and all those magnificent bunkers I seem to find every time I hit the links. The problem is that the ‘good’ commercially useful sand is becoming increasingly harder to find.
For those who like to keep track of cryptocurrencies, Bitcoin continues to make new all-time highs. It is surging another 13% this morning as we write, inching closer to $2800 USD. Demand is apparently surging from Japan and China, but with moves like this we’re sure it’s grabbing the attention of speculators and gamblers worldwide. It made headlines last week when it broke through $2000 and in such a short period of time it’s now going almost straight up, having now doubled just this month. See the chart below.

Diversion:  In memory of Sir Roger, here’s an awesome Bond car chase in a truly terrible Citroen.


Royal Bank reported strong results this morning as their investment in City National is paying off. The U.S. regional bank attributed $77mm in profit last quarter. TD also beat street expectations helped by their U.S. retail operations which grew faster than 10% last quarter. CIBC saw quarterly net income exceed $1bb helped by strong wealth management results and lower provisions. Sears surprised the street, posting a profit for the last quarter and pushed their debt obligations of $400mm that come due in July out to January. Signet Jewelers announced results this morning and said they see the first phase of outsourcing their credit portfolio completed by October. They will use the funds to pay down debt and repurchase shares over time. Same store sales rose at Best Buy by 1.6% last quarter better than expected as sales of Nintendo’s Switch console aided sales.  Target had similar comments when they released results last week, seeing their electronics division bolster on the back of Switch sales.


Oil is down -1.30% to $50.69. US inventories have been drawing down for 7 consecutive weeks. Even so, there are high expectations going into the OPEC meeting today.

Gold is up 0.25% to $1,259.60. Prices have jumped ~$10 since the low in yesterday’s session. The move coincides with a move lower in 10s, which fell from >2.29% to <2.25% earlier this morning.

In other commodities news…

OPEC Committee Recommends Nine-Month Oil Cuts Extension” - BBG

U.S. oilfield service firms lag shale recovery; old deals hold” - RTS

U.S. Steel Giants Warn Foreign Imports Imperil National Security” - BBG

Iran says it has built third underground ballistic missile factory” – RTS


Minutes from the May 3rd FOMC meeting were released yesterday with the main takeaway being that it would “soon be appropriate” to tighten monetary conditions further with a proposal to start gradually shrinking its $4.5 trillion in holdings of Treasury and mortgage securities later in this year (effectively not reinvesting maturing bonds). There was no specific mention of how many more interest rate hikes were forthcoming despite recent media chatter from some policy voters who felt two more could be in the cards for 2017. A few participants cautioned that the Fed could raise interest rates more gradually than previous forecasts had suggested, noting that the economy has showed surprising weakness in recent months (just +0.7% in Q1). But most "judged that if economic information came in about in line with their expectations, it would soon be appropriate for the Committee to take another step in removing some policy accommodation,” the minutes said. Note that markets chose to focus on this latter point with regard to the U.S. dollar, which sold off against its six main rivals immediately after the release.
The Bank of Canada came and went yesterday that saw no change to the overnight rate which was accompanied by a rather minimalist policy statement. The presser from officials was short on words (literally half as many as the April 12 statement) and even lighter on details (not a single numerical data point mentioned) in what appeared to be as generic a statement one can possibly receive. New inclusions in the statement included an acknowledgement that economic data will show “some moderation in the second quarter” after blowout numbers in Q1, a wait-and-see approach to the effects of measures designed to cool the housing market, overall consumer inflation having fallen due to weakening food prices, and that wage growth was “still subdued”. Still, markets interpreted the release as neutral to mildly hawkish, bidding up the loonie by a full penny against the greenback immediately. Session highs of 0.74588 would be hit by day’s end due to the DXY weakness mentioned above.
We can all take a deep breath (for now anyway). Home Trust Co. (the wholly owned subsidiary of Home Capital Group) redeemed all $325 million of their 2.35% 5/24/2017 deposit notes yesterday on time and without a hitch. The company released a post-transaction presser stating that they continue to “maintain sufficient aggregate liquidity and credit capacity” with the latter standing at $1.14 billion. High interest savings account balances and GIC issuance stood at $113.3 million and $12.296 billion respectively ending May 23 --- both at their lowest since the run on deposits began last month. Note that a majority of the proceeds used to mature yesterday’s notes came from their $2 billion HOOPP credit line, which now has $350 million remaining in undrawn capacity available. The two remaining deposit notes outstanding were little changed post-update with indicative bids at $93.00 for the pair of 2018 issues.



Others have seen what is and asked why. I have seen what could be and asked why not. 

- Pablo Picasso

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