Weekly Trends

Ryan Lewenza, CFA, CMT, Private Client Strategist

April 15, 2016

Canadian Growth Update

Equity Market YTD Returns (%)

This week the Bank of Canada (BoC) provided its updated economic outlook with
the release of the April Monetary Policy Report (MPR). Following better-thanexpected economic activity in Q1/16, the BoC revised its growth forecast for the
Canadian economy higher, with the BoC now forecasting 2016 real GDP growth
of 1.7%, from its earlier estimate of 1.4%.

S&P/TSX Comp
S&P/TSX Small Cap

Chart of the Week

High Debt And A Frothy Housing Market To Weigh On Economic Growth
200

Teranet-National Bank Home Price Index (LHS)

Canadian Household Debt to Disposable Income (RHS)

180

11.9

S&P 500

1.8

Russell 2000

-0.7

MSCI World

Recently we have seen an uptick in economic activity which led to the BoC
upgrading their growth forecasts. This includes: 1) solid job gains in March; 2)
stronger exports; and 3) a 0.6% M/M rise in GDP in March, the highest monthly
gain since July 2013.
Despite the recent improvement in data, we continue to expect modest growth
over the next few years. Central to this is our belief that the Canadian housing
market is due for a correction, possibly beginning in 2017 as the BoC hikes rates,
and that consumer spending will be constrained as a result of a hangover from
the debt binge that Canadians have been on (see Chart of the Week).

4.7

0.6

MSCI Europe

-5.8

MSCI EAFE

-1.9

MSCI EM

6.5
-15

-10

-5

10

15

Canadian Sectors
Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Technology
Materials
Communications
Utilities

Weight
6.7
4.7
18.3
38.1
3.0
8.0
3.2
9.5
5.9
2.5

Recommendation
Underweight
Market weight
Market weight
Market weight
Underweight
Overweight
Overweight
Market weight
Overweight
Underweight

Technical Considerations
S&P/TSX Composite
50-DMA
200-DMA
RSI (14-day)

Level
13,624.3
13,127.5
13,423.6
64.9

Reading

180

16,000

170

15,500

Uptrend
Uptrend
Neutral

15,000

160

160

150

140

140

14,500
14,000
13,500
13,000

120
100
80

130

12,500

120

12,000

110

r = 0.98

60

100
'99

'01

'03

'05

'07

'09

'11

'13

11,500

S&P/TSX
50-DMA
200-DMA

11,000
Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16

'15

Source: Bloomberg, Raymond James Ltd.

Please read domestic and foreign disclosure/risk information beginning on page 4

Raymond James Ltd. 5300-40 King St W. | Toronto ON Canada M5H 3Y2.
2200-925 West Georgia Street | Vancouver BC Canada V6C 3L2.

Source: Bloomberg, Raymond James Ltd.

Sectors are based on Bloomberg classifications

Weekly Trends

April 15, 2016 | Page 2 of 4

Canadian Growth Update

This week the Bank of Canada (BoC) provided its updated economic outlook with the
release of the April Monetary Policy Report (MPR). Following better-than-expected
economic activity in Q1/16, the BoC revised its growth forecast for the Canadian
economy higher, with the BoC now forecasting 2016 real GDP growth of 1.7%, from
its earlier estimate of 1.4%. They did however temper their growth outlook by
modestly downgrading their 2017 GDP forecast and striking a cautious tone over
global growth and the outlook for business investment. In this weeks publication we
discuss the recent positive economic releases that led to the BoC upgrading their
growth outlook, and provide our outlook for Canadian growth.
With resources accounting for roughly 20% of our economy, and 11% of our total
labour force, the continued weakness in commodities has significantly weighed on our
economy. For example, last year our economy grew at a disappointing 1.2% versus
the US and global economy at 2.4% and 3.1%, respectively. More recently, we have
seen an uptick in economic activity which led to the BoC upgrading their growth
forecasts. This includes:

CAD Exports Are Trending Higher

47

20%

Canadian Exports (blns)

Y/Y % Change (RHS)

15%

45

10%
43

5%

Job gains: Following weakness in January and February, the Canadian job
market came roaring back in March, with 40,600 jobs created during the
month. This far exceeded expectations for a 10,000 rise, and helped to turn
around the 12-month moving average, which we prefer to focus on given the
volatile nature of monthly changes in the Canadian labour market. The
resource and manufacturing sectors saw additional job losses; however gains
in the service sector like health care and hospitality offset losses elsewhere.
With the solid monthly job gains, the unemployment rate declined to 7.1%,
from 7.3%, while wages rose a healthy 3.3% Y/Y.

41
0%
39

-5%

37
Jan-13

-10%
Jul-13

Jan-14

Jul-14

Jan-15

Jul-15

Jan-16

Source: Bloomberg, Raymond James Ltd.

Exports: Canadian exports surged late last year and carried over into January,
with exports rising to a record $46.18 bln in the month. We saw some give
back in the subsequent months, but exports remain up 2.6% Y/Y. In the MPR,
the BoC cited that non-commodity exports are gaining momentum, and
expect them to grow at a solid pace.
GDP surprise: Reflecting the strength in exports and labour market, GDP rose
0.6% M/M in March, the highest monthly gain since July 2013. All told, the
Canadian economy likely grew at 2.8% in Q1/16, according to the BoC.

Following the technical recession in H1/15, with two consecutive quarters of negative
growth, the Canadian economy looks to have bottomed and is likely to post a solid
GDP print for Q1/16. The question is, is it sustainable?
Canadian Economy Adds 40,600 Jobs In March

While GDP Surged To 0.6% M/M In March

70

18

0.80

16

0.60

50

0.6
0.5

0.5

0.5

14
0.40

30

0.3

12
10

0.20

0.00

0.1

Canadian Labour Force Monthly Chg (in Thousands)

12-Month Average

-50
Mar-14

Jul-14

Nov-14

Mar-15

Source: Bloomberg, Raymond James Ltd.

Jul-15

2
0
Nov-15

Mar-16

0.3

0.3
0.2

0.3
0.2
0.1

0
-0.1

-0.20
-0.2

4
-30

0.3

0.1

10

-10

0.4
0.3

-0.40

-0.1-0.1-0.1
-0.2
-0.3

Canada GDP M/M

-0.5

-0.60
Jan-14

Apr-14

Jul-14

Oct-14

Jan-15

Apr-15

Jul-15

Oct-15

Jan-16

Weekly Trends

April 15, 2016 | Page 3 of 4

Our Outlook For Growth

Starting the year we were forecasting below-trend economic growth for the
Canadian economy, with GDP growth likely to come in between 1.5% to 2%. Despite
the recent improvement in data, we continue to expect modest growth over the next
few years. Below we outline the positives and negatives to growth in our economy:
Positives

US Growth Helps
Drive CAD Exports

US growth: We expect continued slow but positive growth for the US

economy, which given the symbiotic relationship between Canada and US,
should help our economy, largely through higher exports.

30
20

Oil: We believe oil prices have bottomed and will continue to move higher
over the next year, which will help our beleaguered oil and gas sector.
While were not expecting a major rebound in the sector and in related
capital spending, we do believe the worst may be behind us.

10

0
2
-10
0

-20

Fiscal Stimulus: Lastly, the Federal Liberal governments decision to

increase infrastructure spending will provide a much needed boost to our
economy. For 2016, we expect infrastructure spending to provide a modest
boost of 0.1% to 0.2%, but could add as much as 0.5% to growth in 2017.

-30

-2

Canada Trade Exports Y/Y

US Nominal GDP Y/Y

-40

-4
'00

'02

'04

'06

'08

'10

'12

'14

Source: Bloomberg, Raymond James Ltd.

Negatives

r = .63

Housing: The Canadian housing market remains on a tear with average

home prices up 16% Y/Y, led by the Toronto and Vancouver markets which
are up 12% and 23%, respectively. In our view, this is not sustainable and
believe it is just a matter of time before prices peak. Let us be clear that
were not expecting a collapse in prices, rather a much needed breather,
likely beginning in 2017 as the BoC begins to hike interest rates.
Debt: Tied to the housing market is our incredibly high consumer debt load.
Currently, the Canadian household debt to disposable income ratio sits at
168%, which is a record high and well above the US at 105%. Below we
illustrate the clear relationship between our frothy housing market and the
record debt levels. Unfortunately, the laws of economics do not cease to
exist for the Canadian housing market, as inevitably home prices will have
to correct following years of incredible gains.

Putting it all together we believe the Canadian economy bottomed last year, and see
further growth ahead driven in part by strength from the US, a recovery in oil prices,
and a boost from government spending. However, economic growth is likely to be
constrained by a weaker housing market and less consumer spending as a result of a
hangover from the debt binge that Canadians have been on.
Household Debt To Income Is At Record Levels

As A Result Of Our Housing Boom

180

200

160

180

180

Teranet-National Bank Home Price Index (LHS)

Canadian Household Debt to Disposable Income (RHS)

170

160

160

140

150

140

120

140
120

130

100
100

80

Canadian Household Debt to Disposable Income (%)

120

80

110

r = 0.98

US Household Debt to Disposable Income (%)

60

60

'90

'93

'96

'99

'02

Source: Bloomberg, Raymond James Ltd.

'05

'08

'11

'14

100
'99

'01

'03

'05

'07

'09

'11

'13

'15

Weekly Trends

April 15, 2016 | Page 4 of 4

Important Investor Disclosures

Complete disclosures for companies covered by Raymond James can be viewed at: www.raymondjames.ca/researchdisclosures.
This newsletter is prepared by the Private Client Services team (PCS) of Raymond James Ltd. (RJL) for distribution to RJLs retail clients. It is not a
product of the Research Department of RJL.
All opinions and recommendations reflect the judgement of the author at this date and are subject to change. The authors recommendations may
be based on technical analysis and may or may not take into account information contained in fundamental research reports published by RJL or its
affiliates. Information is from sources believed to be reliable but accuracy cannot be guaranteed. It is for informational purposes only. It is not
meant to provide legal or tax advice; as each situation is different, individuals should seek advice based on their circumstances. Nor is it an offer to
sell or the solicitation of an offer to buy any securities. It is intended for distribution only in those jurisdictions where RJL is registered. RJL, its
officers, directors, agents, employees and families may from time to time hold long or short positions in the securities mentioned herein and may
engage in transactions contrary to the conclusions in this newsletter. RJL may perform investment banking or other services for, or solicit
investment banking business from, any company mentioned in this newsletter. Securities offered through Raymond James Ltd., Member-Canadian
Investor Protection Fund. Financial planning and insurance offered through Raymond James Financial Planning Ltd., not a Member-Canadian
Investor Protection Fund.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual funds. Please read the prospectus before
investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The results presented
should not and cannot be viewed as an indicator of future performance. Individual results will vary and transaction costs relating to investing in
these stocks will affect overall performance.
Information regarding High, Medium, and Low risk securities is available from your Financial Advisor.
RJL is a member of Canadian Investor Protection Fund. 2016 Raymond James Ltd.