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Investment Commentary |
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Economic and Capital Markets Monthly Update |
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August, 2010
Volume 3, Issue 8 |
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July, 2010
Volume 3, Issue 7 |
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June, 2010
Volume 3, Issue 6 |
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May, 2010
Volume 3, Issue 5 |
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April, 2010
Volume 3, Issue 4 |
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March, 2010
Volume 3, Issue 3 |
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February, 2010
Volume 3, Issue 2 |
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January, 2010
Volume 3, Issue 1 |
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December, 2009
Volume 2, Issue 12 |
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November, 2009
Volume 2, Issue 11 |
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October, 2009
Volume 2, Issue 10 |
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September, 2009
Volume 2, Issue 9 |
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August, 2009
Volume 2, Issue 8 |
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July, 2009
Volume 2, Issue 7 |
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June, 2009
Volume 2, Issue 6 |
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May, 2009
Volume 2, Issue 5 |
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April, 2009
Volume 2, Issue 4 |
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March, 2009
Volume 2, Issue 3 |
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February, 2009
Volume 2, Issue 2 |
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January, 2009
Volume 2, Issue 1 |
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December, 2008
Volume 1, Issue 11 |
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November, 2008
Volume 1, Issue 10 |
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October, 2008
Volume 1, Issue 9 |
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September, 2008
Volume 1, Issue 8 |
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August, 2008
Volume 1, Issue 7 |
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July, 2008
Volume 1, Issue 6 |
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June, 2008
Volume 1, Issue 5 |
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May, 2008
Volume 1, Issue 4 |
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April, 2008
Volume 1, Issue 3 |
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March, 2008
Volume 1, Issue 2 |
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February, 2008
Volume 1, Issue 1 |
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February, 2008
Encore |
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January, 2008
Volume 12-2 |
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January, 2008
Volume 12-1 |
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December, 2007
Volume 11-24 |
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November, 2007
Volume 11-23 |
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November, 2007
Volume 11-22 |
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October, 2007
Volume 11-21 |
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October, 2007
Volume 11-20 |
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September, 2007
Volume 11-19 |
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September, 2007
Volume 11-18 |
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August, 2007
Volume 11-17 |
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August, 2007
Volume 11-16 |
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August, 2007
Volume 11-15 |
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July, 2007
Volume 11-14 |
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June, 2007
Volume 11-13 |
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June, 2007
Volume 11-12 |
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May, 2007
Volume 11-11 |
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May, 2007
Volume 11-10 |
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April, 2007
Volume 11-9 |
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March, 2007
Volume 11-8 |
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March, 2007
Volume 11-7 |
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March, 2007
Volume 11-6 |
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March, 2007
Volume 11-5 |
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February, 2007
Volume 11-4 |
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February, 2007
Volume 11-3 |
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January, 2007
Volume 11-2 |
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January, 2007
Volume 11-1 |
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News & Announcements |
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Economic & Capital Markets Commentary |
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Economic and Capital Markets Monthly Update
August, 2010 - Volume 3 Issue 8
THE ECONOMY
Canada
• The Canadian economy grew 0.1% month/month in May, continuing a nine-month period without a decline. However, momentum is ebbing and the economy is shifting to a more moderate pace of growth.
• Retail sales fell 0.2% in May, following a 2.2% slide in April, indicative of the cooling economy, but a gain in sales volumes suggests solid job growth continues to provide support to spending.
• Following the best quarter in over 20 years Canada’s labour market is expected to moderate over the summer with ongoing strength in services being tempered by weakness in manufacturing and construction.
• CPI eased 0.1% in June as lower gasoline and auto prices helped control inflation. Despite this, deflation is much less a risk in Canada than in the U.S. due to lesser slack in the Canadian economy.
United States
• The U.S. economic recovery lost momentum in the second quarter as growth slowed to a 2.4% annual rate down from an upwardly-revised 3.7% rate in the first quarter.
• Despite a 1.0% drop in durable goods orders in June, businesses continue to expand capital spending, increasing investment in machinery and equipment.
• Housing prices have stabilized in the past year. However, the outlook remains uncertain. Strong job growth will be needed for potential buyers to have the confidence to take advantage of exceptional housing affordability.
• The manufacturing sector grew in July for the twelfth straight month, providing a boost to the slowing economic recovery. The pace of growth has slowed since peaking in April but is well above the low point of the recession in December 2008.
International
• Perceptions of economic conditions in the euro zone are improving as business and consumer confidence jumped to their highest levels in more than two years in July.
• Economic recovery in the U.K. is proving to be stronger than expected. Preliminary data show real GDP increasing by 1.1% quarter/quarter in the second quarter following a 0.3% growth rate in the first quarter.
• Japanese exports slowed during the second quarter, however, consumer spending is improving as real household spending rose 2.8% month/month in June.
• The Chinese economy grew at a 10.3% rate in the second quarter, but inflation turned lower in June. This should take some pressure off Chinese authorities to tighten monetary and fiscal policy.
EQUITY MARKETS
July brought relief for global equity investors with most major markets staging strong rallies during the month. The S&P/TSX Composite Index gained 3.7% for the period with mid and small cap stocks showing even stronger performance. Markets were buoyed by strong earnings reports, perceived improvement in the Eurozone credit situation and several better economic data points out of the US economy. Sectors that led the market higher during the month included the Technology, Consumer Staples and Utility sectors. Lagging performance was posted by the Materials, Healthcare and Telecom groups. As discussed in our comments last month, we feel the market remains in a corrective phase with near-term returns likely being muted. However, the long-term outlook for Canadian equities remains positive.
The US equity market had a strong showing in July with the S&P 500 ending the month up by 7%. This performance was driven primarily by recent signs that the economic situations in China and Europe have stabilized and may be starting to improve. However, economic data continues to suggest that recent US growth may be at risk - job growth remains elusive and house prices could see another down-leg as an additional wave of foreclosures are expected to hit the market. Sector performance was mixed in July, although all ten sectors ended higher. Materials and Industrials were strongest, primarily due to signs that China’s economy may be re-accelerating. Healthcare was the worst performing sector, as investors fear the potential impacts of healthcare reform. In general, investors appear to be fearful of missing out on any potential market rally, and yet at the same time are showing signs of elevated risk aversion. This is creating a higher degree of uncertainty and an environment where the market is prone to volatile moves within a relatively narrow trading range.
FIXED INCOME MARKETS
The DEX Universe Bond Index recorded a return of 0.46% in July, continuing the strong bond returns experienced in May and June. Total Index returns for the three months was 3.47%, primarily driven by the capital gains generated when the average yield of the Index declined from 3.49% on April 30 to 3.03% on July 31. This decline in yields continues to be driven by investor concerns of slowing global economic growth, global fiscal tightening, and the increasing likelihood of deflation becoming a reality in the near future. On a sector basis, corporate bonds performed the best in July, returning 0.70% versus 0.38% for the government sector. Even with investors concerned about a “double-dip” recession, they remained comfortable acquiring corporate bonds given the improving health of many corporate balance sheets experienced since the debt crisis of 2008. While the Bank of Canada has begun to tighten monetary policy, the fact the U.S. two year Treasury yield is at a record low of 0.50% suggests the U.S. Federal Reserve will not commence tightening monetary policy until some time in 2012. In this environment we anticipate the Bank of Canada will increase its overnight rate to 0.75% at its September meeting but will not tighten further until its outlook for improving global economic growth deems it to be prudent.
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| Canadian Economic Indicators |
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G.D.P. (real)
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-2.6
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3.4
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3.0
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Exports
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-14.0
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7.0
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4.6
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Consumer spending
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0.2
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3.3
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3.0
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Business investment
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-17.4
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0.0
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6.1
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Corporate Profits (pre-tax)
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-33.2
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22.1
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12.1
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Unemployment rate (%)
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8.3
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8.1
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7.7
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Inflation Rate (all items)
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0.3
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1.9
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2.2
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| Interest Rate Trends (%) |
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Canadian Bank Prime
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3.50
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2.25
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2.75
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U.S. Bank Prime
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3.25
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3.25
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3.25
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30-Day Commercial Paper
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| Canada |
2.24
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0.36
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0.79
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| U.S. |
0.38
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0.20
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0.25
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5-Year Bonds
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| Canada |
1.69
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2.77
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2.30
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| U.S. |
1.55
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2.68
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1.62
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30-Year Bonds
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| Canada |
3.46
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4.08
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3.70
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| U.S. |
2.68
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4.64
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3.99
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Cdn./U.S. dollar
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82.05¢
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94.95¢
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97.12¢
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| Market Index Returns (%) |
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S&P/TSX Composite Index
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35.05
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3.96
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1.31
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S&P 500 Composite
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8.08
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3.82
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-1.79
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MS EAFE (net)
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12.62
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6.23
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-6.59
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MS Japan
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-9.07
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0.48
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-0.87
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MS Pacific (ex Japan)
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47.89
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6.98
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-4.09
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MS Europe
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16.92
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8.34
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-8.11
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MS Emerging Markets
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53.00
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5.17
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0.14
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DEX Universe Bond
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5.41
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0.46
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4.71
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GWL Real Estate Fund (gross)
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1.61
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0.51
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1.32
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All returns are in Canadian dollars and include income.
Source: TD Newcrest/"PC-Bond, a business unit of TSX Inc. Copyright © TSX Inc. All rights reserved. The information contained herein may not be redistributed, sold or modified or used to create any derivative work without the prior written consent of TSX Inc."
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The views expressed in this commentary are those of GWL Investment Management Ltd. ("GWLIM") as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice. Prospective investors should review the offering documents relating to any investment carefully before making an investment decision and should ask their representative for advice based on their specific circumstances. GWLIM is a subsidiary of The Great-West Life Assurance Company. Great-West and GWLIM are members of the Power Financial Corporation group of companies.
© GWL Investment Management Ltd. 2010
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