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Category Archives: Inflation

Frank Mueller

Weekly Update – June 15, 2018

“Never let facts get in the way of a good story” – Mark Twain

Weekly Market Wrap-Up

On Friday, US President Trump announced a 25 per cent tariff on strategically important Chinese imports, worth around $50 Billion, along with the threat of further tariffs should Beijing impose their own tariffs in kind. Chinese President Xi responded with retaliatory threats.

Thus, a potential trade war between the world’s two largest economies is one step closer. Global stock prices dropped on the news and increased tension.

Earlier in the week, the US Federal Reserve raised its key overnight rate by 0.25 per cent and signalled up to two further rate hikes for 2018.

It is highly anticipated that the Bank of Canada will follow suit with a rate hike of its own at the next policy meeting on July 11th.

As usual, interest rate increases will generally weigh on bond pricing; as a result, investors may see a further pullback on their fixed income holdings. On the other hand, rising rates are an effective measure against inflationary pressures.

In other news, oil dropped on fears of a supply increase.

Yield Versus Return of Capital

One benefit of holding a balanced mutual fund, an income fund, or some equity funds, is that you are issued distributions. However, there is a common misunderstanding when considering how a fund distributes “yield” on a monthly or annual distribution.

A distribution is comprised of dividends, investment income such as interest, capital gains, and return of capital (ROC). Whereas dividends, interest and capital gains income are the result of the investment choices made by fund managers, ROC essentially amounts to refunded contributions.

There is nothing inherently wrong with return of capital within a distribution, especially when you opt to re-invest your distributions (the default option when investing in mutual funds). In fact, including ROC within distributions can be used to withdraw money in a tax-efficient manner in Non-Registered Accounts.

However, it is important to consider that return of capital, when included in a distribution, should not be confused with real yield.

Should you have any questions about yield versus return of capital, don’t hesitate to ask us.

 

Sources: Fidelity, Advisor.ca

Frank Mueller

Weekly Update – June 1, 2018

“As history has repeatedly proven, one trade tariff begets another, then another – until you’ve got a full-blown trade war. No one ever wins, and consumers always get screwed” – Mark McKinnon

Canada, U.S. Impose Tariffs On One Another

Thursday saw volleys of trade tariffs imposed. Citing “national security”, United States Commerce Secretary Wilbur Ross and President Trump tariffs on imported Canadian steel and aluminum worth about $20 billion, taking effect today (June 1). President Trump also threatened to impose an auto tariffs.

Canadian Foreign Affairs Minister Chrystia Freeland and Prime Minister Justin Trudeau responded only hours later, announcing tariffs of up to $16.6 billion on a wide assortment of U.S. products to take force on July 1.

Tariffs always hurt the end consumer, and they can also hurt market growth. Companies that pay tariffs on imported goods will, to the extent they can, pass the cost on to the end consumer. For instance, tariffs on aluminum could lead to a rise in the production cost of beer cans, and thus, the cost of purchasing beer at the till.

Higher costs over time will put upward pressure on inflation. One option a central bank can employ to counter inflation is to raise their key interest rate. Rising rates drag on market growth and reduce credit availability, leading to lowered returns.

About 75 per cent of Canadian exports go to the U.S., so the beleaguered Canadian economy could be hurt even further.

Bank of Canada Holds Rates Steady

On Wednesday, the Bank of Canada opted to hold its key interest rate at 1.25 per cent, as analysts had expected. However, cautious wording during the previous rate hold were not present this week, signalling a rate hike at the July policy meeting.

The new tariff war between Canada and the U.S. will likely only add to the expectation of a rate hike, as inflation, a natural by-product of tariffs, could be kept in check with rising rates.

Increased borrowing costs for businesses and individuals alike will weigh on the Canadian economy. Canadians already have high levels of household debt, so discretionary spending is likely to decrease – never a good sign for an economy.

Italian Political Chaos

Italy’s “anti-establishment” parties’ plans to form a coalition government fell apart, as the President refused a controversial choice for Economic Minister. Now, the possibility of a snap election has arisen. Markets reacted by putting Italian bonds and specific equities, like bank stocks, under heavy selling pressure.

Italy is a top-5 bond market in the world, so a bond market disruption would have a ripple effect worldwide. Some analysts feel the European Central Bank should steer clear of this, while others feel they should announce their intention to purchase all Italian bonds, should yields hit a certain level (effectively, a yield cap).

Those in favour of ECB intervention feel that simply announcing the intent to put a yield cap on Italian bonds will help calm the waters. It is likely still too early for the ECB to step in, and until they do, investors will likely seek safer, less volatile bond markets around the globe.

Weekly Market Wrap-Up

North America

  • The TSX closed at 16044, down -32 points or -0.20% over the past week. YTD the TSX is down -1.02%.
  • The DOW closed at 24635, down -118 points or -0.48% over the past week. YTD the DOW is down -0.34%.
  • The S&P closed at 2735, up 14 points or 0.51% over the past week. YTD the S&P is up 2.28%.
  • The NASDAQ closed at 7554, up 120 points or 1.61% over the past week. YTD the Nasdaq is up 9.43%.
  • Gold closed at 1298, down 15.00 points or -0.69% over the past week. YTD gold is down -0.92%.
  • Oil closed at 65.75, down -2.13 points or -3.14% over the past week. YTD oil is up 8.82%.
  • The USD/CAD closed at 0.77185, up 0.0008 points or 0.10% over the past week. YTD the USD/CAD is down -2.95%.
  • The MSCI closed at 2093, down -18 points or -0.85% over the past week. YTD the MSCI is down -0.48%.

Europe/Asia

  • The Euro Stoxx 50 closed at 3449, down -66 points or -1.88% over the past week. YTD the Euro Stoxx 50 is down -1.57%.
  • The FTSE closed at 7702, down -28 points or -0.36% over the past week. YTD the FTSE is up 0.18%.
  • The CAC closed at 5466, down -77 points or -1.39% over the past week. YTD the CAC is up 2.88%.
  • DAX closed at 12724, down -214.00 points or -1.65% over the past week. YTD DAX is down -1.50%.
  • Nikkei closed at 22171, down -280.00 points or -1.25% over the past week. YTD Nikkei is down -2.61%.
  • The Shanghai closed at 3075, down -66.0000 points or -2.10% over the past week. YTD the Shanghai is down -7.02%.

Fixed Income

  • The 10-Yr Bond Yield closed at 2.9, down -0.0300 points or -1.02% over the past week. YTD the 10-Yr Bond Yield is up 20.83%.

 

 Sources: Dynamic, Advisor.ca

Frank Mueller

Weekly Update – December 1, 2017

“If inflation continues to soar, you’re going to have to work like a dog just to live like one” – George Gobel

TSX Down Slightly for the Week

The Toronto Stock Exchange’s S&P/TSX composite index dropped 28.51 points on Friday, a 0.18 per cent drop, to close at 16,038.97. On the week, the TSX was down 69.12 points (0.43 per cent). Gold miners and materials led the drop, while the financials and energy sectors gained on the day.

Gold dropped this week to finish at $1,279.70 USD per ounce, although it was only $7.60 USD off last Friday’s $1,287.30 per ounce finish (0.59 per cent). However, the precious metal did mitigate the weekly loss on Friday with a gain of $6.50 (0.51 per cent).

U.S. light crude oil finished at $58.29 USD per barrel, down for the week versus last $58.95 USD per barrel close.

The Canadian dollar gained over a penny Friday versus the Greenback (1.36 cents USD, 1.7575 per cent) to finish at 78.89 cents USD.

U.S. Markets Unfazed by Continuing White House Turmoil, Michael Flynn News

The saga in and around the White House and beleaguered President Trump kept going full steam ahead this week. On Friday, former National Security Adviser Michael Flynn testified on his involvement in the 2016 Russia Election Scandal. While the details of his testimony haven’t been made public, Mr. Flynn did plead guilty to lying previously to the FBI on the subject. As part of his guilty plea, Flynn is apparently cooperating with Special Investigator Robert Mueller.

The Russian investigation could derail the Republicans’ planned tax legislation; failure to enact yet another core election promise could spell the end of the GOP majorities in the House of Representatives and/or the Senate. Further, such a failure could hurt markets and therefore investment portfolios, as the anticipated tax cuts would improve companies’ bottom lines, and thus their earnings.

If the tax cuts fall through, a market pullback is certainly possible, leading to reduced returns on portfolios’ US equities.

As far as this week was concerned, however, markets were unfazed. The Greenback and US Treasury yields dropped on the Flynn bombshell, but major US indexes S&P 500, the NASDAQ and the Dow Jones Industrial Average (DJIA) rebounded from sharp losses early to finish Friday with only minor setbacks.

The S&P 500 dropped 28.51 points (0.18 per cent) after being down as much as 1.26 per cent midday. The DJIA fell by 41.65 points, or 0.17 per cent, and finally the NASDAQ Composite dropped 26.39 points (0.38 per cent).

Canadian Inflation for October Eases Versus September Inflation

October inflation figures in Canada came in at 1.4 per cent in October, down from 1.6 per cent in October. Statistics Canada cited smaller-then-expected gasoline price increases. September saw a year-to-year gas price increase of 14.1 per cent, mainly on the heels of Hurricane Harvey. October came, supply rebounded, and the October year-to-year increase dropped to 6.5 per cent.

The tightrope that Central Banks like the Bank of Canada have is to keep inflation low, to ensure its currency retains value, while also allowing for some inflation to help the economy keep growing. The Bank of Canada’s stated aim is to keep inflation at the two per cent midpoint of the control range of one-to-three per cent.

How does inflation affect your investment portfolio? It is quite simple, really.

Inflation, in its basest form, is simply the depreciation of the purchasing power of currency. Stated another way, inflation is the increase in the cost of goods. However, inflation is also necessary in an economy to help it grow and expand, which helps increase job numbers and consumer spending (good for the companies and therefore, good for portfolio values). So, inflation numbers that are within the one-to-three per cent target range allows markets returns to grow, while helping your money retain its value.

Weekly Market Wrap-Up

North America
The TSX closed at 16039, down -69 points or -0.43% over the past week. YTD the TSX is up 4.99%.
The DOW closed at 24232, up 674 points or 2.86% over the past week. YTD the DOW is up 22.61%.
The S&P closed at 2642, up 40 points or 1.54% over the past week. YTD the S&P is up 18.00%.
The Nasdaq closed at 6848, down -41 points or -0.60% over the past week. YTD the Nasdaq is up 27.22%.
Gold closed at 1283, down -3.00 points or -0.62% over the past week. YTD gold is up 12.74%.
Oil closed at 58.34, down -0.61 points or -1.03% over the past week. YTD oil is up 11.72%.
The USD/CAD closed at 0.7879, up 0.0009 points or 0.11% over the past week. YTD the USD/CAD is up 6.20%.

Europe/Asia
The MSCI closed at 2077, up 17 points or 0.83% over the past week. YTD the MSCI is up 18.48%.
The Euro Stoxx 50 closed at 3528, down -53 points or -1.48% over the past week. YTD the Euro Stoxx 50 is up 7.20%.
The FTSE closed at 7301, down -109 points or -1.47% over the past week. YTD the FTSE is up 2.21%.
The CAC closed at 5317, down -74 points or -1.37% over the past week. YTD the CAC is up 9.36%.
DAX closed at 12862, down -198.00 points or -1.52% over the past week. YTD DAX is up 12.03%.
Nikkei closed at 22819, up 268.00 points or 1.19% over the past week. YTD Nikkei is up 19.38%.
The Shanghai closed at 3318, down -36.0000 points or -1.07% over the past week. YTD the Shanghai is up 6.89%.

Fixed Income
The 10-Yr Bond closed at 2.36, up 0.0200 points or 0.85% over the past week. YTD the 10-Yr Bond is down -3.67%.

Sources: Globe Advisor, Yahoo! Finance, cbc.ca, Bank of Canada, Dynamic

Frank Mueller

Weekly Update – October 20, 2017

“I am proud to be paying taxes in the United States. The only thing is I could be just as proud for half of the money” – Arthur Godfrey

TSX Rises for 6th Straight Week

The Toronto Stock Exchange’s S&P/TSX composite index rose by 39.22 points (0.25%) on the day to close at 15,857.22. This represents a gain of 50.05 points (0.50%) over last week’s 15,728.32 finish.

Gains came from across the board, as 9 of the 10 major Index Sectors posted gains.

Brent crude jumped nearly a dollar per barrel to settle at $57.17 (USD) per barrel, as post-hurricane inflation continued to rise.

The Loonie was roughly even for the week, until the U.S. Senate passed their budget resolution on Thursday. On Friday, the CAD dropped by 82 basis points (1.09%) to finish at 79.22 cents USD as the Greenback surged in reaction to the budget resolution.

U.S. Markets Rise on Tax Cut Optimism, Encouraging Q3 Earnings Reports

On Thursday the U.S. Senate passed a budget resolution that raised optimism President Trump will be able to get his tax-cut blueprint put into effect. On Friday, the major U.S. Indices were up on this optimism.

The Dow Jones Industrial Average (DJIA) spiked 165.32 points (0.71%) to finish at 23,328.36. For the week, the DJIA was up a full 2%. Like the TSX, the DJIA advanced for the 6th straight week.

The S&P 500 was up 13.07 points (0.51%) to close 2,575.17. For the week, the S&P 500 was up 0.86%.

The NASDAQ jumped 23.99 points (0.36%) on Friday to end the week up 0.35% at 6,629.05. The NASDAQ has now posted gains 4 weeks running.

Consumer confidence, as well as strong Q3 earnings calls thus far – 70% of S&P 500 companies so far have posted Q3 earnings that beat street expectations – means continued positive movement is expected, say analysts.

Q3 earnings, overall investor optimism, and the budget resolution passing all worked to put downward pressure on Gold (a classic safe-haven asset). Gold dropped by $8.20 USD per ounce on Friday to finish at $1,281.80. This represents a loss of $24.30 (1.86%) USD per ounce compared to last Friday’s finish of $1,306.10 per ounce.

OSFI Makes Uninsured Mortgage Stress Test Official

As first mentioned on our Weekly Update for July 28, 2017, the OFSI made the Uninsured Mortgage Stress Test official this week. The changes take effect January 1, 2018 (looks like we nailed the date on this one!).

You can read our original post on the subject here.

The biggest change to the original proposals is the stress test rate to be applied. Originally, the stress test rate was proposed to be the mortgage rate the borrower had access to, plus 200 basis points (2%). So, a rate of 2.50% would result in a stress test qualifying rate at 4.50%.

However, the final stress test calculation is measured as the greater of the lender’s rate + 200 basis points OR the Bank of Canada’s Posted Five Year Fixed Rate, currently 4.89%.

So, the minimum stress test rate will therefore be 4.89% (if rates are unchanged from today until January 1, 2018), and will be higher if bank’s increase their lending rates.

WEEKLY MARKET WRAP-UP

North America
The TSX closed at 15,857, up 50 points or 0.32% over the past week. YTD the TSX is up 3.80%.
The DOW closed at 23,329, up 457 points or 2.00% over the past week. YTD the DOW is up 18.04%.
The S&P closed at 2,575, up 22 points or 0.86% over the past week. YTD the S&P is up 15.01%.
The Nasdaq closed at 6,629, up 23 points or 0.35% over the past week. YTD the Nasdaq is up 23.15%.
Gold closed at 1,282, down 29.00 points or 1.84% over the past week. YTD gold is up 12.65%.
Oil closed at 51.66, up 0.24 points or 0.47% over the past week. YTD oil is down 1.07%.
The USD/CAD closed at 0.79, down 0.0100 points or 1.25% over the past week. YTD the USD/CAD is up 6.48%.

Europe/Asia
The MSCI closed at 2,033, up 9 points or 0.44% over the past week. YTD the MSCI is up 15.97%.
The Euro Stoxx 50 closed at 3,605, changed 0 points or 0.00% over the past week. YTD the Euro Stoxx 50 is up 9.54%.
The FTSE closed at 7,523, down 12 points or 0.16% over the past week. YTD the FTSE is up 5.32%.
The CAC closed at 5,372, up 20 points or 0.37% over the past week. YTD the CAC is up 10.49%.
DAX closed at 12,991, down 1.00 points or 0.01% over the past week. YTD DAX is up 13.15%.
Nikkei closed at 21,458, up 303.00 points or 1.43% over the past week. YTD Nikkei is up 12.26%.
The Shanghai closed at 3,379, down 12.0000 points or 0.35% over the past week. YTD the Shanghai is up 8.86%.

Fixed Income
The 10-Yr Bond closed at 2.38, up 0.1000 points or 4.39% over the past week. YTD the 10-Yr Bond is down 2.86%.

Sources: Globe Advisor, Yahoo! Finance, Dynamic Funds

Anthony Sabti

Bank of Canada Raises Overnight Rate to 1.00%

As we discussed last Friday in our Weekly Update, the Bank of Canada followed up on expectations by raising its overnight rate by 25 basis-points to 1.00%. Analysts had forecast a rate hike in either October or December, but recent Q2 GDP growth data exceeded expectation, leading some to predict a rate hike this week. This is the second such rate increase of 25bps, following up on the July 12th increase. Before the July increase, the overnight rate had been at 0.50%.

Inflation is below the 2% target, but there was a slight uptick during Q2. In the face of continued and robust consumer spending, solid employment figures and income growth, the Bank of Canada acted to raise the rate as a means of stemming further inflation.

Recent rate levels have been at historic lows, so these recent rate increases were, in a way, inevitable; still, they are the first such increases in 7 years. The Bank of Canada is confident that the economy is strong enough to weather these increases.

As one might expect, the markets have reacted by driving the Loonie up over 1 cent vs the Greenback to 81.81 cents USD, a 1.29% increase (as of 2:33pm EST).

Sources: Globe Advisor, Bank of Canada