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Friday, December 15th, 2017
Contributors: J.Price, C.Basinger, D.Benedet, C.Kerlow, D.Mak, S. Obata


A strong rally in the loonie came out of nowhere yesterday and continues today.  Seemingly contrarian to the news that came out of the Bank of Canada and Wednesday (where they still see labour slack) and certainly the supply issues facing Canadian crude we thought would weigh on loonies as well.  The opposite happened. “That’s the forex”, as they say.
Stocks are smarting just a bit after the latest tax reform stumble started to call into question the fiscal stimulus that is set to be added to the American economy.  It’s a mere hiccup, however, with futures already pointing to a recovery.
The Fed dots we mentioned yesterday now show the first consensus decline in rates projected, but only after a steady rise to 3% through the end of 2020.  The big question is, of course, is the market suffering from recency bias in thinking rates can’t go higher.  The average Fed funds rate since 1970 has been 5.75%.
To answer that, we would have to ask, can “Millennial > Boomer” ultimately be a thing, where the spending of the giant demographic of young people ultimately outweigh the disinflationary forces (outside of health care) of the retiring boomers.
Crude is moderately higher this morning, amid mixed signals from the IEA. At question is whether we’ll see a continuation the supply/demand imbalance which has plagued energy markets for the better part of two and half years. U.S. oil inventories are declining, but we’re seeing a pretty massive buildup in gasoline inventories which has us questioning future demand by refiners. Near-term the global forecast is a little bearish for crude, but looking out towards the end of next year the demand picture is looking pretty positive, with the Paris based agency expecting a deficit of 200,000 bpd.  

Closer to home, Canadian heavy oil is at its lowest level in four year vs. WTI following the Keystone disruption and rationing on the mainline from Endbridge. Meanwhile Canadian National Rail is focused on playing catchup in clearing out the backlog of grain, and isn’t as focused on crude growth longer term with the approval of recent pipelines by U.S. and Canadian governments. CNR noted that they expect a ‘growth pause’ namely because customers are not that interested in agreeing to longer term commitments.

Yesterday VP Mike Pence met with a number of Republican governors over NAFTA concerns. The governors were concerned with the impact scrapping NAFTA would have on their constituents. Whether it be states in the auto belt or on the agricultural side, the message was clear. They want unfettered access to the North American market.
Canadians continue to dig their debt hole deeper. Canadian third quarter debt to disposable income set another record high in data released yesterday. On average Canadians owe $1.71 for every dollar of disposable income they earn. Low income households are especially at risk, owing $3.33 for every dollar.
Diversion: 70 guitar tracks. 28 orchestra parts. 11 guitars. 13 shirts.  A guitar version of the Imperial March to honour the latest Star Wars release.


Bombardier is making an attempt at becoming a global leader in private aviation with the debut of their Global 7,000. It will compete directly with the G650, by General Dynamics which set the global standard for comfort and speed. Both planes have more than enough range to fly from New York to Tokyo in about 11 hours. Husky rose the most in almost 11 months yesterday after receiving upgrades from Raymond James and Scotiabank, which see promise in their refining business. Linamar has reached an agreement to buy agriculture equipment maker MacDon Industries for $1.2 billion, in an attempt to grow its business globally.
Pfizer has been battling to keep sales up of their ED drug Viagra. Their new strategy is to launch a lower cost generic version before other competitors enter the market next year. Oracle missed quarterly revenue expectations after reporting poor sales growth in its cloud-computing business. Shares fell nearly 7% on the news that growth of this business segment would slow to 21% from 44% in the previous quarter.


Oil is up 0.44% to $57.29 . Prices have rebounded from yesterday’s lows. The news flow remains largely positive with headlines about the Forties outage, production cuts and a decline in global oil stocks. Even so, there are concerns about rising U.S. production and extreme positioning in the derivatives markets.

Gold is up 0.53% to $1,263.80 . Precious metals have continued to rise post-FOMC. Gold is at new highs for the week while silver is just below them. In India, a key market for precious metals, demand for silver may keep rising next year after falling to a four-year low in 2016. The trend is positive but surprising, given the pressures that came from demonetization and new taxes.

In other commodities news…

Video: Oil Consolidation Happening Without M&A, Says Della” - BBG

Chicken Wing Company Says NFL Player Protests Are Hurting Sales” – BBG

North Sea pipeline operator invokes force majeure” – $FT


Loonies were modestly stable in the overnight session (if you can call a half-penny move “modest”) after a whirlwind trading day yesterday that saw a 1.5 penny intraday move on the heels of some peculiar comments from BoC Governor Poloz. In his speech titled "Things Keeping The Governor Awake At Night" presented at the Canadian Club in Toronto, we learned that he’s worried about the job prospects for our nation’s youth (the 15-24 age group in particular with ongoing slack in the labor market posing a threat to his inflation forecast), the rising indebtedness of Canadians (no surprise as he’s acknowledged this prior and comes after we learned that debt-to-disposable income levels rose to a record $1.71 in November), and that the acceptance of digital currencies could grow over time (despite denouncing that their true value is “anyone’s guess”). He concluded his talk by adding that he is “increasingly confident” that less stimulus is needed over time and that previous nods to the bank being “cautious” is not “code for being on hold”. Markets interpreted this latter point as overwhelmingly hawkish and that dropped the USD/CAD cross from 1.2855 all the way down to 1.2714 before attendees even had a chance to finish their lunch.
All of this would’ve marked a good day for loonie bulls --- until he decided to do a complete 180° turn from his tone in the evening. In an interview with CBC radio, Poloz shifted his stance to the dovish camp by remarking that concerns are piling up over various trade deals (NAFTA commentary was auspiciously absent from his daytime speech), slack still remains in the labor market (a head-scratching statement given November’s blowout jobs report), and that Canada’s monetary policy cycle is well behind that of the U.S. (“a year or two” specifically). The latter point deserves extra attention as he cited the sharp drop in oil prices in early 2016 for this concern but that “we have some more time in front of us and so I think we can have our independent policy while the Fed goes about its business” (translation --- the Fed can keep tightening while the BoC remains on the sidelines). This took the wind out of the loonie’s sail and the greenback quickly gained back 70 pips just as the equity session ended. All told, the USD/CAD cross was actually flat on the day when the dust settled, hanging on to the 1.2810 area and sitting within its 45 day median range.



That man is the richest whose pleasures are the cheapest.

― Henry David Thoreau

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