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Wednesday, January 18th, 2017


Canada’s bank rate call is due out later this morning, so it will be a day to watch the loonie and interest rates closely.  Given the data has been surprisingly robust despite the anecdotal evidence of softening housing markets across the country (save a couple of pockets), we are interested to hear the Bank’s take.

Meanwhile, the equity markets are lining themselves up for more “meh”, with overnight and Euro markets turning in mixed results today so far.  Futures are set for a flat open.  The S&P 500 has been pretty tame since the first two sessions of the year (which collectively turned in a 1.42% return), and Europe’s Stoxx 50, while having a bit more daily volatility, is mostly on the same course.  Given 5.2% returns for the S&P since the start of Q4 (and 9.1% since the November 4 low), we aren’t surprised to see a pause in the action.
Digging around some of the CFTC data this morning, we wanted to make sure our readers are aware at just how long the speculators are currently positioned in the oil markets. Net speculative positions in non-commercial contracts are beginning to roll-over after almost reaching the record high from June 2014. In our Chart of the Day you can see just how swift the change was in December of last year. Oil is turning over a little this morning, currently down close to -1.5%. Based on the current sentiment, it’s hard to imagine the market getting more bullish, so just who will be the incremental buyer at these levels?
If Bill posts it…  Bill McBride comments on excerpts from University of Oregon Professor Mark Thoma’s paper on What really caused the housing crisis.  Arguing that it wasn’t subprime, Mr. McBride’s notes on the paper should be read by most Canadians given the state of our property market.  We are comforted that one of the points – regulators turning a blind eye – clearly is not the case here with the CMHC making several moves to cool the fire over the past couple of years.
Euphoria to caution. Reuters takes note of the current shift in sentiment. Uncertainty is expected with a regime change in the White House, but the longer it takes to get clarity on some of the larger polices Trump has promised the wearier the market will be to future claims/tweets.
On a similar topic, Econbrowser has some thoughts on uncertainty, and how we can best measure the effects on the economy.
Interesting post and blog roll on what’s not getting enough attention from Peter Lazaroff. With a focus on retirement savings, there thoughts on personal finance, the market influence of ETFs, and the excess of financial products.
Diversion: A quick history of Formula One technical innovation.


  • Cameco shares are down ~11% in the pre-market after the company warned that full-year profit will be “significantly lower” than expected
  • General Motors announced that it will invest $1 billion in US factories. Thanks, Donald!
  • Goldman Sachs beat on the top and bottom lines with $8.17 billion in revenues and $5.08 in EPS vs. expectations of $7.742 billion and $4.82, respectively
  • Eli Lilly will buy CoLucid Pharmaceuticals for ~$960 million “to gain access to its experimental treatment for migraine”
  • The UK’s competition watchdog gave tentative approval to Mastercard’s “takeover of payments processing company VocaLink”. The merger is valued at $864 million, according to Reuters


Oil is down 1.47% to $51.71. Investors are starting to focus on rising US production, which could partially offset cuts by OPEC and other non-OPEC members. Here is some color from Bloomberg: “The EIA last week raised its domestic output forecast for 2017 to 9 million barrels a day from 8.78 million project in December. That’s up from 8.89 million barrels in 2016. Output is projected to increase to 9.3 million barrels a day for 2018.”

In other energy news…

Exxon doubling Permian Basin holdings in U.S. for up to $6.6 billion” – RTS

U.S. oil and gas industry has turned the corner: Kemp” - RTS

h/t @JKempEnergy

Gold is flat at $1212.95. The precious metal is slightly down from an 8-week high. This comes after a massive run, in which the GLD ETF rose in 13 of 15 trading sessions for the first time since mid-2011.


Canada bond benchmark yields are higher while the loonie drifts lower ahead of this morning’s Bank of Canada announcement. No change is expected to the overnight target band of 0.50% but we’ll be looking for clues in the accompanying statement as well as Governor Poloz’s post-announcement talk. At the moment, OIS spreads have priced in zero chance of a rate cut this year while bumping the likelihood of a tightening move beginning only at the June 14 meeting (67.8% chance). That said, it’s expected that the BoC will lag well behind the Federal Reserve in raising interest rates for several reasons. One, Canada’s output gap remains unfilled and will stay that way until 2018. Two, core inflation remains lower than the U.S. (+1.3% versus 2.1%). Lastly, wage inflation has decelerated to barely over 1% in Canada while the incomes have risen to 2.5% for our American counterparts. Clearly, we are operating in a different monetary environment thatn the U.S. and this is likely to cause our curve to bear steepen faster (given that our short rates won’t move).
Domestic new issuance was busy in credit land yesterday with a couple noteworthy deals. Pembina Pipeline Corp. came to market with a dual tranche senior unsecured offering for a total of $600MM. The CIBC-led financing comprised of a 2.99% 1/22/2024 (+161.40 bps over Canada’s) and a 4.74% 1/21/2047 (+245.0 bps) note equally distributed between the two issues. Closing of the offering is expected to occur on January 20 and the net proceeds will be used to repay short-term indebtedness of the company, to fund Pembina's capital program, and for other general corporate purposes. Demand was strong for the raise with both trading higher in secondary (the latter tightening in by a whopping nine bps on the break). Speaking of CIBC, they became the second Canadian bank to issue a deposit note in 2017, via a mammoth $1.5 billion bullet deal yesterday. The AA rated issue matures on 1/20/2020 and priced with just a 1.66% coupon (a scant +73.80 bps yield spread). Lastly, the Province of Saskatchewan re-opened their 3.30% 6/2/2048 unsecured bonds by adding another $425MM to the issue. The dust has barely settled from the initial sale on December 6 but the province managed to keep the issue spread the same at +104.5 bps over long Canada’s.
Fresh off the headlines that Canadian housing prices and volumes rose yet again in 2016, the CMHC is quietly hiking mortgage insurance premiums to make the cost of purchasing even more challenging. Beginning March 17, homebuyers who don’t make a downpayment of 20% will be forced to pay even more to have the Federal body guarantee the loan with financiers. CMHC has stated that the hike is due to new capital rules put into place by regulators. Those who put down just 5% of the total purchase price will pay a surcharge of 4% (a 40 bps increase) while buyers putting down 15% see their fee rise by 100 bps to 2.8% (yes, CMHC oddly decided to slap on the highest increase to those putting down more money). It’s the third such increase in as many years and when you combine that with the rising interest rate on an average 5 year fixed rate mortgage (due to the steepening yield curve), consumer debt burdens are inevitably going to increase. At the end of Q3, the national debt-to-disposable income ratio remained near its record of 167%.



Until the lion learns how to write, every story will glorify the hunter.

- African proverb

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Charts are sourced to Bloomberg unless otherwise noted.

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