Last week global central bank statements dominated the global capital markets, and we continue to see corollary discussion about those statements at the forefront this week. Probably the highest profile comments came from Warren Buffet, where he stated that the U.S. Federal Reserve (FOMC) will have a tough time raising interest rates in 2015, which is in stark contrast to most strategists.
In an interview earlier this week, the oracle of Omaha said that it would be very tough for them to raise rates as a hike in interest rates would further strengthen the U.S. Dollar versus other world currencies (including our own loonie). He went on to say that because central banks around the world are aggressively easing rates, raising interest rates in the U.S. could have international repercussions. With nearly half of the S&P 500 companies being very dependent on exports or having significant international operations, a further strengthening of the dollar could put substantial downside pressure on earnings growth.
With a summer Fed hike being hotly debated, the US Dollar remains strong, however, the volatility observed across various currencies over the past few months (and especially this week) may indicate the formation of an interim top and/or a pause in the US Dollars surge. We can see that the recent spike has brought volatility to levels coinciding with past cyclical (but not secular) peaks.
Within commodities, oil prices have certainly been the focus over the past few months given their sharp drop off. Nevertheless, oil prices are now making a strong technical case for a sustained move higher. With the elements that caused the decline in prices remaining valid, we have begun to see companies adjust their capital expenditures and production growth in response, thus evidence that we are through the bottom.
Regarding economic statistics this week, the Canadian economy added just over 35,000 jobs in January. However, the report reveals that the bulk of job creation was part-time jobs, and full-time jobs actually declined by 11,800. Also, cutbacks in natural resource jobs seem compatible with the worsening of the trade balance deficit by approximately $650 million, due notably to decreasing energy exports.
Another source of concern for Canada is the marked drop in the Ivey PMI (Purchasing managers Index) to 45.4 (from 55.4), which may suggest that Canadian dollar weakness is no panacea for the manufacturing sector. South of the border, the US nonfarm payrolls beat expectations, settling at 257,000 versus and expectation of only 234,000. Upward revisions for both December and November of 147,000 also surprised markets.
However, the report highlights increased labour cost inflation with hourly wages growing 2.2% in January, and this comes on top of the 2.7% increase in unit labour costs over the past quarter. Meanwhile, the ISM manufacturing settled at 53.5, only a slight deterioration from last month, with the new orders sub-component, likely being impacted by the strength in the US Dollar.
Lastly, in reaction to sluggish Asian demand, the Reserve Bank of Australia cut its policy rate to a record-low of 2.25%. Rapidly falling inflation is such that real policy rates are too high in many regions of the world. As a result, central banks are cutting rates to offset the restraining impact.
With much debate surrounding the economic data releases, the direction of interest rates, currencies, and commodities, we expect to see the global fixed income and equity market volatility remain elevated for the foreseeable future.
Vancouverites beware; a rainfall warning is in effect for Metro Vancouver, with up to 120 millimetres of rain expected in some areas. If you plan to see a movie to escape the rain, here are a few movie recommendations from DHG: The Imitation Game (drama), American Sniper (action), Paddington (family). Please keep in mind we are only amateur movie critics.
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The Dekker Hewett Group