April 09, 2021 | 13:19
Separate Directions, Similar Destination
This year’s market mantra seems to be: “Bad news on the doorstep, I’ll just take one more step, forward.” Looking well beyond some unsettling developments on the third (or fourth) wave, equities forged broadly higher, with major North American averages hitting fresh highs this week. Even the tech sector, which lagged in Q1, has come roaring back: the Nasdaq is up roughly 10% from just a month ago. Most other financial markets largely drifted sideways this week on lower volumes than the frantic levels earlier this year. For a change, bond yields did not make a big move, amid a generally sparse U.S. economic calendar. However, one blip on the radar was a modest slippage in the U.S. dollar, partially reversing its surprising strength in prior weeks.
The Canadian dollar moved alongside the rising tide against the greenback, nudging back close to 80 cents (at just above $1.25/US$). This upswing was in spite of yet another round of lockdowns and restrictions in many parts of the country, including Ontario. The nation’s biggest province is now facing some of its tightest measures since the initial shutdown last spring. This, even as the U.S. seems to be casting off the shackles in many regions—the most welcome thing about watching the Masters is not the beauty of Augusta, but seeing the small gallery crowds. With Canada and the U.S. currently on seemingly opposite opening paths, it is mildly surprising that the Canadian dollar is still grinding higher.
Part of the explanation for the resiliency in the loonie, not to mention the record highs in the TSX, is that Canada’s lagging performance on the vaccine front is not expected to cause lasting damage to the outlook. In fact, we continue to project similar 6.5% GDP growth rates in 2021 for both the U.S. and Canada. Fair question is: How can that possibly be the case when the U.S. is so clearly opening much more rapidly (perhaps dangerously so) than Canada? The mystery deepens when one considers the wave of fiscal stimulus now rolling over the U.S. economy. Here are the three big reasons how Canada is keeping pace with U.S. growth even with these hurdles:
Having said all of that, we would allow that the risks to the relative U.S. and Canadian forecasts tilt in favour of the former. But that speaks more to upside risks for the U.S. growth outlook, and less to downside for Canada. A run of powerful March data—from jobs, to auto sales, to the ISMs—shows that U.S. growth bounced with purpose last month as the doors began to swing open and the $1.9 trillion stimulus package began to wash ashore. And, there is still the tantalizing prospect of President Biden’s massive infrastructure package. While it may be whittled down from the initial $2.3 trillion bid (alongside a smaller hike in corporate taxes), and it will take time to enact, it could at least add slightly to growth much later this year.
Key Takeaway: We remain comfortable with our above-consensus forecast on Canadian growth this year, even with the discouraging new shutdowns in many regions of the country. A rip-roaring U.S. economy, solid commodity markets, and the resilient performance of Canada’s job market in recent months all provide support. Even the cautious IMF has turned more upbeat on global prospects, upping its forecast this week to 6% for world growth in 2021, right in line with our latest estimate.
A week without theatrics in Canada’s housing market is like a week without sunshine (or some such). Early sales results for March from all the large cities rolled in this week, and they were staggering. While the year-on-year figures were partly polluted by comparisons with the initial lockdown in 2020, they were nevertheless astonishing as a standalone. To cite but one example, Toronto’s sales shattered all previous standards, topping any other month by more than 20%. And lest one believes that supplies are low, new listings saw their second strongest month ever… but they simply can’t keep pace with the shooting star of sales. We look for nationwide sales to rise at least 70% y/y to yet another record high, and prices to soar more than 25% from a year ago.
Policymakers swung into action amid this runaway train, with OFSI proposing to bump up the interest rate floor on stress tests for uninsured mortgages by 46 bps to 5.25%. While this won’t make a big dent in market sentiment, it’s a big shift in policy—moving to restrain growth, rather than juicing activity. That’s a critical change in direction and carries an important message for both fiscal and monetary policy.