Second quarter GDP in Canada was weaker than expected and highlights the challenges Canada faces now that the key drivers of the recovery are turning lower.
We expect meaningful adjustments in Canadian currency and bond valuations over upcoming quarters and have positioned our portfolio accordingly. The August employment number (a very volatile number) does little to change our outlook.
Please review the update to our Canada research which we first published in mid-July: Dashboard – Canada Update
Global macro is a broad strategy and is defined and implemented in numerous ways. Below, in our review of portfolio construction, we explain how Iron Harbor approaches investment decision-making in the context of global macro. A presentation hardcopy is available here: Investment Process
Europe has finally turned the corner and we have made significant changes in our portfolio risk exposures.
A hardcopy of this presentation is available here: Eurozone -Podcast (Summer13).
Eurozone -Podcast (Summer13)
Canada is struggling to maintain economic momentum now that the key drivers of the recovery (household consumption, residential investment and exports) are turning lower.
• The household sector is overextended with debt-to-income levels near historical highs
• Confidence among corporates is low as demonstrated by languishing capital expenditures
• Labor productivity growth has been consistently poor for the past decade
• Canadian dollar strength presents a meaningful obstacle to strong export growth as illustrated by Canada’s deteriorating balance of payments
To make matter worse, the Canadian real-estate market appears to be overextended, with prices and construction activity divorced from the underlying fundamentals.
The road ahead for Canada is choppy. Low inflation and retreating domestic demand make easier monetary policy appropriate in most situations. A booming real-estate market, however, makes further accommodation unlikely. At this point, Canada’s only option is to be patient and wait.
Please review our Dashboard – Canada in which we analyze the recent economic trends in Canada and their impact on broader activity: Dashboard – Canada (Summer 2013)
Through 1Q2013, the Eurozone economy has shrunk for six consecutive quarters. This has been the longest recession in the Eurozone’s (albeit short) history. As the region struggles with weak external demand, tight fiscal and monetary policy, and a collapse in domestic consumption, the eventual recovery will be slow and protracted.
Despite the grim outlook, recently there has been cause for optimism. Several activity indicators from across the continent suggest the cyclical trend has stopped deteriorating. Most encouraging is the sharp improvement in the index of leading indicators (LEI) published by the Organization for Economic Cooperation and Development (OECD). The LEI points to a directional turn in activity in 2H2013 in line with forecasts from the European Central Bank (ECB).
Please review our Dashboard – Eurozone in which we analyze the recent economic trends in Europe and their impact on broader activity: Dashboard – Eurozone
US inflation is broadly and quickly trending lower…the opposite direction of the FOMC’s stated intent. More recently, real yields have also moved higher. In the context of sluggish employment growth, slower manufacturing activity and weak momentum in Europe and the BRICs, higher US yields are incompatible with the Fed’s 6.5% unemployment and 2.0%-2.5% inflation targets.
Please review our Dashboard – US Inflation in which we review specific price measures, expectations, and the risks to the broader economy over upcoming months: Dashboard – US Inflation Spring 2013
US employment growth is improving at a steady, yet restrained pace. Manufacturing activity, however, is settling at a lower growth rate and overseas demand is weaker. Furthermore, firms have been slow to add significantly to payrolls despite the improvement in weekly jobless claims. These factors create significant downside risk for upcoming payroll numbers and mean that employment growth may slow in 3Q2013.
Please review our Dashboard – US Employment in which we assess the risks to the broader economy over upcoming months: Dashboard – US Employment Spring 2013