Market Commentary
Bank Economist Predictions for 2012 - interest rates and market news
October 23, 2012 | Posted by: Francine Tracey
Summary Highlight of CIBC Economic Report October 2012
CIBC economists expect that both recent and projected efforts of central banks will be enough to avoid a full-blown global recession, and will allow for a modest growth reacceleration in the first half of 2013. As a result bond yields are projected to grind mildly higher (which in turn, will put upward pressure on 5 and 10-year mortgage rates). Equity markets are expected to improve around the globe, with the exception of Canada which is currently generously valued given the recent past's surge in commodities valuations.
- During the last quarter, central banks announced a series of unprecedented measures, with the underlying theme of creating more financial support in event that global market conditions deteriorate. Recent policy intervention should reduce the risk of a global recession, and therefore the probability that the worst case scenario is “sluggish economic expansion” rather than “global recession” has been increased to 70% by CIBC’s economists.
- Sluggish growth is projected to occur over the next 12 months period and global inflation is not expected to accelerate.
- The US Federal Reserve unveiled a fresh new economic stimulus in the form of additional balance sheet expansion. The labour market will be the key focus of policy in the coming quarters. Ben Bernanke highlighted that stimulus will remain even after the first signs of recovery are observed.
- With economic activity showing signs of bottoming, a further upgrade in economic growth expectations could extend the summer equity market rally further.
- Bond yields are currently at the bottom of their trading range and could revisit the higher end of the range resulting in disappointing returns for conservative investors.
- Global risks are identified as follows: A sluggish US recovery with the election and ‘fiscal cliff’ risks ahead; the ongoing battle between European sovereign risks and monetary and fiscal policy response; and uncertainty about the future growth model of China and the related impact on the rest of Asia.
- Central Banks have been Deleveraging over the past 12 months, and recent announcements indicate that they will ease these policies which will assist with the growth of the economies.
- Equity markets are showing current low valuations because of ongoing risks identified above.
- An improvement in the economic cycle could lead to gains in equity markets. The economic cycle is showing early signs of turning from a contractionary phase to a recovery phase.
- The Canadian equity market trades at a premium to most other developed markets but this premium has so far been justified by strong economic fundamentals. Going forward the cyclical outlook for Canadian equities is mixed. The economy is showing clear signs of fatigue. Household’s heavy debt load implies less room for consumers to take on additional credit with negative implications for ht banking sector, in particular. Canadian markets, therefore, may not outperform other improving markets globally moving forward through the economic cycle.
- In the US, companies are in good financial health and a pick up in economic activities with a job market far from full employment should support profits. The fed is targeting stronger job growth and initial success should have a positive implication for top-line growth, but would still create little pressure on wages. Structural economic challenges remain and may challenge the relative outperformance of this market.
- Interest Rates:
- - Central bank intervention in the third quarter and persistent investor risk aversion has kept interest rates at historically low levels.
- - CIBC’s 123-month forecast for the US 10 year treasury yield stands at 2.25% while they expect the Canadian 10-year government bond yield to reach 2.15% over the same period. Canadian 10 year bonds are currently trading at 1.85% Yield.
October 19th Equity and Fixed Income Trading:
Equity Market Indices:
* Toronto S&P/TSX: 12,416. Up 1.8% 5-day; Up 3.9% YTD
* New York S&P 500: 1,433. Up 0.3% 5-day; Up 14.0% YTD
*New YorkDJIA: 13,344. Up 0.1% 5-day; Up 9.2% YTD
* London FTSE 100: 5,896. Up 1.8% 5-day; Up 5.8% YTD
* Hong Kong Hang Seng: 21,552. Up 2.0% 5-day; Up 16.9% YTD
* Shanghai Composite: 2,128. Up 1.1% 5-day; Down 3.2% YTD
Fixed Income:
* Canadian Prime: 3.00%
* U.S. Prime: 3.25%
* 5-year Canada Bond: 1.50% coupon; 1.37% Yield
* 10-year Canada Bond: 2.75% coupon; 1.85% Yield
* 5-year U.S. Bond: 0.625% coupon; 0.75% Yield
* 10-year U.S. Bond: 1.625% coupon; 1.76% Yield
Commodities:
* Oil: $90.05 (West Texas US$/bbl)
* Gold: $1721.75 (US$/troy ounce)
* Silver: $32.08 (US$/troy ounce)
* Natural Gas: $3.43 (H. Hub US$ mmbtu)
* Wheat: $9.65 (Dk N. Spr, Prtld, US$ bshl)
* Corn: $7.62 (CBOT fut, US$ bshl)
* Soybeans: $15.33 (CBOT fut, US$ bshl)
* Canola: $646.90 (InStr Vn 1Cda, C$ tnne)
Currencies:
* Canadian dollar: 1.0064 vs. US dollar
* Canadian dollar: 0.6289 vs. British pound
* Canadian dollar: 0.7727 vs. Euro
* Canadian dollar: 7.8000 vs. Hong Kong dollar
* Canadian dollar: 6.2938 vs. Chinese Yuan Renminbi
* Canadian dollar: 12.9683 vs. Mexican Peso