Canadian Economic Data Today:

Two pieces of data of importance:  First, the cash keeps on flowing into the country, another $5.5 billion in July flowed in from non-resident, and Canadian liquidated $3.3 billion on foreign holdings during the same period.  Second, is Wholesale Trade’s headline numbers were down, dragged down by car sales (-0.6%). 

 

 The first is not a huge surprise; the average monthly inflow was around $9.7 billion (over the past 6 months) that includes April and May that saw $23 bn and $13 bn inflows respectively.  The trend seems to be “down”, probably because the “risk-on” trade is now attractive.  However, the Canadian market is maybe not see as a “risk-on” market for non-resident investors, since equity outflow were large again at $0.6 billion. 

Wholesale trade is a huge deal for Canada, because the auto sell shortfall is an indication that the North American economy (we mean America here) is slowing, in fact not only were wholesale sales off, inventory have been rising, and indication that the U.S. economy is slowing, which is very important for Canada, for 70% of our trade is with the U.S. 

 

Finally, manufacturing sales were off too!  I don’t count this as a major indicator, first because merchandise trade is now less than ¼ of Canada’s GDP, but more importantly, similar data can be extracted from the wholesale trade data, its more of a confirmation, and in fact the drop was almost 1.0% for the month of July.

Recap of Canada’s economy – David Rossenberg from Gluskin Sheff

• Canada will be the top GDP growth performer among the G7 countries in 2010 and second in 2011
• Significant exposure to natural resources (over 40% of total exports)
• Largest sectors of the S&P/TSX Composite Index:
• Financials = 30%
• Energy = 23%
• Materials = 24%
• Very active capital formation in the resource sectors. Extensive choice of small, mid, and large cap companies
• Arguably the strongest banking system in the developed world (low leverage ratios, high dividend yield/growth, recourse loans)
• One of the few countries with a AAA-rated balance sheet
• The Canadian dollar (the “loonie”) is a resource-oriented currency and is in a secular bull market
• Stable, parliamentary democracy — pro-business/pro-markets government; no election until 2012-2013
• Risk of Quebec secession has disappeared

On a YoY basis virtually all material prices are up, energy prices are down for both oil and gas (7% and 28% respectively), and Zinc, Lead and Aluminum are either down or flat, but Copper, Nickel, Gold, Silver, Palladium and Platinum are all up 15% or more for the past 12 months.  These are tremendously positive factors for Canada.  Despite a slow down in manufacturing and wholesale trade (driven by the American economic problems) the money markets are pricing further interest rate rise out of the Bank of Canada (its important to note that the value of the Canadian dollar is not considered by the BoC when setting interest rates).

“Investors are increasingly seeking yield and especially among solid credits, and again in Canada, even with the Bank of Canada signaling a pause in the tightening cycle, they can pick up a 100 basis point premium at the front end (2-year note) of the Canadian government curve over the U.S. treasury market. Not only that, equity investors can pick up a similar premium in the domestic stock market because, at around 3%, the Canadian dividend yield is very nearly 100 basis points higher than what you can garner in the S&P 500. Yields above zero and resources below the ground, hence the fact that year-to-date, the Canadian equity market (the TSX Index) has outperformed the U.S. (the S&P 500) by well over 500 basis points (on a Canadian dollar basis) on top of last year’s 2,400 basis point outperformance. Look for this divergence to continue, as it has with near consistency for about a decade now” (Rossenberg).