Equity markets outside Canada continued to perform well as economic data showed strength. Outside of high yield, bond markets were generally weak as economic and interest rate concerns weighed on investors.

 

May 2015 Market Performance

All index returns are Total Return (includes reinvestment of dividends) and are in Canadian Dollars unless noted.

Indexes		Return for May	2015 YTD Return
S&P/TSX Composite		-1.22%	+3.79%
S&P500		+4.14%	+10.31%
MSCI EAFE (Europe, Asia & Far East)		+2.01%	+15.31%
MSCI World		+3.11%	+12.16%
MSCI Emerging Markets		-1.23%	+13.17%
FTSE TMX Universe Bond		+0.20%	+2.94%
JP Morgan Emerging Markets Bond (EMBI)		+2.65%	+11.30%

Other Market Data	Month-end Value	Return for May	2015 YTD Return
Oil Price (USD)	$60.20	+0.96%	+13.01%
Gold Price (USD)	$1189.40	+0.59%	+0.45%
US 3 month T-bill	+0.01%	0.00%*	-0.03%*
US 10 year Bond	+2.12%	+0.07%*	-0.05%*
USD/CAD FX rate	1.2437	+3.09%	+7.21%
EUR/CAD FX rate	1.3660	+0.83%	-2.69%
CBOE Volatility Index (VIX)	13.82	-4.88%	-27.92%

*Absolute change in yield, not the return from holding the security.

Market Update

May was a positive month for most equity markets, however Canadian equities, and emerging market equities when measured in Canadian dollars, were negative. Canadian equities in the S&P/TSX REIT and Energy sub-indexes had particularly difficult months. The weakness in the Canadian dollar helped boost modest returns in U.S., EAFE and World equities for Canadian investors. In a reversal of April, small cap stocks in Canada underperformed those in the U.S. Several US equity market indexes hit new highs, including: S&P500, S&P400 Mid Cap, Nasdaq 100 and Nasdaq Biotech.

Equity market volatility rose in May, both in Canada and the US, but remains very low. The last time either market saw a strongly positive or negative day was in early January.

The broad index for Canadian bonds, the FTSE TMX Universe Index, was up 0.2% in May, while US investment grade indices were negative. High yield bonds performed well, particularly in Canada where the Merrill Lynch Canadian High Yield Index was up 1.5%. Emerging market bonds performed well and are now up more than 11% for the year.

Commodities in general weakened in May. The broad Bloomberg Commodity Index was down 2.7%, as losses on agricultural commodities, natural gas and copper outweighed small gains on oil and gold, the largest weights in the index. The most widely reported commodities, oil and gold, were +1.0% and +0.6%, respectively.

The Canadian Dollar weakened against the US Dollar and the Euro as economic data was relatively weaker in Canada than in those areas.

May Economic Indicator Recap

Canada

Housing prices were flat for the month of March and up 1.2% over the last year.  New housing starts in April were in line with the consensus forecast of 182,000 and building permit activity was also strong, up 11.6%.

April’s employment report showed a reversal from March as full time jobs were created, while part time jobs were lost. On a net basis 19,700 jobs were lost as part time job losses outstripped full time job gains. The unemployment rate remained at 6.8%.

April inflation statistics were released on May 22, along with March retail sales. The Consumer Price Index (CPI) was +0.8% on an annual basis, below the forecast of +1.0%. On a monthly basis, the inflation rate was negative at -0.1%. Core inflation which excludes more variable items such as gasoline, natural gas, fruit & vegetables and mortgage interest rose 2.3%. Retail sales in March continued to grow and were up 3.1% over the last year.

Canada’s gross domestic product (GDP) was weak in the first quarter at -0.1% after March came in negative at -0.2%. On an annualized basis GDP was -0.6%. Regardless of timeframe, all of these were below forecasts. Two consecutive negative quarters of growth constitute a recession. Recessions are usually presaged by a negative bond yield curve, something we aren’t seeing, at least not yet. While the economic data was weak, it wasn’t weak enough to warrant a change in interest rates by the Bank of Canada. Bank of Canada governor Stephen Poloz noted that slack remains in the economy and they don’t expect the economy to get back to full capacity until late in 2016. The best way to interpret that statement is don’t expect interest rates to rise until late in 2016. The next meeting is on July 15.

U.S.

The U.S. unemployment rate dropped 0.1% to 5.4% in April. Job creation was in line with expectations and applications for unemployment benefits remained at 15 year lows.

Retail sales continued to soften in April with growth dropping under 1% for the first time since the financial crisis. The US economy is much more dependent on consumer spending than the economies of most other developed countries. Given these low levels, unless inflation really picks up fast, the US Federal Reserve may continue to hold off on raising interest rates longer than many forecasters expect.

On the housing front, building permit and new construction activity were ahead of forecasts, but remain well below peaks seen during the bubble. In a reversal of March, sales of new homes climbed 6.8% in April while sales of existing homes declined by -3.3%.

Inflation in the U.S. was up slightly at +0.1% in April, but was down -0.2% on an annualized basis. Core inflation remains very low as well; it was up +0.3% for the month (+1.8% annualized). GDP for Q1 was lower than first thought -0.7% v.s. +0.2% as first estimated. Given that inflation remains very low and GDP was much weaker than expected, don’t expect any movement on interest rates from the Federal Reserve at their June meeting. As is typical, economists and other forecasters are most optimistic at the beginning of the year. Now that we are almost half way through 2015, the forecasts for rising central bank interest rates are being tempered.

Eurozone

Retail sales declined in March by -0.8%, but were up +1.6% on an annual basis. The strong reports from the previous three months are looking more and more like an anomaly rather than a trend. Like retail sales, inflation cooled in April to +0.2%, 0.0% on an annual basis. Unsurprisingly, the ECB left their benchmark interest rate unchanged at +0.05%.

The first read on GDP for the first quarter was +0.4%, +1.0% on an annual basis. Unlike retail sales and inflation, GDP growth seems to be in a sustained upward trend in Europe.

Germany

Retail sales in Germany were up +1.7% in April and +1.0% compared to a year ago. Inflation remains very low; the April reading was +0.5% and 0.0% for the last 12 months.

GDP growth in the first quarter was +0.3% and +1.1% over the last 12 months. Growth in Germany had been stronger than most of its neighbors for several years, however many of those countries have started to recover and are now growing faster than Germany.

China

Inflation dropped for a second month in a row in April (-0.2%), but was steady at +1.5% over the last 12 months. Retail sales in China continued their multi-year trend of slower growth, but still outpaced all developed countries at +10.0% for the 12 months ended April. Prices of new homes declined -6.1% in April for the 8th month in a row as government efforts to cool the property market continue to slow demand. China’s balance of trade rose to $34 billion in April as imports declined more than exports, -16.2% and -6.4% respectively.

Japan

At its May meeting the Bank of Japan left interest rates at 0% and maintained its policy of increasing the monetary base by ¥80 trillion (CAD$ 820 billion) per year. Inflation was steady at +0.4% in April, ahead of the forecasted -0.1%. On an annualized basis, inflation dropped to +0.6% from +2.3% as the effect of a sales tax increase in April 2014 dropped off. The preliminary estimate of GDP for Q1 came in at +0.6%, +2.4% annualized. Both were well ahead of forecasts, indicating that the Bank of Japan’s monetary policy is having its desired effect of promoting economic growth.

After posting its first trade surplus in over two years, Japan slipped back into deficit in April, albeit with a small one of – ¥53B. The forecast was for a deficit of around -¥300B. Retail sales climbed +5.0%, the largest rise in over a year, after plunging -9.7% in March.

June Economic Calendar

	Canada	US	Germany & Eurozone	China & Japan
GDP	June 30	June 24	June 5 (Eurozone)	June 7 (Japan)
Consumer Inflation (CPI)	June 19	June 18	June 1 (Germany), June 17 (Eurozone)	June 8 (China), June 26 (Japan)
Interest rate decision	N/A	June 17	June 3 (Eurozone)	June 18 (Japan)
Housing Market	June 8 (Permits), June 9 (Starts), June 12 (Prices)	June 16 (Starts & Permits), June 22  & 23 (Sales), June 24 (Prices)	N/A	June 17 (China)
(Un)employment	June 5	June 5	June 2 & 30 (Germany), June 3 & 30 (Eurozone)	June 26 (Japan)
Retail Sales	June 19	June 11	June 3 (Eurozone)	June 10 (China), June 26 (Japan)