With the first quarter of 2021 behind us, it's important to look back as well as forward. Here are four areas of interest you'll want to watch for...
Global equity markets posted gains over the first quarter of 2021 with improving economic data, along with the U.S. Federal Reserve Board’s (FED) commitment to easy policy, helping to boost sentiment towards equities.
The S&P 500 Index advanced, reaching a record closing price, as did the Dow Jones Industrial Average. The prospect of ongoing lower rates boosted investment in technology stocks, which helped push the NASDAQ Composite Index higher. In Canada, the S&P/TSX Composite Index rose to a new record, helped by the strong performance of the Information Technology and Materials sectors.
Recently, oil prices have declined over the past week, dragged down by concerns over global demand along with news that the Organization of the Petroleum Exporting Countries (OPEC) and Russia will begin raising oil production, albeit gradually. The yield on 10-year government bonds on both sides of the border, although having declined last week, are still on an upward trajectory since Jan 1st.
Canadian real estate prices continue to rise:
• The Office of the Superintendent of Financial Institutions (OSFI) has proposed a change to the mortgage stress test that would raise the minimum qualifying rate to the higher of the contract rate plus 200 basis points or 5.25%. This is being done in part to protect lenders from financial risk by helping them determine if individuals applying for an uninsured mortgage will be able to meet the obligations of the mortgage at a higher rate.
• The proposal comes amid a strong housing market that has pushed housing prices much higher over the past year, particularly in the two biggest markets (Toronto and Vancouver), where average prices have risen above $1 million.
• There have been calls for the government to help slow down the market imbalance. Yet the real estate market has been a key component of the Canadian economic recovery, so slowing down activity could hinder that growth.
Decline in Canada’s unemployment rate:
• The Canadian economy added 303,000 jobs during March, with the unemployment rate dropping to 7.5%.
• The accommodation and food services and the retail services industries, both hard-hit amid the pandemic and lockdown restrictions, added a substantial number of jobs during the month.
• All signs point to progress in the recovery of the Canadian labour market. But caution is warranted as some of the country grapples with a third COVID-19 wave and new variants, which are resulting in new lockdowns.
FED not planning to raise rates:
• The FED released the minutes from its last meeting in March, which provided no indication the Fed will lift its key interest rate before 2023.
• Investors were looking for clues the policy may tighten before that time, particularly as economic conditions improve and inflation appears poised to surge higher.
• The minutes reiterated the cautious stance of the FED, which could be constructive for equity markets and put a ceiling on government bond yields.
Global economy projected to expand:
• In its most recent World Economic Outlook, the International Monetary Fund (“IMF”) has raised its projection for global economic growth in 2021.
• The IMF predicts the global economy will expand by 6.0% in 2021, above its January
projection of 5.5%. Meanwhile, the IMF expects Canada’s gross domestic product (GDP) to grow by 5.0% in 2021, an increase from its 3.6% projection in January.
• The rising expectations for growth are in response to the ongoing rollout of the COVID-19 vaccines and reduced lockdown restrictions in many areas of the world. Still, the IMF
cautions that risks to its projections remain, including the potential impact from new
variants. It also notes that a potential swift recovery could result in an unexpected rise in interest rates, which could pose some financial risks.
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All the best and with kind regards... Roger.