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Canadian Housing Market Continues To Be In The Limelight, Inflation Edges Higher In India, FOMC Statement Dovish‏

CANADA

The surge in house prices in Canada remained the central theme across financial markets again this week. Prime Minister Justin Trudeau raised concerns on the housing market for the second consecutive week. "We're at a moment as a country where housing has just become so much more out of reach for a younger generation, and we have to rethink how our system of housing is providing access to homes." He went on to add that the Federal Government "does have some pretty big tools and levers to pull" when it comes to cooling the housing market, including tax policy on home construction, interest rates, and taxes on foreign buyers. He was at a round table discussion in Vancouver he also mentioned that a solution needs to be targeted directly at the Vancouver market and that would require better collaboration with the province and the municipalities and the mayors.

Teranet National Bank National Composite House Price Index (11 cities) was up 8.98% in May 2016 as compared to May 2015. Since the start of this year it is up 4.35%. Vancouver topped the charts posting growth of 21.71% in May, with year to date prices up an astounding 12.43%. In Toronto the year on year change in price has been 10.58%. The City of Hamilton in Ontario reported higher growth than Toronto also at 13.81%. In Victoria price were up 10.76%. Calgary House prices were down 0.22% & Edmonton even more at 1.67%. Quebec City reported a 3.61% drop in home prices. Halifax also reported a steep drop of 4.67%. The other cities in the 11 city Index Montreal, Winnipeg & Ottawa-Gatineau reported marginal increases from last May. As is clear from the above the surge in home prices is restricted to the cities of Toronto and Vancouver & the areas around it. This is quite clearly not a problem across the country but restricted to the two large cities where 25% of Canada's population live in as per the 2011 census.

Data from Statistic Canada could help in explaining some of the large jump in home prices in Greater Toronto Area & Greater Vancouver Areas. As per preliminary estimates, Canada's population increased by 106,966 in the first quarter of 2016. This was the highest gain since 1989 when 115,420 people were added. The reason for this population gain was new immigrants at 86,216 a large number of whom were Syrian refugees. The number for immigrants is also a record hike, since 1971 Canada has never received in one quarter this number of immigrants. Statscan data from inter province migration in Q1 also shed some light on the price movement in Toronto & Vancouver with only British Columbia (5,067) Ontario (1101) witnessing positive migration. The top provinces with witnessed negative migration were Alberta (-1788), Saskatchewan (-1316), Quebec (-1221) & Manitoba (-1143).

The Canadian Dollar gyrated in sync with the move in crude oil prices. It traded weaker than 1.3000 after crude oil prices fell sharply lower on Thursday. The reversal in crude oil prices on Friday sent the Canadian Dollar the other way. In the futures market speculative Canadian Dollar long positions reduced further falling to 18.4k contracts after peaking at 26.3k in the first week of June. The appetite for further long positions on the Canadian Dollar has reduced in the last two weeks as crude oil prices could possibly have topped out. Supply seems to be coming back into the market at the current level of around $50 a barrel. The Baker Hughes count of oil rigs moved higher for the third consecutive week indicating that producers are taking advantage of the rally to pump out some more crude oil.

UAE

Dubai International Airport which is the world's largest international airport, had a through put of 6.9 million passengers in April, which is a growth of 7.2% over the same month in 2015. In the first four months of 2016, growth in passenger through put has been 6.9% which has helped keep up economic momentum in Dubai, inspite of a slowdown across the GCC due to lower crude oil prices. The Indian subcontinent was the fastest growing segment with 1.6 million passengers which is 24% of all passenger movement. There was growth of in aircraft movements of 4.3% & freight volumes were also up 4.8%.

The Sukuk and Bond markets in UAE continued to attract investors for high quality issuers. Emirate of Abu Dhabi owned Al Hilal Bank raised $225 million through a private placement of Sukuk's. The tenor for this funding was 2.5 years and was priced at 3 month libor plus 160bps. As the only Islamic Bank which is 100% owned by the Emirates of Abu Dhabi investors were attracted by the strong ownership combined with attractive yield. Meydan Group which owns and operates Dubai's racecourse & has real estate projects in the vicinity raised funding through a Dhs. 700 million sukuk & Dhs. 300 million term loan for tenor of eight years.

Dubai's large tourism sector is expected to get a boost this October when the first of Dubai Parks & Resorts theme parks "Motiongate" is set to open. This theme park will create 1,200 new jobs and about a third of these are expected to be UAE nationals. This is the first of the 6 new attractions in this development & is expected to increase the appeal of Dubai's tourism.

Inflation in Dubai eased in May, which should be welcome in the current environment. Dubai's CPI increased by 1.4% in May, well below 1.9% which was reported in April. The drop in cost of housing & utilities, which have a weightage of about 40%, to 3.3% from 3.9% in April was the key driver of inflation. The easing of pressure in housing costs will be welcome for the economy & reduce the cost of doing business in Dubai.

INDIA

In India, inflation has again reared its head as CPI hit the highest level in nearly 2 years at 5.76% in May. The prime driver of CPI was the Food & Beverages component, which has a weightage of 45.86%, increasing by 7.20%. Within this Pulses, Sugar & Vegetables increased by 31.57%,13.96% &10.77% respectively. Outside of the food component there is very little sign of inflationary pressure. The high weightage that the Food component has in the CPI & consequently RBI using this as a base to manage interest rates results in India, has resulted in higher interest rates in India. Food prices movements in India is more related to supply side factors and it not really demand led. With large dependence on monsoon rains and limited amount of storage facilities, especially cold storage; food prices either hit rock bottom or shoot higher depending on supply side factors. The consequence of this move higher in inflation is that all possibilities of interest rate cut by RBI, which is sorely needed by the large industrial sector where recovery has been sluggish, is ruled out. At the wholesale level, WPI stayed in the positive territory for the second consecutive month after trending in negative territory for about 18 months. The cause for higher prices at the wholesale level is not due to higher demand at the factory gate, but again due to cost push issues. Food prices again being the prime reason. Items like Minerals (-26.78%), Cotton textiles, Man Made Textiles, Leather, Rubber & Plastic Products, basic metals, alloys and metal products, Iron & Semis all remained in negative territory indicating a picture of lackluster demand for manufactured goods. This makes the rate cut even more needed as lower interest rates could spur some amount of industrial activity.

In India some big ticket reforms seem to be on the anvil, the much awaited GST bill which will unify the plethora of state, central and regional taxes into one, easing the process of doing business could be passed through the parliament as the ruling party has increased its seat share & managed to find a few allies to pass this bill. The merger of 5 of its subsidiaries into India's largest bank State Bank of India was approved by the cabinet in what would be the start of consolidation in the large PSU banking sector in India. The aviation policy released is expected to give a large boost to the aviation sector and aims to turn India into the third largest aviation market by 2022.

India's trade deficit widened to $6.27 billion in May, which is the highest level in three months. Exports were lower for the eighteenth consecutive month, but there was some good news in the details. Non-petroleum exports increased by 1.01% over last year, indicating some pick up and for the first time in this calendar year non-petroleum exports have shown growth. Imports on the other hand imports were lower by 13.29% with crude oil contributing the bulk.

GLOBAL MACRO

There were quite a few data releases this week in the US and the overall picture does not seem very optimistic for a rebound in growth. US retail sales posted strong growth for the second consecutive month in May growing by 0.5%. The imputes to retail sales came from the auto sector which accounts for about 25% of all retail sales, which posted record high sales in May at an annual pace of 17.5 million. Excluding auto and gas sales retail sales increased by 0.3% from last month. There was weakness in the important building materials sector which contracted for the third consecutive month. Overall retail sales did show strength with retail sales excluding auto & gas sales up 4.1%. US Producer Prices moved back into deflationary territory falling 0.1% as compared to May 2015. PPI has now been negative or at zero for 17 consecutive months, due to the strong US Dollar which has reduced pricing power at the factory gate for US manufacturers. US Industrial Production in May fell 0.4% from April, largely due to a drop in vehicle production which fell sharply by 4.2%.

The keenly watched FOMC statement and FOMC Chair Janet Yellen's press conference moved markets, by its overall dovish tone. In terms of the statement the key change from April was the outlook of economic growth was revised higher to "picked up" from "appears to have slowed" in April. The outlook for labor market was changed to "pace of improvement has slowed" from "improved further" in April. The FOMC decided to leave rates unchanged, voting was not unanimous with Kansas Fed President, Esther George dissenting as she wanted the FOMC to hike rates by 25 bps. The real change was in the "Fed dot plots" which is part of the Economic projects of FOMC members. In March when this was last released FOMC members had median GDP projection of 2.2% for 2016 & 2.0% for 2017. This was revised lower to 2.0% for both years. The real big change was in the FOMC's member's expectations of Future Fed Funds rate hike expectations. In March only 1 member was of the view that there will be only 1 rate hike this year, in June six member are of the view that only one more rate hike is possible this year. Nine members still have a view that there will be 2 more rate hikes of 25 bps each in 2016. The real change is in members who think more than 2 rate hikes are possible this year which is down to two members from seven in March. The downshift in Fed's interest rate hike expectations spooked markets. Just to reflect in perspective, in December 2015 when Fed hike rates for the first time, no FOMC member was of the view that less than 2 rates hikes in FOMC was possible. Also 13 FOMC members were of the view that at least 4 rate hikes in 2016 was possible. The projection in June are shockingly different from December last year and the market is worried whether the FOMC has concerns about growth both in the US and globally. "Brexit" fears which are dominating markets currently in the run up to the plebiscite in UK factored in the FOMC discussions and as per Fed Chair Janet Yellen it was one of the factors that factored in the FOMC decision.

The dovishness in the FOMC statement resulted in a large move in "risk averse" assets. Firstly, US Treasuries surged higher pushing yields lower with the 10-year yield trading at below 1.57%, which is the lowest since December 2013. The fear of slower economic growth sent stocks lower. Gold & Silver prices shot higher, Japanese Yen and Swiss Francs firmed up further. The "secular stagnation" hypothesis which has been discussed widely in recent times seems relevant currently. The best GDP growth that the US has notched, since the dip of 0.3% & 2.8% in 2008 & 2009 respectively, has been 2.5% in 2010 and this year it is expected to be around 2% at best. Next week on the Thursday June 23, the referendum in UK will be held, which will determine whether the UK stays in the European Union or exits. Counting will start at 22.00 GMT the same evening and the results from the regional counting centres will start rolling in and before sunrise on Friday the final count could be available.

Compiled & Researched by: Shailesh N. Mulki

Disclaimer: This is not a research report and the views and information contained herein are the personal views of the author. These should not be taken to constitute advice or recommendation.

Source: Bloomberg.com, Investing.com