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Canadian Economy to Pick Up Steam –



Canadian fixed income funds benefitted from central bank easing when the coronavirus pandemic struck in March 2020. Indeed, funds like the $934 million, 5-star Renaissance Canadian Bond Class F returned 9.22% for the calendar year, versus 8.28% for the Canadian Fixed Income category. But 2021 may prove more challenging and returns are likely to be in the lower single digits, says portfolio manager Adam Ditkofsky, a member of the three-person team that oversees the fund on behalf of Toronto-based CIBC Asset Management (CAMI).

“The start of 2021 is very similar to how 2020 began,” says Ditkofsky, vice-president at CAMI, who joined the firm in September 2008, after working for two years as a credit analyst for CIBC World Markets. “Yields are very low and corporate spreads, or the extra yield for holding corporate bonds, are also very low. This doesn’t look like a great backdrop for bonds going into 2021. But we know that 2020 played out extremely well—because corporate spreads recovered in the back half of the year due to aggressive stimuli and a favorable outlook, thanks to the vaccines. But looking ahead for 2021, our expectations are different.”

Ditkofsky notes that his firm’s expectations for the economy changed mid-way through 2020. “The stimuli were more than enough to offset the pandemic. We predicted a V-shaped recovery in the latter half of 2020. This year we expect growth to exceed consensus. We are forecasting growth for Canada in 2021 in excess of 6%,” says Ditkofsky, who works alongside Patrick O’Toole, vice-president, global fixed income, and Jean Gauthier, managing director and chief investment officer. “That [growth rate] has not been seen since 1973—it’s a big number.”

Eye on Interest Rates
The economy will pick up steam thanks to increased household savings and pent-up demand by consumers. But it will also lead to slightly higher interest rates. “We believe there will be better entry points mid-year to enter the bond market and have better returns,” says Ditkofsky, who earned an MBA at University of Western Ontario and a bachelor of commerce at Concordia University. “But barring any unforeseen circumstances, it will be difficult for bond market returns. They will likely be in the low single digits—which we said last year, too. But it won’t be the same as 2020, given the expectations for the economy.”

Currently, the Fed funds rate is 0%, and the Bank of Canada’s overnight rate is 0.25%. Moreover, both central banks have stated they will keep their rates unchanged until 2023. “We don’t see any rate hikes priced into the market in the near term. And the central banks’ tone is unlikely to change given that the economy remains fragile,” says Ditkofsky, adding that millions are out of work and many people are dependent on government transfers and low interest rates. “Stimulus is the key to keeping the economy stable for now.”

Moreover, he notes that the Federal Reserve’s new policy of using averages for measuring inflation will also act as a brake on raising rates. “They [central banks] want to avoid taking their foot off the gas pedal too early.” In addition, he believes that central bank purchases of government bonds will also have an impact on keeping bond yields from rising too much, and it’s important to monitor policy statements to determine if there is any change in outlook which might lead to higher rates and lower bond prices.

Risks to Watch
On the other side of the coin, there are a couple of risks that need watching carefully. First, elevated COVID-19 infection rates could lead to further lock-downs. “That could see lower interest rates, which means higher bond prices. But corporate bond yields would perform poorly as credit spreads would also rise in that type of environment,” observes Ditkofsky, adding that equities would also get hurt. “But I believe governments would step in again to support the economy, and the market. The damage would be contained.”

The second risk is higher-than-expected inflation which would push interest rates much higher, and send bond prices lower. Still, he notes that both Canada and the U.S. have run significant deficits to support their economies.

Areas of Interest
From a strategic viewpoint, Ditkofsky and his colleagues are favouring corporate bonds, since they account for about 60% of the portfolio, or almost double the weight in the benchmark FTSE Canada Universe Bond Index. The balance is split between 23% federal, 14.5% provincial bonds and 2.5% cash.

The bulk of the corporate bond weight is in investment-grade bonds, plus 8.5% high yield bonds. “Given our strong outlook for the economy, we believe this makes sense. Corporate bonds will continue to outperform government bonds over the next 12 months.” Ditkofsky notes that although the benchmark has a yield of about 1.2%, his fund generates yield that is 0.7% higher because of the emphasis on investment grade corporate and high-yield bonds.

As for duration, the managers are maintaining a fairly neutral duration of 8.5 years. “But we tend to be tactical and see duration as a tool to drive active returns. It’s not uncommon to be plus or minus a half year relative to the benchmark, to take advantage of short-term interest rate movements and if we see opportunities in a technical situation where bond yields move sharply in a short period.” Currently, from a tactical standpoint, the portfolio is over-weighted to the mid-term area of the yield curve.

Running a portfolio with about 250 individual corporate bonds from about 150 issuers, Ditkofsky likes securities such as Granite REIT. “It has a solid portfolio that is focused on e-commerce and has been fairly resilient during the pandemic. Historically, it was very exposed to Magna International, but it has diversified away from them. Among their largest tenants is Amazon.” The bond, which matures in 2031, has a yield of 2.35%.

Another favourite is Mattamy Homes Ltd., a privately-held real estate developer, which has a bond maturing in 2027 that is yielding 3.5%. “It’s one of Canada’s largest home builders and has significant land holdings in the Greater Toronto Area. It has a fairly stable credit profile.”

Year-to-date (Feb. 12), the fund is down 1.86%, versus the Canadian Fixed Income category which is down 1.66%. This is largely attributable to yields creeping higher. “It’s not surprising given the economic backdrop. But we believe the market will offer better entry points in the next quarter that will support better returns,” says Ditkofsky, adding that investors should lower their expectations for this year.

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US adds a strong 379,000 jobs in hopeful sign for economy – Investment Executive



The pickup in hiring lowered the unemployment rate from 6.3% to 6.2%, the Labor Department said Friday in its monthly jobs report. That is down dramatically from the 14.8% jobless rate of April of last year, just after the virus erupted in the United States. But it’s well above the pre-pandemic unemployment rate of 3.5%.

Stock prices surged on the news of solid job growth, a day after Wall Street suffered deep losses on fears that inflation and interest rates could soon be headed higher.

One year after the pandemic triggered a violent recession, economists are increasingly optimistic that hiring will accelerate in the coming months as Americans seize the opportunity to once again travel, shop, attend sporting events and visit movie theatres and restaurants. Households as a whole have accumulated a huge pile of savings after having slashed spending on those services. Much of that money is expected to be spent once most people feel comfortable about going out.

Friday’s report showed that the nation’s job growth is still being driven by a steady recovery of bars, restaurants and other leisure and hospitality establishments. Bars and restaurants, in particular, snapped back last month, adding 286,000 jobs as business restrictions eased in California and other states. That trend will likely continue as Texas this week joined some other states in announcing that it would fully reopen its economy with no restrictions.

Also hiring last month were retailers, which added 41,000 jobs, health care companies with 46,000 and manufacturers with 21,000. On the other hand, construction companies shed 61,000 jobs, likely in part because of the severe storms and power outages in Texas.

Friday’s strong jobs report, by suggesting that the economy is on the mend, could complicate President Joe Biden’s push for his $1.9 trillion economic rescue package, which is being considered by the Senate after winning approval in the House. The Biden package would provide, among other things, $1,400 checks to most adults, an additional $400 in weekly unemployment aid and another round of aid to small businesses.

One discouraging note in the February data is that last month’s net job growth came entirely from people who reported that their layoffs had been temporary. By contrast, the number of people who said their jobs were permanently gone was largely unchanged compared with January. People who have permanently lost jobs typically face a tougher time finding new work. In many cases, their former employers have gone out of business.

With so much money being pumped into the economy, Oxford Economics forecasts that growth will reach 7% for all of 2021, which would be the fastest calendar-year expansion since 1984. The Congressional Budget Office projects that the nation will add a substantial 6.2 million jobs this year, though that wouldn’t be nearly enough to restore employment to pre-pandemic levels.

Still, the size of the Biden relief package, coming as the economy is already showing improvement, has stoked fears that growth could overheat and accelerate inflation, sending borrowing costs up and possibly leading the Federal Reserve to jack up interest rates. Those fears have roiled financial markets for the past two weeks.

Fed Chair Jerome Powell sought to assuage those concerns on Thursday — without success, based on sharp selloffs in the stock and bond markets — when he suggested that any meaningful rise in inflation would likely prove temporary and that the Fed would be in no hurry to raise its benchmark short-term rate.

Nor did Powell offer any hint that the Fed would act to push back against a surge in the yield on the 10-year Treasury note, which has jumped from about 0.9% last year to 1.5% late Thursday. Still, Powell sounded some optimistic notes. Citing in part the increasing distribution and administering of coronavirus vaccines, he said, “There’s good reason to expect job creation to pick up in the coming months.”

Other recent economic reports have also suggested better times ahead. Americans sharply increased their spending at retail stores and restaurants in January, when the $600 relief checks were mostly distributed. Retail sales jumped 5.3%, after three months of declines.

Factory output also picked up that month, and demand for long-lasting goods, such as autos and aircraft, rose 3.4%, the government said last week.

Home sales have been on a tear for most of the past year, driven by low mortgage rates and the desire of many Americans for more space during the pandemic. A huge jump in the proportion of people working from home has also driven up sales, which were nearly 24% higher in January than a year earlier.

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Canada’s Ivey PMI climbs to six-month high as employment improves



TORONTO (Reuters) – Canadian economic activity grew in February at the fastest pace in six months as employment picked up, Ivey Purchasing Managers Index (PMI) data showed on Friday.

The seasonally adjusted index rose to 60.0 from 48.4 in January, its highest since August and the first time in three months it was above the 50 threshold indicating an increase in activity.

The Ivey PMI measures the month-to-month variation in economic activity as indicated by a panel of purchasing managers in the public and private sectors from across Canada.

Canada has grappled with a harsh second wave of infections in recent months, with populous Ontario and Quebec both imposing strict restrictions in December and January to contain the spread. Those are now being loosened.

The gauge of employment rose to a four-month high at an adjusted 54.0 from 41.5 in January, while the inventories index was at 57.8, up from 56.7.

Statistics Canada is due to release the February employment report next Friday.

The unadjusted PMI rose to 63.1 from 55.7.


(Reporting by Fergal Smith; Editing by Chizu Nomiyama)

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The economy added 379,000 jobs in February as unemployment dropped slightly – The Washington Post



The U.S. economy added 379,000 jobs in February, a level well above the pre-pandemic rate that surpassed analysts’ estimates and bolstered hopes for more positive growth through the year as the public health crisis lessens.

The unemployment rate dropped a tenth of a percentage point to 6.2 percent.

It was the most positive jobs report since October, following two months of disappointing numbers, including the loss of an estimated 306,000 jobs in December. And it comes in the midst of final negotiations over President Biden’s $1.9 trillion stimulus package, which is being debated in the Senate amid Washington’s intensely polarized climate.

But economists said that while better than expected, the jobs report showed just how much work remains for the Biden administration and lawmakers around the country as the economy continues to climb out of the employment deficit left by the pandemic.

“Obviously it’s great that job gains beat expectations and they are faster than pre-covid average monthly gain,” said Julia Pollak, a labor economist at ZipRecruiter. “That being said, we’re still in a very very deep hole, and these are not the numbers you would hope to see in a robust recovery.”

Job growth would need to pick up significantly to regain the approximately 9.5 million jobs lost since last year. When estimates for how much the labor market would have grown in the previous economy are included, that hole is even larger, as many as 12 million jobs, according to some economists.

White House officials said the report underscored the need for the stimulus package, with Chief of Staff Ron Klain noting that at the current pace, it would take the economy until April 2023 to get back to the employment levels it had in February 2020.

“The rescue plan is absolutely essential to turning this around, getting kids back to school safely, giving a lifeline to small businesses and getting the upper hand in COVID,” President Biden said Friday, noting that some 400,000 small businesses have shuttered during the pandemic. “All those empty storefronts are not just shattered dreams, they are warning lights going off in state and local budgets.”

The gains in February were driven by large increases in the leisure and hospitality sector, which added 355,000 jobs, as coronavirus-related restrictions eased over the course of the month in many jurisdictions.

Of these jobs, about 286,000 came from restaurants, bars and other food service establishments. RSM chief economist Joseph Brusuelas noted that leisure and hospitality netted only 22,000 jobs when the gains were stacked up against losses from the previous months amid closures and surging coronavirus cases.

And employment in the sector still badly lags behind its pre-pandemic level: There are 3.5 million fewer jobs in the industry than there were one year ago.

Other sectors gaining jobs included temporary help services, which added 53,000 jobs, health care and social assistance, which added 46,000 positions, and retail, which added 41,000 jobs.

Clothing stores suffered, losing 20,000 jobs. Manufacturing ticked up by 21,000, while construction fell by 61,000, a decline that was probably driven in part by severe winter weather, the Bureau of Labor Statistics noted.

Government workers were hit hard, losing 37,000 jobs at the local level and 32,000 education workers at the state level, data that some said reflected the need for more aid to help shore up budget shortfalls related to the pandemic.

“We believe that it’s a direct result of the fact that we were unable to get aid to states and cities and towns and schools,” said Lee Saunders, president of the American Federation of State, County and Municipal Employees. “That’s why we’re continuing to fight and hopefully we get some money moving to those entities when the Senate acts. Its unconscionable that we’re seeing these layoffs.”

The $1.9 trillion aid package passed by the House includes $350 billion for state and local governments, an issue that faced major opposition from congressional Republicans during the last round of stimulus negotiations despite enjoying support from some state and local GOP officials.

Daniel Zhao, senior economist at Glassdoor, noted that the job growth in industries like leisure and hospitality was probably more about those sectors recovering from job loss in December and January, and less about regaining jobs lost earlier last year.

“Today’s report is showing green shoots of the recovery poking out of the snow,” said Zhao. “But the growth is a little bit weaker than headline numbers imply. … It’s good that these businesses are recalling workers, but it points more to the fact that these businesses are crawling out of the hole from December, rather than the hole that opened up in April and May. It doesn’t necessarily look like incremental growth.”

Drew Matus, an economist and chief market strategist at MetLife Investment Management, said he was concerned that the average hours worked for all workers declined by about 18 minutes a week — hundreds of thousands of jobs’ worth of hours when multiplied by the entire working population.

“The scale of the decline is quite big,” he said. “This report tells me things are looking up if vaccine administration continues, but we’re still not out of the woods yet.”

Still, there are increasingly optimistic signs about the economy and the public health crisis that delivered such a shocking blow to it last year.

The rate of vaccinations is picking up across the country, with improved forecasts about the supply that will be available before June. Coronavirus cases, hospitalizations and deaths have come down significantly from their peak in January, though concerns remain about another upswing as new variants circulate and exhaustion grows after what will soon be more than a year’s worth of preventive measures.

According to Census Bureau data, the share of businesses reporting a “large negative effect” from the pandemic reached its lowest level in the last two weeks of February, just under 30 percent, as did the percentage of businesses reporting that they had cut staff.

The share of businesses saying they added employees in February, about 5.5 percent, was almost double the rate over the last two reports, from the end of December into January.

Many economists are expecting the labor market to make much bigger gains once more aid is authorized in Washington and vaccinations reach a broader slice of the public.

“The report will neither persuade the Federal Reserve to alter its path of accommodative monetary policy, nor should it be used as an argument to pull back on the Biden administration’s proposal for $1.9 trillion in fiscal stimulus,” said Brusuelas, the RSM economist. “For now, the composition of hiring and unemployment suggests that we have yet to get past the deep freeze in the economy caused by the pandemic.”

The report covers the first full month of the Biden presidency. Overall, the economy still has 9.5 million fewer jobs than it did before the pandemic, and economists warn that the unemployment rate would be higher if not for more than 4 million people who have left the workforce over the past year. Women have left the labor force at a significantly higher rate than men: about 2.5 million women, compared with 1.5 million men.

Federal Reserve Chair Jerome H. Powell said last month that the real unemployment rate is probably closer to 10 percent.

Economists and public health experts are more optimistic about the coming months as the rate of vaccinations accelerates.

February saw decreasing caseloads and more reopenings for businesses like restaurants and bars in states like California and New York. But many industries, such as tourism and hospitality, now employ far fewer workers than they did before the pandemic.

Jeff Stein contributed to this report.

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