Canada continues to see a steady recovery from the effects of the pandemic. As employment levels rise, over half of the jobs lost during the lockdown have recouped1. Auto sales are also picking up after a deep plunge.
However, the standout sector is housing. July saw record levels of home sales with double digit year-over-year price gains in most major cities. Some of this is undoubtedly pent up demand due to a lost spring selling season, but it is still a robust response.
Another surprise is that housing starts are well above expectations. During the lockdown, residential construction was relatively undisturbed, which allowed it to position for a pickup in demand.
In other markets, Europe continues to see solid gains in manufacturing and services. Strong wage subsidy programs have been critical in keeping unemployment numbers in check. China appears to be forging ahead with a V-shape recovery, one of the few large economies that may see a bounce back this year. The key story from Asia is that trade flows are starting to pick up as the virus is well contained in most regions.
One recent worry is the emergence of trade tension. The renewal of U.S. tariffs on Canadian aluminum exports have prompted Canada to respond in equal measure, announcing retaliatory tariffs to be imposed in September. The catalyst for the U.S. action is not entirely clear, but the hope is that this situation does not escalate.
Tiff Macklem, Governor of the Bank of Canada, has been clear that rates may likely stay low well into 2023. The Bank continues to take measures to push the economy forward, most recently cutting its five-year benchmark qualifying rate to make it easier to secure a residential mortgage.
Bond market update
Canadian credit markets continued to outperform in June, Canadian credit markets continued to show strong demand throughout most of July. The spread of the FTSE TMX Canadian Corporate Bond Index to that of the overall market tightened nearly 20 basis points to 142 basis points, approaching pre-COVID levels. We see this demand for credit in the past month driven by a few factors. Cash inflows to ETFs continue to be strong, while the supply of new issue corporate bonds has been scarce. Strong demand from active and international accounts is driving down new issue fills, with deals now coming with little if any new issue concession. These supply-demand technical factors continue to push corporate spreads tighter as dealers have been sitting on very little credit inventory.
Sun Life Core Advantage Credit Private Pool2
The duration of the Sun Life Core Advantage Credit Private Pool has been neutral to slightly short versus its benchmark. We remain underweight federal bonds and provincials bonds. We are overweight corporate bonds, largely driven by exposure to USD corporate securities. Activity in July focused on value trading in our corporate bond holdings, as well as reducing our overall credit exposure as spreads continue to compress.
1 Source: https://www.theglobeandmail.com/business/economy/article-canadian-economy-added-419000-jobs-in-july-marking-third-month-of/ (as of August 7, 2020)
2 Subadvised by Sun Life Capital Management (Canada) Inc.
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