Swift action by governments and central banks is sparking growth as employment numbers rise. Most data has surprised to the upside on the back of this stimulus. In concert with that, Canadian disposable income growth has accelerated this year and household debt loads have dropped.
The global outlook is also stabilizing with China continuing to post a strong rebound. European activity is also surprising, with a solid pick up. German exports, in particular, are increasing, which is positive for the region and a positive barometer for the health of global trade.
The biggest surprise in the Canadian economy has been its housing strength. Monthly housing starts hit a 30-year high in August. Some of this was pent up demand from the lockdown in the spring, but activity appears on track to exceed last year’s results.
Trends in housing activity are already showing the effects of the pandemic. With many employers establishing “work from home” as a flexible option, the demand for homes outside core markets in major cities is increasing.
While job opportunities are increasing, the unemployment rate is still historically high. Inflation is contained and companies seem reluctant to raise prices as demand continues to rebuild.
As the U.S. presidential election heats up, market volatility is starting to increase. Polls show a competitive race. The outcome may be some version of split government with no single party dominating all three branches of government. Historically, markets have preferred this type of result, as evidenced by positive returns in similar situations1.
The Bank of Canada seems content to be “on hold” for at least the next two years. It expects a full recovery may take time and that inflation may likely remain below its 2% target for a few years.
Bond market update
While 2020 has been a volatile year for bond markets, August was relatively quiet, with a continuation of trends that started in early spring.
Canadian credit spreads continued to tighten, but with much less enthusiasm. The Bank of Canada corporate launched its bond-buying program in April. It has since only purchased $140 million in bonds and two issues since the start of July. In comparison, international investors have purchased over $50 billion of Canadian corporate bonds since the start of April. Still, the reach for yield seems to be in public bond markets. Higher beta credits are still being absorbed with ease. Government interest rates moved marginally higher in August, but it feels as though they are now trading in a very tight range.
Sun Life Core Advantage Credit Private Pool2
The Fund’s active spread duration is flat relative to the benchmark, as we actively reduced it over the month as spreads continue to tighten. The Fund is underweight federal and provincial bonds and overweight corporate bonds.
Over the past month, we added several new issue corporate bonds as well as corporate bonds in the secondary market. We funded most of these trades through the sale of other corporate bond holdings.
2 Sub-advised by Sun Life Capital Management (Canada) Inc.
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