Weekly Sound Bite: Stocks showing possible breakout and Bank of Canada's Monetary Policy Report has a glaring omission

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Toronto stocks appear to be at a decision point of having to pick between a breakout or breakdown. Both the mid-cap oriented INK Canadian Insider (CIN) and S&P/TSX Composite indices have been flirting with their 200-day moving averages for some time. As we start the trading day Thursday, it looks like stocks want to move higher with both indices trading above their long-term averages. In fact, the INK CIN Index has closed above its 200-day average for 3 days in a row.

The INK CIN Index also has some positive momentum right now with its Relative Strength Index (RSI) at about 64. Technicians often view an RSI of between 53 and 70 as a positive sign that an upward trend can continue.

Both the INK CIN Index and TSX Composite are up for the week, 1.3% and 2.4% respectively as of Tuesday. The outperformance of the resource heavy TSX Composite suggests that our theme from last week that global growth may be getting ready to surprise on the upside is alive and well. In addition, we note that the global economy sensitive U.S. Materials Select Sector SPDR (XLB) also outperformed the broad American market last week. 

We are also getting some hard global data that is beating expectations. In particular, China March export data beat expectations with dollar-denominated exports rising 11.5% on the year. According to CNBC, that was the fastest growth in a year. Meanwhile, Chinese inflation came in at a "not too hot, not too cold" 2.3% for March, a level which should allow the central bank to continue to provide the economy with accommodative monetary policy. In Australia, employment data for March beat expectations with the unemployment rate falling to 5.7% versus a 5.9% street estimate. The good news in Asia is helping to offset some disappointing news out of the U.S. where March saw retail sales fall 0.3% after a flat February.

While the data is encouraging, there will be no shortage of headwinds for stocks to confront in any attempt to move higher. This weekend, major oil producing nations are meeting in Doha, Qatar to try to come to some sort of agreement to limit output. Oil has risen heading into the meeting and expectations may be too high. Consequently, oil is at risk of a sell-off this next week which would test the resilience of the current stock market rally as fears about oil producer defaults could return.

However, I tend to believe that the "big elephant in the room" may well be the Republican convention in July where the GOP will select their nominee for president. Uncertainty surrounding the outcome could kick off a season of uncertainly for the stock market which could weigh on returns. In an analysis completed by Motif Investing, U.S. stock market returns fell 1.2% on average in the 8th year of a presidential cycle.

Bank of Canada leaves interest rates unchanged

The Bank of Canada left overnight rates unchanged yesterday, a decision that was widely expected. The central bank also released its April Monetary Policy Report (MPR) where it upgraded its estimate for 2016 Canadian growth to 1.7% from 1.4% previously. Curiously, it also downgraded 2017 growth to 2.3% from 2.4%. Now, I don't put a lot of weight on these forecasts because they will most likely change in the months ahead. They do serve, however, as a useful benchmark of the central bank's expectations. Should the economy perform above or below the Bank of Canada's expectations, it could foreshadow a change in thinking with respect to the direction of monetary policy.

I was also interested in what was not in the MPR. The central bank made no mention of the housing inflation we are seeing in Vancouver and Toronto. This is a serious omission in my view as it reflects an approach by not only the Bank of Canada, but also other central banks around the world to more or less sidestep the potential negative outcomes that are associated with their policy decisions.  A boom-and-bust real estate cycle is more than just an abstract risk in both of these cities. In Vancouver, we are now faced with an affordability crisis.

The central bank has a responsibility to acknowledge these outcomes associated with its policies as a matter of accountability. There may well be some strong arguments why these outcomes are tolerable on a national level, but I have yet to hear the Bank of Canada articulate the case. More importantly, by staying quiet on the issue, it leaves other policy makers at the provincial and municipal levels vulnerable to "bubble surprises."

While the affordability issues in Vancouver are not solely driven by monetary policy, low rates administered in Canada and around the world likely played a key role in getting the ball rolling. Had the central bank been more upfront with the risks associated with loosening of its monetary bias in 2013 and its subsequent rate cuts, B.C. and Vancouver municipal policymakers may well have had more lead time to develop policy alternatives to address rising housing costs. Now they are left more or less scrambling.

Listen to Ted Dixon on Roundhouse Radio FM 98.3 every Thursday for his weekly financial markets commentary at 7:30 am Pacific Time.

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