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Aon Retirement and Investment Blog

Weekly Update - 12 January 2015 (Canada)

NEW INTELLECTUAL CAPITAL

  • US Discount Rate Update as of 12/31/2014.  Monthly update for accounting discount rates for private defined benefit plans.  The average plan sponsor's discount rate hovered around 4.15% at the end of December; 86 basis points lower than at the end of 2013.
  • Radar provides a summary of recent regulatory and industry events in Canada affecting talent, retirement, and health. For the English version click here; for the French version, click here
UPCOMING EVENTS
  • Join Aon Hewitt on Wednesday, January 21, noon to 1:00 p.m. (US central), for our first U.S. Retirement Webinar of 2015: 2015 Hot Topics in Retirement. The results from the 2015 Hot Topics in Retirement report shows that the new year has no signs of slowing down.
WEEK IN MARKETS

Equities
  • Global equity markets started the New Year on the back foot as investors worried that recent falls in commodity prices may be signaling a slowdown in the global economy. However, markets rebounded strongly towards the end of the week after the release of the Federal Reserve minutes which maintained they would be 'patient' in raising interest rates. The S&P 500 index outperformed the MSCI World index last week (-0.6% vs. -1.2%).
  • US small cap stocks underperformed large cap stocks as the Russell 2000 returned -1.1% over the week. Growth stocks outperformed value stocks last week (-0.5% vs. -0.7%) as measured by the MSCI USA indices.
Bonds
  • 30 year and 10 year US yields were down 16 bps to 2.53% and 17 bps to 1.94% respectively last week.
  • 20 year TIPS yields moved 4 bps lower to 0.63% over the week. 20 year breakevens were 10 bps lower at 1.56%.
  • The Barclays Capital Long Credit Index spread over Treasury yields and the Merrill Lynch US Corporate Index spread both increased by 3 bps to 189 bps and 148 bps respectively over the week. US high yield bond spreads over Treasuries rose by 12 bps to 520 bps. The Emerging Market ($) bond spread over Treasuries rose by 23 bps to 382 bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) was the exception, remaining flat at 126 bps.
Commodities
  • The S&P GSCI Commodity Index fell by 5.1% in USD terms over the week, as oil continued to fall with Brent hitting its lowest level since April 2009. The price of Brent crude oil fell by 12.8% to $49/BBL, with the Energy sector as a whole down by 8.3%. Industrial Metals were 1.5% lower over the week and the copper price fell 2.4% to $6,167/MT. Agricultural prices were up by 1.7%. Gold was 2.5% higher over the week at $1,219/ounce.
Currencies
  • The US dollar appreciated by 1.5% against sterling and by 1.6% against the euro, ending the week at $1.51/£ and $1.18/€ respectively. The dollar depreciated by 1.7% against the yen, finishing the week at ¥118.87/$.
ECONOMIC RELEASES 
  • The US dataflow in the first week of the year indicated that the recovery broadly continued as 2014 came to a close. The ISM index for the non-manufacturing sector dipped a little to 56.2 in December from 59.3 while the consensus expected a reading of 58. The manufacturing sector version fell back by a similar magnitude in the prior week, implying that activity has lost a little bit of momentum but that it is still firmly in growth territory. Meanwhile, the monthly Employment Report caught the eye again. Another 252k was added to December non-farm payrolls, which was less than in November but still ahead of expectations. Moreover, the previous two months of data were revised up by 50k. In further positive news, the unemployment rate also fell by more than forecast to 5.6% from 5.8%. However, average hourly earnings growth slowed surprisingly in December, from an annual rate of 2.1% to 1.7% and the participation rate is still near record lows. Overall, the US economy continues to strengthen but there are still areas that need improvement and we do not expect an interest rate increase imminently.
  • In Europe, economic conditions remained weak. The Markit Eurozone services PMI fell to 51.6 in December from 51.9, contrary to expectations of no change. The more interesting data release was consumer price (CPI) inflation, which fell into deflation territory at -0.2% in December from 0.3%. However, the core rate, which excludes food and energy prices, actually ticked higher to 0.8% from 0.7%, thus indicating that the fall in the headline measure was entirely due to the plunge in the oil price in recent weeks.  This effect may endure for a while. Germany's headline CPI inflation also fell in December but did not cross into negative territory – it fell from 0.6% to 0.2%. Other data showed too. November German retail sales surprisingly contracted by 0.8% from a revised October growth rate of 2.1%, while industrial production growth also declined, this time by 0.5%, although this was slightly better than the expected 0.6% drop. The markets expect further monetary easing by the ECB over the next few months and the data supports this view.
  • In terms of Japanese economic data, the main noteworthy release was the services PMI for December, which increased slightly to 51.7 from 50.6 in November. When combined with the manufacturing PMI of 52.0, the composite PMI improved for the second month running, to 51.9 from 51.2.
  • Finally, in China, consumer price inflation edged higher in December to 1.5% from 1.4%, as did the HSBC service sector PMI, from 53 to 53.4.

The information contained above is intended for general information purposes only and should not be construed as legal or investment advice. Please consult with your independent professional for any such advice. The blog content is intended for professional investors only.


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