Financial News for the Week of January 17, 2020

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

Data releases over the week reinforce the main themes in the U.S. economy: solid consumption, housing market recovery, faltering business investment and soft inflation.
The phase one trade deal was formally signed, committing China to increase its imports of U.S. goods and services to $200 billion more than the 2017 level. Reaching this target will be a difficult task
While the agreement gives short-term relief, this is only the first phase. The likely difficulty in implementing the current accord combined with the more-difficult issues still to be discussed, mean that trade uncertainty is likely to continue to be a factor in the outlook.

Phase One Complete, But Can It Hold?

It’s only the third week of 2020, and its already proving to be a busy year. This week was a whirlwind, with oodles of data releases and, of course, the signing of the long-awaited phase one trade deal.

From a data perspective, 2019 ended with more of the same for the U.S. economy. Consumption likely remained solid in the fourth quarter, as evidenced by the healthy rise in retail sales in December. Retail sales advanced by 0.3% month-on-month, and November’s figure was also revised higher. There were gains in nearly every category, underlining the robust nature of the increase.

The housing market also continued its good run, with housing starts surging last month. Construction in both singles and multifamily units picked up in December, sending the overall level to its highest point in 13 years (Chart 1). Taking together, housing data for the fourth quarter implies that residential investment is on track to continue its upward climb heading into 2020.

On the flipside, we saw the NFIB’s small business optimism index move in the other direction in December. The decline is likely attributable to heightened policy uncertainty, a theme that has plagued businesses, big and small, throughout 2019 (see report).

On the whole, we expect the U.S. economy to have ended 2019 on solid footing. The final Beige Book of the year supported this narrative, showing a decent rise in economic activity and tight labor markets across Federal Reserve districts.

Despite the increasing pressure on economic capacity, inflation remains stubbornly soft. December’s core consumer price index, which strips out the impact of energy and food prices, remained at 2.3% year-over-year, unchanged since October. On an annual basis, core CPI inflation was only a tick higher in 2019 at 2.2%. Looking ahead, price pressures may continue to be subdued especially with the U.S.-China phase one trade deal effectively cutting the existing tariff rate, while also removing the threat of additional tariffs at least for the time being.

This takes us to the big headline for the week, the U.S.-China phase one trade deal. On the face of it, the agreement could be a positive for U.S. growth as it commits China to purchasing an additional $200 billion worth of U.S. goods and services over the next two years (see commentary). But the big question is: can China adequately ramp up its imports to reach this target? The answer is probably not. Quarterly import growth would have to average above 10% for every quarter from now until the fourth quarter of 2021 to reach this goal (Chart 2).

The agreement also included a dispute mechanism. In the event China doesn’t meet its import commitments, the U.S. can resort back to imposing tariffs and if China responds, the deal would be nullified. Indeed, the agreement gives short-term relief, but its sustainability is still an open question.

Sri Thanabalasingam, Economist | 416-413-3117

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by Connor Hare

Financial News for the Week of January 10, 2020

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

The U.S. economy continued to churn out jobs at a solid pace. Non-farm employment grew by 1.6% over 2019, marking only a slight deceleration from the 1.7% recorded in 2018.
The services side of the economy also continued to fare better than its manufacturing counterpart. The ISM Non-Manufacturing Index edged 1.1 points higher, to its highest level in seven months.
The U.S. trade deficit dipped to its lowest level in three years as tariffs, among other factors, shifted trade flows.

Services Keep the Economic Engine Humming Along

The highly anticipated employment data revealed that the U.S. economy added jobs for the 10th consecutive year, despite a slower pace of hiring. Non-farm payrolls rose by 145k in December, a mild deceleration from November’s 256k. This gain was largely concentrated in the services sector, with job increases in retail trade (+41k), health care (+28k), leisure and hospitality (+40k) and construction (+20k). Manufacturing employment however was down by 12k. The unemployment rate continues to hover at its 50-year low of 3.5%, while year-on-year wage gains decelerated to 2.9% from 3.1% in November.

Despite the overall positive tenor of the report, there are warning signs on the horizon as the U.S. population in 2019 grew at the slowest pace in about a century. Though the economic impact of this development may be slow to materialize, it does have implications for the availability of workers, taxpayers and consumers to fuel future growth.

The employment numbers suggest that U.S. service sector activity has been resilient. This was echoed in sentiment, where the Institute for Supply Management’s Non-Manufacturing Index diverged from its manufacturing counterpart in December. The index edged 1.1 points higher to 55.0 – its highest level in seven months. Healthy consumer fundamentals and less exposure to trade tensions helped the services sector, which accounts for a larger proportion of the U.S. economy, remain in expansionary territory throughout 2019. This is in contrast to the manufacturing sector, where activity has been contracting for the past five months and in December slumped to its lowest level since June 2009 (Chart 1).

Geopolitical developments continued to influence market movements this week as Iran retaliated for the death of a top military leader, with an air strike against U.S. forces. Markets reacted violently to this development, with stock futures tumbling. However, by end-of-week stocks pared losses, and oil and gold retreated from earlier highs.

On the trade front, U.S. tariffs contributed to a slide in imports (down 1% month-on-month) in November while exports picked up (up 0.7% m/m), pushing the trade deficit to its lowest level since October 2016 (Chart 2). The goods and services deficit decreased by 8.2% to $43.1bn in November, down from $46.9bn in the previous month. Of note, the country’s merchandise trade deficit with China fell for a fourth consecutive month reflecting tensions between the two countries. A preliminary trade deal however, expected to be signed next week, should bring improvements in bilateral trade relations. Despite this, the impact of potential tariffs on goods from other trading partners such as the EU and Latin America cannot be discounted, and may result in further data distortions in the months ahead.

Overall, the U.S. economy has managed to exit a tumultuous 2019 relatively better-off than most other advanced economies. While U.S. growth is expected to slow in 2020 as detailed in our latest forecast, it will still lead the G7 pack, notwithstanding continued trade policy uncertainty.

Shernette McLeod, Economist | 416-415-0413

Financial News- January 10, 2020

by Connor Hare

Financial News for the Week of January 3, 2020

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

It was a relatively light week on economic data. The merchandise trade deficit narrowed in November, suggesting some upside risk to real GDP growth in the fourth quarter. Still, activity in the manufacturing sector continues to come in on the weak side, with the ISM index falling again in December to its lowest level since 2009.
The phase one trade deal between China and the U.S. looks to be signed later this month. Details are still scant and time lines around commitments uncertain.
News that a U.S. airstrike in Iraq had killed a top Iranian military leader caused oil prices to spike, global stock markets to sell off and bonds to rally on Friday.

A Risk-Filled Start to the Year

The first week of the year was relatively light on economic data, but not short on geopolitical developments. Financial markets started the New Year in an optimistic mood, boosted by news that the People’s Bank of China had cut its reserve ratio by 50 basis points. This move injects additional liquidity into China’s banking system in the hopes of supporting growth while also alleviating any potential funding stress for its banks heading into the Lunar New Year holiday.

Alas, this optimism did not last long. Markets were roiled on Friday by news that a U.S. airstrike in Iraq had killed Qassim Suleimani, a top Iranian military leader. Fears of retaliation and further escalation caused oil prices to spike, global stock markets to sell off and bonds to rally, with the 10-year yield falling seven basis points to 1.81% as of writing.

Outside of the torrid developments in the Middle East, the U.S. and China appear to be moving forward on signing ‘phase one’ of their trade deal. Earlier in the week, President Trump announced that he would sign the deal on January 15th. Details of the final deal are expected in the next several days. Early indications are that the text of the deal could remain vague on the exact amount and timing of China’s commitments to purchase additional agricultural and other U.S. goods for fears that specific details could distort markets.

News on the trade deal came as preliminary data on the merchandise trade deficit showed a narrowing in November of last year, reflecting a rise in exports and a sharp decline in imports. The fall in imports came alongside data showing a smaller build in inventories in the fourth quarter. Still, the net impact was enough to raise tracking estimates for fourth quarter real GDP growth north of 2.0% (annualized).

Elsewhere on the economic front, global manufacturing activity continued to struggle through the end of last year. In the U.S., the ISM manufacturing index fell to 47.2 in December from 48.1 in November. The decline was contrary to the median economist forecast for an increase in the index. The ISM index has now been in contractionary territory for five consecutive months and at its lowest point since the recession in 2009. Manufacturing sectors remain weak the world over. The Markit PMI index in Germany edged lower in December as well. While still above its trough, it remains in contractionary territory where it has been through all of 2019.

The data flow will pick up next week with the release of the ISM non-manufacturing index and December employment data. So far, the troubles in the manufacturing sector have remained contained therein while broader services expansion has remained unharmed and, importantly, has provided enough support to the job market to support ongoing consumer spending. We will be watching for any developments on this front in the jobs data next week, as well as the impact of new (and old) geopolitical flare ups.

James Marple, Senior Economist | 416-982-2557

Financial News- January 3, 2020

by Connor Hare

Financial News for the Week of December 20, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

The House’s impeachment of President Trump did little to detract from broader economic optimism. U.S. equity markets reached new highs this week.
Housing and consumer spending data released this week confirmed the narrative of resilient U.S. household demand.
Hopefully the recent progress on Brexit and U.S.-China trade relations are signs that headwinds to global growth will diminish in the New Year, giving the global economy a necessary jolt of goods news after a somber 2019.

Hope for Good Tidings in 2020

Politics dominated headlines this week as the House voted to impeach the President. Impeachment proceedings are set to move on to the Senate. Nevertheless, financial markets appear to have largely shrugged off political uncertainty, at least for the time being. U.S. equity markets reached new highs this week, while yields marched a bit higher on a greater sense of economic optimism.

Data received this week remained consistent with the narrative of household resilience. November housing starts beat forecasts for a more subdued increase. Both single family and multi-family units rose in the month. Moreover, permits – a leading indicator of residential construction activity – improved for the seventh consecutive month. Housing starts have risen and persisted above the rate of household formation for several months, and all signs point to this trend holding into early next year as well.

The signal of health from existing home sales was a little less positive. November sales fell 1.7%, bringing the level back to a still healthy 5.35 million units annualized. Improved affordability, largely due to a decline in borrowing costs, has been a major driver for the recovery in existing home sales in the second half of this year (Chart 1). However, a dearth of inventory in many regions has put upward pressure on prices lately, tempering strong demand.

Consumer spending on goods and services plus housing form the key pillars of our U.S. outlook that foresees the economy expanding 2.0% next year, a slight cooldown from 2.3% this year. Underlying this view is that the labor market should continue to improve, absorbing more and more workers while wage growth is also expected to hold at fairly robust levels. Add lower interest rates and you get all the ingredients for household spending to rise at a sustainable clip in the year ahead.

In contrast, business investment is expected to be less supportive of the outlook. Manufacturing output has been in a slump globally this year, and recently in the U.S.. Despite a Phase 1 trade deal with China, we don’t anticipate that trade policy uncertainty will diminish enough to see a big resurgence in private investment. Outstanding trade disagreements remain with China, the EU, and other nations. What’s more, political uncertainty associated with next year’s election is likely to hamper plans by businesses to expand capacity until further clarity on the likely direction of future policies.

Weak foreign demand combined with elevated economic uncertainty does not bode well for a quick recovery in global industrial production. Instead, it raises concerns about whether consumers worldwide will remain stalwart in the face of persistent uncertainty (Chart 2). The global economy this year is expected to grow 2.8%, the slowest pace in a decade. In the year ahead, we anticipate a slight uptick to 3% largely due to more supportive government policies. The hope is that the recent progress on Brexit and U.S.-China trade relations are signs that headwinds to growth will diminish in the New Year. The global economy could definitely use some good tidings after a somber 2019.

Fotios Raptis, Senior Economist | 416-982-2556

Financial News- December 20, 2019

by Connor Hare

Financial News for the Week of December 13, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

The U.S. and China reached a partial trade deal. The U.S. will reduce tariffs from 15% to 7.5% on $120 billion of Chinese imports and cancel the tariffs that were to be imposed on December 15th. In exchange, China will increase its imports of U.S. goods and services.
American consumption remains healthy. While retail sales were soft in November, spending on services continues to be robust, leaving consumption tracking at 2-2.5% for the fourth quarter of 2019.
The Conservative party won a majority in the UK election, paving the way for Brexit in January 2020. The next step of securing a trade deal with the EU will likely be more challenging.

Partial Trade Deal Cuts Tariffs

What a way to end the week. News of a potential phase one trade deal sent markets on a near-vertical climb. The S&P 500 hit a record-high upon digesting the news but fell back when more details emerged. For the week, it was up 0.8% at the time of writing.

Details of the deal are still to come, but the Office of the United Stated Trade Representative stated that the U.S. will reduce tariffs from 15% to 7.5% on $120 billion of Chinese imports and cancel the tariffs that were to be imposed on December 15th. In exchange, China will substantially increase its imports of U.S. goods and services. We do not have any official figures on this, however. It is quite possible, that this “deal” is a head fake.

For the time being, with tariffs on Chinese consumer goods now off the table, U.S. retailers will be breathing sighs of relief, especially as retail sales growth has been slowing recently (Chart 1). Indeed, November data, released today, showed retail sales advanced by a soft 0.2% on a month-on-month basis. While spending on goods took a step down, consumption in services was buoyant in the third quarter. The Quarterly Services Survey had revenues in the services sector growing by 5.8% annualized. Overall, these data imply that consumption continues to drive the U.S. economy forward.

Even with all the vibrancy in spending, price pressures are muted. Consumer price inflation in November increased to 2.1% year-on-year from 1.8% in October, but this was mainly due to energy prices. Stripping out energy and food prices, core price inflation remained steady at 2.3%. Past tariffs, too, appear to be not have been fully passed through to consumers. This can be attributed to U.S. retailers absorbing higher prices, as well as a rising U.S. dollar (Chart 2).

Taking stock of the developments for the week, the Fed will be more than comfortable with their decision to take their foot off the pedal on Wednesday. Consumption remains robust, inflation pressures are muted, and past interest rate cuts are still working their way through the economy. On top of this, global uncertainty could be abating. Specifically, surrounding Brexit.

The Conservative Party won a resounding majority in the United Kingdom election. With this result in hand, Prime Minister Boris Johnson should be able to lead the country out of the EU. Anticipating this outcome, the pound appreciated, and UK bond yields moved higher. But leaving the EU is only the first hurdle. Next on the agenda is for the parties to agree on a trade deal. This will likely lead to a messier second chapter of the Brexit saga (see commentary).

The end game on Brexit and the China-U.S. trade war remains uncertain. Even what seems like progress towards unwinding uncertainty, reveals more uncertainty. This will continue to be one of the key forces influencing the global outlook in 2020.

Sri Thanabalasingam, Economist | 416-413-3117

Financial News- December 13, 2019

by Connor Hare

Financial News for the Week of December 6, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

A Trade tensions reemerged this week. President Trump suggested that the U.S.-China deal could wait until after the election, announced steel and aluminum tariffs on Brazil and Argentina, and threatened to impose tariffs on France. International trade numbers were also unambiguously weak in October, even as trade deficit had narrowed.
Despite uncertainty on the trade front, it was another banner month for America’s job market. Payrolls rose by a healthy 266k in November, with service sector hiring accelerating for the fourth consecutive month.
Contraction in the manufacturing sector deepened slightly in November, with the ISM manufacturing index edging lower to 48.1 from 48.3. Service industries continued to expand, alas at a slightly slower pace than in a month prior.

Hiring Remains Solid Despite Trade Tensions

Trade-related developments and employment data stole the limelight this week. With the deadline of the next wave of proposed tariffs on imports from China a little more than a week away, investors kept a close eye on the state of the U.S.-China trade negotiations and trade policy more broadly. On that front, comments by President Trump earlier this week suggesting that the U.S.-China deal could wait until after the elections were not encouraging, sending equity markets sharply lower. Sentiment was further dampened by news that the U.S. will restore steel and aluminum tariffs on Brazil and Argentina for alleged currency manipulation, and the threat to impose tariffs on $2.4bn of imports from France.

Equity markets rebounded toward the end of the week, amid news of Beijing reaffirming that the talks remain on track and the excellent job numbers. Oil prices rallied on the news that OPEC+ countries agreed to deepen existing production cuts, and Saudi Arabia promising to maintain its voluntary 400K bpd cut, bringing total cuts to 2.1 million bpd.

Trade data was not encouraging this week as trade volumes continued to slow in October. Export and import volumes declined for the second straight month. Since imports fell more than exports the U.S. trade deficit narrowed for the second month in a row, hardly a sign of health.

The return of trade tensions this week suggests that trade policy will likely remain volatile and exports sluggish in the year ahead. This is not good news for U.S. businesses, particularly manufacturers, who continue to contend with retaliatory tariffs, weak global demand and a strong Dollar. Manufacturing sentiment ebbed further in November, with the ISM manufacturing index edging lower to 48.1 from 48.3 in October. While the production subcomponent edged higher on the month, it remained in contractionary territory, and new orders and employment sub-indexes continued to deteriorate, signaling that manufacturing output could further worsen before it gets better.

The services sector hasn’t been immune to trade-related headwinds, with the ISM non-manufacturing index edging 0.8 points lower to 53.9 in October. However, it remains well in expansionary territory, supported by resilient domestic demand. Two-thirds of non-manufacturing industries surveyed in October reported growth, compared to less than a third in the manufacturing survey (Chart 1).

This divergence of fortunes between the manufacturing and services sector continues to manifest in employment data. Payrolls expanded by an impressive 266k in November, with service industries contributing 206k to the headline. Businesses in the services sector have been ramping up hiring since July (Chart 2), while gains remain muted in the goods-producing sector, with the pop in November reflecting the end of the GM strike.

All in all, despite uncertainty on the trade front and softer global growth, the labor market has remained remarkably resilient. With reports like this, the FOMC can sit comfortably on the sidelines after cutting rates three times this year. As long as international risks do not intensify and hurt confidence domestically, the American economy will remain in expansion, supported by a healthy consumer.

Ksenia Bushmeneva, Economist | 416-308-7392

Financial News- December 6, 2019

by Connor Hare

Financial news for the week of November 29, 2020

Financial News for the Week of November 29, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

A quiet, holiday-shortened week featured data that painted a picture of an economy that has slowed, but not stalled. Revisions to Q2 GDP did little to change the picture of the economy.
Durable goods orders were a bright spot, but the Fed’s manufacturing surveys continue to point to a lack of confidence on investment spending. The Beige Book echoed this two-speed view of struggles in the factory sector, and health elsewhere.
The consumer remains an area of strength, with spending on track to put in a solid performance in Q4, helped by healthy advances in wages and salaries and benign inflation.

Something To Be Thankful For

A relatively quiet, holiday-shortened week featured data that painted a picture of an economy that has slowed, but not stalled. Revisions to Q3 economic growth were uneventful. Headline GDP growth was revised up from 1.9% annualized to 2.1%, largely owing to a build-up in inventories. Rising inventories are not typically a sign of economic strength, so we don’t view that slight upward boost as changing the picture in a meaningful way.

Final domestic demand was 2% in Q3, after averaging 2.7% in the first half of the year, and 3% in 2018. That is the narrative right there. The economy has slowed from a robust pace to a moderate pace, very close to what we consider its underlying “trend”(Chart 1). The Fed’s latest Beige Book indicated that this tempo has likely continued this quarter. It characterized economic activity as progressing at a modest pace through most districts, unchanged relative to the prior report. Consumer related sectors, including residential construction, are doing well, while ongoing struggles in the manufacturing sector continued.

Durable goods orders for October painted a slightly better picture. Nondefense capital goods orders ex-aircraft, a key signpost to business investment, had a solid gain for the first time in a few months. It wasn’t enough to change our view of manufacturing weakness, but it did support an upgrade to expectations for equipment spending in Q4. Overall, we expect business investment to advance roughly 2.4%, ending two quarters of contraction. However, this does not entirely lift the damper uncertainty is having on investment (see report). Looking at the regional Fed manufacturing surveys, the capital expenditures components on the whole weakened further in November, so we don’t believe business spending or the manufacturing sector is out of the woods yet.

On the plus side, the October personal spending data suggests that the consumer is looking solid at the start of the fourth quarter. Barring a confidence-sapping event, we expect consumer spending to come in around 2.4%, in line with our September forecast. The gray cloud in the October data was a drop in real personal disposable income. However, that seems to have been due to a decline in farm incomes, after a sizeable boost from government payouts to compensate farmers for tariff-related damages. Wages and salaries still rose 0.4% on the month, and was up 4.9% versus a year ago (nominal terms) – a pretty healthy pace, particularly when overlaid on the benign inflation backdrop.

The Fed’s preferred inflation measure – the core PCE deflator – rose only 0.1% in October (Chart 2). The Dallas Fed’s trimmed mean (which strips out price volatility more broadly than food and energy) has been steady at the Fed’s 2% target for a few months. There’s little on the inflation front to spook the Fed to either cut or raise interest rates any time soon. Early in the week, Chair Powell highlighted the benefits of extending the current economic cycle – mainly that lower income households have not yet regained the wealth lost in the great recession. Strong labor markets are finally starting to spark healthy wage gains for lower-income workers, which spreads the gains from a strong economy more broadly. Amid all the trade gloom and uncertainty, that is something to be thankful for.

Leslie Preston, Senior Economist | 416-983-7053

Financial News- November 29, 2019

by Connor Hare

Financial News for the Week of November 22, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

Stocks were volatile this week amid signs that U.S.-China trade talks may be stalling. Cautious optimism briefly returned on Friday on news that the Chinese president was calling for the two sides to “strengthen communication”.
The housing data released this week was uniformly upbeat. Both construction (+3.8% m/m) and resale activity (+1.9% m/m) picked up in October, suggesting that the housing market was responding nicely to lower mortgage rates.
The FOMC minutes revealed that most participants judged that three rate cuts left monetary policy sufficiently accommodative to meet the Fed’s objectives, suggesting the Fed is putting back on its “data-dependence” hat.

Housing Market Remained A Bright Spot in October

Stocks were volatile this week amid signs that U.S.-China trade talks may be stalling. But, cautious optimism returned on Friday on news that the Chinese president was calling for the two sides to “strengthen communication”. The economic data calendar was sparse, with releases limited to housing data, which was upbeat. Both construction (+3.8% m/m) and resale activity (+1.9% m/m) picked up in October, suggesting that the housing market was responding nicely to lower mortgage rates.

On the demand side, home sales continued to push higher, rising in three of the past four months as lower mortgages rates boosted affordability. In October, the National Association of Realtor’s affordability metric posted its strongest reading since the end of 2017 - a welcome development for prospective home buyers. That being said, without an equivalent response on the supply side, the latest improvement in affordability might prove fleeting. The already-low inventory of houses on the market has been declining year-over-year for four straight months. This has stymied additional activity and pushed home prices higher, with median home prices up 6.2% from a year ago – a significant acceleration from the roughly 3.5% pace seen at the start of the year.

To be fair, construction activity has also shown improvement, with housing starts up 8.5% from a year-ago. U.S. home builder sentiment remains elevated, and single-family building permits have risen for six consecutive months. This suggests that construction will likely continue making headway in the months ahead (Chart 1). As such, residential investment is expected to grow at a solid 5% pace for the second consecutive quarter in Q4, after contracting in 2018 and the first half of 2019.

While the housing market has recently emerged as a bright spot, business investment has been a drag on growth. Since last year businesses have found themselves in a deep fog of economic uncertainty brought about by volatile policy making and the U.S.-China trade war, making them reluctant to commit to new investment projects. As we discuss in our recent report, equipment spending – the largest component of business investment – has borne the brunt of the uncertainty impact (Chart 2), with the rise in uncertainty reducing equipment investment by an estimated 4% from 2018Q1 to 2019Q3. The resolution of the trade war could help boost investment. However, a sustained improvement will only be possible once firms are convinced that policy-making will not be as volatile as it has been over the last few years.

The minutes of the FOMC meeting last month revealed that members were also not expecting a quick turnaround in business investment, stating that “trade uncertainty and sluggish global growth would continue to dampen investment spending and exports.” Furthermore, officials have noted that while risks remained “tilted to the downside”, monetary policy was sufficiently accommodative to support outlook of “moderate growth, a strong labor market” and inflation near 2% target following three rate cuts this year. Thus, with regard to future monetary policy, the Fed is putting back on its “data-dependence” hat, and only a material change in the economic outlook will move it off the sidelines.

Ksenia Bushmeneva, Economist | 416-308-7392

Financial News- November 15, 2019

by Connor Hare

Financial News for the Week of November 15, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

U.S. data this week showcased the contrasting feature of the U.S. economy: a resilient U.S. consumer but a struggling manufacturing sector.
Negotiations on a phase one trade deal between the U.S. and China took a step back this week as negotiators struggled to come to a compromise. A deal is unlikely to be signed before the end of this month.
Inflation remained subdued as the high dollar, inventory stockpiling and margin compression offset the price increases implied by tariffs.
With the economy evolving in line with their view, we believe the Fed has completed its mid-cycle adjustment.

Consumers Resilient Amid Manufacturing Struggles

The data inflow this week continued to contrast the two dominant themes in the U.S. economy: a resilient U.S. consumer and a struggling manufacturing sector.

Retail sales data released today showed that spending bounced back from a dip in September. Sales at non-store retailers, which includes online sellers, drove the increase. With the job market strong and consumers continuing to see solid gains in wages, consumption should remain healthy through the remainder of the year.

The manufacturing outlook isn’t as bright. Newly released production data indicated that manufacturing took another step down in October (Chart 1). The U.S.-China trade war and softer global economic conditions are clearly weighing on the sector. However, as noted in a recent report, it is unlikely that, the malaise in manufacturing can single-handedly trigger a recession, given its small and shrinking share of the U.S. economy.

Although manufacturing weakened, we saw some improvement in small business confidence. The NFIB small business optimism index increased in October, with businesses signaling they will move forward with capital outlays in the months to come. This is a good sign for sputtering investment, which has contracted in the last two quarters as economic policy uncertainty spiked (Chart 2).

Much of this increase in uncertainty is coming from the U.S.-China trade war. There was some optimism last week that we might see the first deal in the conflict as the two sides edged towards a phase one mini-deal. It was even reported that the deal might be made official before the end of this month. However, it’s probably too early to pop the champagne. News emerged this week that officials were struggling to complete the deal. According to reports, China wants a greater reduction in tariffs, while U.S. officials do not believe China has made enough concessions to justify their removal. It’s probably a good idea to not hold our breath as we await the first breakthrough in this drawn-out saga.

Although trade uncertainty has made its way through the U.S. economy, it has yet to show up in overall price pressures. Indeed, despite the imposition of tariffs on many imported consumer goods from China in September, goods prices, which bear the brunt of the tariffs, on aggregate only rose by 0.3% on a year-over-year basis.

In addition to the rising U.S. dollar, other forces may be counteracting the price increases implied by tariffs. Elevated inventories for some consumer products are likely putting downward pressure on prices. There are also indications that importers are absorbing tariff impacts by compressing margins. The latter demonstrating how some U.S. firms are shouldering the burden of the trade war.

From the Federal Reserve’s perspective, the data are evolving largely in line with their economic forecasts. Inflation is at target and the consumption remains healthy. In addition, past rate cuts are moving through the economy, with the impacts most noticeable in housing. As we stated in an earlier report, without any further negative shocks, we believe the Fed has completed its mid-cycle adjustment.

Sri Thanabalasingam, Economist | 416-413-3117

Financial News- November 15, 2019

by Connor Hare

Financial News for the Week of November 8, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

It was a relatively quiet week for economic data. The trade deficit narrowed a bit in September, but new tariffs appear to have weighed on both exports and imports. The ISM non-manufacturing index followed its manufacturing counterpart higher in October, with the recent trend indicating a stabilization in activity.
Trade negotiations continued to dominate headlines. Comments from the U.S. Commerce Secretary suggest that the U.S. is likely to avoid a major escalation in trade tensions with Europe next week over autos.
The interim U.S.-China trade deal is unlikely to be signed this month, but the mid-December tariffs still appear likely to be scrapped. Pres. Trump poured cold water on the notion that there was an agreement on removing existing tariffs.

The Deal With The Deal

It was a relatively quiet week for economic data. The September trade report had a bit of a dated feel since last week’s GDP report already confirmed that net exports were a drag on third quarter economic growth. Still, the report drove in the point of tariff-related volatility in trade activity. The trade deficit narrowed a bit in September as goods imports contracted more than goods exports. This reflected, in part, the impact of tariffs on a large tranche of consumer goods imports from China imposed on September 1st.

The ISM non-manufacturing report, on the other hand, ushered in a bit of optimism. The headline index followed its manufacturing counterpart higher in October, with the improvement broad-based across the subcomponents. While a bit better than expected, the October uptick was not large enough to offset the decline in the month prior. As such, instead of a major strengthening in the pace of expansion, the recent trend is more indicative of a stabilization in activity (Chart 1).

Other second-tier data reports did little to rock the boat. Of note, job openings continued to edge lower in September, reinforcing the notion that appetite among U.S. employers for labor, while elevated, has waned a bit recently. The September data also affirmed that the pullback in job openings so far has limited geographic breadth, with recent pressures concentrated in the Midwest (Chart 2; for more see here).

With little else on the data front, trade negotiations had a free hand at driving headlines. On this front, there were signs of a de-escalation in trade tensions between the U.S. and other major trading partners, importantly the E.U. and China. Auto tariffs remain a major concern for the former, and President Trump is set to make a decision on the matter by next Wednesday. The U.S. Commerce Secretary recently stated that he expected negotiations with “individual companies about their investment plans” to bear fruit, making the imposition of auto tariffs potentially unnecessary. This suggests that the administration will avoid a major spike in tensions next week, either by taking a lighter approach on auto tariffs or by deferring action to a later date.

When it came to China, developments were more capricious. For starters, contrary to initial hopes, the Trump-Xi meeting to sign the ‘Phase One’ trade deal is unlikely to happen this month. On the other hand, it appears likely that the tariffs that were slated to go into effect in mid-December will still be scrapped (provided that the interim deal remains on track to be signed in the near-term). China’s Commerce Ministry spokesperson suggested that the two economic heavyweights had agreed to roll back existing tariffs in phases as trade talks advanced. But this morning, President Trump poured cold water on the notion of such an agreement, while also stating that he will not fully eliminate tariffs on China. This softened some of the optimism that had built from China’s earlier announcement, highlighting the delicate and volatile nature of trade negotiations.

All in all, there are indeed signs of a de-escalation in trade tensions, which help dilute some of the near-term risk as economic activity shows signs of stabilizing. But, as today’s events have shown, we caution against reading too much into the recent optimism, for as long as core issues remain unaddressed, a re-escalation in the trade war remains a distinct possibility.

Admir Kolaj, Economist | 416-944-6318

Financial News for the week of Nov. 8, 2019

by Connor Hare

Connor Hare

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