Financial News for the Week of July 24, 2020

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

A tug of war between encouraging vaccine news and hopes of new economic stimulus, and early indications that the recovery might be stalling, is fueling financial market volatility.
Jobless claims rose to 1.42 million last week after declining for 15 consecutive weeks, suggesting that the labor market recovery might be weakening. By contrast, the housing sector continues to impress as existing home sales soar by 20.7%.
Congress returned to work and is crafting the next installment of aid to household and businesses. Divergences remain, but an agreement is expected over the next few weeks. Likewise, the Fed is set to deliberate on the next steps of its policy response at its scheduled meeting next week

Recovery Risks Stalling Out as Pandemic Worsens

Financial markets were in a tug of war this week as investors weighed encouraging vaccine news and hopes of new economic stimulus against indications that the recovery might be stalling. Later in the week, flaring tensions between the U.S. and China also weighed on sentiment. As of writing, the S&P 500 was on track to end the week flat.

The pandemic marked another gloomy milestone in the U.S. as confirmed coronavirus cases breached the four million mark. This represents a sharp acceleration from just two weeks ago when cases topped three million (Chart 1). From a regional standpoint, California has now surpassed New York for the highest number of cases at over 430,000. With cases continuing to soar in several states, reopening plans are increasingly being rolled back and restrictive measures reintroduced to curb the spread. In one of the latest developments, bars that do not serve food are no longer permitted to offer indoor seating in Chicago, while parties are now limited to six people at restaurants.

The surge in infections is weighing on economic activity, and this is starting to come through in high-frequency indicators. Initial jobless claims, which had declined for fifteen straight weeks, rose for the week ended on July 18, 2020 (Chart 2). Indeed, filings for unemployment insurance increased by 109,000 to 1.42 million last week, up from 1.31 million in the week prior. While the latest reading is still far below the late-March peak when weekly filings topped 6.9 million, it suggests that the recovery may be losing steam. The historical relationship between claims and employment suggests that employment growth will slow in July relative to the strong gains seen in June and May. This view was also echoed in the Census Bureau’s Household Pulse Survey, which points to increased job losses in July.

On a more positive note, the U.S. housing market is showcasing a recovery that appears to be stronger than other areas of the economy. Following three consecutive months of contraction, sales of existing homes made a soaring comeback, increasing by 20.7% in June. Similarly, new home sales shattered expectations with a 13.8% jump. As noted in a recent report, strong demand from millennials taking advantage of falling mortgage rates is a big factor driving this resiliency. In the months ahead, homebuyers from this age cohort should put a floor under housing demand. However, the resurgence in COVID-19 cases will likely weigh on the recovery here as well.

With risks increasingly tilted to the downside, policymakers are working on the next set of measures to help support the economy. Across the Atlantic, hard-fought negotiations between EU leaders finally came through earlier in the week in the form of a €1.8 trillion stimulus package. Closer to home, Congress returned to work this week and is crafting the next installment of aid to households and businesses. While divergences over the scope and the size of the next package remain, an agreement is expected over the next few weeks. Likewise, the Fed is set to deliberate on the next steps of its policy response at its scheduled meeting next week. Here’s hoping that the next array of policy responses is enough to keep the recovery on track.

Johary Razafindratsita, Economist | 416-430-7126

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by Connor Hare

Financial News for the Week of July 17, 2020

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

Despite the continued surge in new infections in the U.S., financial markets were on the upswing this week on positive economic data and encouraging news on a vaccine.
Internationally, the Chinese economy resumed growing in the second quarter. However, the recovery in the second quarter was uneven, with consumers reluctant to spend.
In the U.S., retail sales and housing starts both rebounded sharply in June. Consumer price pressures in previously weak areas also perked up.

Economic Rebound Continued Through June

Financial markets were on the upswing this week on positive economic data and encouraging news on a vaccine. This came despite the continued surge in new infections. Overall, U.S. data for June was positive, but the virus’s broader spread threatens to set back progress thus far.

The big news internationally was that the Chinese economy resumed growing in the second quarter. After a 6.8% year/year decline in the first quarter, real GDP increased by 3.2% versus a year ago. However, the recovery in the second quarter was uneven, with investment outpacing consumption. Consumers have been reluctant to spend even though most businesses have reopened, reflecting the intensity of the demand shock and consumer scarring, which may take time to heal.

American consumers, on the other hand, continued to ramp up spending at retailers in June (+7.5% month-on-month). May’s gain was also revised upward, and total sales are now only 0.6% below February’s level. The rebound in sales has been uneven across categories, but even lagging areas like restaurants and bars and clothing had big double-digit rebounds in June (Chart 1).

However, retail sales only accounts for about 43% of consumer spending. Many services, like housing and medical care are not captured. This includes some of the hardest-hit areas: air travel, hotels, car rentals, child care, haircuts, movies and live entertainment. So, consumers have more money to spend on retail items because they can’t spend on these other areas. It also means the rebound in total consumer spending is likely to lag the retail front.

The strength in retail spending comes even as the unemployment rate remains at a double-digit level. This is thanks to income supports established in the CARES Act (i.e. one-time checks, and expanded unemployment benefits). The generous top-up to unemployment benefits is set to expire in two weeks. Congress is working on another fiscal package, expected before the end of July, which will hopefully include some assistance for households. Without it, consumers will likely tighten their purse strings.

Turning to the housing market, starts jumped 17.3% in June (Chart 2). Momentum in single-family home construction looks to continue in July, with building permits up. Not surprisingly, multifamily permits fell. These projects typically involve greater risk, and given social distancing, are likely less desirable in the current climate. While starts are 24% below February levels, those were boosted by unseasonably warm weather, and are only down 3.4% versus a year ago.

Consumer prices rose again in June for the first time since the pandemic hit. A 0.2% m/m increase in core CPI in June provided some reassurance that earlier deflationary forces have ebbed. However, some of the more persistent categories, like shelter, continued to cool in June. With shutdowns returning across many parts of the country, prices may see renewed downward pressure. All told, we expect inflation to remain muted over the next couple of years.

Leslie Preston, Senior Economist | 416-983-7053

by Connor Hare

Financial News for the Week of January 24, 2020

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

Markets were focused on the progress of the new coronavirus in China, with few economic headlines in the U.S.. It is still early days, but it is likely the important efforts to contain the disease will crimp economic growth in China.
Existing home sales more than recouped November’s decline in December. Unseasonably warm weather likely was a factor, but it sets up strong momentum in residential investment heading into 2020.
Next week features the Fed meeting and our first peek at fourth quarter economic growth. The Fed is likely to leave rates on hold as it assesses the potential upside from the trade deal with China. A solid headline of around 2% growth is likely to mask softer domestic details.

All Quiet Ahead of the Fed

Markets were focused on the progress of the new coronavirus in China, with few economic headlines in the U.S. It is still very early days, with analysts looking back at the SARS outbreak in 2003 for guidance. However, the global health system is now much better prepared to contain an outbreak like this. The containment restrictions in China will hopefully help, but the disruption is likely to hold back economic growth there in the short-term.

The European Central Bank left its low policy rates unchanged this week. Activity in the Euro Area appears to be stabilizing, albeit at a lower level. Christine Lagarde, the new ECB President, also set out the framework for the ECB’s first strategic review in 16 years. It will reconsider the inflation target and the tools used to achieve it. Notably it will also examine how other considerations, like climate change and environmental sustainability can be relevant to the ECB’s mandate.

Existing home sales jumped up 4% in December, more than recovering from the 1.7% decline in November. Activity was likely boosted by unseasonable warm weather in December, so we will likely see some softness in the months ahead. Overall, however, the story of 2019 was a resurgence in housing in the second half of the year (Chart 1). The main reason was rising affordability due to lower mortgage rates and accelerating income.

In fact, home sales could have been even higher if not for constrained housing supply, which is driving up prices. All in, as we outlined in our recent report, we expect existing home sales to continue to improve, but at a more subdued pace this year.

Next week will feature bigger headlines, with a Fed meeting and fourth quarter GDP data. We don’t foresee fireworks from the FOMC, which is widely expected to leave rates unchanged. This decision does not feature a forecast update, but we will be watching for the Fed’s take on the Phase 1 China trade deal. The narrative of a strong consumer and resurgent housing sector, alongside weak business investment, remains very much intact since December’s statement.

Fourth quarter economic growth is forecast to post a respectable 2.1% annualized gain on the surface. However, the details are likely to show the U.S. economy ended 2019 on a soft note. Consumer spending is tracking below 2%, and business investment is looking flat to slightly negative. Residential investment is one area expected to be quite bright, but it is relatively small. A large drop in imports is the main factor keeping growth above 2%, but that is not a positive sign for demand (Chart 2). Trade is often a trickier component to predict, so there is a bit more uncertainty than usual on the quarter’s forecast. Domestic demand should look a bit better in Q1, but overall our latest forecast calls for relatively modest growth in 2020 of around 2 percent.

Leslie Preston, Senior Economist | 416-983-7053

by Connor Hare

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

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

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