Financial News for the Week of November 1, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• U.S. economic activity decelerated in the third quarter to a 1.9% annual pace from 2% in the second quarter, with consumer spending doing much of the heavy lifting.
• The Federal Reserve implemented its third, and likely final, interest rate cut of this year, citing muted inflation pressures and staid global developments. The bar for future rate cuts, however, has shifted higher
• PCE inflation continues to undershoot the Fed’s 2% target, with the headline measure at 1.3% year-on-year and core at 1.7%..

Consumers Step-Up, Businesses Pull-Back

The U.S. economic calendar was packed this week with several major data releases that gave a glimpse into the state of economic activity heading into the last quarter of the year. Kicking things off, the U.S. economy grew at a 1.9% annualized pace last quarter, slowing marginally from 2% recorded in the second quarter (Chart 1). Sectors centered on the domestic side of the economy, including consumer spending (+2.9%), residential investment (+5.1%), and government spending (+2%), all made positive contributions.

Other big entries did not fare as well. Most notably, business investment declined for the second straight quarter (-3%), while net exports and inventories were minor drags. The falloff in business spending is the worst performance since late 2015, reflecting a confluence of factors ranging from slowing global growth, rising trade protectionism, and elevated policy uncertainty to appreciation of the U.S. currency. On the flipside, residential investment, having declined for six consecutive quarters, finally returned to positive territory, spurred by falling interest rates and high demand for homes.

The consumer was once again the main driver of growth, and that bodes well for the economy if employers keep creating jobs and income growth remains steady. On the jobs side, the U.S. economy continues to surprise to the upside with non-farm payrolls rising by a healthy 128k in October, while job gains were revised upwards in the two prior months. However, a higher participation rate acted to induce a minor uptick in the unemployment rate to 3.6%. Overall, the labor market seems to be holding its own, even as the expansion cools. On the income side, average hourly earnings rose a decent 0.2% month-on-month in October (3% year-on-year). Other data releases showed that personal income advanced by 0.3% in September m/m, cooling from a 0.5% gain in August. Disposable income growth also slowed in September, weakening from 0.6% to 0.3%.

The headline PCE price index rose 1.3% y/y in September, while the core measure, the Fed’s preferred inflation gauge, was up 1.7% - well below its 2% target (Chart 2). This allowed the Fed ample room to implement its third consecutive quarter point cut, lowering the fed funds target range to 1.50%-1.75%. Although some easing bias remains, the accompanying policy statement signaled a higher bar for future interest rate reductions. The two previous cuts appear to be paying off by giving a lift to household spending in the most interest rate sensitive areas, such as housing and autos. This outcome has helped to offset a slump in manufacturing. Encouragingly, that slump eased a bit in October, with the ISM manufacturing sentiment index ticking up to 48.3 from 47.8 in September (see report).

Across the pond, Britain not only got a Brexit extension but also an early election. The Brexit deadline was extended to Jan. 31, while British lawmakers voted to hold a December 12th election. This paves the way for one of the most unpredictable and divisive national ballots in Britain, but inches the Brexit issue closer to resolution.

Overall, it appears a healthy jobs market, supported by monetary easing is keeping Americans spending (though with less gusto than before), and helping to make up for a shortfall in business investment.

Shernette McLeod, Economist | 416-415-0413

Financial News- November 1, 2019 

 This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

by Connor Hare

Financial News for the Week of October 18, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• The economic data was subdued this week. Retail sales fell 0.3% in September, ending their six month growth streak. Industrial production also fell. Multifamily starts took a step back, but single-family starts fared better.
• The Fed’s Beige Book confirmed that economic activity has moderated in the period covering mid-August through September. Tariffs, prolonged uncertainty and slower global growth were deepening the manufacturing slump and pushing businesses to trim their growth outlooks.
• Internationally, the U.K. and the E.U. have agreed on the new Brexit deal, but the bigger hurdle of getting the deal through parliament still looms. Meanwhile, China’s economy grew 6.0% (y/y) in Q3, the slowest pace since 1992.

Economy Sends Mixed Signals

It was a short, but action-packed week for financial markets, with plenty of events both domestically and abroad.

Across the pond, the U.K. and the E.U. have agreed on the new Brexit deal. The news boosted the British Pound to its highest level since May, even though the bigger hurdle of getting the deal through parliament this Saturday still looms. Meanwhile, Chinese GDP data reaffirmed that the U.S.-China trade war was weighing on economic growth. Real gross domestic product (GDP) rose 6.0% year-on-year (y/y) in the third quarter of 2019, a tenth of a point below market expectations, and the slowest pace since data collection began in 1992. “Synchronized slowdown” across major economies and slumping international trade has led the IMF to downgrade it’s global growth forecast for 2019 to 3% - down 0.2pp from its the previous release in July.

State-side, the economic data flow was mixed this week. September’s retail sales report showed that American shoppers appeared to have switched into a hibernation mode as cooler weather set in. Retail sales fell 0.3% in September, ending their six month growth streak (Chart 1). Even online sales took a breather, edging lower for the first time since last December. However, consumer activity remained healthy on a quarterly basis, with sales up 6% (annualized) in Q3. This leaves our third quarter tracking for consumer spending just shy of 3% - a downshift from the second quarter, but still a solid print. Still, with consumer spending currently being a key driver of economic growth as activity slows in other sectors, the decline in September will not escape the Fed’s attention ahead of the FOMC meeting at the end of the month.

Residential construction also took a step back last month with both starts and permits falling. The silver lining is that the single-family segment managed to eke out a small gain, with starts and permits up by 0.3% and 0.8%, respectively. Single-family construction has been gradually ramping up this year, with permits and starts both steadily gaining ground since the spring. As a result, residential investment will likely add to headline GDP growth in third quarter for the first time since the end of 2017. Looking ahead, low mortgage rates and a solid labor market bode well for further modest gains the housing market. Developers are also feeling more optimistic, with builder confidence surging to an impressive 20-month high in October (Chart 2), even as hurdles related to labor and land shortages remain.

These developments were corroborated by the Fed’s Beige Book this week. The report confirmed that economic activity has moderated in the period covering mid-August through September. Tariffs, prolonged uncertainty and slower global growth were deepening the manufacturing slump (echoed in the industrial production data this week) and are pushing businesses to trim their growth outlooks. The limited agreement between China and the U.S. reached last week is unlikely to do much for the business climate while tariffs remain in place. With no signs of stabilization in domestic economic backdrop, the Fed will likely continue to err on a side of caution, opting to support the economy with another interest rate cut this year.

Ksenia Bushmeneva, Economist | 416-308-7392

Financial News- October 18, 2019 

 This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

by Connor Hare

Financial News for the Week of October 11, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• CPI report - the only key data release this week - confirmed that inflation remained tame in September. Both headline and core inflation registered a muted 0.1% increase on the month, leaving the readings flat on a year-over-year basis.
• Meanwhile, the JOLTs survey showed that worker demand had softened over summer. The number of job openings fell in August on a year-on-year basis - a third drop in as many months.
• Unless a breakthrough in the U.S.- China trade impasse is reached later today, benign inflation and further signs of the domestic economy cooling off should lead to an even broader agreement for further monetary easing among the FOMC members when they meet later this month.

Fed Leaves the Door Open for Another Cut

This was another busy week for markets. Lingering concerns about the health of the global economy continued to weigh on sentiment after a couple of dour speeches from the leaders of the IMF and World Bank early in the week. However, the mood improved as the week progressed, with equities gaining and bonds selling off. Risk-on sentiment was buoyed by trade talk hopes ahead of the much-anticipated meeting between President Trump and Chinese Vice Premier Liu later today. Investors also welcomed signs of progress in the Brexit talks between the UK and Ireland.

The new leaders of the IMF and World Bank warned about the deteriorating global economic backdrop ahead of their annual meetings next week. The new head of the IMF, Kristalina Georgieva, said that the global economy is now in a “synchronized slowdown”, and that the IMF expects slower growth than last year in 90% of the world. The new head of the World Bank, David Malpass, in turn highlighted the long list of looming risks, such as “Brexit, Europe’s recession, and trade uncertainty,” which may lead to a further downgrade to their global growth estimate.

Chair Powell expressed similar concerns in his speech this week, acknowledging that the U.S. economy has slowed. He also reaffirmed that while the 50 basis point reduction in the fed funds rate so far is providing support, the FOMC committee will continue to assess incoming data signals on a meeting-by-meeting basis. The next meeting will take place at the end of October, and markets are expecting another quarter-point rate cut. Powell’s speech this week did not dispel those expectations, with the chairman reiterating that “policy is not on a preset course”.

While data was sparse, with CPI being the only main release, the FOMC meeting minutes, were noteworthy. The September minutes revealed that most participants were in favor of a 25 basis point cut last month to cushion the domestic economy from external headwinds. It appears that the argument for further monetary accommodation has only strengthened since then. The ISM Manufacturing index has moved deeper into contractionary territory, service sector activity has moderated, and wage and job growth have slowed. Echoing those trends, the JOLTs survey this week showed that worker demand had softened over the summer. The number of job openings in August declined 4% from a year ago, falling for the third consecutive month and mirroring the decline in average weekly hours (Chart 1).

Separately, the NFIB small business confidence index showed that businesses may be stuck between a rock-and-a-hard place, as they face rising costs (especially for labor), but are unable (or unwilling) to increase selling prices (Chart 2). Indeed, despite new tariffs coming into effect in September on many consumer goods, inflation remained tame. Both headline and core inflation registered a muted 0.1% increase on the month, leaving the readings flat on a year-over-year basis at 1.7% and 2.4%, respectively. Unless a breakthrough in the trade impasse is reached later today, benign inflation and further signs of the domestic economy cooling off should lead to even more agreement at the FOMC table for the need of at least another rate cut this year.

Ksenia Bushmeneva, Economist | 416-308-7392

Financial News- Oct 11, 2019 

 This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

by Connor Hare

Financial News for the Week of October 4, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• October began on a sour note. A deepening contraction in the manufacturing ISM confirmed that the global manufacturing slump has washed up on American shores, and the sectoral weakness may be spreading into other industries.
• The jobs report offered some encouragement, even as the details were not entirely positive. Payrolls rose a decent 136k and the unemployment rate fell to a 50-year low at 3.5%. Still, wage growth cooled, dipping below 3% y/y.
• Trade developments remained top of mind. After getting the okay from the WTO, the U.S. plans to apply tariffs on $7.5 bn of EU goods in mid-October. This is around the same time it plans to increase the tariff rate on $250 bn of Chinese goods. This increases the chances of tit-for-tat measures, which would expedite the slowdown in global growth.

Mixed Signals on Strength of Expansion

The mood at the start of October was predominantly downbeat, with a weak manufacturing report setting the tone early on. The ISM manufacturing index fell again in September, diving deeper into contractionary territory (Chart 1). The details of the report were equally disappointing, with weakness broad-based across the subcomponents. Strikingly, new export orders fell to the lowest level since early 2009. The recent deterioration is a clear sign that the global manufacturing slump has now firmly washed up on American shores. The other, larger side of the U.S. economy also showed signs of fatigue. The ISM non-manufacturing index, disappointed expectations, retreating by nearly 4 points to 52.6 in September. While the index remains in expansionary territory, its downward trajectory is an indication that the manufacturing slump is seeping into other sectors.

The consumer remains the main bright spot for the American economy. Keeping with that theme, U.S. vehicle sales continued their momentum with yet another strong reading in September (+1.1% to 17.2 million). On the surface, this bodes well for consumer spending in the third quarter. That said, given that the monthly gain was driven by fleet volume, we caution against reading too much into it.

The jobs report however, offered additional encouragement on the consumption narrative. Payrolls rose by 136k in September – a decent print, but one that highlights an expected slowing trajectory in hiring at this point in the cycle. In addition, the tally for payrolls in the two months prior was bumped up by 45k. Meanwhile, the unemployment rate fell to a 50-year low of 3.5%. Given that the participation rate held steady, the drop in the jobless rate appears to be organically-driven, as workers moved out of unemployment and into jobs. One thorn in the side of this report, however, was a cooling of wage growth to 2.9% y/y – a factor that does not bode well for income growth (Chart 2).

Aside from data, there were plenty of other salient developments this week, with trade remaining top of mind. The WTO gave the U.S. the green light to impose tariffs on $7.5 bn worth of EU goods, with the ruling pertaining to a long-running dispute over illegal subsidies provided to Airbus (the EU is pursuing a similar case against Boeing). The U.S. is wasting no time, announcing plans to apply tariffs between 10% and 25% on October 18th (see list of products). This would come at a particularly bad time for the EU, which is on the brink of recession (see here). The issue is not so much the $7.5 bn of goods impacted, but rather what might come after.

A flare up in tensions may get the ball rolling for more tit-for-tat measures. The EU’s retaliation could push the U.S. to levy auto tariffs. A decision on the latter is already pending for mid-November. What’s more, in mid-October, the U.S. is set to raise tariffs on $250 bn of Chinese goods. Increased protectionist measures with any or both of its two most important goods trading partners, will expedite the slowdown in global growth. In this vein, we expect the Fed to continue with its cautionary stance by cutting rates once more this year.

Admir Kolaj, Economist | 416-944-6318

 This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

by Connor Hare

Financial News for the Week of September 27, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• A downturn in U.S. consumer confidence and rising political risks as the House began impeachment inquiries against President Trump, triggered volatility in global markets.
• U.S. personal incomes jumped in August (to 0.4% month-on-month from 0.1% previously), even as spending was subdued (0.1% in August vs. 0.5% in July).
• Activity in the housing market continued to perk up with larger-than-expected rises in both new and pending home sales on the heels of similar increases in housing starts and permits last week.

Political Risks Heighten Economic Uncertainty

The financial news this week was highlighted by old-fashioned political words like “prorogation” and “impeachment.” In the U.K., the Supreme Court ruled that Prime Minister Johnson acted unlawfully when he prorogued Parliament earlier this month. The ruling is expected to intensify Brexit tensions in the weeks ahead.

In the U.S., House Speaker Nancy Pelosi announced an official impeachment inquiry into President Trump after a whistleblower report suggested that he withheld aid to Ukraine while pressing the country to investigate Democratic presidential candidate Joe Biden and his son. The threat of ousting the president from office contributed to market volatility, but with few believing it will hit the two-thirds of the Senate required for conviction, market reaction was relatively muted, with stock markets edging modestly lower and bond yields down a few basis points.

Meanwhile the U.S.-China trade dispute continues to simmer. Washington and Beijing, sent out mixed signals throughout the week. Mr. Trump noted that he wouldn’t accept a “bad” trade deal with China, but by Wednesday stated that a trade deal with China “could happen sooner than you think.” China, on the other hand, called trade talks “productive” and “constructive” and there are reports that Chinese companies are preparing to increase their purchases of U.S. pork and soybeans, notwithstanding the cancellation of scheduled U.S. farm visits by Chinese delegates.

On a more positive note, Mr. Trump and Japan’s Prime Minister signed a trade-enhancement agreement that will lower agricultural tariffs in Japan, industrial tariffs in the U.S. and set new rules for digital trade between the two countries. The limited accord is potentially the first step in a broader trade agreement between the two countries.

The erratic nature of trade talks has undoubtedly contributed to a falloff in consumer confidence. The Conference Board’s index fell by the most in nine months in September to 125.1, from a downwardly revised 134.2 the month before (Chart 1). The reading was well below market expectations. The expectations index also declined to 95.8 from 106.4 previously. The downturn in expectations could see consumers hold back on spending. Indeed, consumer spending slowed more than expected in August, nudging up just 0.1% month-on-month. On the upside, incomes rose by a solid 0.4%. Price pressures were steady, with PCE inflation holding at 1.4% year-on-year, but the core measure ticked up to 1.8% (from 1.7%).

Activity in the housing market fared better. New home sales increased 7.1% in August and pending home sales rose a better-than-expected 1.6%. Residential investment is likely to add a small, but positive, amount to third quarter GDP – a welcome development after several quarters subtracting from growth. On the price side, the Case-Shiller index slowed in July to the slowest pace since September 2012 (Chart 2). The deceleration in price growth may not be such a bad thing, easing affordability pressures and helping to sustain the recent pickup in housing demand.

Shernette McLeod, Economist | 416-415-0413

 This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

by Connor Hare

Financial News for the Week of September 20, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• In the main financial event of the week, the Federal Reserve cut its key lending rate by 25 basis points, but was mum on the prospect for additional cuts. Our latest forecast sees slower economic growth leading to at least one more rate cut.
• Fed rate cuts will help to offset some of the dampening effects of trade-uncertainty and weak global growth. In fact, this week saw early signs that the American housing market is responding to lower rates.
• Oil prices spiked early in the week on the attack in Saudi Arabia but gave up much of the gains as the week ended. Elsewhere, the strike at GM is likely to add volatility to the economic growth profile.

 Fed Cuts Rates, More to Come

The main event for investors this week was the Fed’s rate decision. Equity markets managed to hang on to last week’s optimism. However, long-term Treasury yields were a little lower as bond markets remain cautious on the economic outlook.

As expected, the Fed cut its key lending rate, but there was little change in its economic forecasts. Investors may have been disappointed by the Fed’s “dot” plot, which showed the median FOMC member does not expect to lower rates in the next few years. It is important to note that Chair Powell de-emphasized the “dots” in the press conference after the decision. He argued that when the Fed is dealing with a high degree of uncertainty and heightened data dependency the dots farther out have less meaning.

Recent history has borne this out. As recently as June of this year, the median FOMC member did not expect to cut rates in 2019 (Chart 1). In the three months since, the Fed has cut rates twice. The FOMC will clearly shift in response to risks to the economic outlook. It is late in the business cycle, with limited pent-up demand and mounting geopolitical risks. This requires the dot plot to be taken with several grains of salt.

Our new forecast discusses how a lower growth trajectory over the next year and continued uncertainty on the trade front is likely to lead the Fed to cut rates once more this year. Indeed, the Fed is not the only central bank easing policy. Easier financial conditions globally should help soften the negative cycle taking hold in sentiment, and ultimately sow the seeds for a modest firming in global economic growth in 2020.

Here in the U.S. we are finally starting to see the positive impact of falling interest rates. The one percentage point drop in mortgage rates since late 2018 is finally providing a boost to the housing market (Chart 2). Residential investment is likely to expand in the third quarter for the first time in almost two years. We expect it to continue to grow at a modest pace, as positive demand forces – record-low unemployment and low mortgage rates – push up against challenges on the supply side – a lack of inventory of homes for sale, and still-inadequate construction.

Adding to an eventful week, the GM strike halted production at more than 30 U.S. plants. There are few signs of a deal, and the strike is likely to subtract around 0.1 percentage points off real GDP growth in Q3. The impact on fourth quarter growth will depend on how long it lasts and on how quickly GM ramps up activity after the strike. A four-week strike would see a very limited bounce back in activity in the fourth quarter, but would push the rebound in growth more into the first quarter of 2020.

Finally, oil prices have fallen back after their spike on Monday. While the increase was startling, oil prices remain about 18% below their year-ago level, and prices at the pump continue to put downward pressure on inflation, adding to consumer purchasing power – at least for now.

Leslie Preston, Senior Economist | 416-982-7053

 This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

by Connor Hare

Financial News for the Week of September 13, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• There was good news in the trade negotiations between the U.S. and China this week as the President announced a postponement of tariffs and China exempted key agricultural goods (pork and soybeans) from existing tariffs.
• The European Central Bank lowered its key policy rate further into negative territory this week and announced a plan to restart asset purchases that will continue “for as long as necessary” to bring inflation back to target.
• U.S. core inflation picked up in August and retail sales beat expectations. Even so, the Fed is likely to cut rates by 25 basis points when it meets next week, likely citing global growth and trade headwinds.

 Optimism on Trade Deal Lifts Markets

Financial markets turned optimistic this week on signs of progress in trade talks between China and the U.S. On Wednesday, President Trump tweeted that “as a gesture of goodwill” the tariff hike scheduled for October 1st (moving the rate from 25% to 30% on over $200 billion in Chinese imports) would be postponed until October 15th. China responded by exempting U.S. pork and soybean exports from its 25% agricultural tariffs.

In other Presidential tweets, Trump once again advised the Fed to cut rates, this time adding “to zero or less”. The president cited “no inflation” as justification. Only a day later, the consumer price index (CPI) data for August showed a pick-up in the core rate of inflation (excluding food and energy) to 2.4% year-on-year (y/y), its highest level since the recovery began (Chart 1). On a three-month moving average basis, core prices are up 3.4% (annualized), a noticeable breakout from the past several years. As much as it is a sign that a hot economy, rising prices also reflect the impact of tariffs. Core goods prices were up 0.8% (y/y) in August, the fastest gain in over seven years.

Trump’s admonishment of the Fed came prior to the ECB’s decision on Wednesday to lower its deposit rate by 10 basis points to a new low of negative 0.5%. The ECB’s decision, however, is a reflection not of economic strength, but of weakness. Right on cue, data showed Euro area industrial production pulled back by 0.4% in July. Inflation in Europe is also lower than in the U.S., hovering close to the 1% mark. The serial disappointment on inflation led the ECB to announce a plan to leave rates unchanged “until it has seen the inflation outlook robustly converge” to its target. President Draghi, in his press conference, said that the ball is now in fiscal policy’s court and expressed hope that governments would respond with additional spending to support the economy and return inflation to target.

Turning back to the U.S., the President won’t have to wait long for the next interest rate decision. The Federal Open Market Committee (FOMC) meets next week and will likely deliver a 25-basis point cut. The FOMC is likely to look through the tariff-related increase in consumer prices, but with an unemployment rate at 3.7% there is little at present to motivate a full-blown cutting cycle. The meeting will come with updated economic projections. Perhaps even more than its near-term forecasts, we’re looking for the migration in the Fed’s long-term projections for the fed funds rate and the unemployment rate, which may validate at least some of the decline we’ve seen this year in bond yields and provide a sense of where policy may land in the coming months and quarters.

With inflation showing a bit more momentum and signs that an ever-worsening trade war may not be the most likely outcome, bond investors may be starting to reassess just how low the Fed will go. Yields have rebounded through the month of September (Chart 2) and providing the economy can avoid a recession, some further increases may still be ahead.

James Marple, Senior Economist | 416-982-2557

 This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

by Connor Hare

Financial News for the Week of August 30, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• US-China trade tensions spiked last Friday as both countries announced more protectionist measures against each other, but later eased this week. Equity markets swept the escalation under the rug, making a full recovery on the week.
• Second-quarter U.S. GDP growth was little changed in a second reading, but consumption was revised up to an even better 4.7% annualized. Real spending was up 0.4% m/m in July, making for a solid start to third-quarter consumption.
• A cloud of uncertainty continues to weigh on the global economic outlook. The odds of a no-deal Brexit have increased following a planned shutdown of the UK’s Parliament from September 9th to mid-October. Meanwhile, parties are scrambling in Italy to form a new government, but the potential new coalition government stands on shaky footing.

 Uncertainty Still Name of The Game

As Americans rushed off to start the weekend last Friday, President Trump announced that the U.S. was ratcheting up existing and planned tariffs on China by 5 percentage points. The measures, which would affect some $550bn in goods, were a response to China’s announcement that it would raise tariffs on $75bn worth of U.S. goods. However, tensions eased this week on indications that China wants to get back to the negotiating table, and would refrain from immediate retaliation to the latest U.S. action.

Equity markets shrugged off last Friday’s escalation, making a slow but full recovery on the week. Yet, there are strong indications that the trade conflict is a long way from being resolved. China clarified this week that products listed more than once in its three retaliatory rounds would in fact face a cumulative tariff rate. This would bring the tariff rate to 30% or higher for some imported U.S. products, including some autos and parts. On the other hand, the U.S. is still pushing ahead with an increase in the tariff rate from 10% to 15% that will affect $125bn in goods starting this Sunday. Altogether, these steps may jeopardize progress in talks scheduled for September.

With trade dominating headlines once again,  including an agreement in principle between the U.S. and Japan, economic data took a backseat. A second reading on U.S. economic growth left the picture relatively unchanged for the second quarter. The headline GDP print was shaved back marginally from 2.1% annualized to 2%, but consumer spending was upgraded from 4.3% to 4.7%. The consumer is poised to remain a central part of the growth story, with real spending up 0.4% m/m in July, making for a solid start to third quarter (Chart 1). Lower interest rates should help stimulate spending further, but much rests on the confidence channel. While overall sentiment remains upbeat, consumer expectations retreated in August, with trade skirmishes and talk of an impending recession weighing on people’s minds (Chart 2). The yield curve remained inverted this week, with the 10-to-2 year Treasury yield spread steadily in the red.

A veil of uncertainty continues to weigh on the broader global economic outlook. In Latin America, the Argentine peso severely weakened as the country remains in economic crisis and on the brink of default. Meanwhile, across the pond, the UK’s parliament is set to be suspended for a few weeks at the request of PM Johnson in an effort to make an unimpeded final push for Brexit before the October 31st deadline. Next week will likely prove to be a tumultuous Parliamentary session that could see a vote of no-confidence put forward by the opposition Labour leader, and an election call possible before the week ends. A snap election could delay Brexit further. Meanwhile in Italy, two parties are attempting to form a new coalition after the Northern League pulled out of the ruling coalition government. A prospective new alliance between an anti-establishment and a center-left party appears to stand on shaky ground. Moreover, opinion polls indicate that the the Northern League remains the most popular party, so the tide could again turn quickly. It’s clear to see that uncertainty is still the name of the game.

Admir Kolaj, Economist | 416-944-6318

 This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

by Connor Hare

Financial News for the Week of August 23, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• This week may have been short on economic data, but the fireworks were lit on Friday as the President lashed out against China’s decision to impose tariffs on $75 billion of U.S. imports, sending stock markets into a tailspin.
• Risks increased, and global outlook has darkened since the Fed’s last meeting in July. Chair Powell acknowledged this at Jackson Hole, saying the Fed “will act as appropriate to sustain the expansion.” We anticipate two additional cuts will be needed this year to cushion the economy.
• The lone data release, existing home sales, was positive, with sales rising 2.5% in July and up 9.9% since January’s trough.

 Markets on Edge as Recession Risks Rise

This week may have been short on economic data, but the fireworks were lit on Friday as the President lashed out against China and the Fed Chair in a series of tweets, sending stock markets into a tailspin. The main event was meant to be the Fed Chair’s Jackson Hole speech earlier in the morning, but an imminent announcement from the White House on the China-U.S. trade front stole the spotlight.

Earlier this week, the Fed’s minutes revealed that while the majority of the FOMC members supported the July rate cut as a “prudent step from a risk-management perspective,” there was a diversity of views among members. We already knew that two voting members dissented, but the minutes showed that those in favor of cuts citing different reasons for monetary easing ranging from low inflation to headwinds from trade tensions and insurance against slowing global growth.

Rather than abating, those risks have increased since July. Today, China responded to the U.S.’s latest tariff escalation by announcing  5%-10% on the remaining $75 billion of the U.S. imports. While the 10% tariff doesn’t seem like it would kick the chair out from under the global economy, as we argue in our recent report, this recent tit-for-tat escalation between China and the U.S. may be the last straw that damages business and market confidence beyond the point of no-return.

In concert, the global outlook has darkened since the Fed’s last meeting. Global growth is now tracking 2.9% - the slowest pace in a decade (Chart 1). Global manufacturing PMIs have remained weak, and geopolitical risks, such as the no-deal Brexit, have intensified. Consumer sentiment levels in Europe are also low, consistent with levels that have historically preceded a recession. All in all, there is little surprise bond markets continue to flash warning signs, with the spread between the 10-year and 2-year Treasuries briefly turning negative again this week.

These recent unfavorable developments were reiterated by Chair Powell in his Jackson Hole speech. Powell also reminded the audience about lags in monetary policy and stated that the Fed “will act as appropriate to sustain the expansion.” He indicated that he is not overly worried about the risks of a pick-up in inflation, or excesses building in the financial system, seemingly removing two arguments against further rate cuts. Given slower global growth and the intensification of trade risks since our last forecast, we anticipate two additional cuts will be needed this year to cushion the economy. There wasn’t anything in Powell’s speech to suggest that the Fed won’t act in the face of a deteriorating outlook.

In the one economic footnote to a week that is ending dramatically, the existing home sales data was positive. Sales rose 2.5% to 5.42 million in July and are now up 9.9% from their trough in January, evidence that the more than 100 basis point decline in mortgage rates is helping to revive demand (Chart 2).

Ksenia Bushmeneva, Economist | 416-308-7392

 This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

by Connor Hare

Financial News for the Week of August 16, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• There was no summer vacation from financial market volatility this week as investors were increasingly worried that the global economy is about to slip into recession.
• The difference between the 10 and 2-Year Treasury yields turned briefly negative this week, sending a signal that bond investors expect the economy to get worse before it gets better. While the risks of a recession have risen, we are not there yet.
• The U.S. data was mixed this week, with evidence that tariffs are impacting prices and the factory sector. Consumers continue to be the bright spot, and there were signs that housing may be firming too.

 Markets on Edge as Recession Risks Rise

There was no summer vacation from financial market volatility this week as investors worried that the global economy is about to slip into recession. An inverted yield curve, as measured by the difference between longer and shorter-term bond yields, is one of the more reliable recession predictors. The difference between the 10-Year Treasury and the 3-Month T-bill has been negative for a couple of months now, but the difference with the 2-Year Treasury turned negative briefly this week (Chart 1).

Notably, there is a long and variable lead time on the signal coming from the yield curve. Anywhere from one to two years in the case of the 1990, 2001 and 2008 experiences. The yield curve signals that bond investors expect the economy to get worse before it gets better, but it is not a definitive signal that a recession is imminent. As we discussed late last year (see Perspective) we look at a suite of indicators to see whether we are close to a recession. Our TD Leading Economic Index has deteriorated, but is not yet flashing recession (Chart 2). It is similar to the 2015-16 slowdown, when the Fed paused on its new tightening cycle due to global weakness.

All told, the risks of a recession have increased since the White House ratcheted up trade tensions with China. That said, we still expect the Fed to continue its risk management approach and cut rates another 25 basis points in September. The negative yield curve raises the probability that they take further action in the months ahead.

The Fed is right to be wary of the risks from trade tensions, as evidence that tariffs are hitting the U.S. economy continued to mount this week. The July CPI indicated that tariffs on Chinese imports are likely lifting prices at the consumer level (likely in the neighborhood of 0.2 to 0.4 percentage points). Core goods prices have picked up in recent months. The Fed will look through one-time price increases due to tariffs, since they are a tax which ultimately crimps growth.

The manufacturing sector also continued to struggle in July. Factory production fell 0.4% in July and has been trending lower in 2019. Weaker foreign demand and elevated trade uncertainty is taking a toll on the sector (see report). Housing starts weren’t looking too hot either in July, although an increase in single-family starts, and in building permits were silver linings. This is in line with homebuilder confidence, which continued to improve in August after weakening at the end of 2018.

The bright light in an otherwise crummy week was the consumer. Retail sales were up more than expected in July, setting up consumer spending to be an impressive 3% in the third quarter, stronger than we had expected. If the global backdrop weakens more sharply than we expect, the consumer at least seems to be in a decent position to weather it.

Leslie Preston, Senior Economist | 416-983-7053

 This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

by Connor Hare