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

Financial News for the Week of August 9, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• China responded to the threat of additional U.S. tariffs by halting agricultural purchases and allowing its currency to weaken beyond the psychologically important 7 yuan to the dollar level.
• Central banks around the world responded to the heightened risk posed by the spiraling trade war by proactively cutting policy interest rates.
• The U.S. services sector showed signs of cooling in July as the ISM non-manufacturing index declined to 53.7 from 55.1 the previous month.

 As U.S. and China Dig in, Central Banks Ease

Heightened U.S.-China trade tensions continue to occupy the limelight. The fallout from last week’s Chinese tariff announcement by President Trump reverberated through the global economy. Last week, the President announced that the U.S. would be imposing a 10% tariff on the remaining Chinese imports previously untouched by tariffs starting September 1st. In response to the tariff threat, China’s currency weakened this week to below the psychologically important level of 7 yuan to the dollar. China also suspended purchases of U.S. agricultural products and has not ruled out placing tariffs on some U.S. imports.

The escalating trade tensions also extended risk-off sentiment in global financial markets. Many Asian currencies plunged in response to the yuan’s weakness, as the region is a central player in global supply chains with complex trade ties to both the U.S. and China. Other emerging market currencies also came under pressure, while the yen, which is seen as a safe-haven asset, appreciated. U.S. equities posted dramatic declines with the Dow registering a drop of more than 2.9% on Monday, its biggest one-day percentage decline since the end of last year. Treasury yields across the curve also tumbled and the yield on the 3-month T-bill exceeded the yield on the 10-year note by the widest margin since April 2007, deepening the yield curve inversion (Chart 1). Markets stabilized later in the week after China’s central bank signaled it wouldn’t let the yuan fall much further.

Following the yuan’s depreciation, the U.S. Treasury Department officially designated China a currency manipulator. The action, though mostly symbolic, requires the U.S. to consult with the IMF to try to eliminate any unfair advantage for China from currency manipulation, and could result in further tariff increases in the future.

Amid the growing trade worries, three central banks in the Asia-Pacific region (India, Thailand, New Zealand and the Philippines) proactively lowered interest rates this week. These actions are consistent with the expectation that the global rate-cutting cycle will intensify in the months ahead as the U.S. and China dig in for an extended battle. Meanwhile, despite the Fed delivering on an insurance rate cut last week, the market continues to expect further cuts in September as odds of a recession lurch higher.

In one of the few data releases of the week, the July ISM non-manufacturing index suggested that the recent economic soft patch is not just limited to U.S. factories. Though the services sector expanded, it did so at the slowest pace in nearly three years. The index eased for the second month in a row to 53.7 in July from 55.1 in June, coming in below expectations (Chart 2). The sub-index tracking business activity dropped sharply to 53.1 from 58.2 in June. New orders also decreased in July. With trade tensions rising and U.S. business activity cooling, the renewed uncertainty will undoubtedly factor into the Fed’s discussions as they attempt to engineer a soft landing for the U.S. economy in these turbulent times.

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 August 2, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• Financial markets plunged after mixed messaging by the Federal Reserve, and later a 10% tariff on all remaining imported Chinese goods was announced to take effect in September.
• The Federal Reserve cut its policy rate by 25 basis points this week, but markets were unhappy with the lack of commitment to cut more if necessary.
• Slowing global economic growth and past tariff actions suggest that another cut is likely in September. However, escalating trade tensions may require even lower interest rates to help cushion the fallout.

 The Fed is Not Done Cutting Rates

Events this week caused a lot more turmoil than usual for financial markets in mid-summer. Global financial markets reacted quickly and negatively to mixed messaging by Federal Reserve Chair Jerome Powell. The very next day, a tweet by U.S. President Trump called for a 10 % tariff on the remaining $300bn in untariffed Chinese imported goods beginning September 1st. Any goodwill from the Federal Reserve was quickly thrown into reverse. Global equity and commodity markets sold off with investors seeking the safety of government bonds. The tweet came after talks broke down during a brief meeting between trade representatives from the U.S. and China.

Tackling these two events separately, financial markets wanted more clarity on the Fed’s commitment to further rate cuts. First off, many were puzzled as to why rates were cut at all given the solid performance of the U.S. economy. The data this week confirmed that global developments had yet to take a significant toll on domestic economic activity. July payrolls came in as expected, with 164k jobs created, and wage growth firmed up slightly to 3.2% y/y. What’s more, consumer spending for June expanded at a healthy pace, and core inflation registered a slight improvement. Lastly, although motor vehicle sales slowed to a 16.9 million annual pace in July, this remains in line with expectations for 2019 as a whole.

The reason why the Fed is cutting is simple. The data reflects past performance, and forward-looking surveys offer a slightly less favorable outlook. For example, July’s ISM manufacturing survey again edged down and is close to tipping into contraction. Moreover, growth in world GDP is strongly correlated with domestic business investment with a short lag (Chart 1). As a result, the half-point decline in global growth since last year has weighed on business investment enough to shave about a tenth of a point off U.S. growth.

This week’s 25 basis-point cut should help to offset the impact of a slowing global economy on domestic growth, but it’s likely not enough to insure against the fallout from past tariff actions. A follow-up rate cut in September should help alleviate some of the pain. However, recent steps by the U.S. administration to place tariffs on the remaining Chinese imported products is likely to now take a deeper bite out of economic activity (Chart 2). This last tranche of goods tilts more heavily towards consumer products and could eventually result in higher consumer prices than previous tariff actions. Furthermore, China is likely to retaliate by taking further actions to impede U.S. business activity in the country. It may also choose to let its exchange rate depreciate beyond US $7, an important psychological threshold that could send tremors through global financial markets.

With no end in sight for trade tensions, any larger-than-anticipated negative impact on consumer spending, confidence and business investment would likely call for even lower interest rates to help support U.S. economic growth.

Fotios Raptis, Senior Economist | 416-982-2556

 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 July 26, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• Markets had no summer vacation this week, with a new British PM, dovish message from the European Central Bank, and new U.S. GDP data to digest.
• Advanced economy central banks are all sounding dovish, with the Bank of England likely to be more cautious next week now that the risks of a disorderly Brexit have risen.
• Second quarter GDP data showed that U.S. domestic growth remained solid in Q2. But the Fed is likely more concerned with weakness in investment and exports as it prepares to cut rates next week.

 Summertime and the Policy’s Easy

The global economy certainly didn’t take a vacation this week. Between a new UK Prime Minister, an ECB prepared to step up the stimulus, and fresh data on U.S. growth, markets had a lot to digest. And let’s not forget the Federal Reserve is likely to cut rates for the first time in over 10 years when it meets next week. So much for the dog days of summer.

Former London mayor Boris Johnson is now Britain’s Prime Minister. Johnson faces an Oct 31st deadline to either leave the EU under the terms of the agreement negotiated by Theresa May, or face a disorderly exit without a deal. The EU had agreed that a UK election would trigger an automatic extension to this deadline, but so far the new PM says an election is off the table. How PM Johnson threads the needle on this one remains to be seen, but it is likely to be a wild ride similar to this past spring. Overall, the odds of a hard Brexit have ticked up in the last two months, and we expect the Bank of England to step back from a hiking bias at its decision next week.

The European Central Bank also hinted at easier monetary policy ahead. Further data this week pointed to a sagging European economy in the second half of the year. Consumer and business confidence have not rebounded from lows consistent with past recessions. Morever, the slump in manufacturing activity is broadening into other regions and industries. This is bad news, as it could trigger a broader pullback on spending, locking in a downward cycle.

Our recent report discusses how this global chill has slowed U.S. manufacturing (Chart 1). This is a key reason why the Fed is likely to attempt to cushion the economy from further weakening by cutting rates a quarter point next week. There are real risks to the expansion, and the Fed needs to get in front of them. Research has shown that when policy rates are close to the zero lower bound, central banks need to act pre-emptively in the face of downside risks since they have less ammunition to combat them.

Today’s GDP report (Chart 2) showed that second quarter growth was supported by strong consumer spending. But, the Fed is likely most concerned about the slowdown in investment and the weakness in exports. For now, the consumer is strong enough to keep economic growth sturdy. And now the U.S. economy looks to get a helping hand from Washington. Congress recently agreed to suspend the debt ceiling until after the next election, and raised the spending caps, removing a key fiscal risk this fall. In fact, spending has been raised slightly higher than we assumed in our forecast, presenting a slight upside risk to growth in 2020.

Monetary policy is set to get a little easier both in the U.S. and abroad, and now U.S. fiscal policy is looking a little easier too. These factors should support growth heading into 2020 just as it was starting to look like the edges of the expansion were fraying. This seems to have put markets in a relaxed mood, just in time for summer vacations.

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

Financial News for the Week of July 19, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• Chinese economic growth slowed 6.2% y/y in the second quarter of this year, as rising trade tensions weighed on activity. Signs of wear are also showing in the U.S., where industrial output continued to grow at a slow pace in June.
• U.S. housing data remains soft. Starts eased in June, while permits dropped precipitously (-6.1% m/m), pointing to more weakness in the pipeline. That said, the services side of the economy continues to hold up well, with consumption providing a major helping hand. Retail sales rose by 0.4% in June, extending the winning streak to four straight months.
• The resilience of the American consumer suggests less urgency for the Fed to cut rates later this month. But, Fed speakers pushed back against that notion this week, emphasizing the need to get ahead of any potential weakness.

Resilient Consumer Unlikely To Change Fed’s Mind

The first half of July, which was marked by a G20 meeting and major Fed communications, was a hard act to follow. But this week still offered plenty of kick, with political developments and a few primary data releases dominating headlines. Of note, tensions in the Persian Gulf remained high with the U.S. claiming that it shot down an Iranian drone in the Strait of Hormuz. The U.S.-China trade spat also continued to reverberate, with President Trump stating that trade talks still have “a long way to go” and calling for an inquiry into Google’s work with China.

The trade blows are inflicting wounds on both sides. Figures out this week showed that Chinese economic growth slowed to 6.2% year-on-year – the slowest pace in 27 years, with output in secondary industries (construction and manufacturing) decelerating to 5.6% from 6.1% in the first quarter. In the U.S., industrial output continued to grow at a slow pace in June, in line with signals from the ISM manufacturing survey (Chart 1). The impact of the trade conflict is not confined to manufacturing. An annual NAR survey showed that Chinese home purchases in the U.S. fell by 56% in the 12-months ending in March.

The good news is that despite all the challenges (trade-related or not), the larger services side of the U.S. economy continues to hold up well. The Fed’s Beige Book corroborated this narrative in what appeared to be another steady-as-she-goes report for the mid-May to early-July period. Consumer spending is providing a major helping hand. Retail sales extended their winning streak to four straight months, with the tally up 0.4% in June. Sales in the ‘control group’, which excludes volatile categories and is used in calculating GDP, rose by an even more impressive 0.7%. With the month prior also receiving a slight upgrade, control group sales in the second quarter advanced 7.5% annualized – the strongest showing since mid-2014 (Chart 2). This bodes well for real consumer spending in the second quarter, which we expect to come in at around 4% annualized – a strong rebound from the sluggish start to the year.

Housing data, on the other hand, remains soft. Starts edged lower in June (-0.9%) and have generally moved sideways in recent months. Building permits, however, fell precipitously on the month (-6.1% m/m), suggesting some weakness is still in the pipeline. Despite a favorable demand backdrop and relatively low and falling interest rates, new construction is struggling to kick into higher gear. A lack of buildable lots, labor shortages and increased production costs remain key hurdles.

Looking past housing challenges, the resilience of the American consumer suggests less urgency for the Fed to cut rates later this month. However, several Fed speakers pushed back against that notion this week, emphasizing the need to get ahead of any potential weakness. Still, should the data continue to hold up, the case for limited stimulus (i.e. only 1-2 cuts) is likely to prevail.

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 July 12, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• In a busy week for Fed communication, Chair Powell gave his semiannual testimony to Congress where he confirmed
  that crosscurrents hitting the outlook would likely require some additional accommodation.
• The Fed Chair also noted that he doesn’t see the labor market as particularly hot and, with wage growth subdued, has
  more room to run.
• Powell also noted the risk that weak inflation could prove more persistent than anticipated. That risk diminished somewhat with the June CPI report, which showed core inflation firming across both goods and services.

Markets Celebrate The U.S.-China Trade Truce

It was a big week for Fed communication. Fed Chair Powell took center stage with his semiannual testimony to Congress, while minutes from the Federal Open Market Committee’s (FOMC) June meeting shed light on participants’ views of the risks to the economy.

The key takeaway from Powell’s prepared remarks was that the Fed Chair still sees crosscurrents and uncertainty as weighing on the outlook. Given that this was the key factor behind the FOMC’s increased willingness to provide additional accommodation, this was as clear a signal as any that a July rate cut is happening. Nailing the coffin closed, when the Chair was asked if the strong June jobs report had done anything to change his mind, he replied, “a straight answer...is no.”

Between now and the July 31st meeting there are data on retail sales, housing starts, home sales, durable goods orders, and a few others. Even relatively positive outcomes on all these reports are unlikely to move the Fed off that 25-basis point cut. They could, however, go a long way to moving market pricing for additional cuts (almost three by the end of this year). In the meantime, Fed speakers have one more week to communicate their take on economic data before the quiet period preceding the July meeting.

The other message in the Fed’s accompanying Monetary Policy Report as well as Powell’s Q&A sessions was the recognition that inflation is weak, and the labor market may still have some room to grow – even with an unemployment rate at 3.7%. Perhaps the most interesting response Powell gave over the two days of testimony was to a question about the possibility that lower interest rates would cause the labor market to run hot. His response was: “you know, I guess I would start by saying we don’t have any basis for calling this a hot labor market.”

Powell went on to say that wage growth of 3%, while better than the 2% it was five years ago, is “barely keeping up with productivity.” In fact, productivity growth has accelerated over the past year, and, as a result, the cost of adding workers relative to the output they produce has declined (Chart 1). Absent evidence of wage inflation, the Fed is unlikely to get too heated by a low unemployment rate, even if it continues to push further below its long-run estimates.

Nonetheless, sometimes the data zigs just when everyone expects it to zag. While the Fed Chair cited the risk that weak inflation would prove more persistent than anticipated, the CPI out this week showed prices rising firmly in June. Core CPI (excluding food and energy) rose 0.3% on the month – the strongest gain since January 2018. Price growth firmed for both core goods and services (Chart 2). Still, with the year-on-year headline rate at just 1.7% and core at 2.2%, the firetrucks can stay parked for now.

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 July 5, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• News of a trade truce between the U.S. and China buoyed equity markets at the start of the week. The ceasefire put additional tariffs on hold, and there were some modest concessions on both sides.
• On the economic front, messages were decidedly mixed this week. The ISM manufacturing and non-manufacturing indexes moved lower in June, while the payroll report showed a reacceleration in hiring with 224k jobs created last month.
• Given the balance of risks, there is still a solid case for a 25- basis point “insurance” cut when the Fed meets later this month. But, insurance is likely to mean one or two rate cuts this year and not four or five as markets are pricing.

Markets Celebrate The U.S.-China Trade Truce

News of a trade truce between the U.S. and China kicked off this holiday-shortened week. The ceasefire puts additional tariffs on hold. There were some modest concessions on both sides. The U.S. will allow American companies to continue selling equipment to Huawei (although specifics are still pending), while China will buy more American agricultural goods. The outcome was broadly in line with analyst expectations, but still positive enough to bouy equity markets, especially in sectors such as semiconductors hit by trade uncertainty. On Wednesday, the S&P 500 reached an all-time high.

On the economic front, messages in this week’s data releases were decidedly mixed. The ISM manufacturing and non-manufacturing indexes moved lower in June and are significantly below year-ago levels. Still, both remain in expansionary territory, implying slower, but not negative economic growth (Chart 1). More concerning is that the greatest weakness was in the forward-looking indicators. The new orders subcomponent narrowly avoided contraction in June, while pending orders have already slipped below the 50-point threshold.

It is not surprising that activity is slowing from its 3%-plus, stimulus-fueled pace of a year ago, but it makes reading the economic tea leaves more difficult. It is hard to know in real time if the economy is returning to a healthy trend-like pace or pushing past it into a slump. Tariffs and trade uncertainty further cloud the mix, and signs globally point to a less benign slowdown.

America’s saving grace may be that a large share of its economy is relatively shielded from global events. Still, while its service sector is less impacted by trade, it has not been spared entirely. Indeed, comments from non-manufacturing survey respondents highlighted concerns about tariffs in several industries, including construction, retail trade, health care & social assistance and professional and technical services.

The best evidence that the American economy is headed for a soft landing is the continued resilience in the labor market. That had been brought into question with the May payroll report (job growth slowed to just 72k), but doubts were assuaged with this week’s report showing a reacceleration to 224k in June. The only fly in the ointment was that there were no signs of faster wage growth. Instead average hourly wage growth remained unchanged at 3.1% for the third consecutive month.

Given the balance of risks, there is still a solid case for a 25- basis point “insurance” cut when the Fed meets later this month. But, as long as signs point to continued, albeit slower, economic growth, insurance is likely to mean one or two rate cuts and not four or five as financial markets are currently pricing. Fed speeches over the next two weeks will be key in communicating this to the public and financial market participants.

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 June 28, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• A light week on economic data was filled with Fed speeches and a trickle of news flow on the upcoming meeting between Presidents Trump and Xi. We do not expect to see a major breakthrough this weekend, but rather an agreement to continue talking (forestalling at least for now the threat of additional tariffs).
• Chair Powell reiterated comments in his press conference last week that crosscurrents to the economic outlook had arisen relatively swiftly over the past month, leading the Fed to shift toward an increased willingness to cut rates.
• Economic data was mixed, with home sales and confidence falling, but consumer spending rising. With revisions, second quarter personal consumption is likely to top 3% annualized, enough to push economic growth to the 2% mark.

Presidents Xi and Trump Meet As Crosscurrents Blow

It was a relatively light week on economic data but heavy on Fed communication and key political events. All eyes will be on the G20 meeting this weekend, where Presidents Trump and Xi will meet on Saturday in Osaka to discuss U.S.-China trade relations.

Following the FOMC meeting last week, Fed speakers were out in full force explaining and defending the committee’s shift from patience to willingness to do more. Most notably, Chairman Powell reiterated that significant crosscurrents had hit the U.S. outlook in the period between the FOMC’s May and June decision. Among these, deteriorating business sentiment and slowing global growth rang the loudest.

Powell did not mention it explicitly, but the breakdown in trade negotiations between China and the U.S. was a key driver of the change in tack. That puts the focus squarely on the leaders of the two countries as they meet in Japan this weekend. Prior to the meeting, optimism that the two sides were getting close to a deal were stoked by Treasury Secretary, Steve Mnuchin, who said they were 90% of the way there. But, just as soon as he said this, doubt was cast by President Trump’s own interview that dangled the possibility of additional tariffs. At the same time, reports that China would come to the meeting with preconditions of its own, including the removal of all existing tariffs and restrictions imposed on Huawei, reined in optimism that a significant breakthrough is imminent. All in all, we expect little to come out of the meeting except an agreement to keep on talking.

On the economic data front, the message was mixed. New home sales fell sharply in May, adding to the spate of challenging data for the housing sector (Chart 1). While lower mortgage rates should give some support to housing demand, this may be offset in part by increased economic uncertainty, leading would-be homebuyers to hold off on making big purchases. Indeed, measures of consumer confidence fell in May, with a drop in expectations for the future leading the pullback.

On the bright side, consumer spending is still holding up. Real personal consumption rose by 0.2% in May, and was revised up to 0.2% growth in April from a previously flat reading. With two of three months of the second quarter now recorded, spending growth looks to advance by well over 3% (annualized - Chart 2). Even with some weakness in investment and trade, second quarter economic growth appears likely to come in near the 2% mark.

Evidence that economic growth is holding up suggests that even as the Fed considers insurance cuts, it need not have to bring out the bazooka. While a 25-basis point cut in July seems increasingly likely, the Fed should be able to afford to save at least some of its bullets and refrain from a larger 50-basis point cut, as futures markets have begun to price. Still, we would hold off betting the farm on it until after next week’s June payroll report.

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