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

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