Financial News for the Week of June 21, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

  • The biggest event this week was the Fed’s pivot away from patience. It is now poised to act in the event of a further deterioration in the outlook. This cheered markets, with stocks and bonds rallying.
  • The Fed’s dot plot also showed that the majority of FOMC members judge the funds rate to already be at its long-run neutral level, and expect to lower rates next year.This is a seismic shift from expecting hikes back in December.
  • Our new forecast released this week, calls for the Fed to cut rates twice this year, as insurance against the downside risks that have accumulated due to trade tensions, and a late-cycle economic slowdown.

The Powell Pivot

Financial News- FOMC Seismic Shift Over Past 6 Months For the second time in the past six months, the Federal Reserve has pivoted on where it thinks interest rates are headed over the next few years. Back in December, the median projection of FOMC members was for 175 basis points of rate hikes by the end of 2020. Now, it is a 25 basis point cut. That is quite the pivot (Chart 1). In its statement the Fed has also shifted from patience to action. The FOMC will now “closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion”.

At the same time, the Fed’s expectations for economic growth have shifted a lot less. The median FOMC forecast for growth is 2.1% this year and 2.0% next year, down only slightly from 2.3% and 2.0% back in December. Looking only at growth expectations it is hard to justify the pivot in interest rates. However, the updated growth forecasts incorporate a lower path of interest rates. Previously, the FOMC believed the economy would grow at that pace as it continued to raise rates. Now it expects that a cut will be required to sustain that near-trend pace.

A big part of the pivot is the continued miss on its inflation forecast. In December, the FOMC expected inflation to be back at 2% by the end of this year, and now that isn’t looking too likely. Given the difficulty sustaining the 2% inflation target, it has lowered its estimate of the “neutral” rate to 2.5%. That is the level at which the rate neither stimulates, nor stifles economic growth. Clearly the Fed has come around to the view that rates over the past little while have been less stimulative than they previously believed.

A majority of FOMC members now believe that at least one rate cut will be required to keep inflation at target and promote maximum employment, and seven out of 17 members judge that it will need two quarter-point rate cuts.

Financial News- Econmic Growth Slowing to Trend The Fed is paying close attention to signs that the economy is slowing. Both the Philly and Empire Fed manufacturing sentiment indicators released this week showed that sentiment soured in June. Now, those readings may have been taken at the time that the President had threatened tariffs on Mexico, before pulling back at the eleventh hour. But, other manufacturing sentiment indicators globally have cooled, supporting the Fed’s vigilance on downside risks.

Our recent forecast (Chart 2) lowered our fed funds rate call for this year, adding in two insurance cuts (see report). We expect cuts are needed to keep growth on track, as persistent trade uncertainty weighs on business sentiment and investment. The upside to rate cuts is that they should provide a bit of fuel for the housing market, which has been largely moving sideways over the past year. Housing data for May showed that while construction activity remains lackluster, the resale market increased 2.5% on the month. That suggests the drop in mortgage rates over the past six months may finally be lifting activity. And a more modest path for rates ahead will help improve affordability.

 

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 June 14, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

  • A potential trade war between U.S. and Mexico was averted, but global trade uncertainty remains.
  • Despite markets pricing in rate cuts, domestic indicators suggest that the U.S. economy is on decent footing. Inflation remains stubbornly low, however.
  • The Fed rate decision next week is clouded by conflicting signals, but we believe it will likely feature an easing bias.

 Conflicting Signals Cloud Fed Rate Decision

Financial News- Retail Sales Growth Continues to Move Up The U.S. economy is taking us on a bit of a rollercoaster ride. Some signals suggest that the downside risks to growth are rising, necessitating further support by the Federal Reserve. Others indicate that the economy is doing just fine, and stepping on the gas might not be warranted. One thing’s for sure, the Fed has a tricky path to navigate as it seeks to sustain the economic expansion.

This week was a perfect example of the conflicting signals faced by the economy. We began the week with a quick extinguishing of a possible trade war with Mexico, but trade uncertainty still looms large. Indeed, the trade conflict between the U.S. and China is not subsiding. Earlier this week, President Trump warned that if President Xi did not meet with him at the upcoming G20 summit, he would immediately slap 25% tariffs on the remaining un-tariffed $300 billion of Chinese imports.

Markets are pricing in the risks emanating from the trade conflicts, resulting in a continued inversion of the yield curve (3-month to 10-year), and an expectation of at least two Fed rate cuts by the end of the year.

However, trade uncertainty does not yet seem to be weighing on business optimism. The NFIB small businesses optimism index improved for the fourth consecutive month as businesses anticipated an improvement in economic conditions and more capital expenditure in months to come.

Moreover, U.S. consumers displayed their strength again, with solid retail sales growth in May alongside a significant upward revision to April data (Chart 1). Consumption growth may now exceed the 3% (annualized) mark in Q2.

Financial News- Oil Tanker Attacks Leads to a Partial Rebound in Oil Prices Despite the strength in consumption, CPI inflation weakened in May. The weakness in inflation in Q1 appears now to be less transitory. Core inflation declined for a range of products including used cars and trucks, apparel, and motor vehicle insurance. While inflation may pick-up going forward, given the increased tariffs on Chinese imports, underlying price pressures in the economy seem to be limited.

The Fed will no doubt take notice of the weakness in inflation in the FOMC meeting next week. But they will also have to consider all other developments as well. Despite rising downside risks, the domestic economy appears to be chugging along. All told, we expect the Fed to convey an easing bias, but not move on rates at next week’s meeting.

We also saw a rise in global political risks rise this week as two oil tankers were attacked in the Gulf of Oman. After falling through much of the week on the back of concerns about global growth, Brent oil prices jumped by around 5% on Thursday (with a similar move in the WTI contract), not quite enough to offset losses earlier in the week (Chart 2). With the relationship between the U.S. and Iran increasingly strained, oil markets may get caught in the middle.

Sri Thanabalasingam, Economist | 416-413-3117

 

 

 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 7, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

  • Trade tensions continued to dominate economic headlines, with U.S.-Mexico taking center stage. It remains unclear if a deal can be reached by Monday. The US-China spat also resurfaced, with signs that it is spreading beyond goods trade.
  • Fed Chair Powell noted that the Fed was monitoring trade developments closely, and was ready to “act as appropriate to sustain the expansion”. This appeared to soothe equity markets, which rebounded to a three-week high.
  • The May jobs report disappointed expectations, with payrolls up only 75k. Looking through the recent volatility, the hiring trend has slowed but remains decent, averaging 151k in the last three months. The unemployment rate held steady at 3.6% and wage growth, while slowing a touch, held above 3% y/y.

 Tariff Threats Muddy the Economic Waters

Trade tensions continued to dominate economic headlines this week, with the U.S.-Mexico quarrel taking center stage. Mexico sent a senior delegation to D.C. to try to address President Trump’s concerns regarding illegal migration, and to defuse the impending tariff threat. While some progress has been made, as at the time of writing, it is unclear if a deal can be reached by Monday’s deadline.

Financial News- Non manufacturing Activity is holding up outperforming manufacturing With Mexico busy at the negotiation table, President Trump tilted the conversation back to China by reaffirming the threat to raise tariffs on another $300 billion of Chinese goods. China’s Commerce Ministry struck a defiant tone in response, suggesting that China would “fight till the end” if need be. Beyond the colorful language, there were signs that the conflict is spreading beyond goods trade, with China cautioning its citizens about the dangers of travelling or studying in the United States.

The uncertainty generated by these events has kept the Fed on high alert. Among several Fed speeches this week, Fed Chair Powell noted that the Fed was monitoring trade developments closely, and was ready to “act as appropriate to sustain the expansion.” Chair Powell’s emphasis on the Fed’s flexibility appeared to soothe equity markets, which rebounded to a three-week high.

Financial News- Hiring Trend Has Slowed Financial conditions factor heavily in FOMC decisions, but economic data is the primary determinant. On that front, data this week reinforced the view that while growth has slowed, there are no impending signs of calamity. Trade tensions are weighing on the manufacturing sector, but the much larger services (non-manufacturing) side of the economy is holding up, as highlighted by the divergent performance of the ISM indices through May (Chart 1). That said, the most awaited report of the week, the jobs report, was a bit of a downer, with payrolls rising by only 75k in May – over 100k short of market consensus. This came alongside downward revisions of 75k to the previous two months. Looking through the recent volatility, the hiring trend has slowed but remains decent, averaging 151k in the last three months (Chart 2). This is broadly in line with our expectations. In addition, most other aspects of the May report were encouraging. The unemployment rate held steady at 3.6% and wage growth, while slowing a touch, held above 3% y/y.

With the broad economic backdrop still decent, trade and global growth remain the ultimate wildcard. Mexico is the second biggest source of goods entering the U.S. after China. As such, the impending 5% tariff will be problematic, particularly for products that cross the border multiple times (i.e. auto parts). Prospects for an increase in the tariff rate to 25% are more daunting, with supply chain disruptions, reduced market access and the hit to confidence all more acute. A simultaneous escalation in tensions with Mexico and China would accentuate these risks further. In the event that tensions escalate in this fashion, the Fed will have little choice but to act.

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 May 31, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

  • U.S.-China trade tensions continued to dominate headlines as both countries dig in for another round of negotiations under more strained circumstances. U.S. tariffs against Mexico appear to also be in the works.
  • As trade tensions flare, investors have run for cover, driving up bond prices and sending the yield curve into inversion territory.
  • U.S. Q1 growth was revised marginally lower (3.1% vs. 3.2%), and Q2 is projected to be lower still (below 2%). Inflation however managed to edge marginally higher with core PCE at 1.6% year-on-year in April.

 Trade Tensions Still in the Spotlight

Financial News- home pricing growth records twelfth consecutive month of deceleration U.S.-China trade negotiations hit a major speedbump earlier in the month and there is now a higher probability that talks could face protracted delays. President Trump stated that the U.S. is “not ready to make a deal”, though he still believes the two nations will ultimately reach an agreement.

In other trade news, just as the U.S. and Mexico took steps this week to ratify the USMCA, President Trump threatened to impose a 5% tariff on all Mexican imports starting July 10th. The President wants Mexico to do more to deter illegal migration from Central America. These tariffs, alongside prolonged Chinese negotiations, complicate trade relations even further. The heightened bout of uncertainty is likely to dent already shaky business confidence.

China has responded to U.S. rhetoric with both direct and indirect threats. The country suggested that they too may influence global supply chains through their dominance of “rare earth” exports – a group of 17 minerals used in the production of most modern electronic devices. A ban on exports to the U.S. could disrupt production and affect prices of many products ranging from smartphones to satellites. There are also indications that China may have once again halted purchases of U.S. soybeans after previously resuming purchases as a sign of goodwill during negotiations.

Meanwhile, on the domestic data front, home price appreciation continues to moderate. Data for March showed that home prices grew 3.7% year-on-year, lower than the 3.9% recorded in February (Chart 1). Price growth has been decelerating since April last year, suggesting that even with lower mortgage rates and rising wages, past price growth may have stretched affordability for many potential buyers.

financial news- growth fears cause yield curve inversion First quarter real GDP growth was revised to 3.1% annualized, relative to 3.2% previously. The slight downgrade reflected lower business and residential investment. Weak performance in these two categories is expected to continue, weighing on growth in Q2 and resulting in a sub 2% outturn. Personal spending in April was also soft at 0.3% month-on-month, even as incomes rose more than expected, coming in at 0.5%. April’s outturn, however, followed strong growth in March, suggesting that personal spending will be a key driver of Q2 growth, even as other components such as investment look to drag on activity.

With concerns of lower growth and heightened trade tensions, investors pushed the yield on 10-yr Treasury notes to the lowest close since September 2017 this week. This caused the yield curve to invert as it dipped below the three-month note (Chart 2). While inversions tend to precede recessions, the phenomenon would need to be sustained and observed among other maturities before the indicator signals an imminent risk and materially affect decisions at the Fed. All said, the reignited trade tensions have skewed the risks to both U.S. and global growth further to the downside – a development which will no doubt receive close monitoring by central bank officials.

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 May 24, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

  • Pessimism dominated markets this week, as negative headlines about U.S.-China trade relations continued.
  • UK PM Theresa May announced her resignation after repeated attempts to get her negotiated Brexit deal through parliament failed.The pound fell this week as markets worry about a no deal Brexit on Oct. 31st.
  • Indicators from the U.S. factory sector continue to point to a weakening trend in the face of softer foreign demand and sentiment.

 Trade Woes Weigh on Markets

Financial News- Core Capital Goods Orders Sideways at best Global markets returned to a pessimistic mood this week, focusing on negative headlines about U.S.-China trade relations. Oil prices fell sharply on the week, as rising inventories in the U.S. had markets worried that trade uncertainty is dampening demand. Measures of manufacturing confidence across various regions were also weak. Manufacturing activity in Europe and Japan continued to contract. In the U.S., the Markit gauge of manufacturing confidence also showed a further deterioration in May.

To top it all off the Brexit saga came back to the fore, as Prime Minister Theresa May announced her resignation. May had been unable to get her negotiated Brexit deal through parliament. The way forward on Brexit remains unclear, and the new Conservative leader, who should be selected by the end of July, will not have a lot of time to chart a new course before the Oct 31st deadline for Britain to leave the EU. In the meantime, the cloud of uncertainty continues to hang over the UK economy, and the increased probability of a no-deal Brexit has weighed heavily on the pound over the past week. Financial News- increase in customs duties pays for farm aid

The sour news continued with the April durable goods orders report, which showed total orders fell 2.1% in April. Nondefense capital goods orders ex-aircraft – a closely watched gauge of business capital spending – was also down in April (-0.9%). Durable goods orders are quite volatile month-to-month, but on a trend basis (the six month moving average) orders have gone sideways at best since late 2018 (Chart 1). This is consistent with the theme discussed in last week’s Bottom Line, that cracks continue to appear in the US manufacturing sector: foreign demand has cooled, and uncertainty on the trade front weighs on business sentiment and willingness to spend on new equipment.

The President has recognized the impact trade conflicts are having on at least one sector of the economy. He formally announced a $16 billion aid package for farmers hurt by Chinese retaliatory tariffs on key agricultural exports from the U.S. This amount is slightly larger than last year’s aid package (around $12 billion). The combined cost of these packages more than outweighs the increase in customs duties the U.S. has collected since the Administration started ratcheting up import tariffs early in 2018 (Chart 2), erasing any fiscal benefits of the tariffs.

Amidst the headlines on ongoing trade tensions between the world’s largest economies, the minutes from the most recent FOMC meeting already seemed a bit stale. These deliberations occurred before the latest increase in the tariff rate on certain Chinese imports. The minutes showed the FOMC’s commitment to patient monetary policy, and a significant discussion on whether the recent softness in inflation is transitory, or a more persistent trend. The Committee is clearly divided on that topic, and a couple more months of data is likely to settle the debate. Inflation aside, given a building cloud of global economic uncertainty, a prolonged pause on rates seems a wise course of action.

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 May 17, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

  • Equity markets rebounded this week as the U.S. administration delayed its decision on auto tariffs for six months.
  • Housing starts and retail sales data for April support the narrative of healthy domestic spending this quarter.
  • That said, externally oriented industries appear to be getting caught in the downdraft of weak foreign demand.Formerly resilient, U.S. manufacturing activity has softened this year, in line with global developments.

Domestic Resilience, But Weakness Abroad Taking a Toll

Financial News- retail sales expected to be supported by robust age growth U.S. equity markets managed to shrug off much of last week’s losses after rumors earlier this week, confirmed by the White House this morning, that the U.S. administration would delay a decision on auto tariffs for six months. However, this somewhat-renewed sense of optimism in equities was not shared by the bond market. U.S. Treasury yields hit lows last seen in late 2017, just prior to fiscal stimulus being announced. Moreover, markets are raising their bets that the Fed’s next move will likely be a rate cut rather than a rate hike.

Unease about U.S. economic performance is building for good reason. Economic growth is set to moderate this year after a blowout, stimulus-fueled 2018. Foreign demand remains weaker than last year, while geopolitical risks and trade policy uncertainty appear to be on the rise. Moreover, high frequency indicators are beginning to diverge. Domestic demand remains resilient, but externally oriented industries are combatting stronger headwinds.

Data for retail sales and housing starts for April support the view that the domestic economy remains healthy. Although retail sales pulled back in Financial News- US Manufacturing activity catching down to global peers April, this came after a very strong March. Some payback was to be expected. Even with the decline, the strength in March, alongside continued income gains supports a very healthy 3% quarterly annualized rate of expansion in consumer spending in the second quarter (Chart 1).

Housing starts, on the other hand, surprised to the upside. After December’s dip, housing starts appear to have regained stronger footing, but activity has been choppy through April. Home builder sentiment is improving as well, reaching a 7-month high in May. Moderating home price growth, combined with lower mortgage rates, rising wage growth, and decades-low vacancy rates should support more homebuilding in the months to come.

All told, the data this week remains consistent with our forecast for the U.S. economy to expand at a 2% annualized pace this quarter, largely on the back of a more confident consumer. That said, signs continue to build that this may be as good as things get for the rest of this year. Cracks are beginning to appear in what was previously a very resilient manufacturing sector. Industrial production contracted 0.5% in April, the third contraction monthly contraction this year. This mirrors the declining pace of output reported in the ISM manufacturing survey (Chart 2). Softer auto sales are partly to blame, as motor vehicle assemblies have fallen 12.8% since December’s peak.

Although manufacturing is a relatively small share of the U.S. economy (about 11%), its performance is still considered a harbinger of the direction of the U.S. economy largely due to its sensitivity to changes in foreign demand. On that front, there are some signs that the global economy is gradually improving. However, escalating trade and geopolitical risks threaten to derail this nascent recovery.

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 May 10, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

  • Effective today, the U.S. increased tariffs to 25% on $200bn worth of Chinese imports.The threat to extend a 25% tariff to virtually all Chinese imports “shortly” remains. This comes even as the two sides continue negotiations to reach a trade deal.
  • The U.S. overall trade deficit edged higher in March to $50bn, even as the bilateral goods trade deficit with China declined to a five year low.
  • Consumer price inflation continues to show little signs of accelerating,with both headline and core inflation around 2%. Things could change however, as tariff hikes filter through the economy.

 U.S. - Tariff Talks Teeter

Financial News- inflation could firm up as tariff hike takes effect and more consumer products at risk With few data releases, the return of U.S.-China trade tensions captured attention. Financial markets were volatile, but largely down as President Trump tweeted over the weekend that an increase to tariffs on Chinese imports would go into effect Friday. These sentiments were reiterated by other high-ranking U.S. trade officials who accused Beijing of reneging on its promises in earlier negotiations. This rhetoric threatened to derail planned high-level talks with Chinese negotiators; however the Chinese delegation only delayed the meetings rather than cancelling them.

The U.S. administration officially implemented the tariff increase from 10% to 25% on approximately $200bn worth of Chinese imports on Friday. Additionally, President Trump has tweeted that he plans to levy the new 25% tariff on a further $325bn worth of Chinese goods “shortly”, a move that would cover virtually all U.S. imports from China. Even as China urged the U.S. to meet them halfway, they announced that countermeasures will be implemented, although specific details have not been revealed.

Despite the new developments, talks continued on Friday as the two sides try to salvage a deal. A sticking point for the U.S., however, is whether China will agree to implement legal changes so as to facilitate the trade deal and to make the details public. China has resisted this push, insisting that it impinges on their national sovereignty.

Financial News- Goods, trade deficit with china narrows to 5 year low, even as tensions escalate The new tariffs will result in a more significant drag on growth if they are sustained, impacting not only capital expenditure and consumer spending but also confidence. In a recent note, we estimate that U.S. growth could be lowered by -0.1% to -0.3% with the higher tariff. Growth could fall by as much as -0.6% if the threatened $325bn becomes a reality. The run-up in inventories witnessed in prior months partially reflected preparation by businesses for this possibility, and with additional tariffs to take effect, they are likely to pass on price increases to consumers.

To date, inflationary pressures have been benign. Consumer prices in April rose 0.3% over the previous month and were up 2% year-on-year (Chart 1). However, the threatened escalation in tariffs could see inflationary pressures firm up. We estimate that consumer prices rose by 0.3ppts from tariffs already imposed and could rise by an additional 0.4ppts if the remaining $325bn of Chinese imports are made subject to 25% tariff (see note).

Despite the U.S.’s heavy use of tariffs to rebalance trade flows, their trade deficit edged up in March, reflecting the difficulties inherent in attempting to redirect international trade. Of note, the merchandise trade deficit with China, a special area of interest, has been declining for the past few months, and hit a five year low in March (Chart 2). This development may positively impact ongoing negotiations between the two economic powerhouses. All told, the U.S. and Chinese economies are at an important juncture. Decisions made now are likely to have significant implications for the global economic landscape in the future.

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 May 3, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

  • Apart from vehicle sales, recent data paint a positive narrative for consumer-related industries at the start of spring. Real consumer spending and pending home sales surged in March, while consumer confidence improved in April.
  • Payrolls were up 263k in April, much better than expected; wage growth held steady at 3.2% y/y and the unemployment rate fell to a near-50 year low of 3.6%. A drop in the labor force participation rate assisted the latter.
  • The Fed held rates steady this week, with an emphasis put on inflation running below target. But in the press conference, Fed Chair Powell noted that inflation was driven down by “transient” factors, adding that there is no strong case “for moving in either direction”. Indeed, for now, all of the tea leaves suggest that the Fed will remain on hold for some time.

 U.S. - Q1 Growth Surge Shakier Underneath The Hood

Financial News- payroll gains defy expectations. Top 260k in April Wage Growth Holds Steady It was a busy week for those keeping a careful watch on the U.S. economy. A volley of first-tier economic data and an FOMC rate decision took center stage, while trade developments reverberated in the background.

While the consumer had a soft showing overall in the first quarter, a two-month data dump this week provided added detail on recent momentum. Real consumer spending was flat in February, before surging 0.7% in March. This spending upswing points to consumers shaking off the adverse effects of the prolonged government shutdown, and provides a solid handoff to consumption in the second-quarter.

The (mostly) positive narrative on consumer-related industries at the start of spring was further bolstered by a 3.8% m/m surge in pending home sales in March and a pickup in consumer confidence in April. The former leads existing home sales by 1-2 months, and points to further stabilization in the housing market. However, vehicle sales were disappointing, falling 6% m/m in April to 16.4M units. Despite this, overall consumer spending is still tracking a 3% annualized pace in the second quarter, a sharp acceleration from the 1.2% clip in the first quarter. This will provide support to overall economic activity as other temporary factors that boosted growth in the first quarter fall off.

Financial News- Fed's Preferred Inflation Gauge (Core PCE) Has eased and is running below target Healthy consumer spending is being supported by a strong labor market. Payrolls rose 263k in April, beating expectations (190k) once again (Chart 1). The jobless rate moved down to a near-50 year low of 3.6%. However, that was driven by a disappointing decline in the labor force participation rate. Wage growth held steady at 3.2% y/y. But with softer inflation (see Chart 2), wage gains look even better in real terms. Given the current tightness, we expect wage pressures to remain, but job gains to slow to a more sustainable sub-150k per month through the remainder of 2019.

Rounding out the April data reports were the ISM indices. Both moderated on the month but continue to hover around the 55-point mark, which is in tune with the broader narrative of slower, but still decent, growth this year.

With the labor market and economic growth not looking too shabby, inflation remains the Fed’s key concern and main reason for holding rates steady, as it did this week. The FOMC statement emphasized that inflation has run below target. But in the press conference, Fed Chair Powell noted that inflation was driven down by “transient” factors, adding that there is currently no strong case “for moving in either direction”. We agree with the Fed’s assessment. Given that inflation has persistently undershot the Fed’s target, it would take a notable acceleration in price pressures to push the Fed to hike. We do not expect inflation to accelerate that quickly, and all of the latest data support our view that the Fed is likely to remain on hold for quite some time.

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 April 26, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

  • The American economy grew by 3.2% in the first quarter of 2019, comfortably beating market expectations. However, the strength was driven by inventories and net exports, while domestic demand growth weakened.
  • The housing market continues to be an economic weak link. Existing home sales in March fell below expectations. A lack of inventory appears to be weighing on sales activity.
  • As confirmed in the GDP report, price pressures were softer than expected early in the year, underpinning the Federal Reserve’s move to the sidelines.

 

 U.S. - Q1 Growth Surge Shakier Underneath The Hood

Financial news- U.S. GDP Brushed Off Disruptions and Grew Strongly in 19Q1 The The U.S. economy brushed off disruptions caused by the partial government shutdown and abnormal weather, and grew strongly in the first quarter, beating consensus expectations by 0.9 percentage points (3.2% vs 2.3%). However, behind the sheen of the solid headline, the drivers of growth were not as lustrous. Domestic demand growth weakened, with consumers saving a little more and businesses slightly more cautious with their investments dollars. Instead, inventories and net exports – the more volatile components of GDP –provided the heavy lifting. The build-up of inventories is now a three quarter trend. It is likely to be reversed in the quarters ahead, dragging on real GDP growth. The good news is that with temporary disruptions dissipating, domestic demand should improve next quarter, taking the mantle in driving growth.

Amid the hurrah of strong real GDP growth, the one segment of the economy that continued to underperform was housing. Residential investment contracted in all four quarters of 2018, and pulled back again in the first quarter. Early indications suggest a mixed start to the second quarter. Existing home sales fell 4.9% in March, below consensus expectations. The pullback followed a strong gain in February, but the level of sales has shown little overall progress over the past several months (and is well off peak levels seen in the fall of 2017). Fortunately, the news was better on the new home sales front. New single-family residential sales rose 4.5%, building on even stronger gains in January and February. In contrast to the existing market, new home sales are just a touch below the recent cycle peak.

Financial News- Price Pressures Seem to be Subsiding With affordability improving – a function of both lower mortgage rates and accelerating income growth – the demand drivers for housing appears to be solid. The supply side appears to be the constraining factor. The inventory of existing homes available for sale continues to hover near historical lows. Unless supply constraints are alleviated, the upswing in demand could reverse the recent deceleration home price growth.

Speaking of prices, PCE inflation data for 19Q1 was released alongside GDP data and came in surprisingly soft. We cannot yet tell which month the weakness was concentrated as only January data are available (February and March data will only be released on Monday). Nevertheless, the weaker reading in Q1 indicates cooling price pressures, reinforcing the Federal Reserve’s position to hold off any interest rate hikes through 2019. Bond yields appear to have dipped lower following the digestion of these details, discounting the surprise in real GDP growth.

Headline inflation is likely to see something of a lift in upcoming months, reflecting the broad-based rebound in oil prices since the end of 2018. Still, the ride may be bumpy. The West Texas Intermediate oil price benchmark hit $65 earlier in the week, before falling on Friday on word that Trump has been upping the pressure on OPEC. This, despite news that the administration will no longer exempt countries from Iran sanctions beginning May 2nd.

Sri Thanabalasingam, Economist | 416-413-3117

 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 April 18, 2019

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

  • Spring is coming to the U.S. economy after a tough winter. An impressive  bounce back in retail sales in March indicates that consumer spending will bounce back in the second quarter after a disappointing start.
  • First quarter GDP growth is released next week, and it is likely going to be messy. A strong headline is likely to belie weakness domestically, while the reverse is likely to be the case in Q2.
  • Overall growth in the first half of the year is tracking close to our March forecast, the quarterly pattern is somewhat reversed. The overall story that the economy has slowed from its 2018 pace, but remains above trend, remains intact.

 

 U.S. - Spring is Coming

Financial News- Growth Boosted by Trade and Inventories The U.S. economy had a tough winter. A government shutdown, stock market rout, and some bad weather patterns weighed on activity. The good news is that spring is coming.

The first estimate of Q1 economic growth will be released next week. The story is likely to be muddy. Headline GDP is forecast to post a reassuring 2.6% print, but that hides a much softer picture for domestic demand (1.7%, annualized). The combination of an inventory build and a decline in imports is forecast to add nearly a percentage point to growth (Chart 1). Domestic demand, meanwhile, was held back by weakness in both consumer spending (+1.2%) and business investment (+1.6%).

Soft consumer spending is likely to prove temporary. The combination of plummeting stock markets, government shutdown, and bad weather helped send consumers into hibernation at the end of 2018 and early 2019. But, March retail sales showed consumers awakening from their slumber, enough to lift consumer spending to roughly 2 ½% in the second quarter.

Financial News - Monthly volatility hides slowing trend in retail sales Headline retail sales rebounded 1.7% in March, after falling in three of the last four months. That was a bit stronger than we had anticipated, and it lifted our tracking for growth in the first quarter by 0.2 percentage points. Strength was broad based. Sales at motor vehicle dealers were up sharply, as expected, and in line with the bounce reported in unit sales.

Retail weakness had stood out against stronger fundamentals in terms of income growth, low unemployment and confidence surveys. That said, the 3%-plus readings on real consumer spending we saw last year are behind us. We expect continued solid quarterly growth in outlays in the 2-2.5% range for the remainder of the year. This downshift in growth is apparent in the smoothed year-on-year growth in retail sales (Chart 2).

The Fed’s latest Beige Book – its qualitative snapshot of the U.S. economy – reinforces this view of the economy slowing from last year’s pace, but still growing solidly. Labor markets were characterized as tight, restraining hiring growth in some regions. Some weakness is evident in manufacturing, consistent with weaker demand from abroad. Trade uncertainty restrained expansions in some districts. The clouds hovering over the global outlook have not cleared, despite a better-than-expected first quarter growth report out of China.

Trade peace with China and Europe would certainly help global sentiment. China and U.S. negotiators plan two more rounds of face-to-face talks, and are working towards a signing ceremony in late May/early June. It remains to be seen whether a deal lifts the tariffs already in place, or if these are kept on as an incentive for compliance. If they are lifted, it would provide a tailwind to Chinese, and likely global, growth.

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