Financial News for the Week of January 11, 2019

HIGHLIGHTS OF THE WEEK

  • U.S. equity markets built on last Friday’s gains, firming up for the second consecutive week. Seemingly-fruitful trade negotiations between the U.S. and China offered notable support.
  • With respect to data, both the ISM non-manufacturing index and small business confidence have eased from recent highs, but remain in healthy territory. Inflation data came in as expected, with core CPI holding steady at 2.2% y/y.
  • The government shutdown, which is on track to become the longest in U.S. history, may test the Fed’s wait and see approach to monetary policy, given data distortions and delays. If it ends soon, we expect its impact to be quite modest. But each passing week has the potential to amplify the impact.

 

Of Mending Bridges and Building Fences

U.S. equity markets built on last Friday’s gains, firming up their comeback in the second week of 2019. The strong December jobs report continued to buoy market sentiment, while seemingly-fruitful trade negotiations between the U.S. and China offered additional support. Discussions in Beijing lasted an extra day, with indications that progress was made on a few items of interest, such as the further solidification of Chinese commitments to purchase U.S. goods. China’s Commerce Ministry suggested that progress was made on more contentious issues as well, such as forced technology transfers and the protection of IP rights. The finding of common ground is a very encouraging development. But, with plenty of work still to be done and details to be hashed out, we’re not out of the woods yet.

On the domestic data front, the numbers this week did little to rock the boat. After a hot three-month streak, the ISM non-manufacturing index descended below the 60-point threshold in December. But, at a reading of nearly 58, the index still points to a healthy pace of expansion for the lion’s share of the economy. Similarly, small business confidence eased off at the end of 2018, but remained quite upbeat relative to history. Employment indicators from the small business survey also reaffirmed the strength the U.S. labor market (Chart 1).

What truly dominated headlines this week were negotiations related to border security that hold the key to ending the partial government shutdown. Talks this week have so far failed to yield positive results. The current shutdown has already matched the longest 21-day closure of 1995-96 and appears likely to extend further.

The shutdown only adds to the cloud of uncertainty facing the Fed. Indeed, the FOMC minutes confirmed that after hiking in December, there was less certainty going forward given recent volatility in financial markets and concerns about global growth. With price pressures easing off in recent months, the Fed is in no rush to hike rates. This narrative is corroborated by today’s CPI data where core inflation held steady at 2.2% y/y (Chart 2). But, this wait and see approach will be challenged by the government shutdown, which will distort the data and delay its release.

Ultimately, the length of the shutdown will determine the overall impact. If it ends over the weekend, we expect the impact to be fairly modest, with the closure shaving off about 0.1 p.p. from first quarter economic growth. But the impact could prove to be non-linear, meaning that the economic costs rise with time. With respect to data, if the shutdown extends to next week the jobless rate could tick up by 0.2 p.p. as some 380k furloughed workers are counted as unemployed, though January payrolls should be spared the distortion. Delays will add to the fog. So far, only second tier indicators such as factory orders and new home sales have been affected. Among primary releases, the retail sales report is next in line to be taken off of the queue, with more releases impacted and uncertainty mounting the longer the shutdown continues.

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 January 4, 2019

HIGHLIGHTS OF THE WEEK

  • The New Year came with baggage from the old for thousands of federal employees caught in the middle of a budget tug-of-war between Congress and the White House that has led to a partial government shutdown.
  • The volatility in stock markets continued early in the week as a slew of weaker-than-expected economic data and signs of a slowing China roused investor concerns that global growth may be slowing faster than expected.
  • Fortunately, a strong payrolls tally lifted investors’ spirits by week’s end. Employment rose 312k and the unemployment rate edged up to 3.9% as more people joined the workforce. Hourly earnings growth also topped 3% (year-on-year) for a third consecutive month.

 

The Shutdown Slowdown

Happy New… whatever. 2019 kicked off with a fizzle as a partial U.S. government shutdown that began in the old year limped into the new. President Trump and Congress are at a stalemate over discretionary funding for 25% of the Federal government, and a border wall with Mexico. The standoff meant a not-so-happy start to the New Year for over 800,000 federal employees who have been furloughed, or if considered “essential”, had to work without pay.

Set to enter its third week, the shutdown is expected to negatively impact consumer spending and business activity. Assuming it ends soon, it is projected to lower first quarter GDP growth by 0.1 percentage points. Once resolved, federal employees will receive back pay, (though workers on contract will not), and this should boost economic activity in the second quarter. The question that remains is how long it will last. The longest government shutdown was for 21 days in 1995 (Chart 1), but workers and businesses who depend on their spending, are hopeful that such a scenario will not be repeated.

The stock market also rang in the New Year noticeably lower. Sentiment had been dragged down by a confluence of factors ranging from slowing global growth and uncertainty over the Fed’s policy path to simmering trade tensions between the U.S. and China. A weaker-than-expected reading for December’s ISM manufacturing index on top of an outright contraction in China’s manufacturing activity, further fueled fears through the middle of the week. Though still technically in growth territory, the U.S. ISM index posted the slowest pace of expansion since November 2016, reflecting concerns of less robust demand and trade worries. The Trump administration has negotiated truces with multiple trading partners, however, many of these are set to expire in short order. Unless a long-term agreement can be reached, businesses may face renewed trade uncertainty as the year unfolds.

By the end of the week, a nod to “patience” by Fed Chair Powell and a strong December jobs report helped pull equity markets back into positive territory. Non-farm payrolls exceeded expectations, adding 312K jobs in December. This resulted in 99 straight months of expanding payrolls – the longest stretch on record. Even the uptick in the unemployment rate to 3.9% resulted from a labor force rising participation rate. Such dynamics suggest that even amid the tightest labor market in decades, the U.S. economy is still able to pull workers off the sideline and into the job mix. Wages also surprised to the upside, growing by 3.2% year-on-year (Chart 2) – the best full-year gain since 2008.

The employment data should serve to calm concerns that the American economy is quickly running out of steam. While growth in 2019 is projected to be lower (see forecast), we still expect it to remain above the economy’s trend pace. All in all, government showdowns aside, consumers remain on firm footing, supported by the most favorable labor market in decades.

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 December 21, 2018

HIGHLIGHTS OF THE WEEK

  • As widely expected, the Fed hiked rates once more this year. At the same time, the Fed’s dot plot moved lower over the forecast horizon. These changes are consistent with a softer inflation and economic outlook.
  • Data came in broadly positive, with housing starts and home resales both defying weaker market expectations. Consumer spending  remained hot in November, with consumption looking set to advance by a sturdy 4% (annualized) in Q4.
  • The late-year equity market sell off continued this week, with looming risks for a partial government shutdown marking the latest in a series of factors that are likely to weigh on sentiment through the New Year.

 

U.S. - Fed Set To Walk On Data Talk

It was a busy data week, but the FOMC meeting was the main event. As widely expected, the Fed hiked rates for the fourth time this year, lifting the upper bound of the fed funds rate to 2.5%. More interesting was that the Fed’s dot plot, which shows members’ expectations for future rate increases, shifted lower in 2019. The median expectation is now for two hikes, down from three previously. The expectation for the longer-run level of the fed funds rate also moved down 25 basis points to 2.75%. Consistent with these changes are a slightly more subdued price outlook and slightly higher unemployment rate, both a sign of a softer economic outlook in the years ahead.

The Fed’s dovish tone with respect to future hikes did little to appease investors. Both U.S. and international equity markets extended their losing streak on the news. It should be noted, however, that the path of interest rates is not set in stone, with the Fed placing a greater emphasis on data-dependency. As Fed Chair Powell put it, from this point on “we’re going to be letting the data speak to us”.

Speaking of data, this week’s releases continued to confirm several running themes. First, inflation remains near target but has softened lately. The core PCE prince index, the Fed’s preferred measure of inflation, edged up in November, but still fell short of target (Chart 1). Secondly, U.S. consumer spending remains hot. Real spending was up 0.3% in November. With two months in the bag, consumption looks set to advance by close to 4% (annualized) in the final quarter of the year, better than previously expected. This brings our tracking for real GDP for the same quarter up to 2.8% – a deceleration from the third quarter (3.4%), but enough to keep growth at 2.9% for the year.

Third, the housing market remains soft but recent improvements are encouraging. Both housing starts (3.2%) and existing home sales (1.9%) rose in November, besting market expectations. On a less positive note, starts were propped up by the volatile multifamily segment (single-family starts fell for a third straight month), while home resales are still down between 3% and 15% year-on-year across major U.S. regions.

As the sugar high from monetary and fiscal stimulus wears off, we expect growth to slow to a still-healthy 2.5% in 2019. But, several potential potholes lie in the path ahead (see here). The latest spending bill impasse, which could lead to a partial government shutdown, is but one example. Given that shutdowns typically prove to be short-lived, history suggests limited economic impact. However, the hit to market confidence could prove more damaging.

Given expectations for slowing growth and the pronounced late-year selloff in equity markets (Chart 2), the “recession” word has gained traction recently. Our recent look at a broad range of indicators points sees little evidence for this in the economic data. That said, negative expectations have the potential to become self-fulfilling. But for now, the only thing we have to fear is fear itself.

Admir Kolaj, Economist | 416-944-6318

Overall, the U.S. economy is strong, and the Federal Reserve is well justified in raising rates another quarter point at its meeting next Wednesday. The real question is how the FOMC’s views have changed about how much further rates need to rise. Given the fairly benign inflation backdrop recently, we expect the Fed to hike rates more gradually in 2019.

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 December 14, 2018

HIGHLIGHTS OF THE WEEK

  • After some optimism early in the week, financial market sentiment soured as focus shifted back to fears of an escalation in trade tensions, Brexit uncertainty, and a potential economic downturn in 2019.
  • The U.S. consumer remained unbowed in November, with consumer spending now tracking above 3% annualized in Q4. Inflation has cooled in line with oil prices, which should help to support real spending going forward.
  • The FOMC makes its final decision of 2019 next week, and a hike is universally expected. We will be watching closely to see how members’ views have changed about how many hikes will ultimately be required in this cycle.

 

U.S. - “Bah! Humbug!”

After some optimism early in the week, supported by positive headlines about the lessening of U.S.-China trade tensions, sentiment turned sour to end the week. Markets seem to be channeling Dickens’s curmudgeonly character Ebenezer Scrooge, saying “Bah! Humbug!” to any good news that comes along. Markets are down roughly 10% in the fourth quarter of this year as investors fret about prospects for 2019, focusing on the potential for escalating trade tensions, uncertainty about the path of Brexit, and a potential economic downturn.

Our latest outlook did feature a small downgrade to global growth (Chart 1). However, the selloff in global risk assets in the fourth quarter has been outsized relative to the magnitude of the economic slowdown. The selloff likely reflects the build-up of unresolved global risks, coupled with a delayed adjustment in growth expectations from lofty levels. Taking a step back from the downturn in equity markets, there are few signs that the economic expansion is nearing an end, other than the fact that the expansion is approaching the longest on record. One worry is that negative sentiment can become self-fulfilling (see our Perspective). We remain vigilant in monitoring signals of an impending downturn, such as yield curves, business confidence, risk-assets, and labor market conditions.

Financial market pessimism certainly hasn’t yet filtered down to the U.S. consumer. The holiday shopping season appears to have gotten off to a good start in November, as retail sales were up more than expected, on top of upward revisions to October. In our latest U.S. Outlook, we also expect the overall economy to moderate towards a sustainable pace in 2019 (Chart 2). This process is already underway in the fourth quarter, where growth is tracking 2.3% after averaging 3.5% through the middle of the year. However, the consumer has more momentum. Today’s retail sales report places expectations for consumer spending in the fourth quarter to 3.5%, from our recently published 2.9%.

The consumer is in pretty good shape. The job market is strong and inflation is contained. Economy-wide growth in wages and salaries has averaged roughly 4% over the past six months. And, headline inflation has cooled in line with lower oil prices. CPI inflation was at 2.2% year-on-year in November’s data. Our forecast is for inflation to remain around that level through 2019. That sets the consumer up for some decent real income gains. Therefore, we expect consumer spending to slow only modestly in 2019, as the windfall from tax cuts fades, but still running at a very healthy 2-2 ½% clip in real terms.

Overall, the U.S. economy is strong, and the Federal Reserve is well justified in raising rates another quarter point at its meeting next Wednesday. The real question is how the FOMC’s views have changed about how much further rates need to rise. Given the fairly benign inflation backdrop recently, we expect the Fed to hike rates more gradually in 2019.

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 December, 2018

HIGHLIGHTS OF THE WEEK

  • Data released this week remains consistent with the view that U.S. economy continues to expand at an above-trend pace.
  • Although disappointing in terms of the headline, job gains were also consistent with an economy running near capacity. Furthermore, wage growth held at a healthy pace in November.
  • An agreement between the U.S. and China to delay an escalation of tariffs until April failed to convince financial markets that trade tensions are easing.

 

Markets Gyrate on U.S.-China Trade Headlines

As an event-filled week in markets concludes, indicator data this week provided an updated reading on the health of the U.S. economy. From the data released for the fourth quarter, the diagnosis is that the economic expansion continues in the U.S., with momentum slowing due to weakness in the external sector.

Manufacturing and non-manufacturing activity picked up a bit in November, but is still off the highs recorded earlier this year. Firms continue to report capacity constraints, including labor and component shortages. Import tariffs remain a key concern. Similar worries were echoed in the Fed’s latest beige book report. Respondents to the Fed’s survey for the month of November indicated that labor shortages were being felt across a broad range of industries, and that tight labor markets were preventing them from getting the workers that they needed. In addition, rising costs, although offset in part by the falling price of oil, were impacting margins and leading firms to raise prices to offset them.

Confirming these survey anecdotes of tight labor markets, this morning’s highly anticipated employment report saw 155k jobs added in November, below consensus estimates that expected an addition of 200k jobs. A steady labor force participation rate helped keep the unemployment rate at its cycle low of 3.7%. Wage growth remained healthy at 3.1% (year-on-year), the same as in October. Although the headline disappointed, the broad slowdown in job gains is in fact consistent with an economy running near capacity. We estimate that long-run trend job growth is about 100k a month, plus or minus 20k or so (Chart 1). Therefore, job gains above this level are consistent with an expanding economy and the absorption of any remaining labor market slack.

Strong fundamentals, however, are providing little comfort to financial markets. News headlines about slowing foreign demand growth, ongoing trade tensions, and Brexit have driven equity market volatility up, and prices down in the past couple of months. Fear lit a bid for bonds this week, with the U.S. 10-yr yield falling below 2.9% - its lowest level since early September. Although a flattening yield curve typically forebodes an increased chance of recession in the quarters ahead, there is little in the way of corroborating evidence (Chart 2). Instead, the recent move is likely a reflection of near-term concerns about temporary weakness in inflation and trade risks, rather than a deterioration in economic fundamentals.

Undoubtedly, an easing of trade tensions would be a welcome development. The G20 summit proved somewhat constructive as it produced a 90-day break from an escalation in import tariffs between the U.S. and China. But, news of the arrest of Huawei’s CFO later in the week revealed how fraught the relationship is currently between the U.S. and China. Tariffs appear to be just the first step in planned engagement with China on a set of deeper issues that need to be addressed.

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 November 30, 2018

HIGHLIGHTS OF THE WEEK

  • FOMC minutes released this week suggested that flexible could be the new gradual for the Fed. While a rate hike for December may be in the cards, future moves are now more dependent on the incoming economic data.
  • President Trump and Xi are set to meet-up at the G20 summit over the weekend. Stakes are high for an agreement to be reached. If not, higher tariffs are set to kick-in come January.
  • While cracks are starting to show in the armor of the U.S. economic expansion, there’s still plenty that’s going well. Q3 GDP growth remained solid, consumer spending is strong, income gains are healthy and inflation is contained.

 

Yellow is the New Green?

Financial markets responded to the message of Fed Chair Powell on Wednesday that the fed funds rate was “just below the broad range of estimates of...neutral,” after previously stating that it was a “long way” away. Market participants took the subtle shift in narrative as a sign that the Fed may be easing the pace of rate hikes in the New Year. Both stock and bond markets rallied in response.

FOMC minutes suggest that a rate hike in December is all but a done deal, but the path thereafter is more uncertain. Indeed, Fed members emphasized the need to maintain flexibility in order to respond to changing economic data. A shift in tenor from possible overheating to slower-than-expected growth was also discernible in the details of the discussion. Trade tensions in particular were “cited as a factor that could slow economic growth more than expected.”

In that vein, the trade tug-of-war with China continues. The hope is that negotiations go well at the G20 meetings in Buenos Aires that kicked-off Friday. The stakes are high. President Trump signaled prior to the meeting that if the two countries failed to reach an agreement favorable to the U.S., additional tariff on virtually all U.S. imports from China would be forthcoming. Such a development would exacerbate the slowdown in global growth - another risk flagged by the Fed.

Further underscoring the concerns raised in the Fed minutes are recent economic and financial data. Signals of slowing activity are most apparent among the interest-rate-sensitive housing and auto sectors, but other indicators also showing signs deceleration. Initial jobless claims have been trending up in recent weeks, rising to a six-month high in the most recent data, while capital goods orders have also turned south, suggesting business investment growth may also be easing. Meanwhile, there are few signs of inflationary pressures. After hitting 2.0% in July, core PCE inflation fell to 1.8% in October. The recent trend is even softer, with price growth averaging just 1.2% over the past three months.

The good news is that consumers are showing little sign of fatigue. Consumer spending grew robustly in October, rising 0.4% and setting the stage for a strong showing in the final quarter of this year. Holiday spending may get a further lift as households spend the extra coin left in their wallets after filling up at the gas pumps. Revisions to third quarter GDP were similarly encouraging (Chart 2) with business and residential investment revised up.
Overall, the economic data flow out of the U.S. this week was relatively balanced. Unfortunately, the downside risks to the outlook are mounting. It became clearer this week that the Fed is paying more attention to these risks and the economy may not need as many rate hikes as they believed back in September. All said, yellow may become the new green for the still-global-growth-leading U.S. economy.

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 November 23, 2018

HIGHLIGHTS OF THE WEEK

  • Equity market volatility persisted this week as the main indexes were dragged down by tech and energy stocks. The latter resumed their slide as oil prices fell to their lowest levels in more than a year.
  • Housing data was mildly positive, but continued to drive in the point that the sector remains a sore spot. Both existing home sales and housing starts rose around 1.5% month on month in October. But, sales are still down some 5% year on year, weighing on builder confidence.
  • Presidents Trump and Xi will meet at the G20 summit next week in Buenos Aires. Any conciliation would be a plus for financial markets. Here’s hoping that the atmosphere and outcome are as pleasant as the host city’s name.

 

Despite Sour Week, There Is Still Plenty to Be Thankful for

What a difference a year makes. Investors had much to be thankful for at last year’s Thanksgiving, with equity indexes experiencing double-digit gains from the start of the year. This year, the atmosphere is a lot less bubbly. The S&P has given back all of this year’s gains and some (Chart 1). Volatility persisted this week as the main indices were dragged down by tech and energy stocks. The latter resumed their slide as oil prices fell to their lowest levels in more than a year. Shifting headlines on Brexit and a softening of manufacturing PMIs in Europe did little to help broad market sentiment. Investors tilted funds toward safer assets such as Treasuries, contributing to a slight pullback in yields.

Despite the carnage in equity markets, there is still plenty to be thankful for. The U.S. economy remains the growth-leader among the G7 and appears likely to retain its lead over the next year. Its labor market echoes this strength, with more job openings than there are unemployed Americans. This backdrop has allowed the Fed to raise interest rates at a faster pace than its peers and also gives it the flexibility to respond to any future hiccups in growth.

The rise in rates, however, has had an impact on typically interest-rate sensitive sectors of the economy, most notably housing. Despite some improvement in housing data this week, the sector remains a sore spot. Both existing home sales and housing starts rose around 1.5% month on month in October, propped up by the volatile multifamily segment. The uptick in resales was encouraging, since it marked the first gain in six months. But, sales are still down some 5% from a year ago (Chart 2). Current conditions are providing little comfort for builders, whose confidence took a plunge this month.

With interest rates rising, resale activity is likely to remain soft. Still, a strong labor market and a more gradual increase in mortgage rates going forward should limit the downside. Median home price growth has moderated to 3.8% year on year, which alongside rising wage growth, will limit the hit to affordability as mortgage rates rise. An improvement in the number of homes for sale in recent months also marks a positive step. Still, inventory levels are historically low and this imbalance should ultimately help housing starts retain their mild upward trajectory over the medium term.

Aside from the housing market, developments on the trade front bear close watching. Next week’s G20 summit appears an ideal setting for President Trump to announce a deal with his Chinese counterpart. Without progress, tariff rates are likely to increase in January, which could further undermine market confidence. As Trump and Xi tango in Buenos Aires next week, here’s hoping that the atmosphere and outcome are as pleasant as the host city’s name. Should trade tensions continue to fester, and confidence take a further hit, the Fed’s preferred path of rate hikes will come into question.

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 November 16, 2018

HIGHLIGHTS OF THE WEEK

  • Equity markets were volatile again this week as concerns over global growth remained top of mind for investors.
  • Economic data continues to point to solid economic growth stateside, with little signs that global weakness has caught on domestically.
  • Inflation data for October showed a relatively benign picture. While the headline rate rose to 2.5% (from 2.2%), core inflation edged lower on the month.

 

Growth is Solid, Inflation is Benign, Why Worry?

It was another volatile week in financial markets as fears around slowing global growth were exacerbated by worries over Brexit. This, as the cabinet minister in charge of negotiating a Brexit deal with the European Union resigned over the direction of the proposed deal. The S&P 500 finished the week down 2.1% as of writing.

Financial market jitters are not a reflection of any newfound weakness in U.S. economic data, which continues to point to solid growth and limited inflation. This week, consumer price index (CPI) data for October showed headline inflation rise to 2.5%, mainly due to rising energy prices. Core inflation, on the other hand, edged down to 2.1% (from 2.2%). Over the past three months, core prices have risen an average of just 1.6% (annualized), suggesting little cause for alarm on the price front. What’s more, the recent pullback in the price of oil is likely to push headline inflation lower in the months ahead, with the Fed’s preferred metric – the personal consumption expenditure price index – likely to drift back below the 2% mark.

A relatively soft inflation environment is giving support to the more dovish voices on the FOMC. In comments made this week, Chair Powell struck a balanced tone, but gave a nod to some of these more dovish elements. In particular, he noted the conditions that could lead the Federal Reserve to slow its pace of rate hikes over the next year. Slowing global economic growth, fading fiscal stimulus, and the lagged impact of past rate hikes are three factors that the Fed is monitoring. Despite these risks, the Chairman also noted the relative strength in the American economy, and notably that with press conferences scheduled after every Fed announcement in 2019 (instead of just once a quarter), every meeting is “live” – that is, has the potential for a change in policy.

Other economic data confirmed the solid economic growth narrative. Retail sales rose a robust 0.8% in October, reversing a downwardly revised pullback in sales in September. The drop in September and rebound in October reflected hurricane-related disruptions. Overall, the retail sales data are consistent with real consumer spending advancing by around 2.5% in the fourth quarter. For all intents and purposes, this is a great number. Nonetheless, it does represent a deceleration from the heady 3.9% pace average over the second and third quarters of the year.

With real consumer spending likely to run in the mid-2% range, the overall economy is likely to follow suit. In this environment, the impact of tariffs is likely to be more noticeable. Already there are signs that businesses are attempting to get ahead of the scheduled increase in Chinese tariffs to 25% (from 10%) by stockpiling imports. This volatility makes reading the economic tea leaves and the job of the Fed in gauging the reaction of the economy to higher interest rates that much more difficult.

James Marple, Senior 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 November 9, 2018

HIGHLIGHTS OF THE WEEK

  • Between the midterm elections and a Fed rate decision there was plenty of news this week. But after the dust settled there was very little new information.
  • In the midterm elections, Democrats gained a majority in the House of Representatives, and Republicans tightened their grip on the Senate. A divided Congress through 2020 will temper parts of Trump’s agenda, and could make some upcoming fiscal tests more challenging.
  • As expected, the Federal Reserve left rates unchanged, with a largely unchanged statement. Recent economic data suggest the next hike is coming in December.

 

Plenty of News, But Not Much New

Between the midterm elections and a Fed rate decision there was plenty of news this week. But after the dust settled there was very little new information. As was widely expected, the Democrats gained a majority in the House of Representatives, and Republicans tightened their grip on the Senate. A divided Congress will temper Trump’s agenda, but much depends on the Democrats’ strategy for working with the GOP. Even less surprising was the Federal Reserve’s decision to hold the funds rate steady, after hiking in September. Equity markets seemed pleased with these largely as expected results.

Congress is now gridlocked through 2020, which raises risks on a variety of fronts. A few tests loom on the near-term horizon. Currently 25% of discretionary spending for the 2019 fiscal year is under a temporary funding agreement until December 7th. The current Congress will likely kick the can into early 2019, which sets up a potential funding battle and the risk of a partial government shutdown in the New Year. Government shutdowns are a risk with a divided government, but typically these do not have a meaningful impact on economic activity (as they have not proved long lasting).

The second fiscal test is the debt ceiling, which is set to be re-instated in March 2019. It must be raised or suspended again to prevent a debt crisis or huge fiscal contraction. We expect Congress will come to an agreement to avert a crisis, but there could be some fireworks in the process. Finally, Congress must enact legislation to avoid automatic spending cuts of $100 billion in FY2020. Our base case is that this is avoided, but if not, it could trim 0.5 percentage points from GDP growth in that year. In the wake of tax cuts and spending increases the federal deficit has grown, and is expected to swell further (Chart 1). This could become a political issue that makes a budget compromise more difficult.

As President, Trump has the authority to push ahead with his trade agenda. He may even get some support from the Democratic House for a harder stance on China. As such, the increase in Chinese import tariffs to 25% from 10% on $200bn of goods on January 1st is more likely than not, presenting a downside risk to our forecast.

Finally, there was little new from the Fed. The statement’s characterization of the economy was broadly unchanged. The slight updates that were made merely reflect the latest data, and are not major new developments. Most importantly, the Fed said it “expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity...” and that “risks to the economic outlook appear roughly balanced”. The recent economic data certainly point to a rate hike at the December meeting.

Most recently, October’s Producer Price Index showed that inflationary pressures are alive well further up the supply chain. And while consumer price inflation hasn’t heated up in recent months, price hikes are likely coming in many sectors as margins are increasingly squeezed.

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 November 2, 2018

HIGHLIGHTS OF THE WEEK

  • The U.S. labor market continues to impress – churning out jobs like nobody’s business (+250k), keeping the unemployment rate near record lows (3.7%), drawing people into the labor force (participation rate up +0.2 percentage points), and pushing up wages to boot (3.1% year-on-year – the highest since 2009)
  • The fly in the ointment? A fierce sell off in equity markets in October, putting in question the more than nine-year-old stock bull market. Major stock indices closed the month down, eking out only marginal gains year-to-date.
  • Trade tension with China is one catalyst for market jitters. A phone call between Presidents Xi and Trump this week signals progress, but the jury is still out on whether a broader trade war can be avoided.

 

 

Economy is Hot, but Markets Worried About the Future

In a job market that just won’t quit, U.S. workers are finally hitting pay dirt. Job growth shows little sign of slowing with nonfarm employment growing by 250k in October. The labor force participation rate also edged up to 62.9% and the unemployment rate continued at its cycle low of 3.7% - the lowest since 1969. With workers getting scarcer, companies either have to pay up, or scale down expectations.

The tight labor market is indeed forcing many to compete for workers by boosting paychecks. Both the employment cost index, which captures wages and benefits, as well as average hourly earnings show upticks in workers’ compensation. Wages broke through the 3% growth ceiling that has stood for nearly a decade, coming in at 3.1% y/y. Wages haven’t exceeded 3% growth since April 2009 (Chart 1).

Going in the opposite direction, home-price gains decelerated for the fifth consecutive month in August. The S&P Case-Shiller Home Price Index grew 5.8% y/y, falling below 6% for the first time in a year. After more than five years of solid home price growth, this is the latest indication of a slowdown in the housing market, which is likely to persist as interest rates edge higher. Despite slowing, house price inflation remains well above wage growth, contributing to the affordability crunch prospective buyers have grappled with of late (Chart 2).

Rounding out the week were data on ISM manufacturing and personal income and spending. Manufacturing activity eased in October, though it remained in growth territory as manufacturers continued to struggle with capacity constraints and tariff pressures. Though consumer spending momentum remained strong through the end of Q3 and should result in a solid Q4 handoff, the stimulus from tax cuts likely plateaued in Q3 and could be a harbinger of slower consumer spending. Year-on-year, core PCE inflation remained at 2.0% for a fifth straight month.

One potential development that could raise inflation (and further reduce the stimulative impact of tax cuts) are higher tariffs. On that front, tensions with China continue to simmer. This week, the Commerce Department barred U.S. companies from engaging in business with a state-owned Chinese chip maker after it was accused of stealing trade secrets from an American firm. The news left China’s chip industry on edge, feeling vulnerable to the escalating China-U.S. trade standoff. Subsequently, a spark of hope emerged Thursday when President Trump signaled progress on trade talks. This followed a phone call, initiated by the White House, to President Xi. The two countries are now more likely to resume talks at the G-20 summit in Buenos Aires later this month. As things stand, however, the jury is still out on whether there will be a cease fire in the trade fight following the summit.

All told, the U.S. economy is currently enjoying the sweet-spot of low inflation and unemployment. Only time will tell for how long.

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