Financial News for the Week of December 22, 2017

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• The Tax Cuts and Jobs Act was passed by Congress and signed by the President this week.
• The U.S. economy continues to show signs of strong momentum heading into 2018. Housing activity is recovering nicely from late summer hurricane-related disruptions, and consumer spending is on pace to expand at a 3.0% annualized pace this quarter.
• Looking ahead into 2018, political events in Europe are likely to continue to dominate headlines in the New Year.

Visions of Tax Cuts Dancing in our Heads

From an economist’s perspective, it’s difficult to be disappointed with how 2017 turned out. After a bumpy start to the year – courtesy of a phenomenon coined ‘residual seasonality’ – growth in the U.S. held at a 3.0% pace for the remainder of 2017, well above trend estimates at just under 2.0%. Moreover, stronger-than-expected growth became a global theme, as G7 economies broadly surprised to the upside. Since the middle of 2016, Canada, the U.S., the Euro Area, and even Japan reported growth well above trend estimates. Strong growth spurred central bank action, with the Fed raising rates thrice, but no longer alone in removing stimulus. The Bank of Canada raised rates twice in late summer, while the Bank of England followed with a rate hike in November. Not to be left out, the ECB followed through with earlier communication of reducing their pace of monthly asset purchases, halving them to €30 billion starting next month.

The hot streak for the U.S. economy looks set to continue heading into 2018. This week’s indicators revealed a housing market rebounding nicely from hurricane-related setbacks, with both housing starts and existing home sales rising above consensus expectations in November. Consumer spending is also holding up, rising 0.4% in November (month-on-month, in real terms) after flat-lining in October. Moreover, with strong employment and decent income growth and a tax cut to boot, consumer spending looks set to advance about 3.0% (annualized) this quarter.

With the U.S. economy running hot, additional stimulus in the form of tax cuts seems unnecessary. But, after months of debate, Congress this week approved tax cuts that will leave American households and businesses with more money to spend for the next five to ten years. As covered in our note, we anticipate that the plan should help to stimulate economic activity in the medium-term, but at the expense of higher debt that may necessitate future cuts to entitlement spending, or higher taxes. Nevertheless, U.S. stock markets rallied in response to the news, while bonds markets sold off sending yields a touch higher on the week.

Heightened levels of economic optimism are to be expected with growth running hot globally. However, geopolitical events are stewing in the background, threatening to knock the current expansion off course. Looking ahead into 2018, concerns about North Korea’s military ambitions will remain, as will tensions between the major powers in the Middle East. And, like a broken record, political events in Europe remain on the radar. Phase two of Brexit negotiations are set to begin early in the New Year, and EU officials this week stated that they will have a EU-Canada style trade agreement in their pocket in case negotiations fail to make material progress by summer. Moreover, results from this week’s Catalonian election shows strong support for independence-minded parties, suggesting the potential for economic uncertainty to linger in Spain, the Euro Area’s fourth largest economy

Add elections in Italy, Sweden and Eastern Europe next year, and it’s clear European politics will dominate headlines for another year. We hope that once again strong 2,000 economic growth manages to trump uncertainty in 2018.

Fotios Raptis, Senior Economist

 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 15, 2017

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• Economic policymakers in Washington squeezed a lot in this week before heading home for the holidays. As expected, the Fed raised rates a quarter point and upgraded their economic growth forecasts
• Republican members of Congress rushed to wrap up a compromise tax plan to be voted on early next week. While the final details are not yet known, the plan is likely to provide a modest boost to growth over the next few years. But, it has several potentially negative consequences for government finances over the longer-term.
• Our Quarterly Economic Forecast also features an upgraded economic outlook, in part reflecting better momentum in the second half of the year, and fiscal stimulus.

Taxmas is Coming and the Debt is Getting Fat

Given the high likelihood of a fiscal boost, our latest Quarterly Economic Forecast, released this week, incorporates a modest boost to real GDP over the next few years (Chart 1). It’s “Onward and Upward” for the U.S. economy over the next two years, with growth expected to accelerate from 2.3% in 2017 to 2.6% next year.  Even before a tax cut, the U.S. economy appears to be hitting a sweet spot. The unemployment rate is at a 17-year low, businesses are ramping up investment and inflation remains contained. The consumer continues to be a stalwart of the economy. This was confirmed by a strong retail sales report for November. Consumer spending growth is on tracking for a healthy 2.8% annualized pace in the fourth quarter, which marks a rebound from a hurricane-dampened 2.3% pace in Q3.

The Fed also raised its economic growth forecast, but left its expectation for the number of rate hikes over the next year unchanged. The reason for the seeming inconsistency is unclear, but likely it is in part because of continued weakness in inflation would have necessitated a downgrade in the number of hikes, were it not for the offsetting growth upgrade.

All told, this is not a picture of an economy calling out for a fiscal boost. Moreover, deficit-financed tax cuts have several potentially negative consequences for the federal budget, and the economy as a whole. First, fiscal stimulus in an economy running full tilt is likely to stoke higher wages and inflation, and could result in a slightly faster pace of rate hikes by the Federal Reserve, ultimately dampening the support to growth. Second, since the personal tax cuts are temporary, a future Congress will need to deal with another fiscal cliff down the road. Third, higher deficits over the next few years (Chart 2)also make it more difficult for the government to respond to a potential economic downturn.

Finally, the plan is estimated to add about one trillion dollars to a debt burden that was already slated to grow due to rising expenditures from an aging population. This means interest costs will eat up more of the budget, leaving less room for other priorities. Larger government debt burdens also crowd out investment in the private sector, dampening productivity growth over the longer term. And, it raises the likelihood of a fiscal crisis – where interest rates on federal debt would rise suddenly and sharply as investors demand additional compensation to hold U.S. debt.

Leslie Preston, Senior Economist

 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 8, 2017

HIGHLIGHTS OF THE WEEK

• The Federal Reserve meets next week and is near-universally expected to raise interest rates by 25 basis points, bringing the target for the fed funds to a range of 1.25% to 1.5%.
• The U.S. labor market continues to make progress with 228k jobs added in November. Given the current rate of job creation, it is only a matter of months before the unemployment rate pushes below 4%.
• The American economy is likely to continue its winning streak. Even without tax cuts, 2018 is likely to see growth around 2.5%. With increasing prospects for fiscal stimulus to push growth even higher, the Federal Reserve will continue to remove monetary accommodation.

The Fed Can’t Ignore A 3-Handle On Unemployment

As the Federal Reserve meets next week to decide interest rate policy for the final time in 2017 it is faced with ebullient financial markets and an economy that is operating increasingly close to full capacity. With November’s gain of 228k jobs, the streak of positive job creation entered its 86th month. The unemployment rate in November held steady at 4.1% (a seventeen year low), but with job growth trending above 200k, it is only a matter of months before it pushes to lows not seen since the 1960s.

Monetary policy is set with an eye to the future. As a thought experiment, assume that the rate of job creation continues at around its current pace of 200k a month. Given demographics, this is more than double the pace needed to keep up with labor market growth. Should this continue over the next year it will push the unemployment rate to just 3.4% - the lowest rate on record (data goes back to 1947).

While there are some doubts about the strength of the relationship between unemployment and inflation, an unemployment rate that begins with a three handle is certain to raise eyebrows. The unemployment rate is already below the FOMC’s assumed neutral level of 4.6%, and other broader measures of labor market slack, such as long-term unemployed and the U-6 measure of labor underutilization, continue to trend lower.

The hope is that employer demand for labor will draw discouraged workers back into the labor force, but the pool of such potential workers is dwindling. Relative to the population, the share of people outside of the workforce (not actively searching for a job), who want a job now is at the same rate it was prior to the recession (Chart 1). The employment to population ratio of core working-aged women (between 25 to 54) has already regained its prerecession peak (Chart 2). The ratio is still lower for men, but it has been steadily declining for no less than seventy years. Subtracting the long-run trend, the ratio does not appear all that abnormal.

Even without tax cuts, the U.S. economy appears likely to continue its winning streak. Growth in the fourth quarter is tracking close to 3%. With supportive financial conditions, economic growth in the range of 2-2.5% appears likely over the next year. Into this environment, Congress looks increasingly likely to pass a tax cut that will raise the deficit and add as much as $1 trillion to the national debt over the next decade.

Any boost to growth from the proposed tax reform plan is likely to show up in higher wages and inflation, which may have to be offset by additional interest rate hikes. Our model simulations based on a Taylor Rule monetary policy reaction function suggest that for every 0.25 percentage points added to economic growth above its trend rate, the Fed should raise rates by an additional 25 basis points. While there is considerably uncertainty around the timing of tax cuts, investors should not discount the likelihood that what Congress giveth the Federal Reserve may taketh away.

James Marple, Director & Senior Economist

 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 1, 2017

HIGHLIGHTS OF THE WEEK

• The prospect of corporate tax cuts led both the Dow Jones Industrial Average and the S&P 500 to record highs this week, with financial stocks outperforming substantially.
• Economic data was supportive, with third quarter real GDP being revised up to 3.3% annualized, as business investment came in stronger than initially thought.
• Incoming Fed Chairman Jerome Powell stated that “conditions are supportive” of a December rate hike, and we expect the Fed to proceed with one, followed by two more in 2018.

Tax Cuts Just Around The Corner

The prospect of corporate tax cuts made for another strong week in equity markets. Investors flocked to financial shares, leading both the Dow Jones Industrial Average and the S&P 500 to record highs. Financials have posted stellar earnings growth this year and are among the corporations that stand to benefit the most from the proposed tax cuts. Consumer discretionary stocks were also in high demand, following record-breaking estimates of Black Friday and Cyber Monday sales. Treasuries, on the other hand, sold off this week, sending the benchmark ten-year yield above 2.4% on Thursday, the highest level in over a month. These positive developments led the greenback higher initially, but the gains were pared by the end of the week.

Economic data released this week also supported investor sentiment, with third quarter real GDP revised up to an impressive 3.3% as business investment accelerated (even more than previously estimated), with firms ramping up expenditures on equipment notably (Chart 1). This marks the strongest two consecutive quarters of growth for the American economy in three years. Momentum in business investment is expected to continue, with shale oil production likely to be a key contributor. Producers have ramped up activity this year in response to a rising price of WTI crude oil. OPEC’s commitment to extend supply cuts through 2018, announced this week, should maintain this momentum. As a result, the upside for the price of crude oil will be limited; we expect the price of WTI crude to sit in the US$50-55 range as the market balances out.

Consumers are also likely to maintain their pivotal role in the economic expansion alongside businesses. Consumer spending slowed in October, after a bump in the prior month as a result of hurricane-damaged vehicle replacement. With continued job growth and accelerating wages, consumer spending should bounce back in the months ahead. On the inflation front, core PCE price growth held steady at 1.4% (year-on-year) in October, with an uptick in the following month looking increasingly likely as industry contacts reported strengthening price pressures in November’s Beige Book (Chart 2). Producers across a range of industries including manufacturing and transportation reported passing on increases in input costs to selling prices, ensuring that inflation will turn higher in the near future. Several FOMC voting members also expressed their agreement with this view in speeches this week.

Incoming Fed Chairman Jerome Powell stated that “conditions are supportive” of a December rate hike at his confirmation hearing on Tuesday. Mirroring this view were Yellen and Kaplan in their speeches this week, in contrast to Kashkari who would like to see firmer evidence of inflationary pressures building before proceeding with a hike. At this point, markets are fully pricing in a December hike and we expect the Fed to proceed with one, followed by two more in 2018. Making this scenario increasingly likely is progress on the tax reform front which will require faster monetary policy normalization in order to temper the potential inflationary pressures

Katherine Judge, Economist

 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 10, 2017

FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

• With little to digest on the data front, attention was devoted to political developments this week. Stock markets remained upbeat through Wednesday, given optimistic expectations on tax reform, supportive earnings reports and gains among energy stocks.
• However, market sentiment turned down thereafter, as developments on tax reform failed to meet expectations, given key differences between the House bill and the newly-released Senate bill.
• While tax reform will remain top of mind in the days ahead, a number of important data releases next week will help tilt the narrative back toward economic fundamentals, with emphasis placed on the upcoming CPI report.

Tax Bills: When Two Is Not Better Than One

This week was exceptionally quiet in terms of economic data. There were no primary reports released and second-tiers did little to spur market action. On that front, JOLTS job openings and weekly jobless claims saw little change, while consumer sentiment (U. of Michigan) pulled back in early November but remained upbeat at 97.8 – a level marking the second-highest reading this year. With little else to digest on the data front, attention was devoted to political developments.

Markets remained upbeat through midweek,  given optimistic expectations on tax reform, supportive earnings reports and gains among energy stocks. The latter were buoyed by a surge in crude oil prices, with rising geopolitical uncertainty in the Middle East, particularly in Saudi Arabia, being the main catalyst behind the move (Chart 1). Global demand has been strong and OPEC discipline is expected to continue, but the risks for oil prices are skewed to the downside as non-OPEC production is on the rise, particularly U.S. shale. The EIA reported that U.S. production reached 9.62 million (B/D) last week, which is at the top range of historical highs.

Market sentiment followed a more downbeat tone later in the week, as developments on tax reform, which appeared to overshadow headlines from the President’s Asia trip, failed to meet expectations. While the Ways and Means Committee advanced the House bill on Thursday, preparing for a vote by the full House next week, the Senate released its own version of the bill, with preliminary reporting pointing to some key differences among the plans. For instance, the Senate bill retains the current seven-bracket income tax structure with a new top rate of 38.5% as opposed to the reduced four-bracket structure in the House bill, it doubles the estate tax exemption but does not eliminate it after 2024, and it eliminates state and local tax deductions (SALT) without keeping a 10k deduction on property tax. Moreover, the Senate bill would delay corporate tax cuts to 2019 as opposed to implementing them in 2018, and takes a different approach on pass-through taxation, creating a new 17.4% deduction, as opposed to lowering the rate to 25% as in the House bill.

In short, there are enough differences between the two bills to make immediate passage less likely. Much rides on tax reform, with expectations for major change being one of the main supporting factors behind the impressive post-election gains in stock markets (Chart 2). As such, the delay is likely to weigh on near-term sentiment, with prospects for a later introduction of corporate tax cuts of particular concern to investors.

Tax reform is likely to remain top of mind in the days ahead, but a number of important data releases next week will help tilt the narrative back toward economic fundamentals. Hurricane-related volatility should begin to taper off in upcoming reports, supporting the Fed’s decision-making process. With the economy still on a solid course and the labor market tightening further, we remain of the view that the Fed will hike rates once more by year’s end. But, this will require some cooperation from inflation metrics, with the emphasis placed on next week’s CPI report.

Admir Kolaj, Economist

Financial News- November 10th, 2017

 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