HIGHLIGHTS OF THE WEEK
- After last week’s start-of-month data dump and the prior week’s executive order deluge, this week has been fairly quiet for U.S. investors.
- International trade data was the only top-tier release, highlighting an improvement in the trade deficit and suggesting some upward revision to fourth quarter GDP. Also constructive was the sustained decline in initial jobless claims, which beat expectations and fell to 234k last week.
- Rather than the data, the markets were more interested in what was being said by policymakers about the U.S. economy, cheering the mere mention of what was touted by the president as a ‘phenomenal’ tax plan. Plenty of Fed-speak also kept market participants looking for clues for the next Fed hike, but one is unlikely until at least mid-year.
- Employment and housing starts data for January suggest a carryover of the positive momentum from the end of last year into the start of 2017.
- Census data released this week confirms that population growth has and will likely continue to support the housing markets in Vancouver and Toronto. Indeed, more supply is needed to help alleviate demand pressures, and we expect that these markets will continue to experience strong housing starts despite a potential for some transitory softening in the existing home market this year.
- None of the news this week is likely to change our own or the Bank of Canada’s view on the Canadian economy. Material economic slack is apparent in the Canadian economy, and its gradual absorption should ensure that the Bank of Canada keeps monetary policy highly accommodative through 2018.
UNITED STATES – QUIET DATA CALENDAR A WELCOME CHANGE
After last week’s start-of-month data dump and the prior week’s executive order deluge, this week has been fairly quiet for U.S. investors. Markets remained fairly upbeat, on continuing hopes of corporate tax reform and relatively positive earnings, with all three major indices setting records once again on Friday morning (Chart 1). The U.S. dollar also got a modest boost, with the DXY index 1.1% higher on the week, at the time of writing.
International trade data for December was the sole toptier U.S. release leaving participants with little to chew on by way of economic data. The trade deficit narrowed to $44.3 billion from $45.7 billion in the prior month (Chart 2), beating economists’ expectations for a more modest pullback (to $45.0 billion). Exports bounced back after two months of contraction, while imports followed suit, in line with an acceleration in economic growth at home. This was relatively good news, pointing to a modestly smaller drag from net trade on fourth quarter GDP, but did little in the way of moving the needle.
The second-tier data was somewhat more inspiring. For one, initial jobless claims fell substantially, going against market expectations for a modest increase. The headline number fell to 234k for the week ending February 4th while the 4-week moving average declined to 244k, the lowest level since 1973. The job openings and labor turnover survey for December also painted a picture of an increasingly tight labor market, with job openings hovering around the 5.5 million mark, while the quits rate slipped only slightly to 2.0%, but remained near the cycle-high level of 2.2%.
Globally, economic data was more mixed. German industrial production hit the brakes in December, down 3% m/m. However, factory orders rebounded, up 5.2% on the month, providing some comfort that industrial production will bounce back in January. Less encouraging was the softer reading of the composite purchasing managers’ index in China which fell to 52.2 in January. While this still represents growth, it signals a slower pace at the beginning of the year. Similarly, Australian retail sales also disappointed, falling by 0.1% in the important December shopping month.
Still, data these days often tends to play second fiddle, with policy discussion about the U.S. economy taking center stage, particularly how any of these may impact the outlook for monetary and fiscal policy. President Trump suggested recently that he will within the next two weeks announce a ‘phenomenal’ tax plan with markets already cheering the mere mention of this initiative (see Chart 1 again).
In the follow-up to the Fed’s meeting last week, the Fed’s speaking circuit was out in full force. Philadelphia Fed President Harker kicked things off, alluding to a rate increase as early as March. However, his hawkish views were offset by the Minneapolis Fed President Kashkari, who cited the slow improvement in core inflation and limited cost pressures stemming from the labor market as reasons to remain patient. Evans (Chicago) and Bullard (St. Louis) also reiterated the dovish stance later on in the week, both citing concerns around the lack of inflationary pressures. Overall, none of this changes our take on the Fed’s next move, with our baseline view seeing the Fed raise rates twice this year, with the first coming around the mid-year mark.
CANADA – JANUARY DATA CONFIRMS SOLID START TO 2017
The data flow this week painted a fairly optimistic picture of the Canadian economy at the start of 2017. In particular, employment and housing starts data for January suggested a carryover of the positive momentum from the end of last year.
This morning’s jobs report was good enough to stir foreign exchange traders into action, causing the CADUSD to appreciate about 0.5% to a firm $0.765 moments after the report’s release. The headline of the January employment report was constructive – 48.3k jobs mainly private sector jobs created, pushing the unemployment rate down to 6.8% despite an uptick in the labour force participation rate to 65.9%. However, the underlying details of the release were less rosy. Two-thirds of jobs created were part-time, dampening hours and wage growth. Moreover, January marks the second consecutive month of decline in hours worked, and the first month since last July in which average hourly wages failed to increase. We’ve written before about the implications of the trend toward part-time employment for the Canadian economy, particularly that it will likely continue to exert downward pressure on earnings and hours worked.
On the housing side, starts in Canada remained near the 200k annualized pace in January, just above our projections of trend household formation. The strength in housing starts continues to be focused in large census metropolitan areas (CMAs), such as Toronto, Vancouver and Montreal. The need for housing in these areas was confirmed by the first snapshot from the 2016 Census that revealed these CMAs experienced a significant increase in population since 2011. In fact, these three cities accounted for a fifth of Canada’s total increase in CMA population since 2011 in absolute terms, while Edmonton and Calgary had the largest percentage increase in population. Moreover, both Vancouver and Toronto recorded the largest increase in population density, adding more than 50 people per km2 since 2011. All of this is further evidence that fundamentals have and will likely continue to support the housing markets in both of these cities. More supply is needed to help alleviate demand pressures, and we expect that these markets will continue to experience strong housing starts despite a potential for some transitory softening in the existing home market this year.
Although backward-looking, the December trade data revealed that Canada’s nominal trade balance in goods remained in surplus with the rest of the world for the second consecutive month. While largely owing to an improvement in the trade surplus in goods with the U.S., it’s important to note that Canada has a substantial trade deficit in services with its largest trading partner that results in the U.S. having an overall trade surplus with Canada. This is one reason why we don’t expect that Canada will become a primary target of any protectionist measures that the new U.S. administration may implement. Having said that, Canada may be hurt indirectly from the fallout that any measures may have on nations important to Canadian aggregate demand.
None of the news this week is likely to change our own or the Bank of Canada’s view on the Canadian economy. Weakness in hours worked and average hourly wage growth are signs of material economic slack apparent in the Canadian economy. The absorption of this slack should continue to be a very gradual process, ensuring that the Bank of Canada keeps monetary policy highly accommodative through 2018.