Markets will continue to weigh the odds of a “phase one” US-China trade deal next week, with optimism earlier this week (fuelled by yet more reports of progress in trade talks) fading after President Trump signed the Hong Kong human rights bill, which China had warned could elicit retaliation. Fresh readings on US business sentiment in the form of ISM manufacturing and non-manufacturing indices will give us a better idea of how companies are viewing the ups and downs of trade negotiations. Payroll data caps off the week, and should show a nice rebound with striking GM employees having returned to work in November.

North of the border, the Bank of Canada’s final rate decision of 2019 is the main event. While some 40 central banks having eased monetary policy this year, we continue to think the BoC will remain an outsider by holding rates steady next week. That view was cemented by today’s GDP report, which showed a 1.3% annualized increase in Q3 that was bang-on the BoC’s forecast from October. That’s a disappointing pace of growth regardless of expectations, but the details were actually slightly firmer than we thought. Business investment posted a surprising increase, marking just the second gain in the last six quarters. The BoC is likely to continue to warn of the downside risks from trade tensions (their tone doesn’t swing around as much as market sentiment regarding a trade deal) but firmer capital spending suggests global concerns might not be as persistent a headwind to business investment as feared. Exports and inventory investment were weak in Q3, though transitory issues in commodity sectors (GDP ex-commodities was up 3% in Q3) were likely a factor. Investment and trade will be watched closely in the month ahead (starting with next Thursday’s trade figures), but at this stage it’s hard to think recent developments have been worse than the BoC anticipated.

The Bank of Canada has emphasized that the health of the household sector will be key to upcoming rate decisions, and in that regard Q3 GDP didn’t raise any red flags. Housing investment grew at its fastest quarterly rate since 2012, while consumer spending increased at a moderate pace with households continuing to use some of their income growth to rebuild a modest savings buffer. Strong job gains and rising wages have been key supports to the household sector this year—the concern is that a shift to below-potential growth will start to test the labour market’s resilience. While we expect next Friday’s employment report will be soft (look for election-related hiring in October to be retraced) we’d need a string of weak jobs numbers to become more worried about the household sector.

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Overall, we look for the BoC to maintain a cautious tone next week, but with perhaps a less overtly dovish message than in October when Governor Poloz wasn’t shy about saying a rate cut was debated. Additional insight in that regard will come on Thursday when Deputy Governor Lane will deliver an economic progress report and take questions from the media.


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