Following an action-packed week on the domestic data front, Canada is headed for relative calm in the week ahead, with just the lonely November housing starts report on the docket. Focus instead will be on external events as economy watchers gauge their impact on the shape of the global growth backdrop. Polling out of the UK continues to suggest that Boris Johnson’s conservatives could be given the majority government needed to push the divorce agreement with the European Union agreed to in October through parliament. Any progress, or lack thereof, on US and China trade negotiations will also be watched closely ahead of the next round of previously-threatened US tariffs later this month. Although the reinstatement of US steel/aluminium tariffs on imports from Brazil and Argentina and the threat of possible new tariffs on France over the last week were also just the latest reminder that international trade policy will remain unpredictable even if a ‘phase 1’ deal with China is ultimately completed.
The significantly softer-than-expected November employment report in Canada released on Friday will keep attention on the near-term economic data flow. Despite the drop in employment, wage growth remained strong. The unemployment rate also jumped higher, but is still low from a historical perspective, and most recognize that Canadian employment numbers are notoriously volatile on a month-over-month basis. Other economic growth numbers out of both Canada and the US have been, if anything, a touch stronger than previously expected. US employment surged higher in November. There were even glimmers of hope that the US industrial sector, which has been weighed down by rising tariff costs, may be hitting a bottom with both domestic shipments and imports of capital goods reportedly picking up in October and sentiment indicators like the ISM manufacturing index stabilizing. We expect next week’s US retail sales report will show a solid tick higher as the all-important holiday shopping season gets more firmly underway. Stronger near-term economic growth numbers only make it more likely that the US Fed is done cutting rates, and we look for the central bank to now hold steady through 2020, including at the last policy decision of 2019 upcoming on December 11th.
The Bank of Canada responded to better global and domestic growth trends by moving more firmly to a ‘neutral’ bias following the last interest rate decision of 2019 – although that was admittedly before the release of the soft November labour market data. That cemented the central bank as one of a shrinking number to resist the urge to cut rates at least once this year. Indeed, the Bank of Canada appears to be (probably correctly) increasingly concerned that some sectors of the economy – namely housing markets – are heating up too quickly resulting in the reacceleration of household debt accumulation from already elevated levels. Reports of further tightening in home resale markets in Toronto and Vancouver in November will only reinforce those concerns. That is not to say that the next move from the Bank of Canada will be an interest rate hike. We still think there is a reasonable chance that they cut in the year ahead – in large part because there is still a non-trivial chance that unexpectedly negative global trade developments spill over into slower activity in Canada. But stronger current conditions also make it tough to see the central bank making a move as soon as the Q1 2020 cut that we have had in our own base case economic forecast.