U.S. Highlights

  • Investors paid close attention to developments from the White House this week, with President Trump’s tax overhaul proposal helping to send the S&P 500 to new highs.
  • Inflation disappointed again in August, but some states are beginning to display meaningful wage acceleration, as we noted in our Quarterly State Forecast this week, which bodes well for the inflation outlook.
  • Next week, investors should look for hurricane impacts to inject volatility into September’s U.S. data. As a result, auto sales should see a boost while net exports should experience a drag.

Canadian Highlights

  • Markets were focused on a speech from Governor Poloz which marked the first major communication from the Bank since it shifted into tightening mode. The governor noted that there are many unknowns overshadowing the outlook for inflation, so the future of monetary policy will be highly data dependent.
  • This morning’s GDP report showed that economic growth came to a halt in July – the weakest performance since last October.
  • The Canadian dollar hit a 4-week low while the S&P/TSX extended its gains thanks to a rise in oil prices to over US$52 per barrel.

U.S. – Equities Soar on Trump’s Tax Reform Proposal

Investors paid close attention to developments from the White House this week, with President Trump’s tax overhaul proposal sending the S&P 500 to another record high at the end of the week. Exchange and fixed-income markets were also impacted, with the greenback appreciating and the ten-year yield rising to its highest level in two months. The proposal contains a sharp reduction in the corporate tax rate to 20% (from 39.1% currently), in addition to the consolidation of personal income tax brackets from seven to three. But the Devil is in the details, of which the plan was largely barren. If delays or opposition to the proposal prevail, equities could pare their gains on diminished expectations for future earnings.

Meanwhile, on the economic data front, Friday’s PCE report marked another month of decelerating inflation in August (Chart 1). Consumer spending was also weak, but that is partly attributable to Hurricane Harvey’s disruption. The report disappointed markets, but not by enough to reverse the equity gains accrued as a result of President Trump’s tax plan announcement earlier in the week.

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Fixed income markets were also impacted by Fed Chair Janet Yellen’s speech on Tuesday that reiterated her view that growth prospects should support an advance in inflation in the near future. Outgoing Fed Vice Chairman, Stanley Fischer, on the other hand, injected more caution into his remarks made on Thursday in London by stating that he would like to see solid proof of inflationary pressures mounting before proceeding with tightening.

Across the Atlantic, the Euro Area is also grappling with missing inflation coinciding with solid economic growth. Underlying inflation in September remains subdued, reinforcing the ECB’s stance of cautiously tightening monetary policy. The first steps in winding down asset purchases are expected to begin next year, with further details anticipated following the ECB’s October meeting. Consumer and business confidence indicators have recently returned to pre-recession levels and investors have taken notice, with both the DAX and the FTSE ascending this week while German and UK government bond yields rose.

Next week, investors should look for hurricane impacts to inject volatility into September’s U.S. data. Specifically, auto sales should see a boost while net exports should experience a drag. This volatility should fade as rebuilding begins in the fourth quarter. While the Fed will look past hurricane disruptions in the data, inflation data will remain central in guiding monetary policy. We still expect a rate hike in December, assuming that price pressures will have had enough time to accumulate over the remainder of the year. Some regions are already beginning to display meaningful wage acceleration on account of tightening labor markets, as we noted in our Quarterly State Forecast this week, which bodes well for the inflation outlook. For example, in both New Jersey and Florida, wage growth this year is running at above 3% year-on-year (Chart 2). This strength should translate into firmer price pressures in the coming months as the increase in producer costs is absorbed by consumers.

Canada – Focused on Central Bank Communication

All eyes were on the Bank of Canada this week, as a speech from Governor Poloz on Wednesday marked the first major communication from the Bank since it shifted into tightening mode. Prior to the first rake hike in July, the central bank had signaled that it felt emergency level interest rates were no longer needed given stronger-than-expected economic growth. The second hike earlier this month came as a surprise to some since there was no prior communication from the Bank.

In his speech this week, the Governor underscored the fact that there is no predetermined path for interest rates, and that it will be closely watching four key areas as it sets monetary policy. These include economic capacity, the impact of technology on inflation, wage growth and elevated household debt. There was also a lengthy discussion on the Business Outlook Survey, suggesting that the central bank will be paying close attention to the results which are set to come out on October 16th – the week before the next Fixed Announcement Date. Indeed, with the Governor signaling that this is an unusual time and that there are many unknowns overshadowing the outlook for inflation, the future of monetary policy will be highly data dependent.

On that front, the data this week was not very encouraging. This morning’s GDP report showed that economic growth came to a halt in July – the weakest performance since last October (Chart 1). While certainly softer than the blistering pace recorded over the first half of the year, it still points to an above-trend annual pace of about 2.2% in the third quarter given the healthy momentum heading in. Meanwhile, the CFIB small business barometer showed that optimism among businesses deteriorated for a fourth consecutive month in September. With this typically seen a leading indicator of growth, it is consistent with a slowing in overall economic activity in the coming months.Together, these data reports cast some doubt as to whether an October rate hike is in the cards.

Markets interpreted the rather dovish tone from the central bank this week as a sign that the Bank will take a more cautious approach going forward. This, combined with the soft data, drove the Canadian dollar down to a 4-week low of 80 US cents (Chart 2). The loonie has now erased roughly half of its gains since mid-August.

In contrast, the S&P/TSX extended its winning streak that began in early-September, with oil contributing to this week’s lift. Indeed, the WTI benchmark hit a 5-month high of US$52 per barrel on Wednesday, with a number of factors bringing out the bulls. An unexpected draw on U.S. stockpiles, forecasts for increased demand as refineries resume operations after Hurricane Harvey, and geopolitical issues in Turkey and Iraq which could halt exports from the region, all worked to boost prices. With prices over the US$50 per barrel mark, hedging activity – particularly among U.S. shale producers – has likely picked up. Hence, further sustainable gains are doubtful. Oil prices are expected to hover in a tight range around the US$50 per barrel mark for the foreseeable future.

U.S.: Upcoming Key Economic Releases

U.S. ISM Manufacturing Index – September

Release Date: October 2, 2017
Previous Result: 58.8
TD Forecast: 58.2
Consensus: 58.0

TD expects the ISM manufacturing PMI to slip back to 58.2, reversing only part of the August jump. Risk for a negative hurricane effect appears limited, as August data appeared unscathed while regional surveys for September registered notable improvement. The Dallas survey in particular rose more than 4 points to a 7-month high, with a pickup in orders. Meanwhile, the national Markit manufacturing PMI moved up to a 2-month high, though month-to-month tracking with ISM is not reliable. Only a modest reversal in September would underpin above-trend Q3 GDP growth trackings near 2% while also suggest that adverse hurricane impacts may prove to be on the lower end of estimates.

U.S. Employment – September

Release Date: October 6, 2017
Previous Result: 156k, unemployment rate 4.4%
TD Forecast: 120k, unemployment rate 4.4%
Consensus: 80k, unemployment rate 4.4%

We expect a 120k print on nonfarm payrolls. The September jobs report should be taken with caution in light of Hurricane Irma, which may impart a significant drag on payroll figures. Estimates suggest a sizeable drag of more than 100k. We lean on the more optimistic side of consensus as indicators are consistent with payroll growth near 200-230k, while jobless claims (259k vs 236k before the hurricanes hit) came in better than expected for the week ending September 15th. Accounting for a moderately negative impact from Irma, we look for payrolls to print 120k. We expect the unemployment rate to be unchanged at 4.4%, with upside risks due to the slowdown in employment growth.

Meanwhile, we expect average hourly earnings to post a 0.3% m/m increase, leading annual growth higher to 2.6% y/y. Calendar effects along with hurricane distortions suggest risks are to the upside this month, though past disappointment suggest another downside surprise cannot be ruled out.

Given the noise associated with the hurricane, Fed implications of payroll gains will be limited this month as officials will look on to October for a better gauge of the underlying trend. Moreover, significant downside to payrolls if realized should not draw undue concern. But combined with disappointment on wages, the report could yield a dovish tone for markets.

Canada: Upcoming Key Economic Releases

Canadian International Trade – August

Release Date: October 5, 2017
Previous Result: -$3.04bn
TD Forecast: -$2.7bn
Consensus: N/A

Canada’s trade deficit is expected to narrow to $2.7bn in August, leaving the deficit still wider than its Q2 average (-$1.9bn). US import and shipment data and higher oil prices point to a moderate rise in energy exports, offsetting its prior decline. We also expect non-energy exports to post a solid comeback underpinned by solid US demand, though rapid currency appreciation in the prior two months poses a risk. One category driving growth is likely to be motor vehicles, based on advance US trade data, while we also see scope for rebounds across metal products, machinery and electronics. Producer price data suggest the volumes should modestly underperform this month. A modest narrowing in August would be encouraging if driven by a rebound in non-energy exports, though net trade is still likely to contribute negatively to Q3 GDP. Stronger US demand, as revealed in recent orders data and sentiment surveys, points to some improvement into Q4, but sharp exchange rate appreciation warrants caution over the near-term path.

Canadian Employment – September

Release Date: October 6, 2017
Previous Result: 22.2k, unemployment rate 6.2%
TD Forecast: 20k, unemployment rate 6.3%
Consensus: N/A

The labour market is expected to remain on a firm footing in September, with net employment forecast to rise by 20k. This report may be noisier than usual due to the presence of some large moves in last month’s data – full and part-time job growth diverged by 210k in August. While we look for full time employment to outperform in September, we do not expect anything resembling a full correction after observing a similar dynamic in February of this year, but there is potential for a large unwind. On the industry breakdown, we expect to see an outperformance in goods producing employment, led by a rebound in manufacturing.

Adding to the upbeat tone of the jobs report will be wages. Wage growth has been on a steady uptrend since bottoming in April and we expect further improvement in September. This is due to the combination of diminishing labour market slack as well as favourable base-effects, which could combine to push wage growth for full time employees back towards 2% from 1.7% y/y. While important to the BoC policy outlook, Poloz likely seeks additional evidence on firming wage growth in line with his recent remarks. Finally, the unemployment rate is likely to drift higher to 6.3% on increased labour force participation.

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