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Canadian Highlights

• Donald Trump’s election victory means heightened macroeconomic uncertainty north of the border.
• Canada’s labour market put in a decent showing in October as the unemployment rate steadied, while job creation continues.
• A hefty increase in preliminary housing sales data for October may be proof that interest rate cuts are beginning to boost housing market activity.

U.S. Highlights

• President-elect Donald Trump will serve as the 47th president of the United States, securing 295 of the 538 Electoral College votes.
• Republicans also gained control of the Senate, while the House of Representatives is still up for grabs. Odds favor the Republicans maintaining control of the House, though 25 seats have yet to be called.
• The Federal Reserve delivered on a quarter-point rate cut this week, and kept the door open to further cuts in the months ahead.

Canada – With Certainty Comes Uncertainty

In case you missed it, there was a U.S. election this week! Former President Trump will return to the White House come January. With that, the degree to which his policies will impact Canada’s economy will be a lingering question for months to come. We have gathered our initial thoughts on the economic impacts here. In the aftermath of the results, Canada’s 10-year yield spiked nearly 20 basis points (bps) to over 3.40% but has fully retraced at the time of writing. The CAD finished flat on the week (0.719 cents) despite heightened volatility, while Canadian stocks caught a bid, rising 2.5%.

A big near-term question is how Trump’s tariff policy will jolt U.S.–Canadian trade relations. Our recent research details our expectations related to the future state of trade. In short, the existing USMCA trade agreement with the U.S. (and Mexico) could keep Canada insulated from tariffs, so long as we make a handful of concessions come the pact’s review in 2026. That said, we do not discount the very real risk that Trump could move forward with tariffs on Canada, which would have immediate negative impacts on GDP, inflation, and trade.

Trump’s presidency also puts the Canadian dollar on a different path. Our forecast for higher U.S. inflation will result in a slower pace of U.S. rate cuts in 2025, widening the spread between the Bank of Canada and the Fed, and pressuring the loonie lower (Chart 1). The Canadian dollar has already depreciated around 3% against the Dollar since early-September, and we expect the CAD will bottom in Q1-2025 before modestly appreciating thereafter. It would not surprise us to see the CAD temporarily break below 70 cents in the near-term.

The election overshadowed some important domestic developments. For one, Canada’s job market looks to be on solid footing. Canada’s economy has added a respectable 270k jobs so far this year, 15k of which came in October. Against this backdrop, we are seeing the unemployment topping out around current levels (Chart 2), as the federal government’s plan to aggressively slow population growth should limit the buildup of further labour market slack. Meanwhile, wages continue to show signs of stickiness and a jump in hours worked suggests October GDP growth could print a solid number.

Elsewhere in the Canadian economy, housing markets may finally be responding to rate cuts. Preliminary sales data for October are consistent with a hefty 8% increase in home sales based on double digit surges in Toronto and Vancouver sales activity. With additional interest rate cuts on the way and new federal borrowing measures, more momentum is likely to build.

For now, the Bank of Canada’s (BoC) best approach would be to look through the near-term uncertainties when setting the policy rate. It is still too early to have a high-conviction call for the December 11th meeting given the deluge of data between now and then, but we do think that the Bank will revert back to a 25 bps cut after opting for a 50 bps jumbo move last month.

U.S. – Trump Victory Likely to Bring Big Policy Changes

U.S. equities surged higher this week following Donald Trump’s decisive victory in the presidential election. Longer-term Treasury yields also shot higher, but later retraced all of Wednesday’s Trump trade as the Federal Reserve helped to calm the bond market by delivering on a quarter-point rate cut. The S&P 500 ended the week 4% higher and is now up an impressive 25% year-to-date. Meanwhile, the 10-year Treasury yield is looking to the end week slightly lower at 4.32% but is up nearly 60 basis points (bps) over the past month. (Chart 1).

Beyond winning the White House, the Republicans also took control of Senate, securing 53 of the 100 seats as of writing. Two races are still too close to call, so there’s potential for the GOP’s majority to widen a bit more once all the ballots are counted. Meanwhile, control for the House of Representatives remains up in the air, with 25 seats still to be called. At this point, odds heavily favor the Republicans maintaining control of the House, but it’s unclear whether the GOP will be able to make further inroads relative to their current slim majority of four. If the GOP retains only a slim majority in the House, President Trump will need near-unanimous GOP support to pass legislation, which could present some challenge to his agenda.

One thing is for certain under Trump 2.0: tariffs are coming. Once sworn in on January 20th, we expect Trump to use executive powers to act quickly and levy sweeping tariffs on many of the U.S.’s trading partners. China is at the top of the list, but history has shown that Trump isn’t afraid to raise tariffs on allies. While it is possible that Canada and Mexico receive some carve-outs, it would likely be conditional on them following the U.S.’s lead and leveraging similar tariffs on China. Others may also negotiate concessions, but that isn’t likely to happen until after the tariffs are in play.

No matter which way you slice it, the more protectionist trade measures will be inflationary and work against the Federal Reserve’s objective of restoring 2% inflation. At the press conference, Chair Powell acknowledged this point, but also noted that the Fed doesn’t adjust its policy rate to potential changes in fiscal or other government policies. For now, the FOMC remains highly data dependent. This puts next week’s inflation report in focus, particularly after the September reading came in hotter than expected. With the economic data still strong, any further signs of stickiness on the inflation front will likely push Fed officials away from continued quarter-point cuts and towards a slower rate cut trajectory.

At this point, we still feel that a December rate cut is still likely. However, we’ve revised our forecast for next year, reflecting the fact that tariffs (and the potential for tax cuts) will result in more persistent inflationary pressures. We now assume the Fed takes a more gradual approach in reducing the policy rate in 2025, cutting at every-other meeting, resulting in a total of 100 bps of easing by year-end (Chart 2).

Summary

United States: Election Results Don't Clarify the Outlook

• Even as the 2024 presidential election has come and gone, there is still a tremendous amount of uncertainty regarding the trajectory of the economy and Fed policy. Tariffs and a tax policy look to be on the docket in the next administration, which could come with higher inflation and thereby higher rates.
• Next week: NFIB Small Business Optimism Index (Tue.), CPI (Wed.), Retail Sales (Fri.)

International: Global and Thematic Implications of the U.S. Election

• In our view, Trump winning the White House and having a largely unilateral ability to implement tariffs and shift U.S. trade policy in a more protectionist direction is yet another deglobalization force. New trade barriers would have the potential to weigh on the interconnectedness of the global economy, which could have longer-term negative implications for global economic growth. We also view the election results as supportive of further U.S. dollar strength in the medium term.
• Next week: India CPI (Tue.), Central Bank of Mexico (Thu.), China Retail Sales & Industrial Production (Fri.)

Interest Rate Watch: Higher Rates Likely Under Trump Administration

• President-elect Trump’s victory sparked upward movements in equities and bond yields across the curve. This week’s Fed meeting was less eventful. As was widely expected, the FOMC reduced the federal funds target range by 25 bps to 4.50%-4.75%. Although Chair Powell declined to comment on the election, our expectation for the path of Fed easing has evolved. As we see it today, the potential for higher inflation next year raises the likelihood that the federal funds rate bottoms out closer to 4% than 3%.

Topic of the Week: The 2024 U.S. Elections: Economic Implications

• Election Day has come and gone. Donald Trump was elected the 47th president of the United States, becoming the second person to serve two non-consecutive terms as president. We walk through our preliminary thoughts on the recent election results and their implications for the U.S. economy.

Full report here.

U.S. inflation numbers will be closely watched by policymakers on Wednesday for any further signs that resilient growth domestic product and consumer spending is putting a floor under price growth.

U.S. GDP growth in Q3 was strong and a jump in auto sales in October means Friday's retail sales report should show another increase early in Q4. But that strength has also come alongside firmer-than-expected inflation prints in recent months, and has markets questioning how quickly (and how much) the U.S. Federal Reserve will cut interest rates in the year ahead.

In October, we expect that U.S. headline consumer price index growth ticked up to 2.6% year-over-year from 2.4% in September. Average gasoline prices fell in October and food prices continue to grow at a pace closer to the Fed's 2% target. But, sticky core inflation—which we expect held steady at 3.3% annually—continues to drive the bulk of price growth. Up until September, home rents were responsible for the lack of downward movement in the core measure. But last month, the share of CPI basket items (excluding shelter) reporting price growth above 3% moved higher from September.

The Fed takes a longer-term view of inflation data, with Chair Powell reiterating after a 25 basis point cut this week that price growth has still slowed substantially from where it was despite recent upside surprises. We continue to expect that gradual softening in labour markets will ease underlying inflation pressures enough to justify another Fed interest rate cut in December. But we also expect that interest rates will need to remain higher in 2025 than policymakers have been expecting to offset the inflationary impact of a large government budget deficit and keep price growth on a (sustainable) path back towards the Fed’s 2% objective.

Week ahead data watch

U.S. retail sales likely edged up again in October, given auto sales were strong. However, (a price-led) sales decline at gas stations would partially offset higher auto sales.

We expect the U.S. industrial production on Friday to inch lower in October, following the 0.3% decline in September. The weakness was mainly driven by lower output in the manufacturing sector as the impact of the Boeing strike and hurricanes dragged into October.

• After Trump comeback, normality to return to markets with US CPI
• GDP data from UK and Japan to also be important
• But volatility to likely persist as markets assess impact of Trump 2.0

US CPI eyed as rate cut bets fade after Trump win

Donald Trump’s historic return to the White House was met with a euphoric response by the markets. Wall Street and Bitcoin rallied to record highs, while the US dollar skyrocketed to 4-month highs. Perhaps the most significant move, however, is the surge in Treasury yields.

Yields had already been on the rise since late September as investors pared back their bets of how many times the Federal Reserve would cut interest rates over the course of the next 2-3 years. But Trump’s victory has dealt a further blow to hopes of low interest rates.

If Trump enacts his campaign pledges of lower taxes and higher tariffs, the expected effect on the economy is that this would push up prices by boosting domestic demand and raising import costs. The Fed would have little choice but to maintain restrictive monetary policy for longer than is currently anticipated.

The October CPI report due on Wednesday will be the first post-election test for rate cut bets following the repricing from the ‘Trump trade’. In September, the headline CPI rate fell to 2.4% y/y. However, it is expected to have edged up to 2.5 y/y in October. The month-on-month rate is projected at 0.2%, unchanged from the prior month. Core CPI is also forecast to have ticked up, rising from 3.3% to 3.4% y/y in October.

On Thursday, producer prices for the same month will also be watched, while on Friday, attention will turn to the retail sales report. Other releases will include the Empire State Manufacturing index and industrial production, both due on Friday.

Should the CPI numbers come in below expectations, yields and the dollar will be at risk of correcting lower following the recent sharp gains. However, if the data continue to surprise to the upside, the greenback’s bullish run might have further to go. This could prove problematic for Wall Street, though, as sooner or later, higher yields would begin to bite for Wall Street traders.

Can UK data halt the pound’s slide?

US yields are not the only ones soaring lately. The 10-year yield on UK government gilts has risen by more than 20 basis points since the country’s new Labour government presented its tax and spend budget on October 30. Despite tax hikes amounting to £40 billion, the budget is seen as increasing the government’s borrowing requirements, as spending looks set to rise faster than the tax intake. Moreover, much of the spending increases will be frontloaded in the first two years of the parliamentary term, potentially lifting GDP growth in the current fiscal year and next.

The Bank of England has already incorporated the Budget impact into its economic projections and has signalled it will have to maintain caution on the pace of easing. Wage growth remains a concern despite falling substantially this year. The latest figures on average weekly earnings are out on Tuesday, as well as the employment change for the three months to September.

GDP stats will follow on Friday with the first estimate for the third quarter. The UK economy is forecast to have grown by 0.2% q/q during the quarter, slowing from the prior quarter’s 0.5% pace.

Faster-than-expected growth in Q3 would further dash hopes of the BoE speeding up rate cuts over the coming months, and this may help the pound recoup some of its recent losses versus the greenback.

However, disappointing data could add to sterling’s woes, potentially pushing it below $1.29.

Euro could take to the sidelines

The euro has also been under strain lately amid a gloomier Eurozone outlook compared to other major economies. Nevertheless, Q3 growth surprised to the upside and the preliminary reading of 0.4% q/q will likely be confirmed in the second estimate on Thursday. Quarterly employment growth numbers are also on the agenda on Thursday, as well as September industrial production.

Ahead of those releases, Germany’s ZEW economic sentiment survey might attract some attention on Tuesday. However, investors might be more interested in the political happenings in Germany following the collapse of the coalition government. Snap elections are looming, which may take place as early as January. A change in government in Berlin might pave the way for a reform of the country’s debt brake rule, which limits new borrowing to 0.35% of GDP.

However, any reaction in the euro is likely to be muted for now and the single currency will likely have a calmer time following the volatility of the past week.

Can Japanese GDP revive the yen?

The yen’s losses since mid-September deepened after the US elections as the dollar jumped to a three-month high of 154.71 yen. But the primary reason for the yen’s negative reversal is the uncertainty around the timing of the Bank of Japan’s next rate hike.

Investors are currently assigning around a 40% probability for a 25-basis-point rate rise in December. But the BoJ may decide to wait until after next year’s annual spring wage negotiations before making up its mind.

For expectations for an earlier rate cut to strengthen, there would have to be a significant improvement in both the growth and inflation data. Hence, better-than-forecast GDP numbers for Q3 on Friday could lift the yen slightly.

Waiting for China’s stimulus to kick in

Elsewhere, the Australian dollar will be keeping an eye on domestic wage growth and employment indicators on Wednesday and Thursday, respectively. Meanwhile the RBZN’s quarterly survey on inflation expectations on Monday could be vital for the New Zealand dollar, as a further decline could bolster bets of a 75-bps rate cut in November.

The aussie and kiwi will additionally be watching the latest data out of China. CPI and PPI figures for October are out on Saturday and the monthly prints on industrial output and retail sales will follow on Friday. Although Chinese authorities have stepped up their stimulus policies over the past year, there’s yet to be a notable acceleration in growth. However, any pickup in activity in October, particularly in retail sales, could raise hopes of a quickening economic recovery, boosting the antipodean currencies and risk assets more broadly.

Market Picture

Gold lost over 3% in value on the day the presidential election results were tallied. Cumulatively, from the peak in late October to the recent low, the losses exceed 5%. So far, it does not look like a tragedy. On Thursday, the price added 2.5% from the lows to the high intraday, recovering most of the decline from the day before.

Technical Analysis

Gold has found support in the form of the 50-day moving average just below $2650. This correction removes the overbought accumulated conditions from nearly three months of previous gains.

Although gold rebounded encouragingly on Thursday, we doubt further gains in the coming weeks. We attribute Thursday’s recovery to gold bugs attempting to join the general pullback into risk assets, reinforced by the temporary pullback in the dollar that day.

We do not rule out a deeper decline in price, correcting more than 50% of the rise from the lows of last October. Some capital parked in gold in recent months while the dollar strengthened, as it was a drag from risk. Now, gold may be in for a reversal.

The start of the corrective movement is confirmed by the return of the RSI on weekly timeframes from extreme overbought with values above 80.

The growth of the dollar may accelerate the global correction, but even without it, precious metals may face challenges.

Stages of Decline

In the short term, we highlight several stages of decline. A consolidation under $2640 will mark the break of support in the form of the 50-day moving average and the deepening of the correction under the traditional 61.8% retracement from the August lows.

The next leg of the decline is seen as a correction to the $2400 area, where the 200-day moving average and the starting point of the last growth phase are centred.

From a more distant perspective, we see impressive chances of price pullback in the $2000 area. In this case, the previous area of highs may act as a global support.

A sharp return to growth will allow us to discuss the imminent renewal of historical highs. That is a real but alternative scenario. It seems to us that there is now more chance that gold will leave the top role for a while.

Donald Trump won the US election to become the next president, and it seems that the Republicans likely won a majority in both chambers of Congress. Trump was slim favourite ahead of the election, so the result was partially priced in already, but there was still a clear market reaction in that bond yields are up by some 10bp, the USD has strengthened around 1% and US stock prices are up by 4-5%. As has been the case for months, the market expects a Trump administration to mean an even more expansionary fiscal policy, higher tariffs (which imply a stronger USD) and deregulation, which could improve corporate earnings.

At its meeting just after the election, the US central bank delivered a 25bp rate cut as expected and did not send any new signals regarding the rate outlook. Part of the increase in bond yields since and just before the election is driven by higher inflation expectations, as the Trump policy agenda is seen as more inflationary. If this continues, it could eventually lead to the Fed becoming more hawkish and signalling that rate cuts could end earlier, but so far, inflation expectations have not become excessively high. Actual inflation was to the high side in September, but that might well look better in the October number that we get on Wednesday, likely the most important data release of the week.

In Europe, bond yields did not follow US yields up. Instead, there was a modest decline in short-term rates, as the result was seen as increasing risks of lower growth in the European economy and hence increasing the probability of ECB rate cuts. As we see it, this risk should not be overstated, at least in the short term. Although European exports to the US could well face higher tariffs from next year, it seems highly unlikely that the tariffs will result in a tightening of US fiscal policy and hence a dampening of global demand and US imports. However, there is in any case increasing concerns over European growth and the risk that inflation could become too low, and we maintain our expectation that the ECB will cut rates by 25bp at every meeting until September, with the possibility that they might chose a 50bp rate cut at the next meeting. One reason is the outlook for fiscal tightening in Europe in 2025. In the coming week, we will get updated forecasts on this and the economy in general from the European Commission.

Further complicating the situation, the German government has collapsed, partly over disagreement about fiscal policy. Markets see an increasing chance that fiscal policy might be eased in the longer term.

The Bank of England delivered a 25bp rate cut this week as expected, but also turned a bit more hawkish as it revised its inflation and growth outlooks substantially higher. Central banks in Norway and Sweden went in opposite directions with a hold in Norway and a 50bp cut in Sweden, see the Scandi Update section.

We did not get the hoped-for concrete numbers for fiscal stimulus in China, other than a statement that it will be "forceful". However, there was an announcement of a CNY 6tn local government debt swap program which should ease the situation for local governments and make them able to support the economy more. All in all, it remains unclear to what extent policies will be able to turn the situation around for Chinese growth.

Full report in PDF.

Markets

This week was amassed with high profile political and monetary event risk potentially providing one (or more) gamechangers for global trading. A congestion of central bank decisions including the Fed, the Bank of England and a long list of smaller central banks, were supposed to give some guidance on where they position themselves on the path of policy easing. The Banco of Brazil (a trendsetter) already switched sides raising the interest rate further. However the monetary policy setup, this time evidently was overshadowed by the outcome of the US Presidential and Congress elections. Especially if one had known the outcome in advance, one probably would have predicted a landslide on global markets. On top of that an (un?)expected break-up of the German government coalition also foreshadowed a regime change. Let’s overlook the market outcome of this historic week (compared last Friday’s close). Admittedly, the starting point of such an of exercise has some arbitrary character. Nevertheless this the result.

The biggest reaction occurred on (US) equity markets. US major indices added about 4.0% to 5.5% to touch record levels on an expected growth-friendly policy of the Trump administration. European equities (Eurostoxx50) over the same period lost about 1.25%. Moves in yields were far less spectacular and maybe in the end a bit contra-intuitive compared to the high profile (political) story. US yields declined between 4 bps (2-y) and 10 bps (10-y). Admittedly, this outcome masks a sharp rise annex correction in two session after the US elections. Even so, it remains striking that what is seen as a potential aggressive shift to a reflationary US policy (both in terms of growth and inflation) only yields this modest result. Maybe markets took a bit of a similar attitude as did the Fed yesterday. Powell and Co when cutted interest rates (25 bps ), indicated that they saw little impact from the election outcome short-term. No concrete measures are yet available and they will be executed in a very complex and unpredictable context. In this respect, political event risk probably still is more ahead of us than behind us. German yields moved between 4.0 bps (2-y) and +0.4 bps (30-y). For now, markets don’t draw firm conclusions from budget orthodox German Fin Min Lindner being fired by Chancellor Scholz, potentially opening the way for a more stimulative fiscal policy, too. EMU interest rate markets in a first reaction to the US election outcome even positioned from more ECB easing to counterbalance the impact of US trade tariffs on EMU growth. Maybe, fiscal policy also has a bigger role to play than markets currently contemplate. Again, (positive) budgetary event risk might still be ahead of us. In the UK, the BOE acknowledged the reflationary impact of the Labour budget, but it didn’t derail the process of cautious removal of policy restriction yet. Finally, FX markets also didn’t draw any unequivocal conclusion. The dollar initially followed the spike higher in US yields, but in a weekly perspective gains are modest (DXY +0.5%, EUR/USD -0.75%). If EMU fiscal policy also turns more growth-friendly, the euro over time might also be (a bit) less vulnerable in the Trump era than markets feared up until now.

News & Views

Czech National Bank governor Michl said that monetary policy must stay restrictive: “the policy mix for the future should be, firstly, keeping interest rates higher than before Covid for the next 10 years and secondly, which is also important, governments must balance their budgets. Because if they don’t do it, there could be the risk of a second wave of inflation.” Core inflation should remain “slightly below” the central bank’s 2% target, Michl said. After yesterday’s 25 bps rate cut, the CNB is discussing when to bring rate cuts to halt, since that (core CPI) goal hasn’t been met, the central bank chief added. He declined to provide a timeframe for a potential policy shift. The Czech koruna extends gains after yesterday’s hawkish cut with EUR/CZK currently changing hands at 25.20 after testing the 25.40 resistance area earlier this week.

Canadian payrolls showed 14.5 net job growth in October, coming in below 27.2k consensus. Details however showed that net lay-offs in part-time jobs (-11.2k) pulled the full time employment change number (+25.6k) down. The unemployment rate stabilized at 6.5%, but the participation rate ticked down from 64.9% to 64.8%. That’s the fourth consecutive decline and the lowest since December 1997 (excluding the Covid-years 2020 & 2021). Total hours worked rose 0.3% M/M and 1.6% Y/Y. Average hourly wages among employees increased 4.9% Y/Y in October, following growth of 4.6% in September. The Canadian dollar didn’t respond to the labour market data. USD/CAD is trading at 1.3912, staying close to YTD resistance levels around 1.3950.

The Canadian labour market gained 14.5k positions in October, with full-time employment up 25.6k and part-time employment down 11.2k.

The unemployment rate was unchanged at 6.5% and the participation rate declined 0.1 percentage point to 64.8%.

Employment by sector showed gains in business, building and other support services (+29k), while losses were seen in finance, insurance, real estate, rental and leasing (-13k) and public administration (-8.7k).

Lastly, total hours worked jumped 0.3% month-on-month, while wages were up 4.9% year-on-year (from 4.6% in September).

Key Implications

Another solid jobs report in October. Job gains were concentrated in full-time positions, with the cyclically sensitive private sector pulling the weight. Employees were working more hours and saw wage growth increase. Not to mention, we are seeing employment for youth starting to bounce back. All told, this report speaks of a labour market that continues to exude decent strength.

To cut by 50 bps or 25 bps? That's the question for the Bank of Canada. It recently accelerated the pace of rate cuts, with inflation stabilizing around the 2% target. Yet the labour market hasn't been forcing the BoC's hand. Today's report should encourage the bank to revert back to a 25 bp cut in December (our call), even if it means eating some crow on its one off 50 bp move previously. That said, if it is dead-set on getting its policy rate back into its neutral range (2.25% to 3.25%) by year-end, a 50 bp move would be the choice. Investors are uncertain which way the BoC will go, and given recent rhetoric from the central bank, it too doesn't seems to know which way it will go either.

Daily Pivots: (S1) 0.8698; (P) 0.8736; (R1) 0.8762; More…

Intraday bias in USD/CHF remains neutral fro consolidations below 0.9773 temporary top. Further rally is still expected as long as 0.8614 support holds. Above 0.8773 will resume the rise from 0.8374 for 61.8% retracement of 0.9223 to 0.8374 at 0.8899 next.

In the bigger picture, price actions from 0.8332 (2023 low) are currently seen as a medium term corrective pattern. Rise from 0.8374 is seen as the third leg. Overall outlook will continue to stay bearish as long as 0.9223 resistance holds. Break of 0.8332 low is in favor at a later stage when the consolidation completes.

Daily Pivots: (S1) 152.16; (P) 153.44; (R1) 154.17; More...

Intraday bias in USD/JPY remains neutral and more consolidations could be seen below 154.70. But further rally is expected as long as 151.27 support holds. On the upside, break of 154.70 will resume the rally from 139.57 towards 161.94 high.

In the bigger picture, price actions from 161.94 are seen as a corrective pattern to rise from 102.58 (2021 low). The range of medium term consolidation should be set between 38.2% retracement of 102.58 to 161.94 at 139.26 and 161.94. Nevertheless, sustained break of 139.26 would open up deeper medium term decline to 61.8% retracement at 125.25.