The Weekly Bottom Line

HIGHLIGHTS OF THE WEEK

United States

• Markets continued to adopt a risk-off bias this week, as investors saw through most of the positive domestic data, and remained fixated on the uncertainty surrounding the highly anticipated results of next week’s presidential election.



• Strong data out of the U.S. continued to support our view of a strengthening domestic economy. The employment report was the highlight, with payrolls up by 161k in October, following an upwardly revised gain of 191k in September, while the jobless rate ticked down just below 5%.



• At this point, the American economic dataflow appears to be supportive of a December rate hike. Nonetheless, a lot can change in a few weeks, with next Tuesday’s election result and the impact it has on financial markets/stability remaining top of mind.

Canada

• Canadian financial markets were buffeted this week by rising uncertainty around the outcome of the U.S. election next week. Falling oil prices worsened the blow, as doubts about OPEC production cuts and a major build in U.S. inventories led to a 10% decline in the benchmark WTI price, bringing it to a five-week low of $45.



• The Federal Government’s Fall Fiscal Update contained lower projections for economic growth and larger budget deficits than in the spring budget. Infrastructure spending remained the focus with the announcement of a Canadian Infrastructure Bank and spending plans carried well into the next decade.



• Policy makers received some good news on the economic front with the release of monthly GDP data for August, which showed a 0.2% increase and marked the third straight month of positive growth.

As Election Day looms just around the corner uncertainty about the outcome appeared to overshadow even the top tier economic data which was unable to jolt investors back into more risky assets. Polling continued to show Trump gaining ground on Clinton with markets trading largely with a riskoff bias. Indeed, the S&P500 sold off, ending four out of the five trading sessions lower, and logging the longest losing streak since the 2008 financial crisis by the end of Thursday, while the safest of government bonds remained in demand.

Overall, the domestic data remained upbeat, confirming that the narrative of a strengthening domestic economy is still holding firm. The good news started with personal income and spending figures for September, with both measures posting solid gains of 0.3% m/m and 0.5% m/m, respectively. The latter was particularly encouraging as far as future spending is concerned, after disappointing consumer expenditure figures in last week’s GDP report.

This good news continued with the ISM manufacturing index, which ticked up another notch to 51.9 in October, providing further reassurance that industry sentiment was indeed turning the corner following its move out of contractionary territory in the prior month. The nonmanufacturing index backtracked somewhat, falling 2.3 points from the prior month, but remained at a still healthy 54.8 print (see Chart 1). The pullback was expected following a surge seen in the September print, with the subcomponents that led the declines in October experiencing large gains in the prior month.

Still, investor sentiment remained lukewarm during the week amidst heightened election uncertainty. Markets were similarly unmoved by this week’s FOMC decision, where the Fed left its policy rate unchanged. Despite standing pat, the Committee judged that that the case for a rate hike “has continued to strengthen”, and cited that only “some” further evidence of continuing progress is necessary at this point.

The highlight of the weekly economic data calendar came on Friday with October’s employment report taking center stage on Friday morning. The report delivered, providing further evidence of continuing progress. Payrolls added 161k new jobs on the month, just below expectations, but a headline made better by a solid upward revision to September’s gain, now reported as 191k (see Chart 2) versus the 157k previously published. Moreover, the October figure remains well above the pace required to eat up the remaining slack in the labor market, with the jobless rate ticking down to 4.9% The healthier labour market is manifesting in higher average hourly earnings, which were up by a robust 0.4% during the month, taking the annual wage inflation to 2.8% – more than a seven year high and consistent with the expectations we highlighted in our recent paper here. The healing labor market and rising wage pressures should support the Fed’s decision to gradually continue its hiking cycle when FOMC meets again in just over a month.

At this point, the likelihood of a hike before year-end is almost certain in our view, with markets now pricing the odds at 80%. But the future is far from certain, with the election uncertainty posing the largest potential risk for the U.S. economy at this point. Still, should this risk fail to materialize, and financial markets remain calm in the coming weeks, the Fed looks all but certain to continue on its glacial hiking cycle come December 14th.

Canadian financial markets were buffeted this week by rising uncertainty around the outcome of the U.S. election next week. Falling oil prices worsened the blow, as doubts about OPEC production cuts and a major build in U.S. inventories led to a 10% decline in the benchmark WTI price, bringing it to a five-week low of $45. Equities took it on the chin, with the TSX ending the week down 1.6% (as of writing), while the 10-year yield edged down 5 basis points.

The big event of the week in Canada was the Federal Government’s Fall Economic Statement. The struggling Canadian economy was front and centre in the document, reflected in lower than expected revenue growth, downgraded economic growth assumptions, and a focus on measures aimed at stimulating growth.

The deficit for this year, while technically smaller than the government’s previous projection in headline terms ($25.1 billion from $29.4 billion previously), was only so due to the elimination of a $6 billion “forecast adjustment” used as a buffer against slower-than-expected economic growth. Deficits were larger further out in the budget projections, with lower economic and revenue projections more than offsetting the now-eliminated contingency fund. The upside of slower growth (at least from a government financing point of view) is lower bond yields. Lower forecasts for current and future interest rates have brought down the outlook for government’s debt service costs by a total of $5 billion by fiscal 2020-21.

In terms of new initiatives, the focus, as expected, was on infrastructure. The statement included over $80 billion in new spending initiatives over 12 years, but most are planned to take place outside of the five-year budget time frame. The biggest item was the announcement of a Canada Infrastructure Bank, with an initial injection of $35 billion in public funds. The Bank will use this investment to encourage private sector funding with a goal of attracting four private-sector dollars for every one dollar of public funds.

In terms of economic growth, policy makers received some good news this week with the release of monthly GDP data for August, which showed a 0.2% increase and marked the third straight month of positive growth. Given the economy’s wobbles, this is an encouraging trend. With the gain in August, the third quarter on track to grow above 3.0%. From 1.2% in 2016, economic growth should improve further in 2017 to 1.8%. Incidentally this is still shy of the economic assumptions contained in the Fall Statement, implying that downside risks to the government’s fiscal plan may continue to linger.

The other good news on the economic front is that the Canadian economy continues to generate jobs at a fairly decent clip. This trend continued in October with an estimated 43.9k jobs created in October. Notwithstanding the regular monthly volatility, this left the year-on-year change in jobs at 0.8%, still an improvement from earlier in the year.

All told, the events this week leave the broad narrative of ongoing, but slow progress in place. With this backdrop, the Bank of Canada is likely to remain on the sidelines for the indefinite future.

The Weekly Bottom Line