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Wealth Management Consultant, Capital Core Financial
Weekly Market Snapshot - June 15th, 2018
The week saw relatively mild moves for equity markets as volatility in bond yields continues to dominate, not surprising given the plethora of central bank policy announcements. Intra-week, US and Canadian 10-year bond yields hit their highest levels in more than three weeks. The US 10-YR briefly moved above 3%, only to end the week down sharply, sunk by dovish European and Japanese central banks and trade war fears. Currencies saw major moves and account for a good deal of the equity market divergence. With the US dollar strengthening, US equities were laggards and export-driven Europe, Japanese and Canadian bourses outperformed.
The Canadian dollar was hit by fallout from the acrimonious G7 (G6+1?) meeting and widening Canada-US interest rate differentials thanks to the Fed hike. Given the current state of affairs in the Canada-US trade spat, the US following through on $50 billion worth of tariffs on China (and China responding in-kind) certainly didn’t improve sentiment toward the loonie. The S&P/TSX popped back into positive territory for the year and sits less-than 1% from a new all-time high. The weaker loonie feeds into stronger earnings growth for a Canadian index replete with companies that derive substantial amounts of foreign earnings revenue. Energy was a weak spot, despite a gain for crude oil prices, as the looming “OPEC and Partners” production quota meeting brings uncertainty. Materials were also weak as the stronger US dollar sank commodity prices.
On top of the unanimous vote to increase rates by 0.25%, the US Federal Reserve provided a more hawkish tone in their statement and press conference. The Summary of Economic Projections (or “dot-plot”) now forecasts a total of four rate increases for 2018 (two more to come), and three 0.25% increases for 2019. Additionally, the Fed announced that, starting in 2019, every policy meeting will come with a press conference, instead of one every other meeting. This allows the Fed greater flexibility to raise rates when they wish, rather than waiting for the next meeting with a ‘presser’. We don’t read anything into this development in terms of the amount of rate increases to be expected, and see the Fed’s move and guidance as very appropriate given the data. Notably, with the mid-point of the Fed funds target range now at 1.875% and the Fed’s preferred measure of inflation (core PCE) at 1.8% y/y, the real Fed funds rate now sits a smidge (7.5 bps) into positive territory, marking the end of a decade-long era of negative real policy rates. This is by no means what we would describe as “tight” monetary policy. Prior to the financial crisis, the real Fed funds rate rose over 3% - a level we don’t expect to see this time. Our expectations sit around the 1.5% level.
Chart of the week: US consumers spend, but watch out: Real wage growth just went flat
After a soft patch in Q1, US retail sales are rebounding sharply, lifting the 12-month moving average to its highest level in six years. However, the retail sales number is not adjusted for inflation, so a chunk of the gain lies at the feet of higher prices (confirmed by recent inflation data). The Federal Reserve cares about nominal growth, and the retail sales and inflation data supports their hawkish tone. Capital markets also look at real (inflation adjusted) rates of growth. The strength of the US consumer on a real basis is actually softening. May’s y/y reading on real wage growth came in at 0%, the worst reading in 14-months, and part of a declining trend since 2015. The bottom line is US growth is robust, but inflation is becoming a more important part of the story.
The week in review
- Canadian debt-to-disposable income (Q1) fell 1.7% to 168.0% after hitting a record high last year.
- The US Federal Reserve raised policy rates by 25 bps as expected; the target range sits at 1.75% to 2.00%.
- The European Central Bank (ECB) left interest rates unchanged, but announced the asset purchase program will taper after September from €30 billion to €15 billion before ending at year-end. The ECB also pledged not to increase interest rates before the summer of 2019.
- The Bank of Japan left monetary policy unchanged and downgraded its assessment of inflation.
- US consumer prices (May) rose 0.2% m/m. Headline CPI increased 2.8% y/y, while core CPI rose to 2.2% y/y - all as expected.
- US retail sales (May) jumped 0.8% m/m (versus +0.4% expected).
- US NFIB Small Business Optimism Index (May) increased to 107.8 (versus 105.0 expected), up from 104.8. University of Michigan consumer sentiment (June) increased 1.3 to 99.3 (versus 98.5 expected).
- US industrial production (May) fell 0.1% m/m (versus +0.2% expected).
- China’s consumer prices (May) were steady at 1.8% y/y.
- China retail sales (May) slowed to 8.5% y/y; industrial output slowed to 6.8% y/y; fixed-asset investment slowed to 6.1% y/y.
The week ahead
- Canadian inflation and retail sales data
- US housing data and current account deficit
- Preliminary PMI readings globally for June
- Bank of England policy meeting
- OPEC meeting
Your Wealth Management Resources Team at Capital Core Financial
Clarke Haynes, FPSC Level 1®, BBA, CIM®, EPC®, RRC®
Wealth Management Consultant, Capital Core Financial