AGF Weekly Perspectives – December 18th Update

Author: Portfolio Specialist Group

December 18, 2017

“A recap of last week’s top economic news and what’s to come”

Weekly Market Review

Fed raises rates as expected

  • As universally expected, the U.S. Federal Reserve (Fed) raised policy rates by 25 basis points, noting an improving labour market and strengthening economic growth. This marks the third such hike this year and fifth of the current cycle.
  • Perhaps more noteworthy, GDP growth projections were revised upward to 2.5% in both 2017 and 2018 from 2.4% and 2.1%, respectively. Inflation projections were unchanged and are expected to remain below the Fed’s 2% target rate until 2019.
  • The latest dot plots reaffirmed the Fed’s plans for three additional hikes in 2018 and between two and three in 2019.

No changes from the ECB

  • The European Central Bank (ECB) made no changes to interest rates or asset purchases, stating interest rates will stay put “for an extended period of time and well past the horizon of the net asset purchases”.
  • Positively, GDP growth forecasts were raised due to “significant improvements” in global factors, with expected economic growth of 2.3% in 2018 and 1.9% in 2019. The ECB’s inflation forecast for 2018 improved slightly to 1.4%, from 1.2%, though remains well below the central bank’s target.
  • President Mario Draghi maintained a moderately dovish tone despite the revisions, reiterating the ECB stands ready to increase asset purchases if the outlook becomes less favourable.

Bank of England holds despite positive data

  • The Bank of England unanimously held rates unchanged in December, citing uncertainty related to Brexit negotiations and reaction to last month’s hike still “mixed and relatively limited”.
  • Economic data in the U.K. continues to be supportive, however, with inflation reaching near six-year highs of 3.1% in November, up from 3.0%. Airfares produced the largest upward pressure to prices in addition to depreciation of the pound as a result of Brexit, which has increased import costs. Core inflation levels remained at 2.7% for the fourth straight month.
  • Unemployment in the U.K. remained at 4.3% in October. Importantly, wage growth improved only 2.3%, which is below inflation levels, causing concern for policy makers.

Other economic news

  • U.S. inflation rose 0.4% in November to 2.2% on a year-over-year basis. Higher prices were reported in several sectors, led by energy, transportation and utilities. Core inflation rose only 0.1%, the slowest increase in four months, which caused the annualized rate to fall to 1.7%. Also reported, U.S. retail sales surged 8% in November, doubling expectations with help from record Cyber Monday sales, post-hurricane spending and a strong start to the holiday shopping season. Retail sales are 5.2% higher from a year ago, the fastest pace since 2012.
  • The eurozone continues to lead global manufacturing activity, buoyed by industrial production unexpectedly rising 0.2% in October to 3.7% annualized. In Japan, industrial output rebounded 0.5% in the month to 5.9%, while China reported a slight pullback for November, though still a strong 6.1% annual pace. The U.S. missed estimates in November with only a 0.2% gain, though much of the contraction was centred in the utilities sector, detracting 1.9%.

What’s to come

Canadian GDP and inflation

  • Canadian GDP, reported Friday, is expected to grow modestly for the month of October. Inflation and retail sales data are also scheduled to be released during the week. November’s update on U.S. housing will also be made available, with housing starts, existing home sales and new home sales all reported.

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Written by

Portfolio Specialist Group

AGF Investments Inc.

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