AGF Weekly Perspectives – January 15th Update

Author: Portfolio Specialist Group

January 15, 2018

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

Weekly Market Review

U.S. headline inflation slips while core prices rise

  • U.S. inflation moderated to 2.1% year over year after prices rose only 0.1% in December. Higher costs for prescription drugs, vehicles and housing lifted inflation levels.
  • Importantly, core inflation rose to an annualized pace of 1.8% after recording its largest monthly advance since January 2017, as core prices rose 0.3% in December.
  • The move higher in core prices is supportive of further restrictive monetary policy, with the market pricing in an 88% chance of a March rate hike following the CPI print, compared to an 82% chance the day before. The market is not pricing in any chance of a rate hike for January.

Canadian housing pauses

  • Canadian housing starts decelerated to 217,000 annualized starts in December, though medium- and longer-term trends remain healthy. Regionally, Ontario suffered the largest setback, while Alberta and PEI also recorded notable weakness during the month.
  • December’s disappointing results did not disrupt activity, as 2017 recorded the largest number of housing starts in a decade, up 11% from the prior year, backed by underlying demographic support and strengthening labour markets.
  • Building permits also fell a worse-than-expected 7.7% in November. Fewer plans for commercial and industrial buildings more than offset an increase in single-family home permits.

Eurozone employment and retail sales strengthen

  • Eurozone unemployment fell to 8.7% in November, matching 2009 lows. Labour conditions across the region pose a challenge for the European Central Bank in its move towards policy normalization, however.
  • Germany continues to drive growth with unemployment at 3.6% levels, while other member nations struggle, with Greece reporting unemployment over 20% and Spain over 15%.
  • Also reported, eurozone retail sales advanced 1.5% in November, the strongest month in over a year. The sharp increase improved retail sales to a 2.8% annualized pace.

Other economic news

  • U.S. retail sales rose for the fourth consecutive month as activity advanced 0.4% in December, closing out the busiest holiday shopping season for retailers since 2014 and second busiest in the past decade. The strong finish to the year resulted in core sales spiking 8.9% in the fourth quarter, the largest quarterly advance in the post-recession era. On a calendar year basis, U.S. retail sales rose 4.2% in 2017, as compared to 3.2% growth in 2016.
  • Eurozone industrial production rose 1.0% in November, improving year-over-year growth to 3.2%. Capital goods production led activity, more than offsetting declines in energy production and non-durable goods.

What’s to come

Bank of Canada’s rate decision

  • The Bank of Canada will decide if current conditions warrant higher interest rates on Wednesday. Despite the conflicting environment of strong economic data and trade uncertainty, markets are almost fully pricing in a 25 basis point hike. Elsewhere, the U.S. reports housing data on Thursday and the eurozone is scheduled to update inflation levels on Wednesday.

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The contents are provided for informational and educational purposes, and are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting or tax. Please consult with your own professional advisor on your particular circumstances.

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