AGF Weekly Perspectives – October 30th Update

Author: Portfolio Specialist Group

October 30, 2017

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

Weekly Market Review

Bank of Canada returns to dovish stance

  • The Bank of Canada (BoC) kept rates unchanged, holding the overnight rate at 1.0%. Accompanying comments, however, were considerably more cautious than prior meetings as sensitivity to higher rates, ongoing NAFTA negotiations and recently introduced OSFI mortgage rule changes all pose downside risk.
  • Coming off talks of an additional hike before year-end, the BoC instead said future decisions will be “guided by incoming data to assess the sensitivity of the economy to interest rates”. The faded urgency to raise rates, combined with a worsening outlook for protectionist trade policies, has weighed negatively on the Canadian dollar, down nearly 6% since mid-September.
  • On the economic front, the BoC revealed an improved outlook with GDP growth on pace for 3.1% in 2017, much improved from the initial estimates of 2.0%. 2018 was increased slightly to 2.1%, though expectations for 2019 were trimmed to 1.5%.

ECB extends asset purchases, reduces amount

  • The European Central Bank (ECB) announced it will extend its quantitative easing measures for an additional nine months, now pushed to September 2018, though the amount of bond purchases will be cut in half to €30 billion per month beginning in January from the current €60 billion.
  • The ECB stressed the reduction should be viewed as “downsizing” as opposed to outright tapering and assured they are prepared to increase asset purchases in terms of size and/or duration should the outlook become less favourable.
  • As universally expected, interest rates were left unchanged and will hold at current levels for “an extended period of time, and well past the horizon of net asset purchases”.

U.S. GDP charges forward

  • The U.S. economy rose a faster-than-expected 3.0% in the third quarter despite enduring two major hurricanes, hardly stalling after 2.9% growth in the prior quarter.
  • Residential and commercial construction declined, as expected, but was more than offset by a stronger quarter in business spending. Consumption was the largest contributor, adding 1.6% to the headline number, followed by a strong quarter in inventories, adding 0.7%. Net exports and fixed investments were also additive, contributing 0.4% and 0.3%, respectively, in Q3.
  • GDP growth for 2017 as a whole is on pace for 2.1% and provides even more reason for a December U.S. Federal Reserve rate hike, with market odds now greater than 80%.

Other economic news

  • S. new home sales surged 18.9% in September, posting the largest monthly advance since 1992. Every region advanced, including the South overcoming hurricane-related disruptions, which is welcome news to a slumping housing market. Year over year, median new home prices increased 4.0%. Also reported, U.S. durable goods orders rose 2.2% in September, more than double expectations. Much of the gain was due to transportation orders, with nondefense aircraft and parts spiking 31.5%. Excluding transportation, orders were still up a solid 0.7%.
  • The eurozone continues to lead global manufacturing activity with the PMI improving 0.5 points to 58.6 in October, a six-year high. The Markit U.S. Manufacturing PMI rose a strong 1.4 points to 54.5, regaining levels last reached in January. In Japan, the manufacturing PMI slipped to 52.4, though still marks 14 consecutive months of expansion.

What’s to come

Canadian and U.S. employment, Bank of England meets

  • A busy week ahead is highlighted by central bank meetings at the U.S. Fed, where it is likely they will defer policy decisions to December, and the Bank of England, widely expected to implement a 25 basis points hike. The eurozone will update employment data, inflation and Q3 GDP on Tuesday, ahead of both the U.S. and Canada reporting employment data on Friday.

Download the Summary for additional market data.

Written by

Portfolio Specialist Group

AGF Investments Inc.

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