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Market Monitor

Economic trends and topics to help you.

Staying current with global economic news and market updates is a full-time job – and then some. To help, we've partnered with Credential Financial Inc. to provide their expert research commentary every month, capturing the highlights of what's important to investors as they track events in Canadian, U.S., European, Latin American and Asian markets.

For the month ending January 31st, 2017

Special Report: The First Eleven Days

Less than two weeks into his presidency, Donald J. Trump has begun delivering on his campaign promises at a rapid pace. Shortly after assuming control of the world’s largest economy, Trump signed a series of executive orders with far-reaching impacts. Here is a summary of the key events:

  • Jan 20: Trump signs his first executive order, repealing the Affordable Care Act, or Obamacare.
  • Jan 23: Trump formally withdraws the U.S. from the Trans-Pacific Partnership (TPP), a proposal seven years in the making.
  • Jan 24: The Keystone XL project is restarted after having been halted by the Obama Administration, allowing the possibility of Albertan crude to be shipped to oil hubs in the U.S. and refineries in the Gulf of Mexico.
  • Jan 25: Trump signs an executive order to begin construction of a wall along the U.S.’s southern border. Trump reiterates that he intends for costs to be paid by Mexico, likely through a tax on Mexican imports. A second order is signed reinstating the Secure Communities Program, allowing increased scrutiny of illegal immigrants.
  • Jan 26: In protest to the proposed wall, Mexican President Peña Nieto abruptly cancels a scheduled January 31 meeting with Trump.
  • Jan 27: British Prime Minister Theresa May is the first foreign leader to meet with Trump, discussing stronger ties and Russian sanctions. An executive order is signed on this day banning refugees and people from entering the U.S. from seven designated countries, all of predominantly Muslim faith.
  • Jan 30: As protests to the travel ban continue across the U.S. and around the globe, Trump fires acting Attorney General Sally Yates, who defied the order by instructing Justice Department lawyers to not defend the ban.
  • Jan 31: Trump nominates Neil Gorsuch to the U.S. Supreme Court.

With every signed order, press conference, and tweet, markets have reacted positively to pro-business news, but retreated when headlines threatened economic growth and job creation. So far, markets have embraced the new changes with the benchmark S&P 500 and Dow Jones Industrial Average up 6.5% and 8.3%, respectively, from Election Day to the end of January, while the S&P/TSX Composite has rose 5% for the same period.

As the new Administration continues to settle in, uncertainty in the geopolitical landscape is expected to continue, and with it, market volatility. Trade agreements such as the TPP and the looming NAFTA renegotiation will have direct impacts on Canada’s economy and the manufacturing sector, which continues to struggle. The Keystone XL project is expected to have a positive impact on the Canadian economy, since oil is one of our main exports. The changing health of the economy and the on-going market volatility will translate to fluctuations in the Loonie. The Bank of Canada prefers a dollar weaker than its current levels, as it should stimulate global demand for our products and jumpstart Canada’s factories.

Canadian Economy and Markets

GDP up. The Canadian economy expanded by 0.4% in November on the backs of increased construction, manufacturing, and oil & gas production, which was a turnaround from October’s decline of 0.3%. The energy sector had the largest monthly jump rising 3.7% as the price of crude held range-bound during the month.

No changes in rates. At the first meeting this year, the Bank of Canada held its benchmark interest rate at 0.5% as many had expected. The central bank also provided an updated economic outlook, forecasting a 2.1% growth in GDP in 2017 and in 2018. However, the Bank cautioned that U.S. President Trump’s policy changes may have negative effects on the economy, requiring continued accommodative measures.

Inflation lower. Declines in food prices for the third consecutive month sent December CPI lower by 0.2%, as compared to November. Gasoline and electrify costs rose but were not enough to keep inflation out of the red for the month. The weak number was likely a key factor in the Bank of Canada’s decision to leave its key rate unchanged. On an annual basis, inflation was 1.5%, slower than the 1.7% expected by economists.

Unemployment rate edges up. A surge in full-time employment helped the economy add 54,000 jobs in December. However, this was not enough to offset the increased number of individuals looking for work as the national unemployment rate rose 0.1% to 6.9%. The participation rate also rose to 65.8% of people eligible to work. For 2016, the 214,000 jobs added represent an annual growth rate of 1.2%.

PPI higher. The producer price index for December matched the previous month’s gains, largely due to a rise in energy and petroleum prices. For the month, PPI rose by 0.4%, with increases seen in seven of the 21 sectors tracked, while six were unchanged. The reading was slower than the 0.6% forecasted by analysts.

Wholesale sales higher. For the second month in a row, wholesale sales in November increased but were just shy of economist expectations. As reported by StatsCan, wholesale sales rose 0.2% to $56.9B, shy of the 0.5% anticipated and notably slower than the 1.3% in the previous month. Of the seven sectors tracked, four declined - with the miscellaneous sectors posting the largest gain. In volume terms, sales declined 0.1%.

Manufacturing sales higher. Canada’s manufacturing sector saw a bounce in November as sales rose 1.5%, beating expectations of a 1% gain, to $51.8B. Of the 21 industries tracked, 14 gained, led primary by metals, petroleum and coal, and chemical sectors. The transportation sector lagged, falling 2.3% on lower demand for aviation parts and products.

Manufacturing activity higher. The manufacturing sector remained busy in December on new orders, hitting a two-year high on increased demand in cars and energy. For the month, RBC’s Manufacturing PMI index rose to 51.8, indicating continued expansion from the previous month’s 51.5 reading.

Trade surplus for economy. After posting monthly trade deficits for over two years, the economy had a trade surplus of $526M in November, surprising analyst forecasts of another deficit. Exports rose 4.3%, contributing to the month’s data on rising metal and mineral product demand and increased shipments to non-U.S. countries.

Retail sales gain. Consumer spending fell short of predictions as November retail sales gained 0.2% to a seasonally adjusted $45.2B, though in volume, sales were higher by 0.7%. Statistics Canada forecasted a 0.5% gain in receipts as only five of the 11 sectors tracked rose, led by auto sales’ 1.9% rise. Annually, sales are higher by 3%, as compared to 4% in October.

Canada Housing News:

  • Housing starts increase. The pace of home ground-breakings rose in December with annual increases seen across Canada except for B.C. and the Maritimes. For the month, the annual rate of urban starts rose 11.8% to 207,041 units. Multiple unit dwellings led the way by increasing 13.9%, while single detached homes rose 8.1%
  • Building permits drop. The number of applications to build dipped in December as activity in Alberta fell the month after a change in provincial building codes. With a forecast of a 5% decline, actual data reported a 0.1% drop. An increase in residential permits helped, but was not enough to offset a decline in non-residential structures.
  • New homes prices rise. Continued strength in Ontario bumped up new home prices by 0.2% in November, as measured by Statistics Canada’s New Housing Price Index. Expectations called for a 0.3% gain as ten of the 21 markets tracked for the Index were higher. The once-hot Vancouver market saw prices fall 0.3%, its first decline since January 2015.
  • Existing home prices higher. Teranet-National Bank’s Composite House Price index rose higher in December by 0.3% driven by Toronto and Victoria, which both had a monthly gain of 1.2%. Annualized, existing home prices have risen 12.3%, the largest increase over a one year period since 2010. Vancouver was one of the four markets that fell with prices falling 0.8%, its third consecutive retreat.
U.S. Economy & Markets

Nasdaq shines. U.S. stock markets remained positive in the new year. Nasdaq was the biggest gainer among the three major indices. The broad-based S&P 500 index gained 1.8% for the month of January, closing at 2,279. The Dow Jones Industrial Average made history this month by breaking through the 20,000-level for the first time, but retreated slightly near the end of the month. At the end, Dow Jones posted a 0.5% return, closing the first month of 2017 at 19,864. Nasdaq gained the most among the three, up 4.3%, wrapping up the month at 5,615.

U.S. GDP growth declines. U.S. economic growth slowed down in the fourth quarter. The Commerce Department reported that GDP growth decelerated to an annualized pace of 1.9% in the final quarter of 2016. Economists were expecting an annualized pace of 2.2%. For the year, GDP grew 1.6%, the slowest growth since 2011 and down from 2015's 2.6% growth. A strong dollar and the uncertainties around the election in 2016 were believed to drag on economic growth.

Yellen speaks. Federal Reserve Chair Janet Yellen spoke at a public event, indicating that the outlook on interest rates movement remained steady despite the new Trump administration’s focus on spurring domestic growth. Yellen said, “Economic growth more broadly seems unlikely to pick up markedly in the near term given the ongoing restraint from weak foreign demand.” However, she also mentioned that the Fed does not want to wait too long to raise rates and let inflation get out of control. In its last meeting, the FOMC projected three rate hikes in 2017.

U.S. CPI rises. Consumer prices continued to increase in the U.S. The Labor Department reported that its consumer price index (CPI) moved up 0.3% in December after rising 0.2% in November. In the twelve months through December, the CPI advanced 2.1%, the largest year-over-year gain since June 2014. Both increases were in line with economists’ expectations. The core CPI, which strips out food and energy prices, increased by 0.2% in December; year-over-year, it was up 2.2%.

U.S. economy creates 156,000 jobs. Despite missing expectations, the U.S. Labor market continued to be robust. The Labor Department reported that the U .S. economy pumped out 156,000 new jobs in December, lower than economists’ forecast for an increase of 175,000. The unemployment rate moved up slightly from 4.6% to 4.7%.

U.S. PPI rises. Producer prices rose in December thanks to a surge in gas prices. The Labor Department reported that the producer price index (PPI) rose 0.3% in December, matching economists’ expectations. Wholesale gas prices rose 7.8% in December. In 2016, PPI rose 1.6%, the largest 12-month gain since September 2014.

U.S. ISM service index unchanged. The U.S. service sector continued to grow at a solid pace, according to the Institute of Supply Management (ISM) service sector index. The ISM reported that its service sector index remained unchanged at 57.2 in December, higher than economists’ estimated decline to 56.5.

U.S. wholesale inventories rise. The Commerce Department reported that wholesale inventories increased by 1% in November after slipping 0.1% in October. Economists were expecting an increase of 0.9%. It was the biggest jump since November 2014.

U.S. ‘flash’ PMI jumps. Research group Markit reported that its ‘flash’ service purchasing managers’ index (PMI) rose to 55.1 in January, up from December’s reading of 53.9. It was the highest reading since November 2015. It was also better than economists’ forecast of 54.4. The manufacturing PMI rose more than expected in January as statistic firm Markit reported that its ‘flash’ manufacturing purchasing managers’ index (PMI) moved up to 55.1 in January from December’s final reading of 54.3.

U.S. factory activity accelerates. Factory activity rose to a two-year high in the U.S. according to the ISM manufacturing index. The ISM reported that the manufacturing index climbed to 54.7 in December, the highest reading since December 2014. Economists’ consensus was for a rise to 53.6. It is believed that a rebound in oil prices contributed to the increase as oil companies resumed their spending on equipment.

U.S. retail sales rise. The Commerce Department reported that retail sales moved up 0.6% in December, after a 0.2% increase reported in November. Economists were expecting an increase of 0.7%. Auto sales led the way with a jump of 2.4% in December.

U.S. consumer sentiment falls. After reaching its highest level since 2004 in December, consumer sentiment pulled back slightly in January according to University of Michigan. The university’s consumer sentiment index edged down to 98.1 in its January’s preliminary reading, falling slightly from December’s reading of 98.2. Economists were expecting the reading to rise to 98.5.

U.S. Housing News:

  • U.S. housing starts rebound. The Commerce Department reported that housing starts increased by 11.3% to a seasonally adjusted annual rate of 1.23M units after sliding in November. Economists were expecting starts to increase to a 1.20M-unit pace. Monthly changes in housing starts had been volatile in recent months. On a separate report, building permits were reported to fall slightly to 1.210M from November’s 1.212M, below economists’ expectation of 1.225M.
  • U.S. new home sales drop. New home sales tumbled in December. The Commerce Department reported that new home sales decreased 10.4% from November to a seasonally adjusted annual pace of 536,000 units. It was the slowest sales pace since February 2016. Economists were only expecting sales to decline by 1.5%. For the year, 563,000 new homes were sold, an increase of 12.2% from a year earlier.
  • U.S. existing home sales drop. Existing home sales fell more than expected in December as inventory dropped to its lowest level since 1999. The National Association of Realtors reported that December’s sales declined 2.8% to a seasonally adjusted annual pace of 5.49M units. Economists were expecting a drop to 5.52M unit pace. Despite the drop in December, home resales increased to 5.45M units for 2016, up from the 5.25M reported for 2015.
  • U.S. pending home sales rise. Pending home sales increased despite a jump in mortgage rates. The National Association of Realtors reported that pending home sales in December rose 1.6% from the previous month, higher than economists’ consensus for an increase of 1%. Borrowing costs soared after Donald Trump was elected President as the market expected inflation to grow under his pro-growth economic strategies.
European Markets

Euro-zone GDP improves in Q4. GDP growth within the Euro-zone rose slightly in the 4th quarter, according to a preliminary estimate by Eurostat. Eurostat reported that the preliminary ‘flash’ GDP grew 0.5% in Q4, slightly higher than the 0.4% growth rate reported in Q3. Year-over-year, GDP grew 1.8% in Q4, slightly higher than the forecast of a 1.7% growth.

Euro-zone inflation rises. Headline inflation within the 19-member bloc jumped in January. The consumer price index (CPI) increased from December’s 1.1% to 1.8% year-over-year in January, higher than economists’ expectation of 1.6%, and the highest rate since February 2013. Core CPI, which excludes energy and unprocessed food prices, remained unchanged at 0.9%, in line with forecast.

Euro-zone unemployment falls. Eurostat reported that the unemployment rate within the 19-member bloc dropped in December, a sign of improvement in the labor market. The number of unemployed dropped by 121,000 compared with November’s fall of 74,000. The unemployment rate declined to 9.6%, the lowest level since May 2009. Divergences remained wide within the zone though as core countries such as Germany had an unemployment rate of 3.9%, while periphery like Greece recorded an jobless rate of 23%.

May speaks about Brexit. Britain’s Prime Minster Theresa May delivered a speech around Brexit. After tumbling to a 31-year low, the British Pound rebounded right after the speech as it provided a certain degree of clarity around the upcoming event. The PM stressed that Brexit will be a clean break from the European Union (EU), and there will be no partial or associate membership. However, she failed to address the key question of how trading relationships with other countries in EU will function moving forward.

Euro-zone ‘flash’ composite PMI drops. Eurozone’s ‘flash’ composite PMI fell in January. The gain in manufacturing was offset by a decline in service activity. Markit’s ‘flash’ composite purchasing managers’ index (PMI) of the Euro-zone dropped slightly to 54.3 in January, down 0.1 from December’s final reading of 54.4. The manufacturing PMI rose from December’s reading of 54.9 to 55.1 while the service PMI dropped from 53.7 to 53.6.

Euro-zone consumer confidence rises. Despite some key elections coming up this year, Euro-zone consumers felt more confident about the economy. The European Commission reported that its consumer confidence indicator rose to -4.9 in January from December’s -5.1, the highest level since April 2015.

Asian Markets

China’s growth on track. The National Bureau of Statistics released China’s GDP data. During the fourth quarter of 2016, the world’s second largest economy grew at 6.8%, up from the 6.7% reported for the last three quarters. For the entire year of 2016, the GDP expanded 6.7%, the slowest growth in 26 years, but within the target range of 6.5 to 7.0%.

China exports decline. China’s exports posted its worst fall in seven years. Official data showed that exports fell 7.7% in 2016, leaving China with a trade surplus of $509.96 billion. The drop was the biggest annual decline since the global financial crisis in 2009. China’s export sectors are likely to face some headwinds going forward as the Trump administration’s tendency toward trade protectionism may dampen exports further.

China’s producer prices surge. Producer prices in China continued to rise. The National Bureau of Statistics reported that the producer price index (PPI) jumped by 5.5% year-over-year in December, higher than economists’ expected rise of 4.6%. In 2016, PPI fell by 1.4%, the fifth straight year of annual decline. On the other hand, the consumer price index (CPI) rose 2.1% in December, slightly below an expected rise of 2.2%. In all of 2016, CPI rose 2%.

China manufacturing PMI drops. China’s official manufacturing purchasing managers’ index (PMI) fell slightly in January but remained in expansion mode. This gauge focusing on state-owned large enterprises fell to 51.3 in January from December’s 51.4. It’s better than economists’ estimated reading of 51.2.

BOJ stays the course. Bank of Japan (BOJ) kept its monetary policy unchanged, a decision that was widely expected. Still, the central bank raised its economic outlook, as recent data had shown improvement in exports and manufacturing in the third largest economy. BOJ raised its GDP forecast of 2017 to 1.5% growth from its previous estimate of 1.3%.

Japan exports rise. Japan’s exports rose for the first time in 15 months. The Ministry of Finance reported that exports increased by 5.4% in December year-over-year, beating economists’ estimated 1.2% rise by a wide margin. That was also a stark contrast to a reported decline of 0.4% reported in November. A fall in the Yen at the end of last year was believed to boost exports.

Japan manufacturing PMI climbs. Japan’s manufacturing activity expanded at the fastest pace in almost three years. The final Markit/Nikkei manufacturing purchasing managers’ index (PMI) of January advanced to 52.7 from December’s reading of 52.4, slightly below economists’ estimated reading of 52.8. It was the fifth straight month the reading remained above the 50-mark and was the highest reading since March 2014.

Key Take-away:

Housing in Canada. Over the last few years, concerns over the growth and sustainability of Canada’s housing market have been rising; in particular, whether any correction would be a hard or soft landing. The latest data provide mixed signals as the number of home starts across the country rose, while the request for permits for future home buildings declined in December. But the greater focus on homebuyers’ minds are prices, which continue to rise for both existing and new homes on a national basis. Regionally, however, deviations can be seen between markets, as Toronto tops all gainers and Vancouver is in the midst of a slow-down. With the possibility of tightening mortgage rules, government regulations, and rising borrowing rates, the housing market may see some weakness in 2017, with markets in Eastern Canada leading the way.

Trump takes residency at 1600 Pennsylvania Avenue. With the keys to his new home, President Trump took control of the world’s largest economy, and presumably set in motion the promises he made during his campaign. Of the many actions slated for his first 100 days, trade is a top priority. Trump has withdrawn from the Trans-Pacific Partnership and pledges to renegotiate the North American Free Trade Agreement. Both are likely to affect Canada. Trump is also set to change or eliminate the Affordable Care Act, or Obamacare, having made it the subject of his first executive order, signed just hours after his installment as the 45th U.S. President. Finally, he is expected to focus heavily on job creation though infrastructure spending and tax reform. Though only a few weeks into his term, Trump (along with his domestic and foreign policies) is shaping up to be game-changer for the U.S. and for the world.

The information contained in this report was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This report is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell any mutual funds and other securities.