Weekly Market Watch – Fed, BoJ Stand Pat

September 22, 2017

Fed, BoJ Stand Pat

Central bankers drove the narrative for much of the week until fresh threats from North Korea reawakened geopolitical tensions that’ve rattled global markets of late. On Thursday in New York, the North Korean foreign minister said the country may conduct a nuclear test of “unprecedented scale” in the Pacific Ocean. The provocative remark comes on the heels of new sanctions against the country and U.S. President Trump’s warning it would “destroy” North Korea if forced to defend itself or allies. Turning to central bankers, the U.S. Federal Reserve met for its regularly scheduled policy meeting mid-week and – as expected – made no changes to interest rates but did say it plans to shrink its US$4.3 trillion balance sheet starting in October. The bank has also pencilled in one more potential rate rise for 2017.  Turning to Japan, the BoJ also left interest rates unchanged at its monetary policy meeting Thursday and – unlike the Fed – will continue to increase its balance sheet by buying bonds. In the U.K., retail sales rose a better-than-expected 1.0% in August well ahead of the anticipated 0.2%. The jump in sales and last month’s corresponding jump in inflation increases speculation that the BoE will raise interest rates sooner rather than later. In other news, the Organization for Economic Development and Cooperation upped its 2017 global growth forecast taking it to 3.7% from its June estimate of 3.5%. The Paris-based policy forum also kicked up the eurozone’s anticipated growth to 2.1% versus 1.8% putting the single currency union on par with the U.S. growth forecast. Canada’s GDP outlook was also ratcheted up to 3.2% from 2.8% which would, if it comes to pass, lead all G7 countries. Finally, the Comprehensive and Economic Trade Agreement between Canada and the EU came into effect last Sunday after 7 years of talks. The free-trade pact will eliminate 98% of the tariffs between the two countries. Looking ahead, market watchers get a look at Canadian retail sales and the state of consumer prices today.

Stocks End Mixed

U.S. benchmark stock indexes inched higher through much of the week but sold off on comments from North Korea. For the four days covered in this report, the Dow added 91 pts. to close at 22,359, the S&P 500 ended flat at 2,500 and the Nasdaq gave back 26 pts. to finish at 6,422. In Canada, the TSX ended the period in positive territory rising 281 pts. to close at 15,454.

Markets Continue to Impress Following U.S. Election

Strategy: Global markets continue to benefit from solid fundamentals, bolstering our bullish positioning strategy. The economic expansion is running near highs for this cycle with global GDP running at 3%+ aided by both solid consumer spending and a recovery in business investment outlays. The broadening out of economic momentum from the U.S. to other major economies including Canada, Europe and Asia has improved the resiliency of the global economic expansion, now in its ninth year. Healthy activity has helped to drive corporate profitability growth with earnings growing at double-digit rates across major markets. Combined with signs central banks are set to tighten monetary policy at a modest pace as recent inflation readings stabilize and begin to rebound toward 2%, risks of overly aggressive rate hikes seem negligible. In fact, most of the reliable indicators we track to help us gauge the likelihood of recession suggest the next recession is not likely to materialize until 2019. Thus, we maintain our asset allocation recommendation: overweight to equities and underweight in fixed income. Our geographic (Canada, Europe, Emerging Markets) and sector (industrials, financials, resources, technology, consumer discretionary, health care) preferences within asset classes retain a cyclical bias. For investors based in Canadian dollars, the recent weakness in the US dollar has had an important (negative) impact on U.S. market returns, re-emphasizing the importance of currency moves on portfolios.