Weekly Market Watch – Global Economic Outlook Strengthens – Friday October 6, 2017

October 6, 2017

Global Economic Outlook Strengthens

There was good news on the economic front this week for the world’s largest economies which reported solid factory activity. In the U.S., factory output reached a 13-year high in September as the ISM gauge of manufacturing reached 60.8 last month from 58.8 in August, the highest since May 2004. The reading exceeded expectations and suggests the factory sector is weathering the impact of hurricanes Harvey, Irma and Maria. There was similarly good news out of China as manufacturing activity grew at the fastest pace since 2012 as production, total new orders and output prices all improved. The official Chinese PMI index released last Saturday rose to 52.4 in September from 51.7 in August which marked the 14th straight month of expansion for the country’s manufacturing sector. Turning to Japan, its manufacturing PMI survey increased to 52.9 in September from 52.2 in August which also points to increased expansion. Taken together, the data coming from the world’s workshops point to smooth sailing for the global economy which has helped spur stock markets in the U.S., Japan and Europe to fresh highs. In the euro zone, one area of weakness emerged as retail sales fell for the second month in a row in August. That may give the ECB pause as it considers a reduction in stimulus efforts which was evidenced in minutes published Thursday. The minutes showed officials are ready to scale back the bank’s massive bond purchases but it remains unclear exactly how and when they’ll act. In Canada, monthly GDP data released last Friday showed the economy stalled in July following eight straight months of expansion bringing an end to an exceptional run that helped spur the central bank to raise interest rates twice in recent months. Looking ahead, it’s jobs day in both the U.S. and Canada as both countries report on their employment situations.

North American Stocks March Higher

Stocks marched higher through Thursday this week pushing major U.S. benchmarks into record territory again with traders remaining bullish about the strength of the U.S. and global economies. For the four days covered in this report, the Dow rose 370 pts. to close at 22,775, the S&P 500 added 33 pts. to close at 2,552 and the Nasdaq moved ahead 90 pts. to finish at 6,585. In Canada, the TSX gained 142 pts. to end at 15,776.

Markets Continue to Impress Following U.S. Election

Strategy: Global markets have remained in a buoyant mood in recent weeks thanks to a steady stream of positive economic data and supportive monetary/fiscal policy developments. We have always maintained an optimistic outlook with respect to the ability of this current business cycle to continue generating healthy, albeit historically modest, growth. Recent data, however, has been beating expectations consistently with global growth climbing to 6-year highs and (even more impressively) broadening out to all major regions and economies. Falling unemployment rates, expanding business spending on capital expenditures and new highs in manufacturing activity are helping to provide an added boost to this current expansion phase which is in its 9th year. Central banks are also doing their part as they gradually turn toward unwinding a portion of the ultra-accommodative monetary policy settings still in place since the financial crisis. While raising interest rates occasionally causes a short-term spike in market volatility, the improved balance in economic and market drivers helps to improve the durability of the cycle. We remain of the view investors should overweight equities relative to bonds given recession probabilities over the coming 12 months remain quite low, and we continue to prefer cyclical sectors over interest-rate sensitive defensives in this late stage of the cycle as rates/yields trend higher and economic growth remains healthy.