Markets

North American markets closed slightly higher as we close out the week. The Dow extended its weekly winning streak to three, while the TSX was anchored by a sagging gold sector and Apple’s 8% decline singlehandedly pulled the S&P500 lower.

A better than advertised 146,000 increase in US employment got trading started off on the right foot this morning, but that warm and fuzzy feeling was short lived after a subsequent report showed consumer confidence fell sharply.

The Canadian employment report was nothing short of blockbuster with a gain of 59,300 positions last month, about six times more than forecast. The finer details were equally as encouraging as almost all of the gain was in full-time employment with private companies. We also had a decent earnings report from Scotiabank who beat estimates on the back of strong activity in capital markets, a continuing theme we’ve seen across the financial sector.

The Canadian dollar climbed to a one month high after the employment report, up 24 bps to US$1.0114. Bond yields jumped a couple of ticks for the same reason, with the 5-year Canada now yielding 1.29% and the 10-year 1.71%. Gold is up a dollar to US$1703/oz. Oil is flat at US$86.24/barrel.

Have a great weekend.

Weekly Bottom Line - December 7, 2012

HIGHLIGHTS OF THE WEEK

United States

•    The risk of running off the fiscal cliff will become a reality in a couple of weeks if a middle ground is not found by December 20th.

•    Financial markets may be acting too complacent. As of early Friday, the S&P500 index was up 4.5% in three weeks, even though there is already evidence that excess cautious behavior from policy uncertainty is taking a toll and creating distortions in the real economy.

•    Our Q4 real GDP tracking is less than 1%, showing an economy already on thin ice.

•    The Fed has a 2-day meeting on December 11th and 12th. Monetary policy can not single-handedly push against the fiscal headwind, but we doubt the Fed will stand by idly. Operation Twist terminates at year-end and in its place may come an extension of QE3 with open-ended Treasury purchases.

Canada

•    To no one’s surprise the Bank of Canada left interest rates unchanged this past week, as Canadian economic growth continues to be soft, hurt by weak foreign demand. But, the Bank retained its hawkish bias.

•    November’s very healthy job growth would seem to support that hawkish stance by the Bank. However, some of the details in the report reveal the soft underbelly of the Canadian economy, namely a slowing goods sector.

•    In addition to weaker external demand, Canada faces competitiveness challenges seen clearly in Canada’s poor productivity performance in Q3. These reasons underscore why November’s healthy job gain is unlikely to be sustained in the months ahead.

Webcasts:

Canada:  https://www.brainshark.com/tdeconomics/vu?pi=zHJzwYfH0z1sQYz0

United States:  https://www.brainshark.com/tdeconomics/vu?pi=zGwzUCfh2z1sQYz0

Financial Update - December 05, 2012

There’s lots going on this morning, but you wouldn’t know it from looking at the relatively flat indexes. Apple is taking a beating after research firm IDC suggested the companies share in the tablet market will fall below 50% by 2016 as competition heats up. Copper and gold giant Freeport McMoRan agreed to acquire both Plains Exploration and McMoRan Exploration for about $9 billion, leading to a steep drop in the former and a surge in the latter companies. The Canadian REIT”s are strong this morning after a consortium of pensions announced plans to buy shopping mall operator Primaris for about $4.4 billion. In fact almost every sector in the TSX is higher this morning, but the index is being anchored by pronounced weakness in the gold sector as the price of the metal approaches a three-month low. Chinese markets rallied overnight after regulators discarded a rule limiting investment by insurance companies in the countries commercial banks. The TSX is up 24 pts. The Dow is up 16 pts.

The Canadian dollar is up 10 bps to US$1.0078. Bond yields are down about 2 bps across the curve to 1.26% for the 5-year Canada and 1.68% for the ten. Oil is off 54 cents to US$87.96/barrel. Gold is down $7 to US$1689/oz.

Have a great day.

Data Release: Bank of Canada holds interest rates steady at 1.00%

Good Morning,

TD Economics

Data Release: Bank of Canada holds interest rates at 1.00%

• As expected, the Bank of Canada left its benchmark overnight rate unchanged at 1.00%.
• As for the much watched forward-looking language, the Bank reiterated that “over time, some modest withdrawal of monetary policy stimulus will likely be required”, and that the timing on such a move will be “weighed carefully” against global and domestic developments.
• In its assessment of how those global economic conditions are developing, the Bank stated that the U.S. economic expansion is progressing at a gradual pace, but being held back by uncertainty related to the fiscal cliff. Growth in China appears to be stabilizing, and global inflationary pressures are subdued in response to persistent excess capacity. The Bank also highlighted that globally financial conditions remain stimulative, although vulnerable to an economic shock from the U.S. or Europe.
• For Canada, the bank chalked some of the third quarter weakness to transitory disruptions in the energy sector, but expects momentum to pick up in 2013. It also noted that household credit growth has slowed, but that it is too early to tell whether the moderation will be sustained. The Bank also noted that exports continue to be restrained by weak foreign demand and competitiveness challenges.
• Inflation has evolved broadly as the Bank expected, with total and core inflation set to return to 2% over the next 12 months.

 Key Implications

• After surprising markets last week with the announcement that Governor Carney will be leaving for the Bank of England, today’s interest rate announcement did not change the calculus for monetary policy in the months ahead. The Bank maintained its forward-looking language, and there was nothing unexpected in its assessment of economic developments since the last statement.
• With the economics world waiting for a resolution to the fiscal negotiations in Washington, January’s statement and Monetary Policy Report are likely to provide a lot more meat on the Bank’s expectations for Canadian growth in a post-fiscal cliff world. For now, the Bank maintains its prudent tightening bias; barring unforeseen events the next move in Canadian interest rates in up, rather than down. And overall, TD Economics continues to expect the Bank of Canada to be the first among its peers to hike rates, likely in the second half of 2013, but that interest rate increases will be modest and occur in gradual steps.