Tid­bits from RBC Eco­nom­ics

The Prince George Citizen - - Money - MARK RYAN

We were be­ing trans­ferred from Prince Ru­pert to Cran­brook, (the armpit of B.C. to the left toe) which re­quired a stopover in Van­cou­ver. My first bank post­ing to my sec­ond meant a mo­men­tary a lux­ury for us, stay­ing in a ho­tel on the com­pany dime. But by the time we gave up pos­ses­sion of our home in Prince Ru­pert, all three of our lit­tle girls were flat on the floor, cov­ered in red spots, and rag­doll sick.

“Hey, you said your kids have the chick­en­pox, right? And still in­fec­tious? Per­fect! When you’re in town, we will come over to the ho­tel and let them play to­gether.”

It sounded crazy when our friends wanted to meet up at a Van­cou­ver ho­tel to rub up against our in­fec­tious crit­ters, but it was con­sid­ered an in­oc­u­la­tion of sorts. Get them ex­posed to the virus as young chil­dren, or even ba­bies, and the symp­toms of the out­break are rel­a­tively mild. Then their im­mu­nity would be es­tab­lished, and their chil­dren bet­ter off for it there­after.

This mem­ory came to mind to­day when I was read­ing an RBC eco­nomic re­port on the U.S. Fed’s de­ci­sion to ex­tend its loos­en­ing trend on in­ter­est for the next while. They are try­ing to keep the econ­omy form catch­ing a cold, but the nag­ging fear is whether they’re just cook­ing up a batch of pneu­mo­nia. Let’s hope not.

This week we get a few tid­bits from RBC Eco­nom­ics, look­ing at what sort of mar­ket the sum­mer gave us.

Fed cuts rates again

Last week’s rate cut was widely ex­pected as the Fed con­tin­ued its “mid-cy­cle” pol­icy ad­just­ment (i.e. more than one cut, but not an ex­tended eas­ing cy­cle). The key ques­tion is how much fur­ther that ad­just­ment, framed as in­surance against risks from trade ten­sions and slow­ing global growth, will go. The mid­dle-ish point of fed-head opin­ions sug­gest of no fur­ther cuts (or hikes) through the end of next year. But that masks sig­nif­i­cant diver­gence among com­mit­tee mem­bers with seven ex­pect­ing one more cut this year, five look­ing for no change, and five think­ing a rate hike would be ap­pro­pri­ate by year end. Lack of unity might ex­plain why the pol­icy state­ment was lit­tle changed, sim­ply re­it­er­at­ing that the Fed will “act as ap­pro­pri­ate to sus­tain the ex­pan­sion.”

Our fore­cast as­sumes the Fed will lower rates once more this year. A to­tal of 75 ba­sis points of cuts would be con­sis­tent with mid-cy­cle eas­ing in 1995 and 1998. Whether the Fed makes that ad­di­tional move will de­pend on how the bal­ance of risks around the eco­nomic out­look evolves into year end. Geopo­lit­i­cal risk has gone both ways re­cently, with the U.S. and China restart­ing trade talks but ten­sions in the Mid­dle East ris­ing and Brexit no closer to be­ing re­solved.

Do­mes­ti­cally, more re­ports like yes­ter­day’s IP num­bers (man­u­fac­tur­ing +0.5 per cent in Au­gust) would help al­le­vi­ate con­cerns about the health of the U.S. in­dus­trial sec­tor, with the key worry be­ing that weak­ness there spills over into the broader econ­omy. More clar­ity on these is­sues would help the di­vided Fed reach a con­sen­sus.

Cana­dian re­tail sales still soft in July

The head­line sales in­crease in July was the first in three months and, ex­clud­ing price im­pacts, vol­ume sales were un­changed, both from a month ear­lier and from year ago lev­els. Flat vol­ume sales from a year ago com­pare with, os­ten­si­bly, strong growth in house­hold pur­chas­ing power over the last year. Em­ploy­ment was up two per cent from a year ago in July, wage growth was well-above the rate of in­fla­tion, and ex­ter­nal trade risks have pushed in­ter­est rates sharply lower. All of that should be boost­ing house­hold pur­chas­ing power, and con­sumer con­fi­dence lev­els re­main around cy­cle-highs.

And, in­deed, the broader house­hold spend­ing back­drop ar­guably still has looked a lit­tle bet­ter re­cently. Over­all con­sumer spend­ing growth out­per­formed the re­tail sale num­bers over the first half of this year. E-com­merce sales, not all of which are in­cluded in the head­line re­tail sales num­ber, were up 32.8 per cent in July. And hous­ing mar­kets have firmed with home re­sales in­creas­ingly ap­pear­ing to have passed their near-term bot­tom in the spring. We ex­pect house­hold spend­ing will con­tinue to grow at a re­spectable, if un­spec­tac­u­lar, pace over the sec­ond half of this year. And that will prob­a­bly be needed given still el­e­vated un­cer­tain­ties about the po­ten­tial for in­ter­na­tional trade dis­rup­tions to spill over into slower Cana­dian man­u­fac­tur­ing sales ac­tiv­ity.

Cana­dian in­fla­tion con­tin­ues to tread wa­ter

Head­line in­fla­tion crept lower over the last three months as con­sumers got a break on gaso­line prices over the sum­mer. Mean­while, un­der­ly­ing in­fla­tion con­tin­ues to hum along at two per cent, mak­ing the Bank of Canada the envy of its global peers. With the Fed set to lower bor­row­ing costs again to­day (and po­ten­tially leave the door open to an­other cut) the Bank of Canada might just end the year with the high­est pol­icy rate in the G7. In­fla­tion would be a key rea­son for that. For con­sumers, the com­bi­na­tion of steady in­fla­tion and ac­cel­er­at­ing wage growth is good news. Of course, other pres­sures like hous­ing af­ford­abil­ity aren’t cap­tured well in the CPI, so not all house­holds will be feel­ing an in­crease in pur­chas­ing power.

Mark Ryan is an in­vest­ment ad­vi­sor with RBC Do­min­ion Se­cu­ri­ties Inc. (Mem­ber–Cana­dian In­vestor Pro­tec­tion Fund), and these are Ryan’s views, and not those of RBC Do­min­ion Se­cu­ri­ties. This ar­ti­cle is for in­for­ma­tion pur­poses only. Please con­sult with a pro­fes­sional ad­vi­sor be­fore tak­ing any ac­tion based on in­for­ma­tion in this ar­ti­cle. See his web­site at: http://dir. rbcin­vest­ments.com/ mark.ryan.

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