Big Picture

TSX, Dow Post Record Highs; U.S. Recession Fears Wane as Yield Curve Normalizes

It’s been a strong week thus far for the TSX. After posting a small gain on Monday, Canada’s main stock index hit record closing highs on both Tuesday and Wednesday, as upbeat corporate earnings helped offset pessimism over a precarious U.S.-China trade deal.

It’s also been a largely positive week for U.S. markets. After a flat Monday and Tuesday, the Dow advanced Wednesday as investors parsed the latest headlines on U.S-Chinese trade talks and Federal Reserve interest-rate policy. Both the Dow and the S&P 500 closed at record highs Wednesday.

Optimism over a “phase one” trade deal has boosted stocks recently, but cracks are emerging. On Thursday, trade talks hit a snag over farm purchases, and both sides remain at odds over the forced transfer of technology and whether the U.S. has actually agreed to lift tariffs on Chinese imports. The trade woes have weighed on the loonie, which hit a one-month low Thursday, while N.A. markets were fairly flat Thursday.

Turning to the Fed, Chairman Jerome Powell on Wednesday told U.S. lawmakers the central bank saw little need to cut rates further after making three reductions since July. According to Mr. Powell, stable inflation and a strong U.S. jobs market should allow the Fed to hit the pause button.

More good news for investors: Yields on U.S. government bonds have rebounded from near-historic lows hit just two months ago, helping to stave off near-term recession fears as the yield curve normalized last week. While that’s a positive development, The Economist recently warned that “each of the past three pre-recession inversions reversed themselves before the ensuing downturn began.”

While the U.S. economy seems to have stabilized, all is not well with the global economy. China’s economy is slowing; Germany barely avoided a recession in Q3 and Japan’s economy grew at the slowest pace in a year, thanks to the U.S.-China trade war and ongoing tensions with South Korea.


Strong Week for TSX, Dow

For the four days covered in this report, the Dow was up 101 points to close at 27,782, the S&P 500 rose 4 points to settle at 3,097, while the tech-heavy Nasdaq also climbed 4 points to close at 8,479. In Canada, the TSX added 95 points to end at 16,972.



Canadian labour market strength has buoyed the domestic economy. The Canadian GDP registered a modest 1.3% increase on a year-over-year basis in 3Q, lifted by consumption. While still heavily indebted, Canadian consumers have benefited from strong job and wage growth, low interest rates, and stabilization in the housing market. Conversely, the global consequences of the U.S. – China trade dispute, compounded by constraints in the domestic oil sector, have weighed on business investment, sentiment, and exports. For the remainder of the year, we expect economic growth to moderate as we do not foresee a near-term resolution to these issues. We anticipate consumer spending to remain the engine of the Canadian economy, with employment supported by the still robust services sector. Inflation, which decreased to 1.9% from 2.4% three months ago, is likely to remain benign as commodity prices are expected to soften, and output decelerates further.

(Bill Curry)

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