By Andrew Trimble
It was an eventful week filled with encouraging news about global economic growth. In the U.S., data released Wednesday showed better-than-expected retail sales for January, firming inflation and factory production rising. Taken together, the data points extend an upward trend in real economic activity south of the border. Coincidentally, the prints came in the same week Fed Chairwoman Janet Yellen indicated the bank’s willingness to raise interest rates due to the progression in jobs gains and inflation. The chances of a Fed rate hike in March have now doubled to 1 in 4 according to futures tracked by CME Group. Turning to China, consumer prices increased 2.5% in January from a year earlier, the fastest pace in two years. The Producer Price Index also notched a five-year high as factory prices jumped 6.9% versus a 5.5% rise a year ago. The releases point to stirring inflation in the world’s second largest economy which gives the PBOC some wiggle room when it comes to stimulus measures. Elsewhere, the European Union on Monday raised economic forecasts for 2017 predicting growth across the bloc despite political risks and uncertainties. The EU estimates the 19-country single currency union will grow 1.6% this year, an increase from 1.5%. If current, longer-term projections hold through 2018 it will mark the first time since 2008 that all member states have recorded increases in GDP. When it came to the U.K., growth is expected to rise to 1.5% for 2017 versus a previous estimate of 1.0%. Finally, the European Parliament green-lighted the Canada-European trade pact Wednesday with it now moving to European national Parliaments and the Canadian House of Commons for final approvals. Looking ahead, U.S. and Canadian stock markets are closed Monday, February 20.
Major North American stock benchmarks extended their record-closing streaks this week although some – the S&P 500 and Nasdaq – lost steam over the course of Thursday’s session. For the four days covered in this report, the Dow added 350 pts. to close at 20,619, the S&P 500 moved ahead 31pts. to settle at 2,347 and the Nasdaq rose 80 pts. to end at 5,814. The TSX finished 135 pts. higher to close at 15,864 Thursday, a record high for the fifth day in a row.
Strategy: Year-to-date major stock indices have ground out healthy gains amidst generally tight trading ranges and low volatility (S&P500: +4.8%, TSX: +3.8%, MSCI EAFE: +4.5%). In fact, the equity implied volatility index (better known as VIX) hit a near-10 year low on February 1st at 9.97. The quiet that has fallen over markets stands in stark contrast to the growing uncertainty and unpredictability in the stance of the new U.S. administration on key policy issues such as geopolitical alliances, import tariffs, immigration, tax cuts, infrastructure spending, etc. In particular, political momentum seems to have waned recently as the President’s popularity suffers from recent controversial actions and comments which are weighing on tax reform prospects (a key to market expectations for stronger earnings growth this year and next). As well, investors are contending with rising geopolitical risks in Europe with nationalists, hoping to follow Britain out of the EU, leading in polls heading into elections in the Netherlands (March) and France (April). Rising headline risks combined with profit-taking pressures may leave the market vulnerable to near-term disappointment to U.S. policy or geopolitical developments. However, given economic data trends remain positive, with recession risks relatively muted over the coming year, we would view any material pullback (5%-10%) in equity markets as another opportunity to reload on equities and cyclical exposures for those who had missed out earlier.