By Andrew Trimble
It was a holiday-shortened week in the U.S. but a busy one nonetheless with euro zone inflation and Chinese growth in the headlines. In China, fourth-quarter GDP data was released late Thursday Eastern Time showing the economy expanded at a rate of 6.8%, up slightly from the previous three quarters which all came in at 6.7%. The fact that China ended the year on an up note is in stark contrast to the beginning of the year when fears abounded about the strength of the world’s second largest economy. Chinese retail sales for December were another positive as they rose 10.9%, the fastest pace in a year. In the euro zone, consumer prices rose in December in almost all of the 19 member countries, a sign the threat of deflation that once loomed over the currency areas has lifted. The EU stats agency said Wednesday that consumer prices were 0.5% higher in December from November and up 1.1% in the final month of the year. In related news, the ECB met Thursday for its regularly scheduled policy meeting making no changes to interest rates or its quantitative easing program. The central bank said the program would remain in place amid the rising inflation until officials are convinced the trend can be sustained. The U.K. also reported rising consumer prices in December with annual inflation increasing 1.6% in the last month of the year from 1.2% in November. The slide in the price of the pound in the months since Brexit helped fuel consumer prices. Turning to Canada, the BoC kept its benchmark rate steady at 0.5% Wednesday but said a rate cut was on the table depending how things unfold following the U.S. presidential inauguration. The bank admitted to uncertainty when it comes to the still-unfolding policies of the Trump administration and what impact it may have on the Canadian economy. Elsewhere, the IMF upgraded its global growth targets Monday saying aggregate growth should come in at 3.4% for 2017, up from 3.1% in 2016. Looking ahead, Canada reports retail sales and CPI data today.
North American stocks retraced some of their steps this week ahead of today’s presidential inauguration of Donald Trump. For the four-day period covered in this report, the Dow fell 153 pts. to end at 19,732, the S&P 500 shed 11 pts. to close at 2,263 and the Nasdaq finished 34 pts. lower to settle at 5,540. In Canada, the TSX also gave back some of its recent gains losing 88 pts. to close at 15,409.
Strategy: Global markets ended 2016 on a strong note with equity markets posting solid gains in the month of December (S&P500: +1.97%, TSX: +1.66%, Euro Stoxx 50:+7.94%). Certainly for full-year 2016, broad market performance largely followed our portfolio strategy settings of overweighting equities (S&P500: +11.95%, TSX: +21.08%) and underweighting fixed income (U.S.: +2.61%, Can.: +1.66%). With equity markets and bond yields having witnessed large gains in recent months, a profit-taking driven pullback (or sideways churn) characterized by rapid sector rotation could materialize in the first quarter of 2017 as investors seek confirmation of anticipated bullish developments including plans for fiscal stimulus in the U.S., oil prices remaining above US$50/bbl, improving corporate profits, etc. We would see this as a natural pullback within our long-held bullish medium-term view on equities with an overweight in cyclical sectors.