A Strong U.S. Employment Report and Continued Supportive Messaging From the Fed Continues to Fuel the Recovery

Jan 11, 2019 | Nick Scholte


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While the yield curve is "flashing yellow", all the other major economic indicators tracked by RBC continue to signal "green"

To my clients:

It was an up week for North American stock markets with the Canadian TSX rising 3.6%; the U.S. Dow Jones Index rising 2.4%; and the U.S. S&P 500 rising 2.5%.

After last Friday’s longer and heavier than usual update I will keep things brief this week. Markets rose almost every day this week (the Canadian market in fact did rise every day; the U.S. markets rose Monday through Thursday, and just missed making it a perfect week by about 1/100th of one percent today), continuing the recovery that began last Friday. A blockbuster Employment Report and the announcement of face-to-face trade negotiations between the U.S. and China played a large part in starting the turnaround. But probably the biggest reason was the assurance (and re-assurance just yesterday) by Federal Reserve Chairman Jerome Powell that the Fed would be flexible and market sensitive with respect to any potential future interest rate increases. As a consequence of Powell’s assurance, last Friday I asserted that:

the content, tone, and delivery of the message was fully on point and I suspect may be a turning point to the corrective episode we have been experiencing the past two months in the markets.

I hope I was right – so far, so good anyway. But frankly, it is far too soon to tell if this will be THE sustainable turn for the better. Most notably, the China trade negotiations could still disappoint, although I suspect there is real motivation on China’s part to negotiate given the slowing growth signals coming from the country. However, the bottom-line take away message is that of the 6 major recessionary indicators that RBC actively tracks, 5 are still signaling green, and only the yield curve is flashing yellow. In other words, we don’t see recession in 2019, and the markets should recover from the year-end 2018 correction (even if this week old recovery proves not to be THE recovery).

That’s it for this week. All the best,

Nick

Nick Scholte, CIM, FCSI

Vice-President & Portfolio Manager
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
3200-1055 West Georgia │ Vancouver, BC │ V6E 3P3
Toll Free: 1.844.665.9900 │ nick.scholte@rbc.com

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