To my clients:

It was an up week for North American stock markets with the Canadian TSX rising 1.2%; the U.S. Dow Jones Index rising 4.7%; and the U.S. S&P 500 rising 4.4%.

In last week’s update I wrote that in light of a second inversion of the yield curve and worsening trade tensions (notably a new front opened with Mexico), I was contemplating another reduction in equity. However, I went on to write:

But I’m holding off for the time being, recognizing that a) Trump meets with Chinese President Xi late next month and perhaps trade negotiations can get back on track; and b) the U.S. Federal Reserve might be “forced” (per Goldman Sachs) to cut short term interest rates in the very near future. Either outcome would be immediately positive for the markets.

As it turns out, on Tuesday of this week Federal Reserve Chairman Jerome Powell admitted that the Fed is monitoring the impact of tariffs and trade tensions on the overall economy, and all but acknowledged the Fed may soon cut rates so as to sustain the economic expansion. While this was not an actual rate cut, the mere mention of the possibility of one sent U.S. markets sharply higher this week, and went a long way toward fulfilling outcome “b” that I underlined above. Further, on the trade front, Mexico has been quick to enter into negotiations with the U.S. to prevent the imposition of tariffs as a result of illegal immigration into the U.S. Just today, Trump indicated that he sees a good chance of a deal with Mexico. These positive developments aside, China trade issues remain very much unresolved.

On the economic front, this being the first week of a new month, came the release of the “Big Three” (Nick’s term) economic reports:

- first up, at 52.1 the ISM Manufacturing Index both missed expectations of a 53.0 reading as well as declined from the prior month’s reading of 52.8. As trade tensions continue to fester, the impact upon the manufacturing sector is beginning to take hold.

- Next, the ISM Non-Manufacturing (aka “Services”) Report at 56.9 both beat expectations of a 55.5 reading as well as improved from the prior month’s reading… coincidentally also 55.5

- And then today, the U.S. Employment Report saw just 75,000 new jobs created, missing expectations of 185,000, and down from the prior month’s reading of 224,000

- Lastly, as a “bonus” to the Big 3, the weekly jobless claims report held steady at 218,000 new claims, up from the recent 50-year lows, but still remarkably low in the grand scheme of things

Overall, while muddy, the economic picture nonetheless is best described as softening. This is in line with RBC’s base case of lower GDP growth, but no recession. Of course, the concern lingers that the softening will continue and lower GDP growth morphs into outright negative GDP growth (i.e. recession). I still don’t expect this to happen as I remain of the view that China and the U.S. will work out their trade differences since it’s in the best interests of both to do so… but I’m far from certain of this outcome. So, as last week, I will monitor events closely and may still reduce equity in the not too distant future if conditions soften much further.

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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