A Week Chock Full of Developments

Nov 01, 2019 | Nick Scholte


From accommodative central banks, to resilient economic data, our base case remains no imminent recession for the U.S.

To my clients:

First, a heads up to clients that I will be away from the office November 11th to November 15th inclusive, and will be back in the office on Monday, November 18th. While away, I suspect my ability to remain connected will be sporadic. I’ll do my best to monitor developments, and will be in touch with Brenda as appropriate. However, I do not intend to write a weekly update on Friday, November 15th. As always, clients can reach out to Brenda to help with any immediate needs.

It was an up week for North American stock markets with the Canadian TSX rising 1.2%; the U.S. Dow Jones Index rising 1.4%; and the U.S. S&P 500 rising 1.5%.

There were several noteworthy developments for the week…

In the U.S., the Federal Reserve cut rates for the third successive meeting on Wednesday of this week. Chairman Jerome Powell indicated that the Fed was likely on pause so that the Fed could “assess” the impact of the recent cuts and because “we believe monetary policy is in a good place.” He further suggested that it would require a meaningful turn for the worse to cut more. But, more importantly and very significantly in my opinion, he stated inflation would need to make a “really significant move up… that persists” for a hike to be the next move. Given chronically low inflation, the underappreciated cause of which may likely be demographic trends in the developed world (see my October 18th update here for a discussion) this statement all but ensures there will be no further U.S. rate hikes for quite some while. The certainty of this outlook should be supportive of business confidence and a re-strengthening in economic growth.

Meanwhile, in our home country, the Bank of Canada (BOC) kept rates steady. However, there was a change in tone from the central bank, both in the statement itself and during the accompanying press conference. Specifically, Governor Stephen Poloz hinted at a possible rate cut in Canada’s future saying “we are not an island - we are not immune to these global developments.” As I have said in these weekly updates in the past, Canada indeed is not an “island”, and the impact of higher interest rates on our currency is not sustainable because higher rates equals a more expensive currency which means more expensive Canadian exports. In a slowing global economy, higher export prices for an export centric economy such as Canada’s simply don’t make sense. A rate cut is coming. Possibly as soon as the next BOC meeting on December 4th.

On the economic data front, the U.S. Employment Report this morning showed 128,000 new jobs created for the month of October. On the surface, this might not seem to be that great of a report given the near steady diet of 200,000+ monthly job gains for much of the past decade. But owing to a now-ended strike at General Motors (estimated to have reduced the employment report numbers by about 50,000) and the end of 20,000 temporary census jobs, this was actually quite a good report for this particular stage of the economic cycle. The report easily beat expectations for just 75,000 new jobs to have been created.

Also released today was the monthly ISM Manufacturing Report coming in at 48.3. While modest improvement was seen in this metric from the prior month’s reading, it nonetheless remains below 50 and therefore indicates the manufacturing sector continues to contract. While the trade outlook with China has modestly improved in recent weeks, it is still the case that trade concerns are depressing manufacturing activity, and this reading remains a crucial indicator to watch for continued and/or increased weakness. Most other metrics, while soft, continue to indicate expansion. Manufacturing is the exception. Luckily for the economy – and the markets – the manufacturing sector of today represents a much lesser part of economic activity than it did in the immediate post war era.

Regarding the overall economy, it seems to be reasonably resilient. The first read on Q3 GDP in the United States came in at 1.9%. To be sure, this is not a strong measure. But equally, it does not reveal an economy accelerating into imminent recession. Frankly, the reading is indicative of my and RBC’s long-held view that this middle portion of 2019 would be a time of slowdown, but not contraction. Our base case continues to be that the U.S. economy will avoid recession and, further, that the GDP readings will begin to slowly recover from here. Time will tell and we will monitor closely.

Lastly, as many will have read or heard on the news, another of Canada’s corporate icons, Encana (a contraction of the words Energy and Canada), will be moving its head office out of Canada and into the U.S. This marks a continued denuding of corporate Canada, and emphasizes the ever-narrowing scope of quality investments available in Canada. While Encana was not a name held in my client portfolios, the company’s departure nevertheless illustrates the shrinking pool of investable opportunities outside of banks, telecoms and utilities, and real estate investment trusts. While resources are obviously still an important component of our economy, the volatile nature of such companies (owing to their reliance upon commodity prices) and the continued departure of many significant corporate resource leaders (Encana, Macmillan Bloedel, Barrick Gold etc.), means that even resources are becoming a more difficult sector in which to find quality Canadian opportunities. The point being – and it’s a simple point – is that diversification into the U.S. and globally remains a key tenet of the portfolios I manage.

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


Nick Scholte, CIM, FCSI

Vice-President & Portfolio Manager

Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
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