April 5, 2019
Making Cents of the Markets
Be in the Know
This week was all things trade and Brexit, along with a healthy jobs report on Friday. The US and China wrapped up their most recent talks in Washington, after meeting in Beijing last week. Things appear to be moving along with Chinese President Xi Jinping urging President Trump for an early end to trade talks, while Vice Premier Liu He reporting that they had “reached a new consensus” in talks this week. Of course, not much later Trump said “we have a ways to go.” To translate, there is no clear idea when this will all be over. The talks could end anywhere from now until the Fall of 2020, which would make them an election issue. It seems that the likely scenario is that a solution will be achieved around the G20 meeting in June, but regardless progress is being made, and rhetoric has been de-escalating for the last several months.
On Brexit, the proverbial can is likely going to be kicked again, as Prime Minister May requested an extension (Brextension!) into June from the EU. The EU may prefer a longer extension (up to a year), but we should find out next week when they meet on April 10. Avoiding a hard “no-deal” Brexit appears to be the only thing British lawmakers can agree on at this point. Falling out of the EU without a deal would be irresponsible for both Britain and Europe, which they are technically still scheduled to do on April 12 but is unlikely.
Friday we had the much anticipated jobs reports in both the US and Canada. Canada’s run of job growth was stalled with its first drop in seven months, as employment fell by 7,200 in March. This missed expectations, but the unemployment rate held steady near a multi decade low at 5.8%. In addition, a miss was only a matter of time as Canada had added 290,000 jobs between August and February, which was the largest six-month increase since 2002. In contrast, we received the US jobs report which gave a welcomed indication of growth from the labour market. The US had a surge in employment, with jobs growing by 196,000 in March (beating expectations) and their unemployment rate holding just above 49-year lows at 3.8%. Having more job openings than unemployed people looking for work is clearly a scenario for more employment. The recent recession worries seem to be abating.
We mentioned last week that historically, April is a strong month for stock markets which is a trend that may continue as they are off to a strong start with the S&P 500 up 2.1% and the TSX up 1.8% for the week. We thought it was interesting that with all the coverage of the yield curve inverting, sparking fears of a recession, there really wasn’t a lot of coverage about it returning to normal. The reason that a normal yield curve is important is it shows a reduced risk of a recession in the near to medium term, but as they say, fear sells. However, the signal from inverting last week still counts so we remain on high alert watching economic reports as they come in. Remember, an inverted curve doesn’t cause a recession and there have been cases of inversion and reversion without a recession. It’s important to also consider other signals and indicators in combination. With the likelihood of the Brexit can being kicked further down the road, trade deals on track, and the yield curve back to normal, we think things should be positive heading into the second quarter of the year; granted, it’s never a straight line from the bottom-left to the upper-right.
Next week is the unofficial start of Q1 earnings, and we are expected to see a negative number. A few things to keep in mind when the headlines start to come in: we are likely to get an earnings drop year over year for the S&P 500, but because we are comparing to last year’s corporate tax drop aided quarter, that was always the expectation. Sales growth is still expected to be about 6% this quarter, which is more indicative of how much product companies are selling and how the economy is doing. In addition, the results are being swayed by a few big outliers. The first being energy companies. Oil prices were much higher for the first quarter in 2018 than they were this year, so that whole sector is due for negative comparisons. Furthermore, a few big companies in the tech sector (namely, Apple) are set to show a drop in earnings, which have an outsized effect on the overall numbers. We are highlighting this because with the index being market-value weighted, earnings are set to show a drop of about 1% year-over-year. However, the median company is actually expected to show growth of about 3.6%. The remainder of the year is also expected to show stronger growth, despite the soft patch.
Chart of the Week
Ever since it moved out of inversion last week, there has been very little media coverage on the yield curve (strange, right?). Currently the spread has risen over 12 basis points on the back of some better economic news, such as the jobs report highlighted on Friday:
Beyond the Markets
Spring keeps rolling in and there is no better way to celebrate the changing season than with a visit to the Chilliwack Tulip Festival! The festival features over 6.5 million bulbs, food trucks, and tractor rides from April 10 to May 5. During the early bloom (April 10 to 18), you can witness the flowering of 10 varieties of hyacinths and 17 varieties of daffodils. Then from April 19 to May 5, the fields will bloom into a sea of coloured tulips in a display that would make even the brightest rainbows seem dull!
Click here to purchase your tickets to the Chilliwack Tulip Festival.
Listen to this week’s Making Cents of the Markets on CKNW. We talked about Bank of Canada rates, Vancouver home sales, and tax time. Listen here.