On the surface, it was yet another week of wrangling over the European debt situation and this time we witnessed a covert, well orchestrated intervention by the world’s most influential central bankers. Simultaneously, the People’s Bank of China also cut its reserve requirements in an effort to boost Chinese lending and to stimulate growth in the world’s second largest economy. The wildcard of Europe notwithstanding, there is an increasing sense the North American economy is subtly moving from a ‘not as bad as feared’ scenario to one where the data is in fact getting to ‘better than expected’. It may sound like semantics but it does suggest both the Canadian and the U.S. economies have now retreated from the threat of recession.
The U.S. unemployment rate fell to a level not seen since 2009 reaching 8.6% in November. Also, U.S. manufacturing grew at its fastest pace in the past five months suggesting the economy is picking up as 2011 comes to an end.
Canadian manufacturing slipped in November but the index remains firmly in an expansion mode. A report by Moneris Solutions (debit and credit card processor) suggests Canadians participated in the traditional U.S. shopping holidays Black Friday and Cyber Monday by spending significantly more on this year’s than they did a year ago. U.S. retail sales, vehicle purchases, and consumer confidence have also returned as Americans have turn less pessimistic on the outlook for employment.
The drama in Europe seems to be moving towards an end game as the political chess match continues. Germany’s Chancellor Merkel and French President Sarkozy are scheduled to meet next Monday, as the leaders of the largest economies in the euro zone are expected to hash out the plan they will present at the December 9th EU leaders summit. The European Central Bank (ECB) now seems prepared to channel EU loans through the International Monetary Fund which would avoid violating EU rules which prevent the ECB from offering direct budget financing.
The tide of Central Bank liquidity intervention raised all risk asset prices mostly at the expense of the U.S. dollar. The dollar fell against a basket of global currencies including the Canadian dollar. Precious metal prices rose and crude oil flirted with the $100/bbl level for most of the week.
The Trading Week Ahead
Hard to believe there is little more than a couple of weeks to go before the holiday season arrives and trade desk staffing levels drop as a result. Until then, trading activity will be brisk and the week ahead is likely to be a busy one. The focus, once again, will be on Europe and the December 9th summit in Marseilles. German Chancellor Angela Merkel has remained firmly against the idea of a Eurobond launch to resolve the crisis unless there is an agreement on more fiscal accountability by EU members. We may learn more about the framework of such an agreement by next week.
The Economic calendar is a bit light this week but ISM data is always worth noting. Expectations are that Monday’s nonmanufacturing number will follow suit with the strength in last week’s manufacturing number. The index should touch a six-month high. The Bank of Canada will get its chance to react to the news of unexpected Canadian job losses in November. Our jobs report was the final major data point for the year and marks the second consecutive month of job losses in Canada. The weaker employment situation feeds into the central bank’s dovish view but flies against the recently stronger than expected Q3 GDP report.
Expectations are for the key overnight rate to be kept at 1.00% until a rate cut at some point in 2012.
Canadian banks have begun reporting their fiscal 2011 year end results and so far CIBC, TD, Royal Bank and Bank of Nova Scotia have all reported better than expected results under a difficult operating environment. This week, we could see a long awaited dividend increase from Bank of Montreal, which remains the only Canadian bank that hasn’t yet increased its dividend since 2008.
QUESTION OF THE WEEK
Will Europe throw China and the United States into recession?
There is a recurring pattern in the ongoing sovereign-debt drama. EU policymakers essentially drag their feet until the ensuing panic prompts them to do what the market demands. Until recently the Eurozone’s core – the dominant economies of Germany and France – remained healthy. But now the rot has spread and recent economic data has come in well below expectations. The EU will soon slip into recession, if it hasn’t done so already. So, will Europe force other economies to contract as well? U.S. economic data has vastly improved since this summer, and the risk of a recession is receding. Third quarter economic growth came in at a better than expected 2.5% and the latest reading of the manufacturing index shows a pick-up in new orders and jobless claims recently fell to one-year lows.
A possible 2008-style freeze in Europe’s credit markets poses the greatest immediate threat to the U.S. and the global economy. This week’s coordinated effort by the world’s central bankers goes a long way in helping mitigate that immediate risk. Over the next few years, the risk of higher U.S. taxes creates a source of domestic uncertainty which will likely peak as a key issue during the 2012 presidential campaign.
As for China and the emerging markets, the fact inflation is now receding means governments can move to pro-growth policies in 2012. China kicked things off with a 50 basis point reduction in their banking system reserve requirement ratio. Keep in mind, China and the emerging economies also have the added resources to implement fiscal stimuli if needed. Such an outcome would be a boon to the global economic outlook and would help restore an economic cushion able to withstand a faltering Eurozone.
@David_RGMP