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Market Wire:
Animal Spirits Lift American Consumption

Karl Schamotta December 22, 2017

Reflecting an increased level of economic confidence, Americans spent more and saved less last month – suggesting that high holiday spirits could drive a growth surge in December. Household consumption rose 0.6 percent in November on a seasonally-adjusted basis, while personal income rose 0.3 percent from the prior month. Market expectations had been set around the 0.4 percent and 0.3 percent levels respectively, providing the foundation for a modest rally in the trade-weighted dollar post-print.

The personal consumption expenditures price index rose 0.1 percent in November – matching October’s 0.2 percent gain. With revisions included, this less-volatile measure of core inflation increased 1.8 percent in the 12 months through November, illustrating an acceleration relative to October’s 1.6 percent print.

However, growth in the consumption index excluding food and energy – the Federal Reserve’s preferred inflation measure – was more modest, rising 0.1 percent in November from October, up 1.5 percent from a year earlier. This is keeping market-implied interest rate expectations under pressure, and is likely to limit the dollar’s gains through the session.

In contrast, the Canadian dollar chart resembled Santa’s sleigh taking a direct hit from a rocket-propelled grenade this morning, after numbers from the country’s national statistics agency revealed that economic growth slowed to a standstill in the month of October. Statistics Canada reported that real gross domestic product remained essentially unchanged for the month, offsetting yesterday’s surprisingly-strong inflation and retail sales data – which had pushed January interest rate hike odds well north of the 50 percent mark.

Service-producing industries rose 0.2 percent, with consumer spending powering the wholesale and retail sectors, but tangible goods activities contracted 0.4 percent, with mining, quarrying, and oil and gas extraction production slowing as prices flat-lined. Perhaps most importantly, growth moderated in the real estate sector, with the industry grouping expanding by a lower-than-expected 0.3 percent in October. According to StatsCan, “the level of activity of this subsector remains below its March 2017 level, following provincial government changes to housing regulations in Ontario in April”.

Winter may not have come for the Canadian real estate market, but it’s coming – suggesting that yesterday’s surge in early-year monetary tightening expectations may yet prove over-optimistic.

Bottom Line: After last night’s passage of a bill to keep the government temporarily funded until January 19th, markets are preparing for a tumultuous start to the new year, and foreign exchange traders are trimming positions ahead of the holidays, with portfolio rebalancing and window-dressing transactions helping to lift the core safe-haven currencies against their rivals – but before Santa arrives, markets have a lot to be thankful for. In the last year, the Federal Reserve managed to raise rates several times without derailing credit creation, populist movements failed to overturn governments in Europe, the Trump administration proved to be all bark and no bite, the global economy continued to grow – and volatility remained incredibly low across a range of asset classes. This sense of complacency is unlikely to persist, so count your blessings, plan for change ahead, and enjoy the holidays!

Karl Schamotta

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