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Market Wire
It’s Summertime, and North American Growth is Easy

Karl Schamotta July 31, 2018

The Canadian economy grew 0.5 percent in May, beating economist’s forecasts with 19 of 20 industrial sectors recording gains. Markets had expected a 0.3 percent print – giving currency traders the motivation to push the loonie exchange rate slightly higher in the moments after the release.

Activity in the construction sector increased 0.7 percent, fully offsetting April’s weather-related loss – and unconventional oil production jumped 5.3 percent as temporary shutdowns in the sector came to an end.

Overall, the economy expanded 2.6 on an annualized basis in May, leaving second-quarter growth on track to touch 3 percent – slightly above the Bank of Canada’s projections. With limited evidence of a slowdown in the housing market, an absence of material developments on the trade war front, and exports rising to meet increased demand from American consumers, the conditions are in place for another rate hike this year – perhaps at the Bank’s October meeting.

In the United States, consumer spending advanced for a fourth consecutive month in June, with robust employment conditions and rising income helping to fuel household expenditures. According to numbers released by the Commerce Department, wages and salaries increased 0.4 percent in June, while disposable income rose 0.3 percent. Spending on goods was effectively unchanged after a 0.9 percent surge in May – but the services category accelerated 0.6 percent after growing by a more modest 0.3 percent in the prior month.

Core personal consumption expenditure – the Federal Reserve’s preferred measure of inflation -rose 1.9 percent on a year-over-year basis. The central bank remains on course to hike rates later in the year, but a move is unlikely when policymakers announce the latest decision in Washington tomorrow.

This data was largely telegraphed in Friday’s gross domestic product report – meaning that market response has been relatively muted. The dollar continues to come under selling pressure into month end, suggesting that speculative positioning could shift when the Commodity Futures Trading Commission publishes its Commitments of Traders on Friday.

More broadly, global risk assets remain well-supported after the Bank of Japan opted not to tighten policy, pledging to keep rates “extremely low” for an extended period of time, while conceding that inflation could fall short of target for another 3 years. With hawkish market fears proving unfounded, Japanese yields are down across the curve, and bond prices are higher in most major trading blocs.

Bottom Line: Smoke from the ‘trade wars’ narrative continues to obscure the signal emanating from real economies in Canada and the United States – which are on fire. Here’s hoping that the politicians don’t ruin a good thing…

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