August 27, 2021 | 13:21
Tropical Storm Jerome Fades
Much like the weather, everyone talks about tapering, but no one does anything about it—at least not yet. The hotly debated, long awaited, and highly anticipated speech by Fed Chair Powell at the annual Jackson Hole symposium turned out to be mostly a non-event for markets. While he indicated bluntly that substantial progress had been achieved on the inflation side (and then some!), and there had been positive steps for employment, more work was needed on the latter and Delta posed risks. Much of his speech was directed at the inflation outlook; Powell remains steadfast in his transitory view, although there are flashes of concern on that front. Still, the market had been braced for the possibility of a more direct tapering message and, thus, breathed a sigh of relief. But while not revealing specific timelines, a key takeaway is that the Chair has set the stage for the process to begin before the end of the year—a drum many, more hawkish, FOMC members were pounding steadily on this week.
In the lead-up to the big event, markets were mostly reversing last week’s downbeat action, with yields rising, stocks at record highs, and oil bouncing back to nearly $69. The latter move was almost a perfect V-shaped recovery of last week’s 9% drop, although it was wind-aided by Hurricane Ida. Natural gas was stronger yet, pushing above $4.30, its highest level in almost three years. Even with that quick comeback in energy prices, the Canadian dollar only clawed back a small portion of the recent big dip to around 79 cents (or just over $1.26).
Some of the persistent softness in the loonie may be driven by election uncertainty. First, the polls have tightened somewhat, potentially flagging another minority government result. Second, there were some new policy proposals this week that were—shall we say—somewhat surprising on the housing and taxation fronts. Even so, the TSX was only briefly rattled, managing to churn out a solid gain for the week, and was testing fresh record highs by Friday.
Another modest weight on the Canadian dollar has been a sudden run of generally disappointing domestic data. Just last week, we opined that the swift pullback in the currency was mostly driven by global factors, and that the Canadian economy had shown surprising spunk in mid-summer. Well, that spunk suddenly turned into a mild funk in July; in that month, each of retail, wholesale, and manufacturing sales declined by more than 1%, according to the flash estimates from StatCan. That’s a mildly disappointing surprise, as July marked a further reopening of portions of the country and a further solid advance in jobs. Frankly, our forecast of 6% annualized GDP growth in the second half of the year was predicated on a series of strong monthly gains through the summer amid reopening. The raft of soggy July results on hand points to something far short of ‘strong’.
Given that Canada’s employment report isn’t due until September 10, the main event on the domestic scorecard next week will be Tuesday’s first official reading on Q2 GDP. StatCan’s initial pass was for a 0.6% rise (or about 2.4% annualized), a touch above the BoC’s latest estimate of 2.0% (we’re at 2.5%). But given how stale that report now seems, the focus may well be on the flash estimate for July GDP, especially given the declines posted in the “big 3” sales releases noted above. A serious misfire in the month and/or a downside surprise to Q2 will likely prompt us to shave our 6% growth call for all of 2021—a figure we currently share with the Bank of Canada, but which is a shade below the latest consensus.
The big event in the last week of summer will be Friday’s U.S. payroll report for August. After a pair of 900k-plus increases, job growth is expected to only decelerate slightly to around 750k, while the jobless rate is likely to dip further to about 5.2%. Ahead of the key release, we’ll get plenty of warm-up acts to provide a sense of how the economy fared in August. Auto sales are expected to have remained sluggish, with the sector representing the tip of the spear of supply chain issues and chip shortages. The ISM is anticipated to stay just below 60 for factories and just above for services, but the front-line commentary in these releases is particularly pertinent to get a sense of how business is dealing with Delta and plentiful job openings. Finally, keep an eye on Tuesday’s Conference Board release on consumer confidence—the University of Michigan’s sentiment survey famously saw a huge drop to a 10-year low this month, sagging even below last spring’s depths. The issue is whether this pronounced weakness is echoed in the other major measure of household confidence.
Pulling these strands together, the overall message from the economic data in recent weeks is that demand remained firm in North America during the summer but supply simply could not keep pace. As a result, real growth has disappointed somewhat, as more of the spending gains have been channeled into price increases and not higher volumes. In turn, the surprisingly strong inflation reality—along with another upswing in new virus cases—has weighed heavily on consumer sentiment. That mix of slightly soggier growth but much heartier prices has not been quite enough to prompt the Fed into immediate action, but it does point to tapering starting before year-end.