The Fed may well do further QE, but progress on a fiscal deal that avoids excessive tightening in both the USand Europe will be far more critical in shaping 2013 growth. While we may get a side deal on US dividend tax treatment, a broader step to put off the “fiscal cliff” isn’t likely in the cards until after the election, andEurope doesn’t seem to be rushing to provide support for the beleaguered Spanish bond market. While we are bulls in waiting, investors in “risk on” assets don’t need to rush in just yet.
Key Numbers to watch this week:
· Canada – Retail Trade – May (Tuesday – 8:30 AM ) – While underlying prospects for consumers should remain weak due to slow growth and weaker credit accumulation, May retail sales may have actually sprung back to life.
· US – GDP – Q2 (Friday – 8:30 AM ) – The US economy was already stuck in low gear, but a further down-shift could well have been seen in Q2. Consumer spending is tracking around a 1.5% rate—a notable deceleration from 2.5% in Q1—and weakness towards the end of the quarter suggests little momentum heading into Q3
· Declines of 21% and 12% on the year in the energy and materials sectors and a pullback in tech profits could see index earnings retreat by about 10% on the year. Bright spots may include utilities, health care and industrials.
· Renewed “risk on” sentiment and sector specific developments have seen active lumber futures rebound handily from June’s yearly lows. The recent slew of positive data and support from low-mortgage rates suggest the worst is now over for the long-ailing US housing sector.
· Fiscal “train wreck” fears are fuelling renewed talk in political circles stateside about a “grand bargain” on deficit reduction. A recent proposal by Democratic senators aimed at drawing bipartisan support would cap the tax rate on dividends and capital gains for upper income households at 20%.
· The BoC in its latest MPR, ruled out any near-term rate hikes, slashing its growth outlook for here and abroad. But C$ bears shouldn’t read too much into the downgrade, as it’s still the case that rate cuts would be off base.
· A deteriorating US growth pace is tilting the odds higher for another round of QE by the Fed. Although dollar depreciation would be one channel to help America’s economy, it’s not likely to work this time. The reason: everybody else looks even worse.
· After mainly exceeding expectations throughout the post-recession period, UK inflation is, for the first time, surprising to the downside more often than not. While recent declines in unemployment are encouraging, forward looking indicators suggest hiring is still very weak and joblessness could well rise again. Therefore, we still expect further sterling weakness against theUS$.