Even though the week ended with slightly more positive sentiment on the US-China front, trade headlines will continue to dominate next week especially against a light data calendar in Canada and the US. Outside of North America, one of the key events on next week’s calendar will be the meeting of the European Central Bank where we look for the ECB to join many other central banks in adding more monetary policy stimulus. The Bank of Canada continued to swim against that tide, holding rates steady on Wednesday and issuing a more neutral policy statement than many (including ourselves) anticipated. The tone was similar in Deputy Governor Schembri’s economic progress report, which emphasized that the Canadian economy is close to full capacity and inflation is right on the BoC’s 2% target. That good starting point, along with monetary policy that’s already slightly accommodative, gives the central bank a buffer against negative external developments. Schembri also emphasized that the BoC will set monetary policy based on domestic conditions, suggesting it won’t blindly follow other central banks in lowering rates. That defiant attitude trimmed the odds of a rate cut later this year, though markets continue to expect a cut in the first half of 2020.
One of the factors supporting the BoC’s steady rate decision is a quicker-than-expected recovery in housing activity. The bank noted that resales and starts are catching up to underlying demand, with help from lower mortgage rates. We expect a solid homebuilding backdrop will remain in evidence next week with starts likely to moderate but remain above the 200,000 annualized unit mark for a third consecutive month. We’ll have to wait until the following week for the latest national resale numbers, though local market releases suggest activity continued to firm in August. The housing recovery has come with a renewed uptick in household credit growth (driven by mortgages, not other consumer credit), which as the BoC pointed out, adds to already-high household debt levels—perhaps another reason for the BoC not to push interest rates lower just yet.
In the US, headline CPI is expected to remain flat at 1.8% while the core rate is seen ticking higher to 2.3%. The more significant release is Friday’s retail sales, with the health of the US consumer seen limiting the odds of a recession. Another solid retail sales report might help ease some of the concerns generated by a softer-than-expected US employment report this week. Core sales are expected to rise a healthy 0.4% (average gains have been twice as strong so far this year) while the headline number will be a bit less robust thanks to lower gasoline prices.
