As quickly as the indices went up, their momentum to keep on going seems to have run out. The unexpectedly positive US job numbers from Friday, catapulted indices all over North America up, but on Wednesday the upswing flattened, and indices like the TSX – on the Toronto Stock Exchange – even took a slight downturn. It seems that after the rally, most investors read it for what it was: a short term spike due to positive sentiment, without any rational reason to believe growth could be sustained for too long.
This is due to the fact that the underlying economic conditions, despite the unexpected spike in US job growth for the month of June, don’t warrant strong medium term growth. The Bank of Canada confirms that through its most recent update, signaling that oil prices are expected to remain subdued, and cutting growth forecasts for the Canadian economy while leaving the interest rate at a record low of 0.5%.
Although Canada might be an unusual test case for the world economy – being the G7 nation with the highest reliance on natural resources – its export data does provide an insight into what is happening in the US. Canada’s greatest trading partner is the US. The US accounts for 70% to 75% of Canadian exports. Due to the relatively low oil prices, Canadian exports to the US should have shifted to include more manufactured products, since low oil prices have kept the Canadian Dollar down. But Canada has been unable to boost its export-led industrial output, because there are not enough orders coming from the US.
These facts point towards lower than expected consumption in the US. Despite the massive number of jobs added in June, it seems that the US economy is largely being buoyed by low interest rates rather than by an increase in consumption – which is the primary driver of the US economy. Inflation remains stubbornly low, while shocks from Brexit and other parts of the world have taken their toll. This means that growth going forward, will remain mediocre at best.
Due to these future projections, investors should understand that the recent rallies in the markets, are more due to a correction in retrospect – job creation data from June – and not due to expected growth in the future. That is why the recent rally has ran out of steam as quickly as it started. Nothing else could be expected.