Volume 24, Issue 3 January 13, 2020.

  Source: Globe & Mail


Britain is Leaving Soon; No Time To Waste!
Jennifer Lee,
BMO Senior Economist

There’s no rest for the wicked. January has just begun and the mad scramble to kick off the trade talks between, not the U.S. and China, not the U.S. and France (though that will begin soon), but the U.K. and the European Union, is beginning. The U.K.’s Lower House of Parliament passed the Brexit Withdrawal Agreement bill this week and the Upper House should do so soon. Assuming they pass it, Britain will be cleared to leave the EU formally on January 31, 2020 (or 3½ years after the historic referendum). Then, the official trade talks can begin; but, obviously, work is currently being done behind the scenes. According to Croatia’s PM Plenkovic, the EU is “ready to start working next week on the negotiating framework for the future relationship between the United Kingdom and the European Union”. And, Britain is doing the same.
 
The good news is that there is clarity… Britain is leaving. No more “will they or won’t they” questions. The bad news is that the talks will be very, very difficult and it is highly unlikely that both sides will be able to hammer out a proper, comprehensive trade agreement by the time December 31, 2020 rolls around.  And as PM Johnson is adamant that there will be no extension, it creates the distinct possibility that there could be a hard Brexit. No one should be shocked. If, by any chance, the British leader changes his mind (it has been known to happen), he has until June 30 (during a planned summit) to ask for a longer transition period. As of now, the PM has declared that it is not going to happen.

Taking that stance at face value, Ursula von der Leyen, President of the European Commission, warned that Britain will have to “prioritize” what it wants. And, the country “cannot expect to agree on every single aspect” of the new partnership without extending the transition period. I’d have to agree. In the perfect world, a comprehensive deal would be made and presented to the European Parliament by late November, and all of the various parliaments should pass it, too, by the end of the year. But given how long it took to get to this stage, 11 months sounds optimistic. Really optimistic.

 

Have a great week.

Frank & Mark




Source: Globe & Mail, BMO Capital Markets, Bank of Canada

Canada:

the TSX added 1.0%. Despite flaring tensions between the U.S. and Iran, WTI is actually down so far on the year, trading below $59 at one point on Friday. Typically, a potential supply-side disturbance would bode well for Canadian producers. But, two key factors have prevented a run-up in prices. First, the market has (rightly so far) believed that a material escalation between the U.S. and Iran is a low-likelihood event. Also, underlying supply-demand fundamentals continue to show a relatively soggy market for crude, though late-2019 action from OPEC+ (and possibly some more on the horizon) is helping to keep a floor in place. At any rate, despite all the noise, WTI remains rangebound, as has long been our assumption. Canadian energy stocks are up modestly so far on the year, but still underperforming the TSX and S&P 500.  YTD, the TSX is up 0.9% and the benchmark 10-year yield ended the week to yield 1.58%.

U.S.:
On the data front, the U.S. non-manufacturing PMI rode in to the rescue of the factory sector this week, rising to a stronger-than-expected 55.0 in December, comfortably in expansion territory even as its factory cousin is contracting. Meantime, Friday’s payrolls report was nothing special, with employment rising by a modest 145k in December—though that’s hardly bad given late-cycle capacity constraints and labour shortages. Job growth actually accelerated in the second half of the year, and the jobless rate finished 2019 at 3.5%. These numbers, along with well-behaved wage growth (down a tick to 2.9% y/y) are just about right for the bulls. YTD, the S&P 500 is up 1.0%, the Dow Jones Industrials is up 1.0%, and the Nasdaq is up 2.3%. The yield on the 10 year Treasury closed at 1.83%.




Source: BMO Capital Markets 

The Good: Employment +35,200 (Dec.); Jobless Rate -0.3 ppts to 5.6% (Dec.); Merchandise Trade Deficit narrowed to $1.1 bln (Nov.).


The Bad:  Average Hourly Wages slowed +3.6% y/y (Dec.); Housing Starts -3.4% to 197,329 a.r. (Dec.); Building Permits -2.4% (Nov.); Conference Board’s Consumer Confidence -9.9 pts to 102.1 (Dec.)—3-yr low; Ivey PMI -8.1 pts to 51.9 (Dec.); Raw Material Prices +1.5%; Industrial Product Prices +0.1% (Nov.).