Canada’s main stock market index rose to its highest level in nearly a month yesterday as firmer commodity prices and optimistic U.S. data lifted energy producers, miners and the banking sector.
In general, corporate earnings are doing well, economic data is improving and the sovereign debt issues have currently receded. Data showed U.S. housing starts hit their highest level in 6 months and industrial output rose a solid 0.9% in January, signaling economic recovery was taking a firm hold as the year began.
Gold hit a 1-month high and oil held above $77 a barrel following, although gains were tempered by the U.S. dollar’s strength following the positive U.S. data.
The Toronto Stock Exchange’s S&P/TSX composite index was up 0.42%.
In the United States stronger-than-expected corporate results and upbeat economic data drove U.S. stocks higher as investors expect the global economic recovery will bolster corporate profits. Deere & Co, the world’s largest farm equipment maker, led markets after its results beat expectations and it raised its outlook for the year ahead and its shares gained 5%. The results follow the upbeat trend in 4th quarter U.S. corporate earnings, with more than 70% of the Standard & Poor’s 500 companies beating analyst estimates so far, according to Thomson Reuters data. Keeping up with the trend, technology bellwether Hewlett-Packard Co. posted results after the closing bell which were better-than-expected and raised its full-year outlook.
As mentioned the optimistic outlook on the economy was supported by data showing a 6-month high in housing starts and a rise in industrial production in January. The housing market, the main trigger of the most painful U.S. economic downturn in 70 years, has been a particular area of concern after disappointing reports on December home sales. Housing starts peaked at a 2.273 million unit annual pace in January 2006 and bottomed at 479,000 units last April. They have been bouncing around between 500,000 and 600,000 units recently. Some analysts worry mortgage rates will rise, putting additional pressure on a still weak market, when the Fed ends purchases of mortgage-related securities at the end of March.
Capacity utilization, a measure of slack in the economy, rose to 72.6% from 71.9% a month earlier, but was still 8% below the average from 1972 to 2009, suggesting little inflationary pressure.
The Dow Jones industrial average added 0.39%, the Standard & Poor’s 500 Index rose 0.42% and the Nasdaq Composite Index gained 0.55%.
Several Federal Reserve policy makers want to begin selling securities relatively soon to cut back the U.S. central bank’s help to the financial system as the economy finds a footing, the Fed said yesterday. Minutes of the Fed’s latest policy meeting in January suggested officials remain positive about the economy’s prospects even as they worry about the impact of an elevated unemployment rate, which they see holding near the current 9.7% through 2010.
To combat the worst recession and financial crisis since the 1930s, the U.S. central bank has cut benchmark interest rates to near zero and bought more than $1.5 trillion in government and mortgage bonds to pump money into the economy. The minutes offered a window into the Fed’s thinking on how best to withdraw the extraordinary stimulus it has provided, but also revealed substantial disagreement among officials on the timing and sequencing of exit steps.
“Several thought it important to begin a program of asset sales in the near future to ensure that the Federal Reserve’s balance sheet shrink more quickly,” the minutes of the January 26 and 27 meeting said. The Fed held its target for interbank overnight rates in a zero to 0.25% range and reiterated a pledge to keep rates extraordinarily low for “an extended period.”
Underlying the internal disagreement on the Fed’s exit strategy are fundamental differences in economic theory. Officials diverge on how much a weak employment market and the economy’s untapped productive capacity (low capacity utilization) will dampen inflation in the event that inflation remerges. The minutes showed officials do not believe a pickup in underlying inflation is an immediate concern, although many voiced anxiety that commodity prices could rise as the global economy gains traction, contributing to a broader level of inflation. Fed officials are keeping an eye on how quickly the recovering economy absorbs the excess slack that built up during the recession. With unemployment hovering close to 10% they have said they are likely to keep interest rates extraordinarily low for “an extended period.”
European stock markets are higher this morning by about 0.50% as positive U.S. earnings and a fairly upbeat assessment from the U.S. Federal Reserve helped maintain optimism about the recovery in the world’s largest economy. Wall Street, which has also been advancing recently is currently positioned for a flat open while commodity prices are a little softer this morning.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
