Weekly Pulse: The number is…zero thousand

While the trading week had five days, it was really only Friday to which investors were looking forward. Indeed, the U.S. Labour Department released its monthly employment report showing that absolutely no jobs were gained or lost in the month of August, even after Wednesday’s ADP report suggested that 91,000 private jobs had been created. The private job numbers from the Labour Department were very poor suggesting only 17,000 private jobs were added when economists were looking for 95,000. While we can debate which survey is right, ADP or Non-Farm, and while future revisions could change these numbers dramatically, the message from these surveys is that job growth in the United States continues to struggle.

While stock markets started off the week with a positive tone in the hopes that the Federal Reserve might take action at their next meeting towards the end of September, that tone turned negative thanks to the disappointing employment report. Even with the U.S. macroeconomic picture looking cloudy, the TSX Index managed to post a gain this week thanks to precious metal stocks and the Canadian banks. Bank reporting season has come and gone and investors were content with the results they saw as almost all banks beat expectations. We saw a number of themes emerge including solid strength from retail banking, reasonable credit quality, but also weaker capital markets revenue in what has been a challenging environment for fixed income and equity traders.

The precious metal stocks advanced in response to strength in underlying gold and silver prices. Both took a time out recently giving back gains that pushed gold to an all time high; however, today’s employment report saw gold advance almost US$50 per ounce on the spot market while silver is now approaching levels we haven’t seen since May.

The Canadian dollar basically found itself where it started on Monday morning, although it tried to rally along with stocks during the course of the week. Even after a disappointing employment report, the U.S. trade weighted dollar actually strengthened as a safe haven currency, putting pressure on the Canadian dollar.

The trading week ahead

With the Canadian banks reporting season over (or ended), we won’t see much corporate earnings news until Q3 reporting arrives in mid October. With a lack of corporate news flow, attention will focus on macroeconomic data in the weeks and month ahead. If data continues to be weak, then September could prove to be a challenging month. Two events that are going to be very influential for investor sentiment will be 1) a speech by President Obama next week and 2) the Fed meeting later this month.

President Obama is expected to address Congress next Thursday night where he is expected to lay out new policies for job creation. We can’t overemphasize how important this speech is and how important his fiscal policy proposals will be to the U.S. economic recovery. Fed Chairman Ben Bernanke basically said “it’s your turn Congress” during his speech at Jackson Hole, recognizing that there is only so much that monetary policy can do and that there are still a number of options which can be pursued on the fiscal front that can create jobs. We hope all Washington politicians were listening to Mr. Bernanke as the fate of the U.S. economy lies in their hands.

We have an interest rate decision due out of the Bank of Canada on Tuesday and nobody is expecting rates to move higher. Instead, investors are trying to gauge how far off in the future we might see rate hikes. A couple of months ago the answer might have been by the end of this year, but after the events of August those expectations have been pushed well into 2012.

We also remind investors that Monday is a holiday in both Canada and the United States, so enjoy the long weekend and travel safe.

Question of the week

August was a very difficult market for investors, making year to date returns challenging. What has outperformed as an asset class sofar this year, equities or commodities?

We provide a chart that shows the August and Year-to-date returns for the world’s most influential stock markets and indices along with various commodity prices. We can’t conclude that all commodities have outperformed stocks. However, we can certainly say that precious metal prices have outperformed significantly as energy and base metal prices have struggled to post positive returns. The outperformance of precious metals should encourage investors to look at these stocks if they believe underlying metal prices will remain strong as the valuation gap between stock and metal has increased. Looking at just the stock markets, you’ll notice that the performance of precious metal stocks helped the TSX Index outperform all other indices in the month of August, illustrating that investors have been well served to stay in Canada for now.

Gareth Watson is the Vice President, Investment Management & Research at Richardson GMP in Toronto. This team of research experts is responsible for monitoring and interpreting economic, geo-political situations, current market environments and trends. @Gareth_RGMP