Stocks were marginally higher on the week as investors continued to process the potential impact of U.S. tax reform and political developments out of Washington, D.C. From an economic perspective, both the Canadian and U.S. labour markets strengthened in November. U.S. average hourly earnings grew 2.5% over the past year, accelerating from the 2.3% growth reported in last month's report. Modest but rising wages should support household spending, in turn powering the economy forward at a moderate pace. November's jobs report is unlikely to materially alter the U.S. Federal Reserve's monetary policy approach of gradually raising interest rates (including a rate hike next week) and slowly reducing its balance sheet. Overall, inflation has rebounded from lows experienced midyear and labour market conditions remain quite healthy, reflecting the solid fundamental backdrop that has supported the bull market in stocks.
After two consecutive rate hikes in the fall, the Bank of Canada held its benchmark interest rate steady last week, consistent with our expectations. In its policy statement, the BoC noted:
Over the past several months, consensus expectations had indicated that another rate hike this month was possible; however, we view the BoC's move to hold rates steady as the appropriate policy response. We maintain our view that the domestic economy will cool moving into and through 2018. Therefore, particularly with inflation still muted, it would be prudent for the Bank of Canada to evaluate the impact of this year's rate hikes and shifts in the domestic and global economic landscape before tightening policy further.
We think the central bank's policy stance has the following implications:
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Macroeconomic reports and ongoing news flow regarding U.S. tax reform will be the focus for investors next week. From a Canadian perspective, existing home sales will be reported on Friday. South of the border, the U.S. Federal Reserve's interest rate decision will come Wednesday afternoon.
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