Many investors might wonder why the Canadian financial markets often move in step with U.S. markets.
Goldman Sachs economists Robin Brooks and Andrew Tilton have come up with a partial answer by tracing the reaction of Canadian stocks, bond yields and the loonie to various economic “data surprises.”
Surprises are defined as the gap between the actual data and the Bloomberg consensus before a particular release.
“For a small open economy like Canada, it is obviously not just domestic data surprises that will drive markets,” the two economists argue in a report Wednesday. “Foreign data surprises, notably those for the U.S., will matter as well.”
But the authors cautioned that data surprises are “just one input driving markets, and … many other considerations apply.”
For the TSX, seven of the top 10 positive market-moving data surprises are U.S. events, not Canadian ones. And they are (in decreasing order of importance): Canadian quarterly GDP, U.S. ADP employment survey, U.S. retail sales, U.S. ISM non-manufacturing index, U.S. Philly Fed, U.S. Empire manufacturing index, Canadian monthly GDP, Canadian Ivy PMI, U.S. existing home sales and U.S. CPI.
The data surprises most likely to push stocks down include the Fed funds rate, Canadian wholesale sales and Canadian CPI.
Goldman Sachs says there are three good reasons why Canadian markets follow U.S. cues:
1. U.S. data often comes out first, giving investors a jump on what might happen in Canada.
2. What happens in the U.S. matters to the global economy, which drives commodities-reliant economies such as Canada.
3. U.S. data generally has an oversized influence on global risk appetite.
Goldman Sachs also tracked the impact of data surprises on the loonie and two-year bond yields. The big drivers of higher yields are Canadian quarterly GDP, U.S. payrolls and Canadian employment.
And the biggest upward movers of the loonie are Canadian current account data, Canadian quarterly GDP and U.S. ISM non-manufacturing index.
“Recent positive U.S. data surprises support Canadian dollar appreciation, underpin the move higher in Canadian bond yields and the rally in the TSX,” GS concluded.