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Inside the Market Why this corporate earnings season is unlike any that came before it

The U.S. Capitol is seen in Washington, U.S. on Jan. 16, 2019.

YURI GRIPAS/Reuters

Economic and financial data have become casualties of the U.S. government shutdown.

At a time when financial markets are particularly sensitive to recession risk, a blackout of key indicators is making it harder to take the pulse of the U.S. economy.

The closing of several government departments has already delayed the release of data on home sales, trade, construction, factory orders, inventories, durable goods and retail sales. If the shutdown continues, fourth-quarter GDP figures, scheduled for the end of January, could also be put off.

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The data drought has also crossed the border, with Statistics Canada announcing Thursday that it lacks the U.S. figures needed to release monthly trade data.

“It's incredibly unfortunate timing. A lot of the pieces to the puzzle that make up GDP are going to go missing,” said Doug Porter, chief economist at BMO Nesbitt Burns. “So we’re going to be driving through a bit of fog here.”

With investors eager to fill the data gap, corporate earnings season is serving as an alternative source of economic foresight.

“If they’re saying they’re still seeing growth, that would definitely give the market comfort,” said Christine Poole, chief executive of Toronto-based GlobeInvest Capital Management Inc.

Management at several U.S. companies, including some of the big banks, have been saying just that.

On an earnings call with analysts Monday, for example, Citigroup Inc. CEO Michael Corbat said he saw “a disconnect between what we see in our business and what the markets are saying.”

He said “the biggest risk in the global economy is one of talking ourselves into the next recession as opposed to the underlying fundamentals taking us there.”

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Citi stock is up 11 per cent since the call, while the rest of the financials sector has been among the leaders of the rebound.

Not all the economic indicators emerging from the corporate sector are positive, however.

U.S. profit forecasts for the year ahead have been falling precipitously, casting doubt on the growth outlook for the economy and the stock market alike.

Over the past three months, the profit growth expected out of S&P 500 companies for 2019 has declined from 10.2 per cent to 6 per cent, according to Refinitiv data.

Continued negative revisions from Corporate America could put equity gains at risk and revive the economic growth fears that flared up in December.

Then, the market became fixated on the state of the global economy, as the toll of the trade war became increasingly apparent.

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The string of negative economic signals included dramatically slowing Chinese trade, rising indicators of a European recession, unexpected weakness in U.S. manufacturing and a nosedive in global crude oil prices. In Canada, the oil sell-off dealt yet another blow to a sector beleaguered by a lack of pipeline capacity.

The confluence of warning signs triggered the stock market correction that gained momentum in late December.

Markets quickly regained their composure, however, as global equities rebounded almost as forcefully as they sold off. Market sentiment seemed to shift from fears of a recession to a mere slower rate of growth, said Jason Mann, chief investment officer of Toronto-based Edgehill Partners.

“Everyone is looking for some confirmation or rejection of the slowdown narrative from updated data,” Mr. Mann said.

Not all U.S. government data producers are affected; the Labour Department is still operational, so monthly jobs reports will still be available.

But what is now the longest U.S. government shutdown in history has closed nine departments, including Commerce, one of the most active distributors of economic data.

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A retail report, for example, was not released Wednesday, as originally planned, leaving the market without key information on holiday spending.

“It’s one of the more important numbers in any given month and one of the few that actually can directly move the equity market,” Mr. Porter said.

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