Dissing U.S. Disinflation Talk

Douglas Porter, CFA, Chief Economist, BMO Financial Group
November 28, 2014
Feature Article
Page 8
How to Spur Global Growth:
Dig Deep
U.S. and Canada: Solid Q3 Growth…
Won’t Be Repeated in Q4
OPEC: No Change…
Crude Hits 4-Year Lows, C$ Drops
Inflation Slows in Europe and Japan…
Pressure Builds on ECB and BoJ
U.S. Equities on Track for
6th Straight Weekly Gain
BMO Capital Markets Economics
www.bmocm.com/economics  1-800-613-0205
Please refer to page 16 for important disclosures
Our Thoughts
Page 2 of 16
Focus — November 28, 2014
Commodities: From Super Cycle to Spin Cycle
T
o think that just a few short weeks ago the biggest concern for the Canadian energy
industry was access to global markets. How quaint. OPEC’s decision this week to
hold its production ceiling steady at 30 million bpd dealt yet another heavy blow to
already reeling oil prices. WTI fell 13% this week alone, down by more than $10 to $66
by Friday, the lowest in more than four years (back when oil was still climbing back
from the deep hole hit in early 2009, when prices bottomed in the $30s). This brings the
cumulative decline in both WTI and Brent to 35% since the heady days of summer, and
even the H1 average price ($101 for WTI). We will not attempt to get into the heads of
the Saudis, and try to guess their intentions and time frames and what that means for oil
prices looking ahead, but it’s reasonable to plan for the worst, and only hope for
something better for the Canadian outlook.
Assuming current prices are sustained for some period of time, here are the key
macro implications for Canada:
 Real GDP growth will get dinged, especially through capital spending. While
production is likely to hold up, drilling will ebb; and, eventually, some new
projects will slow. The old estimate is that every 10% drop in oil shaves real
GDP by about 0.1%. However, those models are based on history, when
production was far less than today (oil output has doubled in the past 20 years).
Plus, the impact is not linear—it probably gathers importance as prices sag
deeper. GDP growth will at best hold at 2.4% in 2015 even as the U.S. hits 3.0%.
 Incomes will feel the most pain. Corporate profits, government revenues, and
even personal income growth will be pinched by the drop, and will be captured
by the GDP price deflator in the next two quarters. Merchandise trade is poised
to dip back into the red after a solid surplus in Q3.
 The regional growth backdrop is shifting before our eyes. Oil producers Alberta,
Saskatchewan and Newfoundland will likely sag back to the national average (or
even below) in 2015, while Ontario and Quebec, to a lesser extent, will benefit
from a stronger U.S. economy, a lower dollar and, yes, lower energy costs.
 Headline inflation should recede back below 2% after popping to 2.4% in
October. That’s the good news. The bad news is that Canada currently has the
highest underlying rate of inflation in the industrialized world.
 The Canadian dollar will remain under pressure. Arguably, the surprise is that the
currency has not suffered even more, though it did slide to a five-year low of 87.5
cents ($1.143/US$) on Friday. We estimate that the loonie should weaken by 3-to-5
cents for every $10 drop in oil prices. The only thing holding the currency back from
even deeper damage has been a run of surprisingly upbeat domestic data.
 Lower bond yields. Ten-year Canada’s careened below 1.9% on Friday and 30year Treasuries fell to just 2.9%. A steep tumble in headline inflation could prove
temporary; but, it can still weigh on expectations, at least for a spell.
 The TSX will be under pressure, at least relative to most other industrialized
markets. Even with this week’s big setback in the energy group (down more than
10%), the sector still has a 21.5% weight in the index.
Douglas Porter, CFA
Chief Economist
[email protected]
416-359-4887
Our Thoughts
Page 3 of 16
Focus — November 28, 2014
Notably, because this impending dent in the Canadian economy arrives amid a series
of robust data, the Bank of Canada will likely remain firmly on the sidelines. All else
equal, lower oil prices would point to lower interest rates in Canada, due to their net
dampener on growth and inflation. Meantime, other commodities are providing no
offset for the sag in oil, as the Bank’s non-energy commodity price index has also
stepped back in the past six months amid weaker farm prices and still-soft metals
prices (importantly, copper dipped below $3 this week).
Despite this relatively dour take on the crude calculations for Canada, we would
continue to pound the point that lower oil prices are not a negative for global
growth—quite the opposite in fact. While some of the recent slide is due to somewhat
dimmer growth prospects in Europe, Japan and China, it still seems that bountiful oil
supplies are the major driver of the price decline. In other words, this is mostly a
supply-side shock (in reverse), which is a net positive for global growth. And, that
goes for the U.S. as well, despite the big run-up in domestic production in the past
three years. (Crude oil output has vaulted up more than 50% in that time from less
than 6 million bpd to 9 million now, but the U.S. still imports 5 million bpd net.)
And, who are even bigger winners from the dive in oil prices? None other than Japan,
Europe, and China, the world’s biggest oil importers. While the positives can take
time to develop, make no mistake that periods of lower oil prices have consistently
proven to be a powerful tonic for global growth over the past 40 years.
Inflation Expectations are more a Mosaic than Metrics
M
uch has been made lately about U.S. inflation expectations, particularly since the
October 29th FOMC statement said “market-based measures of inflation
compensation have declined somewhat; survey-based measures of longer-term inflation
expectations have remained stable.” And, in the weeks that followed, some surveybased measures began ebbing as well. Because “well anchored” longer-term inflation
expectations are a prerequisite for policy rates to remain unchanged for a “considerable
time,” some analysts suggest that the recent signs of possible un-anchoring—to the
downside—could cause the Fed to postpone liftoff. The problem with this thinking is
that the Fed tends not to look at the various measures of longer-term inflation
expectations as individual metrics but as pieces of a mosaic that also incorporate the
technical and temporary factors that might be impacting them and, most importantly, the
economic context in which they are occurring.
Against the current background of real GDP growth averaging above 4% in four of the
past five quarters (not Q1), the jobless rate at 5.8% and payroll employment growing at
a solid 200k-plus pace, the policy toleration for ebbing longer-term inflation
expectations is higher than it otherwise would be. And it’s hoisted even higher amid the
current drop in crude oil prices (particularly since the drop is being driven more by
supply factors and a strong greenback than weakening global demand).
The consumer, survey-based measures of longer-term inflation expectations are influenced
by such startling headlines and their implications for gasoline and heating oil costs. The
University of Michigan metric dipped to a recession-low-matching 2.6% in November,
after a 43-month run in the 2.7%-to-3.0% range. In the context of recent economic and oil
market developments, the Fed can easily still deem this as being “well anchored”.
Michael Gregory, CFA
Deputy Chief Economist
[email protected]
416-359-4747
Our Thoughts
Page 4 of 16
Focus — November 28, 2014
The same could be said about the results from the Philly Fed’s Survey of Professional
Forecasters. In its quarterly (November) tally, the 5-year-ahead expectation for CPI
inflation dipped 11 bps to 2.09%, but the 10-year call was unchanged at 2.20%.
Meanwhile, the medium-term expectation for PCE price inflation slipped 10 bps to
1.90%, but the long-term call was unchanged at 2.00%. Interestingly, part of this
group’s ebbing CPI expectation might also reflect next year’s introduction of a new
and improved CPI. The Bureau of Labor Statistics is calling this the most significant
change to the CPI in 25 years, designed to account for greater substitution among
items owing to relative price changes. This means the new CPI should show lower
inflation than the old CPI (to some degree) as cheaper goods are substituted more
readily for more expensive ones, and should track the PCE price index more closely.
Bottom Line: Don’t expect the Fed to deviate from its “well anchored” talk anytime
soon.
U.S. Economy Could End Year Like a Lamb,
But Should Roar in New Year
D
espite an upward revision to Q3 GDP growth (to 3.9% from 3.5%), we took
another scalpel to our growth estimate for Q4 (to 2.3% from 2.5%) amid several
disappointing reports this week. Consumer spending rose moderately in October,
keeping its yearly rate (of 2.2%) little better than the norm of the past three years.
After trending higher, consumer confidence did an about-face in November,
reflecting reported weakness in employment. As if on cue, weekly jobless claims
popped above 300,000 for the first time in over two months. Business investment, the
economy’s main driver at up 7.2% y/y to Q3, looks to have cooled somewhat, as
“core” capital goods orders fell in three of the past four months. The housing
recovery continues to take one step back for every two forward. Fewer pending home
sales and a downward revision to new home sales suggest the recovery, though well
established, lacks momentum, as indicated by slower price appreciation.
Still, the U.S. economy is growing meaningfully faster than in recent years. Including
our Q4 tally, growth will have averaged 2.8% in the past six quarters compared with
2.1% in the first four years of the recovery. The economy has largely shaken off its
financial-crisis shackles, as households have cut $1 trillion in debt since 2008
(-7.6%). Borrowing has picked up, and it’s only a matter of time before less
unemployment translates into substantive wage gains. Meantime, spending power
will receive a boost from lower gasoline prices. The 85-cents/gallon decline since
early summer will stoke holiday shopping spirits, and could lift personal
consumption about 1% in the year ahead. In two other non-recession periods when
oil prices fell sharply—1986 to 1988 and 1997 to 1998—personal consumption grew
strongly, averaging 4.0% and 5.1%, respectively. The spending boost to the economy
should more than offset a reduction in shale energy production. Positive economic
shocks have been rare since the Great Recession. For most Americans, this is one to
be thankful for.
Sal Guatieri
Senior Economist
[email protected]
416-359-5295
Our Thoughts
Page 5 of 16
Focus — November 28, 2014
Bank of Canada Preview: Still Dovishly Neutral
T
he Bank of Canada is universally expected to hold policy rates steady at 1% for
the 34th consecutive meeting—or over four years—on December 3. Since the
October meeting and MPR, Canada’s economic backdrop has changed, but not
enough to alter the Bank’s dovishly-tilted neutral stance.
Benjamin Reitzes
Senior Economist
[email protected]
416-359-5628
Inflation has continued to accelerate, rising more than the October MPR forecast.
Higher inflation will be noted, but will likely be classified as transitory. Expect a
similar brush off of inflation worries as we saw in the last statement. Admittedly, the
Bank has a solid case on this front, with clothing, reading materials, meat and
communications (just 14% of the core CPI basket; the first two are import-heavy and
partially driven by the weaker C$) contributing about 0.9 ppts to core inflation, 0.6
ppts more than if they were climbing at a 2% rate. And, the steep decline in energy
prices will also ease any concerns about inflation.
Look for the Bank to remain cautious on the economic backdrop, driven by the slide
in oil prices and weak global outlook. The former is likely the bigger concern, as the
lack of OPEC production cuts suggests oil prices still have meaningful downside. A
weaker Canadian dollar and lower gasoline prices will provide some offset, but that
takes time to evolve. Business investment will likely get hit hard by lower energy
prices, dampening the BoC’s expectations for a rotation toward capex. However, the
shift toward export-driven growth is coming along nicely and that isn’t expected to
change, with the loonie likely to test cycle-lows following the drop in commodity
prices. Meantime, auto sales remain on a record pace and housing is still firm.
Accordingly, the concerns about household imbalances aren’t likely to diminish. One
positive for the economy was the sizeable 0.8% upward revision to the GDP level
and above-potential growth in five of the past seven quarters, but that will likely only
get a cursory mention at best. However, the strong GDP report highlights the risk that
the output gap could close earlier than the Bank forecast in October (though the drop
in oil prices says otherwise).
Overall, while the statement will change materially since it’s not accompanied by an
MPR, the message from Governor Poloz will be that the Bank of Canada is
comfortable remaining on the sidelines for some time yet, as the drop in oil prices
weighs on the outlook for growth and inflation.
It’s Go Time for the ECB (Just not right now)
T
he case for the ECB to make outright purchases of government debt became that
much stronger this week. The data alone are pushing for it. Let’s rhyme them
off: Private sector lending remained low at -1.1% y/y and the flash reading for
November Euro Area inflation came in at 0.3% y/y, the slowest in five years.
Meantime, the jobless rate held in double-digit territory at 11.5% (true, Germany’s
rate is half of that, but Italy is at a record high 13.2%). Oh, and did I mention that
inflation is at 0.3%? The ECB’s mandate is to keep inflation at or near 2%. As the
ECB’s Vítor Constâncio put it, “we’re in a situation of very low inflation that is very
far away from our objective”.
Jennifer Lee
Senior Economist
[email protected]
416-359-4092
Our Thoughts
Page 6 of 16
Regardless, the December 4th ECB meeting is likely too soon to pull the trigger. The
central bank has cut rates twice (June, September), and started buying covered bonds
in October, and asset-backed securities last week, all part of the Septemberannounced plan to help ease credit conditions. Plus, there’s been only one targeted
longer-term refinancing operation (TLTRO) so far and there are eight more to go.
ECB President Draghi wants to see how the next installment of the TLTRO plays out
on December 9-11th, particularly after the first take-up of €82.6 bln was
disappointing. (Actually, he described it as “within the range of take-up values we
had expected”, but that the September and December TLTROs “should be assessed
in combination”.) So at a minimum, both take-ups have to disappoint before the ECB
decides to step up their game. But the sense of urgency is ramping up. In Mr.
Draghi’s words last week, “It is essential to bring back inflation to target and
without delay. Monetary policy can and will do its part to achieve this.” Even Pope
Francis weighed in during an address to the European Parliament, suggesting: “The
time has come to promote policies which create employment.”
The Bottom Line: Look for the ECB to take the next easing step in early 2015.
Focus — November 28, 2014
Recap
Page 7 of 16
Focus — November 28, 2014
Jennifer Lee
Senior Economist
[email protected]
416-359-4092
Canada
 GDP growth stronger-thanexpected in Q3… and final
sales solid…
 …but oil price decline will
weigh in coming months
United States
 GDP growth stronger-thanexpected in Q3 but Q4 not
starting off well
 S&P 500 and Dow at or near
record highs
Japan
 Worrying sign: inflation
slows further
Europe
 ECB’s Draghi and
Constâncio give more hints
of sovereign debt purchases
 Government 10-year yields
tumble to record lows
 Slowing inflation a concern
Other
Good News
Bad News
Real GDP +2.8% a.r. (Q3)
Real GDP at Basic Prices +0.4% (Sep.)
Retail Sales +0.8% (Sep.)—volumes up 1%
Current Account Deficit narrowed to $33.6 bln a.r. (Q3)
Industrial Product Prices -0.5% (Oct.)
Raw Material Prices -4.3% (Oct.)
Ottawa’s Budget Deficit improves to $0.7 bln (Apr.-toSep.)—from $10.3 bln a year ago
Conference Board’s Consumer Confidence
Index -1.4 pts to 82.7 (Nov.)
Real GDP revised higher to +3.9% a.r. (Q3 P)
Real Personal Spending +0.2% (Oct.)—but soft
S&P Case-Shiller Home Price Index +0.3% (Sep.)
FHFA House Price Index unch (Sep.)
New Home Sales +0.7% to 458,000 a.r. (Oct.)
U of M Consumer Sentiment Index +1.9 pts to 88.8
(Nov. F)—a 7-year high
Conference Board’s Consumer Confidence Index
-5.4 pts to 88.7 (Nov.)
Initial Claims +21k to 313k (Nov. 22 week)
Pending Home Sales -1.1% (Oct.)
Core Durable Goods Orders -1.3% (Oct.)
Chicago PMI -5.4 pts to 60.8 (Nov.)
Industrial Production +0.2% (Oct. P)
Jobless Rate -0.1 ppts to 3.5% (Oct.)
Consumer Prices +2.9% y/y (Oct.)
Retail Sales -1.4% (Oct.)
Eurozone—Economic Confidence +0.1 pts to
100.8 (Nov.)
Eurozone—Jobless Rate unch at 11.5% (Oct.)—
did not worsen
Germany—Ifo Survey +1.5 pts to 104.7 (Nov.)—first
improvement in 7 months
Germany—Unemployment -14,000 (Nov.)
Germany— Retail Sales +1.9% (Oct.)
Germany— GfK Consumer Confidence +0.2 pts to
8.7 (Dec.)
U.K.—Nationwide House Prices +0.3% (Nov.)
Eurozone—Consumer Prices +0.3% y/y (Nov. P)
Eurozone—Private Sector Lending -1.1% y/y (Oct.)—still
shrinking but pace slowed
Germany—Consumer Prices +0.5% y/y (Nov. P)—slowest
pace since 2010
France—Consumer Spending -0.9% (Oct.)
Italy—Jobless Rate +0.3 ppts to 13.2% (Oct. P)
Italy—Retail Sales -0.1% (Sep.)
Spain—Consumer Prices -0.5% y/y (Nov.)—2nd slowest
pace since 2009
U.K.—GfK Consumer Confidence unch at -2 (Nov.)
India—Real GDP +5.3% y/y (Q3)
Brazil—Real GDP -0.2% y/y (Q3)
 OPEC decides to maintain
production ceiling of 30
mbpd
 China reportedly set to
launch deposit insurance
Indications of stronger growth and a move toward price stability are good news for the economy.
Feature
Page 8 of 16
Focus — November 28, 2014
How to Spur Global Growth:
Dig Deep
Chart 1
Benjamin Reitzes, Senior Economist • [email protected] • 416-359-5628
Real GDP
Could this be as good as it gets for global growth? After all, we’re
five years from the worst of the financial crisis, and the
improvement in economic conditions appears to be levelling off. For
Canada, Douglas Porter recently highlighted many reasons to
appreciate the current state of the economy—the jobless rate is close
to normal, consumer spending and housing remain firm, strong
household net worth is a good counterbalance to high debt levels
and government finances are improving. Could this also be as good
as it gets for Canada?
The short answer is no, especially for global growth. The current
backdrop suggests there is meaningful room for improvement.
Unfortunately, outside of the U.S., economic prospects are not
particularly bright, suggesting that global growth will be hardpressed to reach the 4%+ average rate seen in the decade prior to the
Great Recession (Chart 1). While we’re optimistic about the U.S.
outlook for 2015, Europe will continue to struggle, Japan is at risk
of entering the New Year in recession, and there’s little doubt China
is decelerating. Policymakers have struggled to provide a significant
lift to growth, with monetary policy doing most of the heavy lifting
amid generally tightening fiscal positions.
Policymakers can do more to improve global economic fortunes,
and they should take their cues from financial markets. Global
investors can’t get enough high-quality government debt, driving
long-term bond yields to record lows in many countries (Chart 2).
Governments should take advantage of exceptionally cheap
financing to make long-term capital investments. While there’s no
single proof-point, there is little doubt that infrastructure investment
has been lacking in recent years, as governments have been austerity
minded (Chart 3). Canada and Japan have been a bit more active,
but more still could be done. Now is the time act on this pressing
need and introduce a global infrastructure push.
Global Growth: Serially Disappointing
(ann % chng)
13 14e 15f 16f
World
Emerging Markets
G7
3.3 3.2 3.5 3.6
4.6 4.3 4.5 4.8
1.5 1.7 2.1 2.0
China
India
Asia¹
Canada
U.S.
Latin America²
Euro Area
Japan
Brazil
2015
2014
2013
2012
-2
0
2
4
6
8
Ranked by 2015
ex. China, Japan, India
ex. Brazil
e = estimate f = forecast
Source: [2015-16] BMO Capital Markets forecasts
1
2
Chart 2
Borrowing Costs at Generational Lows
(percent)
10-Year Government Bond Yields
10
Canada
8
6
U.S.
4
Germany
Japan
2
0
95
00
05
10
15
Chart 3
Fiscal Austerity Hit Investment
(2009 = 100)
Government Investment
In Toronto (which comes to mind first since it’s home), the primary
issue in this year’s municipal election was transportation
infrastructure, as the gridlock punishing the city is only getting worse.
Broad government involvement is essential, as is the need to look
beyond public transit. The rest of Canada, and other countries
throughout the world, certainly have projects that would be welcomed
by taxpayers. Not only does infrastructure provide long-term benefits,
but it provides short-term stimulus as well.
115
A globally coordinated effort, perhaps a 1% of GDP infrastructure
spending plan among the G20 over the next year or two, would
85
110
Japan
105
100
Canada
U.S.
95
90
European
Union
09
10
11
12
13
14
Feature
Page 9 of 16
provide a significant boost to the global economy. This would square
with the G20’s agreement to boost GDP by 2 ppts. Perhaps it would
even be enough to push growth out of the serial disappointment phase
coined by BoC Governor Poloz. Such an effort is made more essential
by the fact that, in much of the world, demographics are going to drive
a deceleration in potential GDP growth over the coming decades. In
addition to the short-term boost, infrastructure can provide long-term
support to growth. For example, easing gridlock in major cities
throughout the world would have numerous benefits such as
improving economic efficiency, not to mention the societal and
environmental aspects.
Focus — November 28, 2014
Chart 4
Government Debt Concerns
G7 (% of GDP)
Net Government Debt
Japan
Greece
Italy
U.S.
Spain
France
U.K.
Germany
Canada
143
95
91
92
125
120
86
56
73
22
71
43
64
30
This is clearly an ambitious plan and it’s naïve to think that every
29
country will be a willing participant, or even be able to pass such a
0
25
50
75
100
125
sizeable infrastructure package through their own legislatures, but
that doesn’t mean they shouldn’t try. The age of government Source: OECD Economic Outlook, November 2014
austerity has weighed on growth and has not eased debt burdens.
Indeed, generational lows in bond yields come despite elevated debt in much of the
developed world (Chart 4).
Perhaps the biggest issue with such a plan is that government isn’t the ideal delivery
vehicle for an efficient use of capital. But it’s the only sector that can provide the scale
necessary to be effective. Private sector partnerships might offset some of those concerns.
Even so, significant oversight on project selection and spending would be necessary.
China is an excellent example of the challenges facing such a sizeable endeavor. Bridges
to nowhere, empty apartment complexes, corruption and wastefulness are significant
problems. Indeed, each country will have idiosyncratic issues, highlighting the
exceptional challenge to implementing a global infrastructure spending plan.
While more infrastructure spending comes with ongoing costs, the focus on
containing government program spending and operating budgets needs to remain
sharp. Infrastructure projects can pay for themselves over time, but excessive
program spending and operating costs are not sustainable in the long run. Indeed,
large European economies are good examples, with Italy and France needing to enact
significant reforms and control spending to get their debt burdens under control.
The Government of Canada’s recently announced infrastructure spending of $5.8 bln
over three years is a good start, but the scale is modest. Even the 10-year $70 bln
New Building Canada Plan is insufficient, equaling about one-third of one percent of
GDP annually. Meantime, the European Union is reportedly on the verge of agreeing
to a €315 bln infrastructure plan, funded by €21 bln in seed money from national
governments. Whether the modest sum the public sector is putting up is enough to
drive that amount of private-sector spending is debatable, but at least the overall scale
is there at more than 2% of GDP.
Bottom Line: There is no reason to acquiesce to secular stagnation or accept persistently
soft economic growth. There is a fundamental need for significant infrastructure projects
on a global basis, and long-term borrowing costs remain exceptionally attractive—
negative in real terms, in some cases. We will need to strengthen our infrastructure at
some point: why not now, when growth is weak and borrowing costs are low.
2014
42
42
41
2008
150
175
Economic Forecast
Page 10 of 16
Focus — November 28, 2014
Economic Forecast Summary for November 28, 2014
BMO Capital Markets Economic Research
2014
2015
Annual
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2013
2014
2015
Real GDP (q/q % chng : a.r.)
1.0
3.6
2.8
2.2 
1.9 
2.2 
2.4 
2.5 
2.0
2.4 
2.4
Consumer Price Index (y/y % chng)
1.4
2.2
2.1
2.2
1.7 
1.4 
1.7 
2.1 
0.9
2.0 
1.7 
Unemployment Rate (percent)
7.0
7.0
6.9
6.6
6.6
6.5
6.4
6.4
7.1
6.9
6.5
175
197
199
188
189
186
184
181
188
190
185
Current Account Balance ($blns : a.r.) -45.0
-39.6
-33.6
-43.5 
CANADA
Housing Starts (000s : a.r.)
-52.1  -49.2  -45.7  -41.1 
-56.3
-40.5  -47.0 
(average for the quarter : %)
Interest Rates
Overnight Rate
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.25
1.00
1.00
1.05
3-month Treasury Bill
0.87
0.93
0.94
0.90
0.90
0.90
0.90
1.16
0.97
0.91
0.96
10-year Bond
2.47
2.35
2.14
2.04
2.07
2.16
2.32
2.56
2.26
2.25
2.28
Canada-U.S. Interest
(average for the quarter : bps)
Rate Spreads
90-day
82
90
91
88
88
81
57
60
91
88
72
10-year
-30
-27
-35
-31
-31
-32
-33
-35
-9
-31
-33
-2.1
4.6
3.9
2.3 
2.9
3.0
2.8
2.7
2.2
2.3 
3.0
Consumer Price Index (y/y % chng)
1.4
2.1
1.8
1.6
1.7
1.7
2.0
2.2
1.5
1.7
1.9
Unemployment Rate (percent)
6.7
6.2
6.1
5.8
5.6
5.4
5.2
5.0
7.4
6.2
5.3
0.93
0.99
1.03
1.02
1.11
1.19
1.27
1.31
0.93
0.99
1.22
Current Account Balance ($blns : a.r.) -408
-394
-388  -408 
-400
-400  -440 
UNITED STATES
Real GDP (q/q % chng : a.r.)
Housing Starts (mlns : a.r.)
-420  -434  -445  -459 
(average for the quarter : %)
Interest Rates
Fed Funds Target Rate
0.13
0.13
0.13
0.13
0.13
0.21
0.46
0.71
0.13
0.13
0.38
3-month Treasury Bill
0.05
0.03
0.03
0.02
0.02
0.09
0.33
0.56
0.06
0.03
0.25
10-year Note
2.76
2.62
2.50
2.35
2.38
2.48
2.65
2.90
2.35
2.56
2.60
EXCHANGE RATES
(average for the quarter)
US¢/C$
90.6
91.7
91.8
88.7
87.8
86.8
85.8
85.1
97.1
90.7
86.4
C$/US$
1.103
1.090
1.089
1.127
1.139
1.153
1.166
1.175
1.030
1.103
1.158
¥/US$
103
102
104
112
116
117
118
120
98
105
118
US$/Euro
1.37
1.37
1.32
1.26
1.24
1.23
1.22
1.20
1.33
1.33
1.22
US$/£
1.66
1.68
1.67
1.60
1.58
1.56
1.55
1.53
1.56
1.65
1.55
Blocked areas represent BMO Capital Markets forecasts
Up and down arrows indicate changes to the forecast 
Key for Next Week
Page 11 of 16
Focus — November 28, 2014
Canada
Bank of Canada Policy
Announcement
Wednesday, 10:00 am
Employment
Friday, 8:30 am
Nov. (e)
+15,000 (+0.1%)
Consensus +5,000 (+0.03%)
Oct.
+43,100 (+0.2%)
Nov. (e)
Unemployment Rate
6.6%
Oct.
6.5%
Nov. (e)
Oct.
Average Hourly Wages
+1.7% y/y
+1.5% y/y
Consensus 6.6%
Merchandise Trade Balance
Friday, 8:30 am
Oct. (e)
+$200 mln
Consensus +$50 mln
Sep.
+$710 mln
The Bank of Canada is expected to hold interest rates steady
at 1% for a 34th straight meeting. For an in-depth look at the
Bank of Canada policy announcement, see Page 5.
Benjamin Reitzes
Senior Economist
[email protected]
416-359-5628
Canada’s labour market appears to have woken from a year-long slumber, with big job
gains in September and October. Even the underlying details and sector composition
of hiring were encouraging, with manufacturing recording solid increases. However,
given the volatility of the survey, we’re not quite convinced job growth has kicked
into a higher gear. November’s report will be the litmus test, as three months of solid
data would be difficult to ignore. Given the economy’s solid performance since the
start of 2013—five of seven quarters with above-potential growth—job growth should
be trending at, or slightly above, 1%. We’re calling for a 15,000 increase in
employment, which would confirm the solid trend and suggest the economy may have
been stronger than the Bank of Canada thought (though the drop in oil prices will
dampen any enthusiasm). Watch involuntary part-time employment, which is a
measure of slack Governor Poloz has highlighted. Our employment call would push
the jobless rate up a tick to 6.6%, still well down from a year ago and close to what
has been traditionally thought of as levels close to full-employment.
Canada’s October merchandise trade account is expected to be in surplus for the
seventh month in the past nine. There are likely to be some upward revisions as well,
with the current account data pointing to a wider surplus in Q2 and Q3 than initially
reported in the monthly trade figures. Exports are expected to be down modestly, due
entirely to the drop in energy prices—and they fell meaningfully further in November,
suggesting a potential return to deficit. Better non-energy exports, benefiting from
solid U.S. demand and a weaker C$, will provide some offset. Imports look to be up
slightly, consistent with persistently firm consumption. While the goods surplus will
probably shift to a deficit over the next few months, the move will be due largely to
price shifts, suggesting that it won’t necessarily be a negative for GDP growth.
United States
Manufacturing ISM
Monday, 10:00 am
PMI
Nov. (e)
58.0
Prices Paid
52.0
Oct.
53.5
Consensus 57.9
59.0
52.5
Nonmanufacturing ISM
Wednesday, 10:00 am
Nov. (e)
57.1
Consensus 57.5
Sep.
57.1
While factories in Asia and Europe are struggling, Michael Gregory, CFA
American firms are on an upswing. After jumping to three- Deputy Chief Economist
year highs, the ISM manufacturing index is expected to [email protected]
416-359-4747
recede only slightly to 58.0 in November. Last month, 16 of Sal Guatieri
18 industries reported growth, and respondent comments Senior Economist
were upbeat. Although a stronger dollar has curbed exports, [email protected]
416-359-5295
strength in business investment and construction is fuelling
a manufacturing rebound. Production is up 3.4% y/y to October, versus a half-century
norm of 2.9%, and is poised to top pre-recession highs.
Although the ISM nonmanufacturing index ebbed in the past two months after
reaching nine-year highs in the summer, it likely stabilized in November. Domestic
oil production is (so far) holding firm, despite plunging crude prices, while retail
spending is expected to improve moderately this holiday season, supported by intense
discounting and lower gasoline prices. However, winter’s early arrival likely dented
construction and transportation. Almost all major industries (16 of 18) reported
Key for Next Week
Page 12 of 16
Focus — November 28, 2014
growth in October. However, the respondents’ comments were mixed, with “cautious
optimism” summarizing the prevailing mood.
Beige Book
Wednesday, 2:00 pm
Nonfarm Payrolls
Friday, 8:30 am
Nov. (e)
+230,000
Consensus +225,000
Oct.
+214,000
Nov. (e)
Unemployment Rate
5.8%
Oct.
5.8%
Nov. (e)
Average Hourly Earnings
+0.2%
Oct.
+0.1%
Consensus 5.8%
Consensus +0.2%
Goods & Services Trade Deficit
Friday, 8:30 am
Oct. (e)
$40.9 bln
Consensus $41.2 bln
Sep.
$43.0 bln
The Beige Book will cover the period from early October to mid-November. It seems
unlikely that the previous overall conclusion of “modest to moderate” economic
growth across the Fed’s 12 districts will change, particular given the softer tone to
some of October’s indicators. (For the record, the previous district tally was 6
“moderate”, 5 “modest” and 1 “mixed”.) However, not all October indicators were
softer (the employment report was particularly solid). And, an early look at
November could reveal whether residential real estate activity has picked up from
October’s mixed pace and whether the falling jobless rate is imparting any pressure
on wages. Upward pressure on wages for the highly skilled was noted by half the
regions in the prior report, although it concluded that “overall wage pressures remain
contained across most Districts.”
Nonfarm payrolls are expected to increase 230,000 in November, close to the fourmonth average and a step up from October’s 214,000 gain. Almost every industry has
created jobs this year, with firms both capable and willing to expand. The
unemployment rate should remain at six-year lows of 5.8%, assuming some payback
from October’s outsized (683,000) increase in household survey employment.
However, other measures of slack should improve, with declines in the number of
involuntary part-time workers and marginally attached persons, and in the duration of
joblessness. While average hourly earnings remain sedate, rising at a 2% annual pace,
broader wage indicators, such as the employment cost index and hourly compensation,
have turned higher, though neither signals an imminent rise in inflation.
October’s goods and services trade balance will reflect the push and pull of opposite
forces, similar to the past several months. Pulling the overall deficit wider, we look
for continued deterioration in the deficit in non-petroleum goods trade, which is
already at its largest level in more than 7½ years ($47.2 billion). This reflects
relatively stronger growing U.S. domestic demand compared to foreign counterparts
and a stronger U.S. dollar. In October, the greenback appreciated 1.3% against the
broad basket of currencies (+5.2% y/y). This also reflects the labour dispute at
America’s west coast ports. Eyeing the recent July 1st end of the port workers’
contract (and with 2002’s strike still in memory), importers have been expediting
their shipments for several months; so much so that port congestion has now become
a problem. (Note that, because of unsuccessful contract negotiations, select labour
disruptions started on October 31st).
Pushing the trade gap narrower, we look for continued improvement in the deficit in
petroleum goods, which is already at its smallest level in nearly 4½ years ($14.0
billion). This reflects rising domestic (shale) crude oil production and, partly because
of this feedstock, increasing exports of refined and semi-refined products. In October,
imports of all petroleum products averaged their lowest level in at least 23 years, and
exports averaged their highest level in as long a period. Meanwhile, crude oil prices
plummeted 9.5% in October (-16.1% y/y). We judge the pushing forces overwhelmed
the pulling ones in the month, allowing the overall trade deficit to shrink.
Financial Markets Update
Page 13 of 16
Focus — November 28, 2014
Nov 28 ¹
Nov 21
Week Ago
4 Weeks Ago
Dec. 31, 2013
Canadian
Money Market
Call Money
Prime Rate
1.00
3.00
1.00
3.00
0
0
(basis point change)
0
0
U.S. Money
Market
Fed Funds (effective)
Prime Rate
0.25
3.25
0.25
3.25
0
0
0
0
0
0
3-Month
Rates
Canada
United States
Japan
Eurozone
United Kingdom
Australia
0.91
0.01
-0.05
0.08
0.55
2.76
0.91
0.01
-0.02
0.08
0.56
2.74
0
0
-2
0
0
2
2
0
-5
0
0
4
0
-6
-11
-21
3
16
2-Year Bonds
Canada
United States
Canada
United States
Japan
Germany
United Kingdom
Australia
1.02
0.50
1.89
2.20
0.42
0.70
1.92
3.03
1.06
0.50
2.01
2.31
0.46
0.77
2.05
3.26
-5
0
-12
-11
-4
-7
-13
-24
-1
1
-16
-13
-4
-14
-33
-26
-12
12
-87
-83
-32
-123
-110
-121
12.4
23
60
328
12.9
23
64
344
-0.5 pts
0
-4
-16
-1.6 pts
0
-4
-12
10-Year Bonds
Risk
Indicators
VIX
TED Spread
Inv. Grade CDS Spread ²
High Yield CDS Spread ²
Currencies
US¢/C$
C$/US$
¥/US$
US$/€
US$/£
US¢/A$
Commodities
CRB Futures Index
Oil (generic contract)
Natural Gas (generic contract)
Gold (spot price)
Equities
S&P/TSX Composite
S&P 500
Nasdaq
Dow Jones Industrial
Nikkei
Frankfurt DAX
London FT100
France CAC40
S&P ASX 200
¹ = as of 10:30 am
² = One day delay
87.40
1.144
118.54
1.2465
1.565
85.01
89.02
1.123
117.79
1.2391
1.566
86.70
0
0
-1.3 pts
5
-2
22
-1.8
—
0.6
0.6
-0.1
-1.9
(percent change)
-1.5
—
5.5
-0.5
-2.2
-3.4
-7.2
—
12.6
-9.3
-5.5
-4.7
259.69
69.07
4.22
1,182.86
269.11
76.51
4.42
1,201.55
-3.5
-9.7
-4.4
-1.6
-4.5
-14.2
9.0
0.8
-7.3
-29.8
-0.2
-1.9
14,838
2,073
4,804
17,870
17,460
9,956
6,722
4,368
5,313
15,111
2,064
4,713
17,810
17,358
9,733
6,751
4,347
5,304
-1.8
0.5
1.9
0.3
0.6
2.3
-0.4
0.5
0.2
1.5
2.7
3.7
2.8
6.4
6.7
2.7
3.2
-3.9
8.9
12.2
15.0
7.8
7.2
4.2
-0.4
1.7
-0.7
Global Calendar: December 1 – December 5
Wednesday December 3
Capital Spending
Q3 (e)
+2.0% y/y
Q2
+3.0% y/y
Composite PMI
Nov.
Oct.
49.5
Manufacturing PMI
Nov. F (e) 52.1
Oct.
52.4
Services PMI
Nov.
Oct.
48.7
EURO AR
Manufacturing PMI
Nov. F (e) 50.4
Oct.
50.6
ITALY
Real GDP
Q3 F (e)
-0.1%
Q3 P
-0.1%
Q2
-0.2%
U.K.
Japan
Tuesday December 2
Euro Area
Monday December 1
Manufacturing PMI
Nov. (e)
53.0
Oct.
53.2
EA
EURO AREA
Producer Price Index
Oct. (e)
-0.3%
-1.3% y/y
Sep.
+0.2%
-1.4% y/y
EURO AREA
Composite PMI
Nov. F (e) 51.4
Oct.
52.1
Retail Sales
Oct. (e)
+0.5%
Sep.
-1.3%
Construction PMI
Nov. (e)
61.0
Oct.
61.4
Friday December 5
Leading Index
Oct. P (e) 104.1
Sep.
105.6
Services PMI
Nov. F (e) 51.3
Oct.
52.3
-0.4% y/y
-0.4% y/y
-0.3% y/y
Thursday December 4
EURO AREA
Retail PMI
Nov.
Oct.
47.0
ECB Monetary Policy Meeting
+1.6% y/y
+0.6% y/y
Real GDP
Q3 P (e)
Q3 A
Q2
EURO AREA
+0.2%
+0.8% y/y
+0.2%
+0.8% y/y
+0.1%
+0.8% y/y
GERMANY
Factory Orders
Oct. (e)
+0.5%
unch y/y
Sep.
+0.8%
-1.0% y/y
Composite PMI
Nov. (e)
56.3
Oct.
55.8
Services PMI
Nov. (e)
56.5
Oct.
56.2
Other
Bank of England Monetary Policy Meeting (Dec. 3-4)
CHINA
Manufacturing PMI
Nov. (e)
50.5
Oct.
50.8
HSBC Manufacturing PMI
Nov. F (e) 50.0
Oct.
50.4
AUSTRALIA
Building Approvals
Oct. (e)
+5.0%
-6.5% y/y
Sep.
-11.0%
-13.4% y/y
Reserve Bank of Australia Monetary
Policy Meeting
INDIA
Reserve Bank of India Monetary Policy
Meeting
HSBC PMI
Nov.
Oct.
CHINA
Composite Services
51.7
52.9
Non-manufacturing PMI
Nov.
Oct.
53.8
AUSTRALIA
Real GDP
Q3 (e)
+0.7%
+3.1% y/y
Q2
+0.5%
+3.1% y/y
BRAZIL
Central Bank of Brazil Monetary Policy
Meeting
AUSTRALIA
Retail Sales
Oct. (e)
+0.1%
Sep.
+1.2%
Trade Deficit
Oct. (e)
A$1.8 bln
Sep.
A$2.3 bln
MEXICO
Central Bank of Mexico Monetary Policy
Meeting
North American Calendar:
December 1 – December 5
Canada
Monday December 1
9:30 am
Nov.
Oct.
RBC Manufacturing PMI
Tuesday December 2
Wednesday December 3
Quebec Economic and Fiscal Update
10:00 am BoC Policy Announcement
5:30 pm BoC Governor Poloz gives an
interview at The Economist’s
Canada Summit in Toronto
55.3
Auto Sales D
Nov.
Oct.
Thursday December 4
10:00 am
Nov.
Oct.
Friday December 5
Ivey Purchasing Managers’ 8:30 am
Index (s.a.)
Nov. (e)
Employment
+15,000 (+0.1%)
51.2
Oct.
8:30 am
Nov. (e)
+43,100 (+0.2%)
Unemployment Rate
6.6%
Oct.
8:30 am
Nov. (e)
Oct.
8:30 am
Oct. (e)
6.5%
Average Hourly Wages
+1.7% y/y
+1.5% y/y
Merchandise Trade Balance
+$200 mln
Sep.
8:30 am
Q3 (e)
Q2
+$710 mln
Labour Productivity
-0.2%
+1.8%
8:30 am
Nov. (e)
Nonfarm Payrolls
+230,000
+6.5% y/y
Consensus +5,000 (+0.03%)
Consensus 6.6%
Consensus +$50 mln
United States
10:35 am 3-, 6- & 12-month T-bill
auction $10 bln
(new cash -$4.4 bln)
9:45 am
Markit Manufacturing PMI 7:45 am
ICSC Same-Store Sales
(Nov. F)
Nov. 29
Nov. 22 (mtd) +2.2%
+1.7% y/y
10:00 am Manufacturing ISM
8:30
am
Fed
Chair
Yellen
speaks in
PMI
Prices Paid
Washington
Nov. (e)
58.0
52.0
8:55 am
Redbook Same-Store Sales
Consensus 57.9
52.5
Nov. 29
Oct.
59.0
53.5
Nov. 22 (mtd) -0.8%
+4.0% y/y
Total Vehicle Sales D
10:00
am
Construction
Spending
Nov. (e)
16.5 mln a.r.
Oct. (e)
+0.3%
Consensus 16.5 mln a.r.
Consensus +0.6%
Oct.
16.4 mln a.r.
Sep.
-0.4%
11:00 am
Business Roundtable CEO
Economic Outlook Survey
(Q4)
30-year real return bond auction
announcement
7:00 am
Nov. 28
Nov. 21
MBA Mortgage Apps
-4.3%
7:30 am
Nov.
Oct.
8:15 am
Nov. (e)
ADP National
Employment Report
+225,000
8:30 am
Initial Claims
Nov. 29 (e) 295k (-18k) C
Nov. 22
313k (+21k)
Oct.
8:30 am
Nov. (e)
+214,000
Unemployment Rate
5.8%
Oct.
+230,000
8:30 am
Oct.
8:30 am
Nov. (e)
5.8%
Average Hourly Earnings
+0.2%
Q3 F (e)
Productivity Unit Labour
Costs
+2.4% a.r. unch a.r.
8:30 am
Nov. 22
Nov. 15
Q3 P
Q2
+2.0% a.r.
+2.9% a.r.
10:00 am
Nov. (e)
Nonmanufacturing ISM
57.1
Oct.
2:00 pm
57.1
Beige Book
Consensus +221,000
Consensus +2.2% a.r.
+0.2% a.r.
+0.3% a.r.
-0.5% a.r.
Consensus 57.5
Fed Speakers: New York’s Dudley (12:15
pm); Vice Chair Fischer (1:00 pm)
11:00 am 4-week bill auction
announcement
11:30 am 13- & 26-week bill auction
$50.0 bln
C
= consensus
D
= date approximate
R
Fed Speakers: Vice Chair Fischer (8:10
am); Governor Brainard (12:00 pm)
11:30 am 4-week bill auction
= reopening
Fed Speakers: Philadelphia’s Plosser
(12:30 pm); Governor Brainard (2:00
pm); Dallas’ Fisher (7:30 pm)
Challenger Layoff Report
+11.9% y/y
Continuing Claims
2,316k (-17k)
ICSC Chain-Store Sales
Nov. (e)
+4.1 % y/y
Oct.
+4.6% y/y
Consensus +225,000
Consensus 5.8%
Consensus +0.2%
Oct.
+0.1%
8:30 am
Oct. (e)
Goods & Services
Trade Deficit
$40.9 bln
Sep.
10:00 am
Oct. (e)
$43.0 bln
Factory Orders
-0.3%
Sep.
3:00 pm
Oct. (e)
-0.6%
Consumer Credit
+$16.0 bln
Consensus $41.2 bln
Consensus unch
Fed Speakers: Cleveland’s Mester (8:30 Consensus +$16.5 bln
am); Governor Brainard (12:30 pm)
Sep.
+$15.9 bln
11:00 am 13-, 26- & 52-week bill, 3-&
10R-year note, 30R-year
Fed Speakers: Cleveland’s Mester (8:45
bond auction
am); Vice Chair Fischer (2:45 pm)
announcements
Upcoming Policy Meetings | Bank of Canada: Jan. 21, Mar. 4, Apr. 15 | FOMC: Dec. 16-17, Jan. 27-28, Mar. 17-18
Page 16 of 16
Focus — November 28, 2014
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