Focus - BMO Nesbitt Burns
Transcription
Focus - BMO Nesbitt Burns
Douglas Porter, CFA, Chief Economist, BMO Financial Group February 6, 2015 Feature Article Page 7 Canadian Dollar Drop: Who Wins, Who Loses? U.S. Payrolls: Best 3-Month Gain in 18 Years Global Central Banks Easing: Denmark, PBoC, RBA ECB Cuts One Avenue Off for Greece Oil Prices Rebound Despite Big Inventory Build BMO Capital Markets Economics www.bmocm.com/economics 1-800-613-0205 Please refer to page 15 for important disclosures BoE on Hold Our Thoughts Page 2 of 15 Focus — February 6, 2015 Hey, Hey, My, My, Oil & Yields Can Never Rise? T he answer to that question appeared to be a resounding “no, they can never rise”, at least until this week. While it is still early days, and the rebound is fledgling, it does appear that both are at last trying to form a bottom. Even with an ugly mid-week spill on record U.S. inventories, oil prices did something remarkable—they managed to rise on a weekly average basis for the first time in 20 long weeks. WTI is currently up 16% from last week’s lows of under $44, but Brent has powered up an even more impressive 25% in under two weeks and is now at a 2015 high of $58. (Unsurprisingly, retail gasoline prices have been quick to respond, but I digress.) We continue to believe that oil will remain on the defensive for some time yet, given the ongoing build-up of inventories, but the market is clearly impressed by the rapid decline in active drilling rigs in the U.S. and the run of spending cuts announced by the major oil producers in recent days. Similar to oil, it tentatively appears that long-term bond yields have also found a bottom, although given the many false dawns previously, we would stress the word “tentatively”. After approaching a post-recession low of under 1.7% last week, the 10-year Treasury yield bounced roughly 25 bps this week to above 1.9%. Rising oil prices and solid equity gains started the move, but the finishing touch was delivered by the robust January employment report on Friday, which alone triggered about half the yield rise. After a few weeks of so-so U.S. economic data, the jobs report washed away any doubts on the underlying strength of the recovery. Above and beyond the solid 257,000 payroll gain for January, the two prior months were revised up sharply (November saw the biggest rise in private sector jobs in 17 years at 414,000). While the unemployment rate edged up a tick to 5.7%, that reflected a 1 million rise in the labour force, and both jobs surveys have averaged gains of more than 300,000 over the past three months. Piling on, wages reversed the prior month’s decline and remain nicely above inflation at 2.2% y/y. The Fed can certainly afford to remain patient before hiking rates, given the soggy global backdrop, the strong U.S. dollar and the downward pull on inflation from low oil prices. However, if this type of job growth persists, few would seriously doubt the wisdom of some mild policy snugging later this year. Canadian bond yields also bounced off the bottom, finally. After touching an all-time record low of 1.23% at the start of the week, 10-year GoCs rose 20 bps to 1.43%, and 30years pushed back above 2%. Still, both are down roughly 35 bps just since the start of the year, and remain remarkably low by any metric. The main reason Canadian yields had plunged so far was the dramatic dovish turn by the Bank of Canada, including the January rate cut, and the widespread prospect of more. However, this week’s action at the very least cast a shadow of doubt on a further cut. First, there is the long-awaited firming in oil prices. Second, the long-standing concern about household debt raised its ugly mug again, with McKinsey centring out Canada as one of seven trouble spots. (While we would sharply dispute some of their comparisons, the broader concern about an overly loose monetary policy threatening to aggravate this vulnerability is valid.) Finally, much of the economic data from Canada was surprisingly decent, especially in light of the wave of ugly headline news so far this year. To wit, employment was up 35,400 and the jobless rate fell a tick to 6.6%, auto sales rose 3.4% y/y, home sales were still solid in non-oil regions, and consumer confidence rose to a five-year high in January (take that Douglas Porter, CFA Chief Economist [email protected] 416-359-4887 Our Thoughts Page 3 of 15 Focus — February 6, 2015 Target, oil patch, BoC etc etc etc). Staggeringly, Alberta continues to lead the country in job growth (it’s now up 3% y/y in that province), despite some losses in the natural resource sector. Even so, we suspect that the Bank is still likely to trim again in one of the next two meetings, given their broader list of concerns. The natural follow-through from firmer oil prices and a slightly better economic backdrop was a less negative Canadian dollar. Following the near-record 9% drubbing in January, the currency managed to strengthen 2% to finish close to 80 cents, its first weekly gain in almost three months. The reprieve may prove temporary if we are right on a) oil prices remaining on the defensive, and b) the Bank remaining bound and determined to trim again. Nevertheless, the main message from this week’s market action and from the underlying economic data is that there actually will now be a bit more of a two-way trade in oil prices, bond yields and the Canadian dollar, and we haven’t been able to say that in quite some time. Pressure’s on Consumers to Carry the U.S. Expansion T here’s a lot riding on the American consumer this year. With energy producers slashing capex, the mighty dollar drilling a hole in the trade balance, and government spending likely to provide only limited support, the pressure is on households to step to the plate and spend about 1% faster than last year—if not, we won’t see 3% GDP growth this year. We believe households are up for the challenge. Recent trends in consumer spending are encouraging. Personal spending accelerated in each quarter of 2014, and closed with the fastest pace (4.3%) in nearly nine years. Moreover, the strength cut across a wide range of goods and services. Auto sales accelerated to eight-year highs in the fourth quarter, as did spending on services. For the year as a whole, the 2.5% increase in personal consumption, though no ball of fire, was the best since 2006, and a notable step up from the average 2.1% rate in the prior four years. While spending retraced slightly in December, continued strong auto sales in January (16.7 million annualized) suggest consumers are starting the year on the right track. Our confidence in a stronger consumer is buoyed by several factors. First, American businesses are now hiring at the fastest rate in 15 years (with over 3.1 million jobs created last year), and the pace has only increased in recent months. Wage growth is also starting to turn up, albeit slowly and to only around 2% or so. That’s not enough to fuel inflation, but it will support spending. Moreover, wages will rise faster as the unemployment rate drifts toward 5% this year. Second, cheaper gasoline should boost purchasing power by about 1½% this year compared with last summer. Third, American households have never been wealthier, and rising home and equity markets suggest the trend will continue. However, a key reason we expect consumers to spend at a 3.5% clip this year is that they are less weighed down by debt. The end of deleveraging should allow for at least moderate (and more sustainable) borrowing to support demand. According to data from the New York Fed, households had almost $1 trillion less debt in 2014Q3 than in mid2008, a 7.6% decline. At 90% of disposable income, the debt ratio is the lowest since 2003—before the credit party really got going. While households have taken on $166 billion more personal debt since 2008 (largely student and auto loans), they have chopped home equity lines of credit by about $200 billion and credit card balances by nearly as much. Moreover, mortgage balances are down $1.2 trillion (largely via foreclosures). Sal Guatieri Senior Economist [email protected] 416-359-5295 Our Thoughts Page 4 of 15 Focus — February 6, 2015 Combined with record low borrowing costs, a smaller debt load means the cost of servicing it has never been lower in the last three decades, at less than 10% of income. Granted, a lower homeownership rate (back to 1994 levels) means more people are paying rent than in 2008. However, even including rental payments, the financial obligations ratio is sitting at lows not mined since the early 1980s. As a result, households are under much less financial strain. Personal loan delinquency rates have never been lower in the past four decades, and the same applies to bank-issued auto loans. Credit card delinquency rates are also very low. Mortgage delinquencies have fallen sharply, and the new foreclosure rate has returned to normal levels at 0.41%, bang on the historical mean. The improvement in finances paves the way for increased borrowing that will support both consumer spending and home sales (which also tends to drive consumption). In fact, total consumer credit has already picked up to 7.1% y/y in November from 6.2% in 2013, and not just because of soaring auto loans. Revolving credit is up 3.5%, a six-year high. While student loan growth is starting to moderate (not a bad thing), revolving credit should quicken as wage growth increases. The Fed’s survey of loan officers reports consistently stronger demand for consumer loans in the past three years. This is not to say there aren’t potential problems on the debt front. Student and auto loans have ballooned in recent years, and now account for 18% of total household debt versus 11% in 2008. Student debt has doubled in the past seven years to $1.13 trillion in 2014Q3. Consequently, student loan delinquency rates (30-days or longer) have risen to around 9%. Outstanding auto loans are rising at a hefty 11% clip and now stand just shy of $1 trillion. Subprime auto financing is on the rise, and accounts for one in four new auto loans versus one in five in 2009, according to Equifax. While auto loan defaults remain low, this won’t last if the economy turns down. Growth in student and auto loans is bound to slow, especially when interest rates normalize in coming years. However, overall credit should continue to grow at a decent rate this year. Long-term interest rates are expected to remain low even if the Fed tightens policy modestly. And, so long as household credit rises alongside expected faster income growth, the accumulation of debt in this cycle should be more sustainable than it was a decade ago. Still smarting from the financial crisis, most households will likely live within their means this time. Bank of Canada Rethink? A ll of a sudden, things aren’t looking quite as bleak for Canada. Oil prices have bounced back and are sitting near the BoC’s January MPR assumption ($60 Brent, $55 WTI, $40 WCS), employment rebounded in January (even if the details were soft), and the U.S. economy looks like it might kick into high gear at any moment following the best three-month job gain since 1997. These factors suggest the Bank of Canada may not be as quick to pull the trigger on another rate cut in March. Indeed, the question of whether they could reverse January’s cut was even posed by some. Despite the above positives, we’re not ready to abandon our call for a March cut, though the decision is a bit less one-sided now. In the post-meeting press conference, Governor Poloz revealed that the Bank’s initial forecast had the output gap closing in Benjamin Reitzes Senior Economist [email protected] 416-359-5628 Our Thoughts Page 5 of 15 Focus — February 6, 2015 late 2017. That forecast shifted to the end of 2016 after the BoC lowered the path for the policy rate. It’s tough to believe that one 25 bp rate cut would be enough to pull forward the closing of the output gap by about three quarters, suggesting there’s at least one more rate cut built into the BoC’s projection. Moreover, if Poloz signals that the BoC has taken out sufficient “insurance”, the Canadian dollar will likely appreciate sharply and that doesn’t seem to be policymakers’ preference. The odds still favour another cut by the Bank of Canada. You Go First. No, You Go First. No, You Go First… A nother week, another round of central banks providing more stimulus. This has been the case over the past month, starting with the RBI, SNB, Turkey, BoC, Denmark (4x now!), ECB, Singapore, Russia, RBA, and the PBoC, to name a few. Overall, while it is good news that we have so much stimulus, it is not good news that we need so much stimulus. In particular, China’s easing of reserve requirements was notable, given that we have yet to see hard January data. Sure the January PMI surveys were disappointing, and could be blamed on the crackdown on government officials to spend less on lavish gifts ahead of the Chinese New Year. But, these are surveys, not actual data. The early move to lower reserve ratios suggests that China’s government is becoming increasingly concerned about slower growth and is, again, stepping in to soften the blow. Unless there is something going on that the world is not privy to, the easing move sends a message that the PBoC will be there, again, to bail everyone out if needed. This suggests we could see more risk-taking, more borrowing and, potentially, a higher mountain of bad debt. This is something to keep an eye on in coming months. Also, has everyone kept up with all of the developments in Greece? Depending on who you are listening to, the talks between Greece’s newly-elected government led by Syriza and the rest of Europe are either going swimmingly, or not well at all. I’m going to lean toward the latter. The ECB’s decision this week to lift the waiver on allowing Greek bonds to be used as collateral was very much a “talk to the hand” signal. In a nutshell, when Greek banks needed to borrow from the ECB, they were allowed to use Greek government debt as collateral. But that was on the assumption that Greece would comply with the bailout terms. That waiver was set to expire on February 28th. Now, the ECB cannot assume that there will be a successful conclusion of the review of that program. So, the message is: “Sorry, we can’t take those bonds as collateral.” If the banks need funding now, they will have to turn to the ELA (Emergency Liquidity Assistance), which is a program where the Bank of Greece can lend to Greek banks, but at a higher rate of interest. And, the ECB has the power to restrict these loans if two-thirds of the governing council feel it is warranted. So now what? Someone has to blink. It doesn’t appear that Germany will ease its demands on Greece, nor will the ECB. The market is nervous that a Grexit is a growing possibility, which has sent 10-year Greek yields up to 10%. Granted this is far from the sky-high 40% they hit in 2012 but still near two-year highs. There has to be some compromise… the question is who will blink first? Jennifer Lee Senior Economist [email protected] 416-359-4092 Recap Page 6 of 15 Focus — February 6, 2015 Jennifer Lee Senior Economist [email protected] 416-359-4092 Canada Welcoming some better economic news United States Employers start the year off on a hiring binge Q4 GDP growth to be revised lower on wider trade gap and drop in manufacturing inventories Japan PM Abe’s nominee for the BoJ a supporter of aggressive monetary stimulus Europe Rough week for Greece… proposal to swap current debt with GDP-linked bonds receives a cool reception from Germany… ECB to stop accepting Greek debt as collateral from banks BoE on hold Denmark cuts… again Other China’s RRR -50 bps RBA -25 bps RBI on hold Good News Bad News Employment +35,400 (Jan.) Jobless Rate -0.1 ppts to 6.6% (Jan.) Average Hourly Wages +2.0% y/y (Jan.) Auto Sales +3.4% y/y (Jan.) Conference Board’s Consumer Confidence Index +2.7 pts to 107.0 (Jan.)—highest since 2010 Building Permits +7.7% (Dec.) Merchandise Trade Deficit grew to $649 mln (Dec.)—but non-energy shortfall narrowed to a 5-mth low $5.7 bln Industrial Product Prices -1.6%; Raw Material Prices -7.6% (Dec.) Ivey Manufacturing PMI -10 pts to 45.4; RBC Manufacturing PMI -2.9 pts to 51.0 (Jan.) Nonfarm Payrolls +257,000 (Jan.) Labour Force +1,051k (Jan.)—but lifted the jobless rate 0.1 ppts to 5.7% Average Hourly Earnings +0.5% (Jan.) Nonmanufacturing ISM +0.2 pts to 56.7 (Jan.) Auto Sales +8.9% y/y to 16.7 mln units a.r. (Jan.) Construction Spending +0.4% (Dec.) Real Personal Spending -0.1% (Dec.) Manufacturing ISM -1.6 pts to 53.5 (Jan.) Factory Orders -3.4% (Dec.) Goods & Services Trade Deficit grew to $46.6 bln (Dec.) Initial Claims +11k to 278k (Jan. 31 wk)—but still low Nonfarm Productivity -1.8% a.r. (Q4 P) Unit Labour Costs +2.7% a.r. (Q4 P) Manufacturing PMI +0.2 pts to 52.2 (Jan. F) Leading Index +1.3% (Dec. P) Services PMI -0.4 pts to 51.3; Composite PMI -0.2 pts to 51.7 (Jan.) Eurozone—Services PMI +1.1 pts to 52.7; Composite PMI +1.2 pts to 52.6 (Jan. F) Eurozone—Retail Sales +0.3% (Dec.) Germany—Factory Orders +4.2% (Dec.) U.K.—Manufacturing PMI +0.3 pts to 53.0; Construction PMI +1.5 pts to 59.1; Services PMI +1.4 pts to 57.2; Composite PMI +1.4 pts to 56.7 (Jan.) Eurozone—Retail PMI -1 pt to 46.6 (Jan.) Eurozone— Producer Prices -1.0% (Dec.) Germany—Industrial Production +0.1% (Dec.) —below expected France—Trade Deficit grew to €3.4 bln (Dec.) Italy—Consumer Prices -0.4% y/y (Jan. P) U.K.—Trade Deficit widened to £10.1 bln (Dec.) Australia—Retail Sales +0.2% (Dec.) New Zealand—Employment +3.5% y/y (Q4) China—Manufacturing PMI -0.3 pts to 49.8; Nonmanufacturing PMI -0.4 pts to 53.7 (Jan.) China—HSBC Manufacturing PMI revised down to 49.7; Services PMI -1.6 pts to 51.8; Composite PMI -0.4 pts to 51.0 (Jan.) Australia—Trade Deficit narrowed to A$436 mln (Dec.) Australia—Building Approvals -3.3% (Dec.) Indications of stronger growth and a move toward price stability are good news for the economy. Feature Page 7 of 15 Focus — February 6, 2015 Canadian Dollar Drop: Who Wins, Who Loses? Chart 1 Douglas Porter, CFA, Chief Economist • [email protected] • 416-359-4887 Benjamin Reitzes, Senior Economist • [email protected] • 416-359-5628 Canadian Dollar The Canadian dollar was battered in January, falling a near-historic 9%, the second biggest monthly decline on record (behind only the dark days of October 2008). The currency was hit with three major negative shocks in rapid-fire succession—a broad-based advance in the U.S. dollar, a near-record plunge in oil prices, and a surprise Bank of Canada interest rate cut. And, it is down by more than 20% since early 2013, the steepest two-year decline on record (Chart 1). While the outlook is highly contingent on the path of oil prices, as well as Bank of Canada policy, we believe the bulk of the currency’s decline is now behind us and it should bottom around mid-2015 at close to 77 U.S. cents (or C$1.30). The Canadian dollar is presently close to what we believe is fair value, based on today’s oil prices, and it is below both its 40-year average (82.5 cents) and the OECD’s Purchasing Power Parity measure (roughly 80 cents) (Chart 2). However, just as the currency traded above these metrics for much of the past decade, it can now trade below these measures for an extended period of time. Record Drop (US¢/C$ : 2-yr % chng : as of February 5, 2015) 40 30 20 10 0 -10 50 Exporting firms are the greatest beneficiaries of a weaker loonie, as it makes their goods less expensive abroad. And, since the U.S. is Canada’s largest export market, exporters should be well positioned to take advantage. The manufacturing industry, which has a sizeable share of exports, is commonly cited as the prime beneficiary. Strong U.S. demand growth, a weaker C$, lower energy costs; what more could one ask? Unfortunately, it likely won’t be as simple as revving up factories. The Great Recession took a heavy toll on Canada’s manufacturing base and a lot of capacity was destroyed. Indeed, manufacturing capacity utilization rates have returned close to pre-recession levels (Chart 3). That suggests that we’ll need to see new investment in manufacturing capacity before the sector can materially increase sales. The irony here is that the Bank of Canada (led by Mark Carney at the time) harped on business about “dead 60 70 80 90 00 10 90 00 10 Chart 2 Close to Fair Value (US¢/C$ : as of February 5, 2015) Canadian Dollar 110 100 The new currency landscape will have a profound impact on Canada’s economy. However, it is important to stress that this big move is not a uniquely Canadian story—almost all currencies are down heavily against the U.S. dollar, and the loonie is broadly unchanged from a year ago against a basket of other currencies. Also, a weaker currency does not equate to economic gloom; there are both winners and losers. Winners Record -20 90 40-year Average 80 OECD Purchasing Power Parity 70 60 50 60 70 80 Chart 3 Cap-U Normalizing, Sales not So Much Canada Manufacturing 52.5 Capacity Utilization 2 50.0 (rhs) 47.5 88 84 80 45.0 76 42.5 Sales Volumes 1 40.0 (lhs) 37.5 00 1 72 02 04 (2007 C$ blns : s.a.) 06 2 08 10 (percent : s.a.) 12 68 14 Feature Page 8 of 15 money” and the need to invest, especially with the strong loonie lowering the cost of new equipment. Now, with the loonie around 80 U.S. cents (C$1.25), we’re more likely to see investment ramp up a bit faster. Even so, it could be some time before the benefit to manufacturing shows up in the data. It’s also important to note that natural resource exporters (and anyone else that ships to the U.S.) will benefit as well. The drop in the loonie has, modestly, cushioned oil producers from the plunge in prices. In C$-terms, oil is off about 45% from its recent highs, 10 ppts less than in US$ terms. Retailers should also benefit from the weaker loonie. When parity prevailed, cross-border shopping exploded, with a record number of Canadian tourists going South to shop (Chart 4). Broader selection and lower prices were irresistible. Trips to the U.S. levelled out as of November, but look for a sizeable drop early in 2015. That should be a boon to domestic retailers as consumers shop closer to home. The drag that was cross-border shopping from 2010 to 2013 will now work in reverse to boost domestic retail activity. Canadian investments (real estate, fixed income, equities, etc.) could see some increased inflows from the weaker loonie. Domestically, investors have a bit less incentive to send their money abroad, unless they believe the currency is going to weaken further or foreign markets offer higher risk-adjusted returns. Real estate, in particular, could get some modest support, as that investment/vacation property in Florida or Arizona is significantly less attractive after the currency’s ~25% premium and rebound in prices over the past few years. And, foreign investors could see the loonie’s swoon as a chance to buy Canadian dollar assets on the cheap. Losers Focus — February 6, 2015 Chart 4 Cross-Border Shopping Set to Slow (as of February 5, 2015) 110 2.25 100 Cdn. Tourists Returning from the U.S. 2 90 Canadian Dollar 1 2.00 (lhs) 1.75 1.50 (rhs) 80 1.25 70 1.00 60 0.75 90 1 95 (US¢/C$) 2 00 05 10 15 (mlns of tourists : s.a.) Chart 5 Lower Loonie Lifting Prices Consumer Price Index 12.5 (y/y % chng) Recreational Reading 5.0 10.0 7.5 Household Appliances 2.5 Canada 0.0 5.0 -2.5 2.5 Canada -5.0 0.0 U.S. -2.5 Households are likely the biggest losers, on aggregate, from a 09 11 weaker currency, though it is death by a thousand cuts. The numerous negative impacts are small and difficult to measure. Higher import prices have the largest detrimental impact for households, as the weaker loonie makes foreign goods more expensive. Reading materials and appliances are prime examples as they have high import content (Chart 5). Food prices could also see a little extra upward pressure. The impact will be clearer in core CPI, rather than total CPI, as the latter is being pulled sharply lower by the plunge in energy prices. Furniture, sporting goods, clothing, and autos also have high import content and some are already showing signs of pass-through from the weaker dollar. The other major hit to consumers comes from the increased cost of U.S. travel. That vacation down south looked very attractive when the loonie was near parity; suddenly, it looks prohibitive. Other regions of the world look a bit more attractive now, but farther or more costly travel is a deterrent. Canadian business also faces higher costs for imported production inputs. The highly integrated nature of the North American supply chain means that a number of inputs come from the U.S. And, that’s not only the case for manufactured goods, as the 13 U.S. -7.5 15 09 11 13 15 Feature Page 9 of 15 services sector also sources some of its inputs (other services contracts) from U.S. providers. In a similar vein, the cost of productivity-enhancing machinery and equipment, of which about three-quarters are imported, will climb as well. However, the latter won’t be the dominiant issue for Canadian firms looking to invest/expand, as the loonie at parity didn’t appear to have a meaningful positive impact on investment. The weaker loonie will also hit Canadian sports teams hard. Revenues are in Canadian dollars and many costs (player salaries in particular) are in US$, denting profitability. The Toronto Maple Leafs have bigger problems, but smaller-market teams could face some financial pressure. The tectonic shift in the loonie’s landscape will also reinforce shifting regional growth dynamics. Central Canada, B.C., and most of Eastern Canada will see a greater benefit from improved competitiveness than Alberta and Saskatchewan. Overall, the weaker loonie should moderately support GDP growth, although the overall impact on Canadians is not as cut and dry. Focus — February 6, 2015 Economic Forecast Page 10 of 15 Focus — February 6, 2015 Economic Forecast Summary for February 6, 2015 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 2.0 1.1 1.8 2.0 2.2 2.0 2.4 2.0 Consumer Price Index (y/y % chng) 1.4 2.2 2.1 1.9 0.9 0.5 0.8 1.3 0.9 1.9 0.9 Unemployment Rate (percent) 7.0 7.0 7.0 6.7 6.7 6.8 6.8 6.7 7.1 6.9 6.7 176 196 199 185 184 188 189 180 Current Account Balance ($blns : a.r.) -45.0 -39.6 -33.6 -49.5 CANADA Housing Starts (000s : a.r.) 177 178 183 -71.8 -74.2 -65.6 -60.3 -56.3 -42.0 -68.0 (average for the quarter : %) Interest Rates Overnight Rate 1.00 1.00 1.00 1.00 0.67 0.50 0.50 0.50 1.00 1.00 0.54 3-month Treasury Bill 0.87 0.93 0.94 0.90 0.60 0.41 0.41 0.41 0.97 0.91 0.46 10-year Bond 2.47 2.35 2.14 1.95 1.41 1.42 1.58 1.82 2.26 2.23 1.56 Canada-U.S. Interest (average for the quarter : bps) Rate Spreads 90-day 82 90 91 87 58 39 31 8 91 88 34 10-year -30 -27 -36 -33 -37 -39 -39 -40 -9 -31 -39 -2.1 4.6 5.0 2.6 2.3 3.0 2.8 2.7 2.2 2.4 3.1 Consumer Price Index (y/y % chng) 1.4 2.1 1.8 1.2 0.0 -0.3 0.1 1.0 1.5 1.6 0.2 Unemployment Rate (percent) 6.6 6.2 6.1 5.7 5.6 5.2 5.0 7.4 6.2 5.3 0.93 0.99 1.03 1.07 1.10 1.19 1.27 1.31 0.93 1.00 1.22 Current Account Balance ($blns : a.r.) -408 -394 -401 -438 -411 -408 -421 -438 -400 -410 -420 UNITED STATES Real GDP (q/q % chng : a.r.) Housing Starts (mlns : a.r.) 5.4 (average for the quarter : %) Interest Rates Fed Funds Target Rate 0.13 0.13 0.13 0.13 0.13 0.13 0.21 0.46 0.13 0.13 0.23 3-month Treasury Bill 0.05 0.03 0.03 0.02 0.02 0.02 0.10 0.33 0.06 0.03 0.12 10-year Note 2.76 2.62 2.50 2.28 1.78 1.80 1.97 2.22 2.35 2.54 1.94 79.7 97.1 90.6 79.4 1.240 1.273 1.270 1.255 1.030 1.105 1.259 98 106 122 EXCHANGE RATES (average for the quarter) US¢/C$ 90.6 91.7 91.8 88.1 C$/US$ 1.103 1.090 1.089 1.136 ¥/US$ 103 102 104 115 119 121 123 124 US$/Euro 1.37 1.37 1.32 1.25 1.13 1.14 1.14 1.13 1.33 1.33 1.14 US$/£ 1.66 1.68 1.67 1.58 1.51 1.52 1.52 1.51 1.56 1.65 1.51 Blocked areas represent BMO Capital Markets forecasts Up and down arrows indicate changes to the forecast 80.7 78.6 78.7 Key for Next Week Page 11 of 15 Focus — February 6, 2015 Canada Housing Starts Monday, 8:15 am Jan. (e) 177,500 a.r. (-1.6%) Consensus 184,000 a.r. (+2.1%) Dec. 180,300 a.r. (-6.5%) BoC Senior Deputy Governor Wilkins speaks at the Ottawa Economics Association Tuesday, 12:35 pm Existing Home Sales, MLS Home Price Index Friday, 9:00 am (expected) Existing Home Average Sales Prices Jan. (e) +1.5% y/y +3.0% y/y Dec. +7.9% y/y +3.8% y/y MLS Home Price Index Jan. (e) +4.8% y/y Dec. +5.4% y/y Softness in building permits suggests housing starts fell Benjamin Reitzes modestly to 177,500 units annualized in January. The Senior Economist [email protected] regional breakdown might be of greatest interest in this 416-359-5628 report, as activity in Alberta and Saskatchewan will likely slow sharply in the early part of the year, while the rest of the country is expected to remain relatively healthy. Our call would put the 12-month average at 189,000, consistent with underlying demographic demand. Bank of Canada Senior Deputy Governor Wilkins will make the first public appearance by a Bank official since January’s surprise rate cut. The title of her speech is “Minding the Labour Gap” suggesting there won’t be any significant policy fodder, but will likely reinforce that labour market slack is among the core reasons the BoC lowered policy rates. Expect a dovish tone from Wilkins. Governor Poloz is scheduled to speak on February 24th, and will probably be watched much more closely. It’s a tale of two regions for Canada’s housing market: Alberta and most everywhere else. The plunge in oil prices has already put Alberta home sales under serious pressure, with activity in Calgary and Edmonton tumbling at the start of 2015. Listings have surged as well, which will likely lower prices in the coming months. On the other side of the spectrum, Toronto and Vancouver saw activity and prices continue to advance at a solid clip. And, interest rates falling anew will provide further support for housing broadly. Look for the divergence between Alberta (and to a lesser extent Saskatchewan) and the non-oil producing regions to increase through at least the first half of 2015, as oil prices are only expected to recover slowly over the course of the year. Average price gains are expected to clock in at around 3% y/y, close to a 3-year low. The quality-adjusted MLS house price index, a better representation of market conditions, looks to slow to +4.8% y/y, a one-year low. United States Retail Sales Thursday, 8:30 am Jan. (e) -0.3% Ex. Autos -0.2% Dec. -0.9% -1.0% Consensus -0.4% -0.4% Plunging gas station receipts and further slippage in auto Sal Guatieri sales from eight-year highs should drag down retail sales Senior Economist again in January. However, with consumer confidence [email protected] 416-359-5295 scaling decade peaks, most retailers likely saw a broad upswing in demand. Look for retail sales, excluding autos and gasoline, to rise 0.4%. That should keep consumer spending on track for 3% or better growth in Q1 after the largest shopping spree in nine years in Q4. While equities got off to a rocky start this year, fuel savings have increased and job growth remains solid. There is a lot riding on the January report, as consumers are widely expected to propel the expansion forward in 2015 in response to increased wealth and spending power. Financial Markets Update Page 12 of 15 Focus — February 6, 2015 Feb 6 ¹ Jan 30 Week Ago 4 Weeks Ago Dec. 31, 2014 (basis point change) -25 -25 -15 -15 Canadian Money Market Call Money Prime Rate 0.75 2.85 0.75 2.85 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 0.56 0.02 0.00 0.05 0.56 2.42 0.58 0.00 -0.01 0.05 0.56 2.53 -2 2 1 0 0 -12 -35 1 6 -2 0 -33 -35 -2 0 -3 0 -36 2-Year Bonds Canada United States Canada United States Japan Germany United Kingdom Australia 0.48 0.62 1.43 1.92 0.33 0.36 1.63 2.45 0.39 0.45 1.25 1.64 0.27 0.30 1.33 2.44 8 16 18 28 6 6 30 1 -47 5 -23 -3 6 -13 3 -27 -54 -5 -36 -25 1 -18 -13 -29 16.2 24 66 351 21.0 25 70 369 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 80.21 1.247 118.98 1.1344 1.527 78.13 78.54 1.273 117.49 1.1291 1.506 77.62 -4.8 pts -2 -4 -18 -1.4 pts 0 -4 -19 -3.0 pts 2 0 -6 2.1 — 1.3 0.5 1.4 0.7 (percent change) -4.8 — 0.4 -4.2 0.7 -4.8 -6.8 — -0.7 -6.2 -2.0 -4.4 224.71 51.81 2.62 1,236.01 218.84 48.24 2.69 1,283.77 2.7 7.4 -2.7 -3.7 -0.4 7.1 -11.1 1.1 -2.3 -2.7 -9.3 4.3 15,190 2,068 4,780 17,928 17,649 10,853 6,865 4,700 5,820 14,673 1,995 4,635 17,165 17,674 10,694 6,749 4,604 5,588 3.5 3.7 3.1 4.4 -0.1 1.5 1.7 2.1 4.1 5.6 1.2 1.6 1.1 2.6 12.5 5.6 12.5 6.5 3.8 0.5 0.9 0.6 1.1 10.7 4.5 10.0 7.6 Global Calendar: February 9 – February 13 Japan Monday February 9 Current Account Surplus Dec. ’14 (e) ¥356 bln Dec. ’13 ¥31 bln GERMANY Trade Surplus Dec. (e) €16.0 bln Nov. €17.9 bln Wednesday February 11 Tertiary Industry Index Dec. (e) unch Nov. +0.2% Thursday February 12 Machine Orders Dec. (e) +2.3% Nov. +1.3% Markets Closed (Holiday) Consumer Confidence Jan. (e) 39.3 Dec. 38.8 Bank Lending ex. Trusts Jan. (e) +2.8% y/y Dec. +2.7% y/y Euro Area Tuesday February 10 FRANCE Industrial Production Dec. (e) +0.4% -1.1% y/y Nov. -0.3% -2.6% y/y Manufacturing Production Dec. (e) +0.4% -0.8% y/y Nov. -0.6% -1.3% y/y ITALY Industrial Production Dec. (e) unch -0.7% y/y Nov. -1.8% -1.8% y/y +5.8% y/y -14.6% y/y Producer Price Index Jan. (e) -0.6% +1.1% y/y -0.4% +1.9% y/y Dec. EURO AREA Industrial Production Dec. (e) +0.2% +0.3% y/y Nov. +0.2% -0.4% y/y GERMANY Consumer Price Index Jan. F (e) -1.3% -0.5% y/y Dec. +0.1% +0.1% y/y EU Leaders Summit U.K. Industrial Production Dec. (e) -0.1% Nov. -0.1% RICS House Price Balance Jan. (e) 12% Dec. 11% +0.5% y/y +1.1% y/y Other Manufacturing Production Dec. (e) -0.1% +2.0% y/y Nov. +0.7% +2.7% y/y CHINA Trade Surplus D Jan. (e) $48.9 bln Dec. $49.6 bln INDIA Real GDP Q4 Q3 +5.3% y/y CHINA CPI Jan. (e) +1.0% y/y Dec. +1.5% y/y AUSTRAL House Price Index Q4 (e) +1.8% Q3 +1.5% PPI -3.7% y/y -3.3% y/y IA +7.1% y/y +9.1% y/y NAB Business Confidence Jan. Dec. 2 G20 Finance Ministers and Central Bankers Meet in Turkey (Feb. 9-10) D = date approximate Friday February 13 Bank of England Quarterly Inflation Report CHINA Aggregate Yuan Financing D Jan. (e) 2.05 trln Dec. 1.69 trln AUSTRALIA Employment Jan. (e) -5,000 Dec. +37,400 New Yuan Loans D Jan. (e) 1.35 trln Dec. 0.70 trln Jobless Rate Jan. (e) 6.2% Dec. 6.1% M2 Money Supply D Jan. (e) +12.1% y/y Dec. +12.2% y/y AUSTRALIA Westpac Consumer Confidence Feb. Jan. +2.4% Upcoming Policy Meetings | ECB: Mar. 5, Apr. 15, June 3, July 16, Sep. 3, Oct. 22, Dec. 3 Real GDP Q4 A (e) Q3 EURO AREA +0.2% +0.2% +0.8% y/y +0.8% y/y Trade Surplus Dec. (e) €19.0 bln Nov. €20.0 bln GERMANY Real GDP Q4 P (e) +0.3% +1.0% y/y Q3 +0.1% +1.2% y/y FRANCE Real GDP Q4 P (e) +0.1% +0.3% y/y Q3 +0.3% +0.4% y/y ITALY Real GDP Q4 P (e) -0.1% -0.5% y/y Q3 -0.1% -0.5% y/y North American Calendar: February 9 – February 13 Canada Monday February 9 8:15 am Jan. (e) Housing Starts 177,500 a.r. (-1.6%) Dec. 180,300 a.r. (-6.5%) Consensus 184,000 a.r. (+2.1%) Tuesday February 10 12:35 pm BoC Senior Deputy Governor Wilkins speaks at the Ottawa Economics Association on “Minding the Labour Gap” United States 10:35 am 3-, 6- & 12-month T-bill auction $11.5 bln (new cash $-0.6 bln) 10:00 am Jan. (e) Dec. Federal Reserve Labor Market Conditions Index +5.0 m/m +6.1 m/m Wednesday February 11 7:45 am 8:30 am Dec. (e) Nov. 12:05 pm 2-year bond auction $3.4 bln (new cash $3.4 bln) Jan. (e) Retail Economist-GS Same- 7:00 am Store Sales – Feb 7th week Feb. 6 Jan. 30 Johnson Redbook Sameth Store Sales – Feb 7 week 2:00 pm Jan. ’15 (e) NFIB Small Business Jan. ’14 Economic Trends Survey 101.0 Dec. 100.4 10:00 am Dec. (e) Wholesale Inventories +0.1% Nov. +0.8% 10:00 am Job Openings & Labor Turnover Survey (Dec.) 10:00 am IBD/TIPP Economic Optimism Index 51.8 C 51.5 8:55 am 9:00 am MBA Mortgage Apps C = consensus D = date approximate Fed Speaker: Richmond’s Lacker (8:20 am) 11:30 am 4-week bill auction 1:00 pm 3-year note auction $24.0 bln 8:30 am Dec. (e) Mfg. Sales +0.5% Mfg. New Orders +1.0% Nov. -1.4% -1.7% 8:30 am Dec. (e) Nov. New Motor Vehicle Sales D +16.5% y/y +4.4% y/y 9:00 am Jan. (e) Dec. Existing Home Sales D +1.5% y/y +7.9% y/y 9:00 am Jan. (e) Dec. MLS Home Price Index D +4.8% y/y +5.4% y/y 8:30 am Jan. (e) Import Prices -3.0% Dec. -2.5% 8:30 am Producer Price Index revisions Feb. P (e) University of Michigan Consumer Sentiment 98.5 Jan. 98.1 Consensus -1.0% +1.3% Budget Deficit $18.0 bln $10.3 bln 8:30 am Jan. 31 Jan. 24 Continuing Claims 8:30 am Jan. (e) Retail Sales Ex. Autos -0.3% -0.2% 10:00 am Dec. -0.9% Consensus 98.2 9:45 am Bloomberg Consumer Comfort Index – Feb 8th week 10:00 am Dec. (e) Nov. Business Inventories +0.2% +0.2% 2,400k (+6k) Consensus -0.4% Fed Speaker: Dallas’ Fisher (8:00 am) 1:00 pm 10-year note auction $24.0 bln n.a. Average Prices +3.0% y/y +3.8% y/y 5-year bond auction announcement Initial Claims 288k (+10k) C 278k (+11k) Consensus +0.1% Fed Speaker: Governor Powell (4:00 pm) 11:00 am 4-week bill auction announcement 11:30 am 13- & 26-week bill auction $52.0 bln New Housing Price Index unch +1.6% y/y +0.1% +1.7% y/y Friday February 13 8:30 am Feb. 7 (e) Jan. 31 Consensus 101.1 Feb. (e) Jan. Thursday February 12 -0.4% -1.0% 11:00 am 13- & 26-week bill, 30-year TIPS auction announcements 1:00 pm 30-year bond auction $16.0 bln Consensus -3.3% Fed Speaker: Dallas’ Fisher (1:30 pm) Upcoming Policy Meetings | Bank of Canada: Mar. 4, Apr. 15, May 27 | FOMC: Mar. 17-18, Apr. 28-29, June 16-17 Page 15 of 15 Focus — February 6, 2015 General Disclosure “BMO Capital Markets” is a trade name used by the BMO Investment Banking Group, which includes the wholesale arm of Bank of Montreal and its subsidiaries BMO Nesbitt Burns Inc., BMO Capital Markets Ltd. in the U.K. and BMO Capital Markets Corp. in the U.S. BMO Nesbitt Burns Inc., BMO Capital Markets Ltd. and BMO Capital Markets Corp are affiliates. Bank of Montreal or its subsidiaries (“BMO Financial Group”) has lending arrangements with, or provide other remunerated services to, many issuers covered by BMO Capital Markets. 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