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April 15, 2011
HIGHLIGHTS OF THE WEEK United States • Softer than expected February trade data was outshined by strong March industrial production data at the end of the week. • Real GDP is likely to come in under 2% in the first quarter of 2011, after the strong 3.1% reading in the fourth quarter of 2010. • However, the softening in economic growth will prove to be temporary and does not represent structural weakness in the U.S. economy. Economic growth is poised to accelerate in the coming quarters. • Rising inflation expectations will likely provoke the Federal Reserve to start raising interest rates in early 2012. Canada • Bank of Canada maintains overnight rate at 1.00% this week, accompanying communiqué was more dovish than many had anticipated. The Bank upgraded its outlook for both economic growth and inflation, but cited the elevated Loonie as a risk due to its dampening effect on import prices and the competitiveness of Canada’s export sector • Many Canadians are wondering why the Bank of Canada is not raising interest rates despite rising food and energy costs. Though the Bank did indeed state that headline inflation would likely spike to close to 3% this year, ultimately there would be little pass-through to underlying inflationary pressures given the temporary nature of food and gas price shocks. • The Bank’s forecast for core inflation remains moderate, implying that rate hikes are at least a few months away.
THIS WEEK IN THE MARKETS Current*
Week Ago
U.S. CONSUMER PRICE INFLATION
52-Week 52-Week High Low
Stock Market Indexes S&P 500 1,319 1,328 1,343 1,023 S&P/TSX Comp. 13,876 14,208 14,271 11,093 DAX 7,178 7,217 7,427 5,670 FTSE 100 5,996 6,056 6,091 4,806 Nikkei 9,592 9,768 11,274 8,605 Fixed Income Yields U.S. 10-yr Treasury 3.42 3.58 3.83 2.38 Canada 10-yr Bond 3.31 3.44 3.72 2.69 Germany 10-yr Bund 3.38 3.48 3.49 2.12 UK 10-yr Gilt 3.61 3.81 4.04 2.83 Japan 10-yr Bond 1.29 1.33 1.37 0.85 Foreign Exchange Cross Rates C$ (USD per CAD) 1.04 1.05 1.05 0.93 Euro (USD per EUR) 1.44 1.45 1.45 1.19 Pound (USD per GBP) 1.63 1.64 1.64 1.43 Yen (JPY per USD) 83.1 84.8 94.5 78.9 Commodity Spot Prices** Crude Oil ($US/bbl) 107.7 112.8 112.8 66.0 Natural Gas ($US/MMBtu) 4.12 4.06 5.17 3.18 Copper ($US/met. tonne) 9389.3 9855.5 10179.5 6067.8 Gold ($US/troy oz.) 1484.6 1474.9 1484.6 1135.8 *as of 11:30 am on Friday, **Oil-WTI, Cushing, Nat. Gas-Henry Hub, LA (Thursday close price), Copper-LME Grade A, Gold-London Gold Bullion; Source: Bloomberg
6 5 4
Year-over-year % change Core CPI* Total CPI
3 2 1 0 -1 -2 -3 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 *Excluding food and energy. Source Bureau of Labor Statistics.
GLOBAL OFFICIAL POLICY RATE TARGETS Current Target 0 - 0.25% Federal Reserve (Fed Funds Rate) 1.00% Bank of Canada (Overnight Rate) 1.25% European Central Bank (Refi Rate) 0.50% Bank of England (Repo Rate) 0.00% Bank of Japan (Overnight Rate) Source: Central Banks, Haver Analytics
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UNITED STATES - STILL STRONG DESPITE THE HICCUP IN THE FIRST QUARTER It was a very busy week for U.S. data releases, but as the week progressed the news seemed to have gone better. Tuesday opened with weaker-than-expected net exports data, while on Wednesday U.S. March retail sales data was solid, but did not knock our socks off. As the week drew to a close, however, strong industrial production data helped lift the S&P 500 index. Nonetheless, as of writing it remained 0.7% below last week’s level. We are two weeks away from the first estimate of real GDP growth for the first quarter of 2011, but this week’s data suggests that real GDP is likely to come in under 2%, after the strong 3.1% print in the fourth quarter of 2010. In the fourth quarter, an acceleration in GDP was supported by solid gains in consumer spending and net exports – particularly the latter offered the largest boost since 1980. This week’s trade data, however, sets the stage for export growth to decelerate dramatically in the first quarter of 2011. This was in part due to a softening in external demand for durable goods. Consequently, net exports will likely drag on GDP growth in the first quarter. Similar to trade, consumer spending also took a breather in the first quarter. Spending is poised to come in below 2% in the first quarter of 2011, down from the strong 4.4% print in the fourth quarter of 2010. The slowdown in spending is likely driven by higher gas prices, which skyrocketed in February and took a bite out of spending power. And, as the quarter closed, uncertainty injected by geo-political tensions and the disaster in Japan may have caused consumers to postpone purchasing some big-ticket items in March. So, after the strong growth in February, March was a month of payback as auto sales pulled back. However, these factors should prove to be a transient impact and not represent structural weakness in the U.S. economy, as renewed job strength and low interests continue to support spending. Therefore, the softening in real GDP in the first quarter of 2011 does not undermine our outlook. Economic growth is expected to accelerate in the coming quarters and real GDP is set to grow at an average annual rate of about 2.8% in 2011. In particular, the rise in core retail sales in March provides a good hand off for the second quarter. What is more, the Federal Reserve’s Beige Book released this week reaffirmed that the economic expansion remains intact and continues to gain traction. Finally, industrial production data for March revealed that manufacturing remains one of the
INFLATION EXPECTATIONS 3.1
%
2.9 2.7 2.5 2.3 2.1 1.9 1.7
Implied 5 year forward inflation rate
1.5 Apr
May
Jul
2010
Aug
Oct
Dec
Jan
Mar 2011
Source: Federal Reserve Board.
strongest sectors in the economy and the stars are aligned for continued strength underpinned by consumer spending on durable goods and business investment in machinery and capital. In a week already heavy with data releases, all eyes were on Friday’s Consumer Price Index report. Led by strong gains in energy, CPI inflation rose to 2.7% in March from 2.1% in February. However, core inflation inched up to only 1.2% in March from 1.1% in February. With economic growth gaining traction, concerns about inflation have come to the forefront. Market based measures of inflation expectations have risen steadily over the last few weeks. Expect the Federal Reserve to show increased attention to the price component of its mandate and begin telegraphing to markets how it will begin unwinding monetary accommodation in the months ahead. All told, despite the temporary hiccup in economic growth in the first quarter, the economy is well position to accelerate in the coming quarters, which will keep inflation in the spotlight. While we continue to expect inflation to remain under control, rising inflation expectations is likely to prompt the Fed to begin tightening monetary policy in early 2012. Christos Shiamptanis, Economist 416-982-2556
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CANADA – TO RAISE, OR NOT TO RAISE? THAT IS THE QUESTION A surprise to no one, the Bank of Canada left its benchmark overnight rate unchanged at 1.00% on Tuesday. If there was a surprise, the tone of the accompanying communiqué was somewhat more dovish than many anticipated. The Bank upgraded both its profile for economic growth and inflation, but played up the downside risk to both from a stronger Loonie. In fact, this was the first time in this recovery that the Loonie was cited as a risk to inflation due to its dampening effect on import prices. The key takeaway from all of this is that the Bank remains at least a few months away from raising rates. In the meantime, many Canadians are left wondering why monetary policy is not being used to address these rapidly rising food and energy costs, despite the fact that they are real costs to Canadian households. Indeed, gasoline has been a major driver of headline inflation recently and retail food prices are expected to rise significantly in the coming months. While the Bank of Canada’s mandate is to maintain headline inflation at 2%, it uses core inflation as an operational guide which strips out a number of these components – none of gasoline, fuel oil, natural gas, fresh fruits, or vegetables is included. The reason for using core inflation is twofold. First, these components are notoriously volatile and dramatic rises tend to be temporary, as was the case back in 2007-09. Notably, crude oil hit almost US$150 per barrel in July 2008, but fell to around US$30 by the end of the year. Global food prices, as measured by the UN food price index, rose by almost 70% over a 16-month period, but gave back all of those gains in 8 months. For Canada, it would be impossible to address such rapid fluctuations in prices by changing the overnight rate as the impact of FOOD AND GAS PRICE SPIKES ONLY TEMPORARY 40
Y/Y % Change
Y/Y % Change
8
30
7
20
6 5
10
Gasoline (left)
0 -10
4 3
Food (right)
-20
2 1
-30
0
-40 2007
2008
Source: Statistics Canada
2009
2010
2011
CANADIAN HEADLINE AND CORE INFLATION 3
2
Y/Y % Change
Core CPI
1
Forecast
Total CPI
0
-1 2009
2010
2011
2012
Source: Statistics Canada; forecast by Bank of Canada as at April 2011
that change does not emerge until 18 to 24 months after. In other words, if the Bank were to have raised interest rates in response to rising prices back in 2007, the impact would not have emerged until after prices had already fallen back. In fact, oil prices fell back this week on fears that the recent run-up would result in global demand destruction, while global food prices are indeed beginning to moderate. Thus, using monetary policy to combat very rapid and potentially temporary inflationary pressures is not good policy. Second, because the prices of many of these commodities are determined by international financial markets, rising prices are not an indication of underlying inflationary pressures in Canada. The prices of food and gasoline are not rising because domestic wage growth and job gains are allowing Canadians to push up prices, which is what domestic monetary policy is meant to address. Indeed, according to the Bank of Canada’s April Monetary Policy Report, the Bank is expecting headline inflation to spike temporarily to 2.7% by the second quarter of this year and fall back to 2% by mid-2012, while core inflation only gradually rises to 2.0%. Ultimately, the Bank judges that temporary nature of headline inflation will result in little pass-through to core inflation, and that the offsetting impact of the high Loonie will lead to only moderate underlying price pressures. Francis Fong, Economist 416-982-8066
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U.S.: UPCOMING KEY ECONOMIC RELEASES U.S. Existing Home Sales - March* Release Date: April 20, 2011 February Result: 4.88 million TD Forecast: 4.95 million Consensus: 5.00 million
After the sharp unexpected drop in February, we expect the pace of existing home sales to rise modestly in March, advancing to 4.95 million units. This will be consistent with the modest gains in pending home sales in the prior month, but is unlikely to mark the beginning of a meaningful upswing in housing activity. Both single-family and condo sales are expected to rise, with sales of distressed properties continuing to account for one-third of total sales. Cash purchases should also make-up a significant portion of the total sale as investment buyers remain active in the market, taking advantage of the bargains to be had. Notwithstanding the upswing in March and the supportive tailwind likely to be provided by the improving labour market condition, we expect the pace of existing home sales to remain at very depressed levels in the coming months as fear of further price declines tempers demand.
U.S. EXISTING HOME SALES* 8,000
Thousands of units
7,000 6,000 5,000 4,000 3,000 2,000 Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
*Seasonally adjusted at annual rates Source: Census Bureau / Haver Analytics
*Forecast by Rates and FX Strategy Group. For further information, contact TDRates&FXResearch@tdsecurities.com.
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CANADA: UPCOMING KEY ECONOMIC RELEASES Canadian CPI - March*
Release Date: April 19, 2011 February Result: core 0.2% M/M; all-items 0.3% M/M TD Forecast: core 0.2% M/M; all-items 0.6% M/M Consensus: core 0.2% M/M; all-items 0.5% M/M The Canadian inflation dynamic is in the process of turning a corner in March. The boost to commodity prices caused by the geopolitical turmoil in the MENA region is expected to push headline prices higher by 0.6% on a nonseasonally adjusted basis. When seasonal factors are taken into account, the forecasted increase of 0.3% is somewhat more subdued. Meanwhile, boosted by an unfavourable base year comparison, headline inflation is likely to have accelerated sharply to 2.8% in the month. By contrast, core inflation is expected to have remained relatively benign in March before moving higher into the second quarter. Core prices are forecast to have risen by 0.2% on both a seasonally and non-seasonally adjusted basis. Underpinning this expectation is the continued rollout of the electricity tax credit in Ontario and flat auto prices. On a year-ago basis, core inflation is forecast to have bounced off of the artificially weak cyclical low of 0.9% set in February to a rate of 1.2%. Expanding our forecast out to the quarter as a whole, we are in line with what the Bank of Canada outlined in their
CANADIAN CONSUMER PRICE INDEX (CPI) 3.0
Y/Y % Chg. Bank of Canada core CPI except eight most volatile items and indirect taxes
2.5
CPI: All Items
2.0
1.5
1.0
0.5 Feb-10
Apr-10
Jun-10
Aug-10
Oct-10
Dec-10
Feb-11
Source: Statistics Canada / Haver Analytics
recently released Monetary Policy Report (MPR). As such, we do not anticipate that this release will have too much of an impact on the market other than to solidify the view that core inflation is recovering from the cyclical trough set in February. Moreover, as the temporary forces that had restrained core in Q1 fade, we expect the market to share our view that additional stimulus withdrawal by the Bank in the second half of the year is warranted.
*Forecast by Rates and FX Strategy Group. For further information, contact TDRates&FXResearch@tdsecurities.com.
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Canadian Retail Sales - February*
Release Date: April 21, 2011 January Result: total -0.3% M/M; ex-autos 0.0% M/M TD Forecast: total 0.6% M/M ; ex-autos 0.7% M/M Consensus: total 0.5% M/M ; ex-autos 0.5% M/M Retail sales are expected to have rebounded by 0.6% in February following two months of declines. While preliminary data for autos suggests sales fell modestly in the month, we recall the head fake this series provided in January. While a catch-up in the following month does not typically occur, we are inclined to leave auto sales in neutral and expect the ex-autos measure to be broadly consistent with the headline. As a result, retail sales are forecast to be driven by a combination of higher gasoline prices (though the real spike occurred in March) and continued momentum in housing activity. Rising consumer prices are also forecast to have restrained real retail sales, through volumes are still expected to have increased in February. When combining the forecasted increase in retail sales volumes with the declines observed in manufacturing and expected in wholesale volumes, monthly industry-level real GDP is anticipated to be broadly unchanged in February.
6
CANADIAN RETAIL SALES* 2.5
M/M % Chg.
1.5 0.5 -0.5
Total
-1.5
Ex Motor Vehicles
-2.5 Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
*Seasonally Adjusted Source: Statistics Canada / Haver Analytics
When combined with the robust 0.5% growth rate observed in January, we continue to expect the expenditure-based measure of real GDP growth in Q1 to rise by a very healthy 3.8%. Although this is somewhat less than the rate forecast by the Bank of Canada, the theme of continued strength in consumer spending is shared.
*Forecast by Rates and FX Strategy Group. For further information, contact TDRates&FXResearch@tdsecurities.com.
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RECENT KEY ECONOMIC INDICATORS: APRIL 11-15, 2011 Release Date
Economic Indicators
Apr 12 Apr 12 Apr 12 Apr 12 Apr 12 Apr 13 Apr 13 Apr 13 Apr 13 Apr 13 Apr 13 Apr 14 Apr 14 Apr 14 Apr 14 Apr 15 Apr 15 Apr 15 Apr 15 Apr 15 Apr 15 Apr 15 Apr 15 Apr 15
NFIB Small Business Optimism Import Price Index Trade Balance IBD/TIPP Economic Optimism Monthly Budget Statement MBA Mortgage Applications Advance Retail Sales Retail Sales Ex Auto & Gas Retail Sales Less Autos JOLTs Job Openings Business Inventories Initial Jobless Claims Continuing Claims Producer Price Index PPI Ex Food & Energy Consumer Price Index CPI Ex Food & Energy CPI Core Index SA Empire Manufacturing Total Net TIC Flows Net Long-term TIC Flows Industrial Production Capacity Utilization U. of Michigan Confidence
Apr 12 Apr 12 Apr 12 Apr 14
New Housing Price Index Int'l Merchandise Trade Bank of Canada Rate Manufacturing Sales
Apr 12 FR Current Account Apr 12 UK Total Trade Balance Apr 12 UK CPI Apr 12 UK Core CPI Apr 12 UK Retail Price Index Apr 12 GE ZEW Survey (Econ. Sentiment) Apr 13 FR CPI - EU Harmonised Apr 13 UK ILO Unemployment Rate (3mths) Apr 13 EC Euro-Zone Ind. Prod. WDA Apr 15 EC Euro-Zone CPI - Core Apr 15 EC Euro-Zone Trade Balance SA Source: Bloomberg, TD Economics
United States
Canada
International
Data for Period
Units
Current
Prior
Mar Mar Feb Apr Mar 8-Apr Mar Mar Mar Feb Feb 9-Apr 2-Apr Mar Mar Mar Mar Mar Apr Feb Feb Mar Mar Apr
Index M/M % Chg. USD, Blns Index USD, Blns W/W % Chg. M/M % Chg. M/M % Chg. M/M % Chg. Thousands M/M % Chg. Thousands Thousands M/M % Chg. M/M % Chg. M/M % Chg. M/M % Chg. Index Index USD, Blns USD, Blns M/M % Chg. % Index
91.9 2.7 -45.8 40.8 -188.2 -6.7 0.4 0.6 0.8 3093 0.5 412 3680 0.7 0.3 0.5 0.1 223.33 21.70 97.7 26.9 0.8 77.4 69.6
94.5 1.4 -47.0 43.0 -65.4 2.0 1.1 0.9 1.1 2741 1.0 385 3738 1.6 0.2 0.5 0.2 223.03 17.50 30.6 51.5 0.1 76.9 67.5
Feb Feb 12-Apr Feb
M/M % Chg. CAD, Blns % M/M % Chg.
0.4 0.0 1.00 -1.5
0.2 0.4 1.00 4.4
Feb Feb Mar Mar Mar Apr Mar Feb Feb Mar Feb
EUR, Blns GBP, Mlns Y/Y % Chg. Y/Y % Chg. Y/Y % Chg. Index Y/Y % Chg. % Y/Y % Chg. Y/Y % Chg. EUR, Blns
-5.2 -2443 4.0 3.2 5.3 7.6 2.2 7.8 7.3 1.3 -2.4
-4.1 -3858 4.4 3.4 5.5 14.1 1.8 8.0 6.3 1.0 -3.1
R
R R R R R R R
R R R R
R R R R
R R
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UPCOMING ECONOMIC RELEASES AND EVENTS: APRIL 18-22, 2011 Release Date
Time*
Apr 18 Apr 18 Apr 18 Apr 19 Apr 19 Apr 20 Apr 20 Apr 21 Apr 21 Apr 21 Apr 21 Apr 21 Apr 21
10:30 12:00 12:30 8:30 8:30 7:00 10:00 8:30 8:30 10:00 10:00 10:00 16:00
Apr 18 Apr 19 Apr 19 Apr 19 Apr 19 Apr 21 Apr 21
8:30 7:00 7:00 8:30 8:30 8:30 8:30
Economic Indicator/Event
Consensus Last Period Forecast
Data for Period
Units
Mar Mar 15-Apr Mar 16-Apr 9-Apr Feb Mar Apr Feb
Thousands M/M % Chg. W/W % Chg. Millions Thousands Thousands M/M % Chg. M/M % Chg. Index Y/Y % Chg.
540 525 -5.00 390 3682 -0.2 0.3 36.8 --
517 479 -6.7 4.88 412 3680 -0.3 0.8 43.4 -3.39
Feb Mar Mar Mar Feb Feb Feb
CAD, Blns M/M % Chg. M/M % Chg. M/M % Chg. M/M % Chg. M/M % Chg. M/M % Chg.
10.00 0.6 0.2 0.3 -0.2 0.5 0.5
13.29 0.3 0.2 0.8 1.5 -0.3 0.0
Apr
Index
-11.0
-10.6
Apr Apr Feb Apr Apr Mar Mar
Index Index Euro, Blns Index Index Yen, Blns Y/Y % Chg.
60.0 59.8 -57.0 56.9 327.5 6.6
60.9 60.1 -0.7 57.5 57.2 556.0 6.4
Apr Apr Mar
Index Index Y/Y % Chg.
110.5 105.5 0.8
111.1 106.5 1.2
United States
Fed's Fisher, Lockhart to Discuss Globalization in Atlanta Fed's Bullard to Speak on Banking Rules in Kentucky Fed's Fisher to Speak on U.S. Economic Outlook in Atlanta Building Permits Housing Starts MBA Mortgage Applications Existing Home Sales Initial Jobless Claims Continuing Claims House Price Index Leading Indicators Philadelphia Fed. RPX Composite 28dy Int'l Securities Transactions Consumer Price Index Bank of Canada CPI Core Leading Indicators Wholesale Sales Retail Sales Retail Sales Less Autos
Canada
International
Apr 18 10:00 EC Euro-Zone Consumer Confidence Apr 18 21:30 AU Reserve Bank's Board April Minutes Apr 19 3:30 GE PMI Manufacturing Apr 19 4:00 GE PMI Services Apr 19 4:00 EC Euro-Zone Current Account SA Apr 19 4:00 EC PMI Manufacturing Apr 19 4:00 EC PMI Services Apr 19 19:50 JN Adjusted Merchnds Trade Bal. Apr 20 2:00 GE Producer Prices Apr 20 4:30 UK Bank of England Minutes Apr 21 4:00 GE IFO - Business Climate Apr 21 4:00 GE IFO - Expectations Apr 21 4:30 UK Retail Sales Ex Auto Fuel * Eastern Standard Time; Source: Bloomberg, TD Economics
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CONTACTS AT TD ECONOMICS Craig Alexander Senior Vice President and Chief Economist mailto:craig.alexander@td.com
CANADIAN ECONOMIC ANALYSIS
U.S. & INTERNATIONAL ECONOMIC ANALYSIS
Derek Burleton, Vice President and Deputy Chief Economist mailto:derek.burleton@td.com Pascal Gauthier Senior Economist mailto:pascal.gauthier@td.com
Beata Caranci, Associate Vice President and Deputy Chief Economist mailto:beata.caranci@td.com James Marple Senior Economist mailto:james.marple@td.com
Diana Petramala Economist, Macro mailto:diana.petramala@td.com
Martin Schwerdtfeger Economist, International mailto:martin.schwerdtfeger@td.com
Francis Fong Economist, Special Studies mailto:francis.fong@td.com
Christos Shiamptanis Economist mailto:christos.shiamptanis@td.com
Dina Cover Economist, Industry mailto:dina.cover@td.com
Alistair Bentley Economist mailto:alistair.bentley@td.com
Shahrzad Mobasher Fard Economist, Industry mailto:shahrzad.fard@td.com
Chris Jones Economic Analyst mailto:christopher.w.jones@td.com
Sonya Gulati Economist, Regional and Government Finances mailto:sonya.gulati@td.com
TO REACH US
Leslie Preston Economic Analyst mailto:leslie.preston@td.com
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