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March 18, 2011
HIGHLIGHTS OF THE WEEK United States • The U.S. is feeling the aftershock effects of the natural disasters in Japan. The elevated uncertainty pushed U.S. equity markets down, but the declines were more muted than those seen in the Japanese stock market. • Japan’s disaster also raised volatility in the foreign exchange markets. As a result, a coordinated G7 effort was underway Friday to step into the exchange rate markets in a bid to control volatility and stem the upward trend in the Japanese yen. • While oil prices initially dipped in the wake of the Japanese disasters, they have since rebounded. • Despite rising energy prices, the Federal Reserve in its announcement said that the effects on inflation should prove temporary. But, there was a change in tone in regards to core inflation, highlighting that disinflation has become a thing of the past. Canada • As more information flowed in and worries honed in on the minute-by-minute state of the Fukushima Daiichi nuclear power plant, the extent of the humanitarian and economic impact was constantly being reassessed. • But, rather strikingly, equities and the Canadian dollar managed to end the week up slightly compared to last Friday’s levels, lifted in part at week’s end by the announcement of coordinated central bank intervention by G-7 countries to boost the yen. • Abstracting from the anticipated sectoral shifts, we are not inclined to mark down our 2011 Canadian real GDP growth forecast of 3% based on the Japan crisis. And, indeed, data this week continued to point to a solid pace of economic momentum early in the year. THIS WEEK IN THE MARKETS Current*
Week Ago
CRUDE OIL - WEST TEXAS INTERMEDIATE
52-Week 52-Week High Low
Stock Market Indexes S&P 500 1288 1304 1343 1023 S&P/TSX Comp. 13836 13674 14253 11093 DAX 6741 6981 7427 5670 FTSE 100 5739 5829 6091 4806 Nikkei 9207 10254 11339 8605 Fixed Income Yields U.S. 10-yr Treasury 3.29 3.40 3.99 2.38 Canada 10-yr Bond 3.17 3.28 3.72 2.69 Germany 10-yr Bund 3.18 3.21 3.33 2.12 UK 10-yr Gilt 3.53 3.55 4.06 2.83 Japan 10-yr Bond 1.22 1.26 1.41 0.85 Foreign Exchange Cross Rates C$ (USD per CAD) 1.02 1.03 1.03 0.93 Euro (USD per EUR) 1.41 1.39 1.42 1.19 Pound (USD per GBP) 1.62 1.61 1.63 1.43 Yen (JPY per USD) 81.0 81.8 94.6 78.9 Commodity Spot Prices** Crude Oil ($US/bbl) 100.8 101.2 105.4 66.0 Natural Gas ($US/MMBtu) 3.85 3.79 5.17 3.18 Copper ($US/met. tonne) 9564.5 9172.0 10179.5 6067.8 Gold ($US/troy oz.) 1417.6 1417.5 1434.5 1086.7 *as of 10 am on Friday, **Oil-WTI, Cushing, Nat. Gas-Henry Hub, LA (Thursday close price), Copper-LME Grade A, Gold-London Gold Bullion; Source: Bloomberg
110
US$ per barrel
105 100 95 90 85 80 Jan-2011
Jan-2011
Feb-2011
Mar-2011
Source: Haver Analytics, TD Economics
GLOBAL OFFICIAL POLICY RATE TARGETS Current Target 0 - 0.25% Federal Reserve (Fed Funds Rate) 1.00% Bank of Canada (Overnight Rate) 1.00% 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 - AFTERSHOCK EFFECTS ON U.S. MARKETS
U.S. DOLLAR- JAPANESE YEN EXCHANGE RATE USD/JPY 77 78 79 80 Earthquake Strikes
81 82 83 84 3/9
3/10
3/11
3/13
Source: Bloomberg, TD Economics
3/14
3/15
3/16
3/17
S&P 500 Index 1,350
1,300
1,250
1,200
3/16
3/09
3/02
2/23
2/16
2/09
2/02
1/26
1/19
1/12
1/05
12/29
12/22
12/15
12/08
1,150
12/01
Japan’s natural disasters and the threat of a nuclear meltdown dominated the news this week. More than anything else, the devastation in Japan has injected a whole lot of uncertainty into financial markets. Investors’ anxiety was evident as they sold riskier assets and moved into the safety of fixed-income U.S. bonds. As of writing, the S&P declined by 1.7% on the week. And, as investors sought safety in U.S. government bonds, 10 year Treasury yields slipped, falling as low as 3.17% on Wednesday – the lowest level since December 2010. While yields moved back up as the week drew to a close, they are still 10 basis points below last week’s level. Despite the declines, movements in U.S. markets were small compared to the sharp declines in the Japanese stock market, which retreated by 10.2% on the week. Moves in equity and bond markets came against the backdrop of elevated volatility in foreign exchange markets. In the aftermath of the earthquake and tsunami, the Japanese yen has been steadily appreciating against the U.S. dollar, despite the Bank of Japan’s attempt to inject 21,800 billion yen (about 280 billion U.S. dollars) into the economy. But, what really surprised markets, was the sudden surge in the yen to an all-time high on Wednesday evening. The yen strengthened by 4% against the U.S. dollar in less than one hour in late Wednesday trading, before giving up some of these gains Thursday morning. To temper the volatility and the upward pressure, the G7 Finance Ministers, in a coordinated move, agreed to step into the currency markets. The yen weakened by roughly 2.5% against the U.S. dollar after the intervention, but still remains stronger compared to a week ago. Should the yen continue to strengthen next week, expect more coordinated interventions by the G7. The natural disasters in Japan also had knock-on effects
Source: Bloomberg, TD Economics
to market sentiment on oil prices. While oil prices initially dipped in the wake of the disasters, they have since rebounded in part due to the expectation that demand for oil will rise as countries substitute away from nuclear power. On top of that, tensions in the Middle East showed no signs of letting up. Should the price of oil continue to hold at these levels (102 $US per barrel), it will likely shave 0.3 percentage points off U.S. economic growth in 2011 and it will also continue to drive a wedge between headline and core inflation in the coming year Rising energy prices were also a topic of concern for the Federal Open Market Committee (FOMC). In their statement on Tuesday, they noted that while energy prices had sheen a sharp run up in recent weeks as a result of tensions in the Middle East, the effects on inflation should prove temporary. Nonetheless, the Fed’s attitude towards inflation has clearly changed since their previous statement. In particular, their statement was altered to note that core inflation is “somewhat low” rather than “trending downwards.” Given the Fed’s dual mandate on employment and inflation, any change in language is an important signal to the markets and highlights that disinflation is becoming even more far-off. This was also reconfirmed by the Consumer Price Index data for February which revealed that core inflation rose on year-over-year basis for the second straight month. All told, the Japanese crisis has definitely added new risks to the global economy. However, the economic drag from a global perspective is unlikely to be substantial and does not change our view that the U.S. economy will grow at roughly 3%, with core inflation edging up to 1.6% by year-end. Christos Shiamptanis, Economist 416-982-2556
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CANADA – JAPANESE FALLOUT UNLIKELY TO DERAIL THE CANADIAN ECONOMY This week, all eyes remained glued on the devastation in Japan. Indeed, as more information flowed in and worries honed in on the minute-by-minute state of the Fukushima Daiichi nuclear power plant, the extent of the humanitarian and economic impact was constantly being reassessed. As such, it was a volatile week in Canadian financial markets. But, rather strikingly, equities and the Canadian dollar managed to end the week up slightly compared to last Friday’s levels, lifted in part at week’s end by the announcement of coordinated central bank intervention by G-7 countries to boost the yen. In contrast, bond yields ended Friday markedly lower. Relative to last Friday, yields on Canadian government bonds retreated by roughly 13 basis points on the 2-yr and 5-yr notes and 10 basis points on the 10-yr notes. With the Japan nuclear crisis still unfolding and the economy facing significant near-term disruptions, forecasters will be working through the impact on Canada’s economy. As we wrote in a report: “The Economic Impact of Japan’s Natural Disaster” (available at http://www.td.com/ economics/special/ms0311_JapanEarthquake.pdf), the net impact is not expected to be meaningful given that Japan accounts for only 2% of Canadian exports and imports. However, there are almost certain to be some temporary effects on economic activity due to the disruptions to global supply chains, while a number of sectors will be impacted, both negatively and positively. For one, concern about the global outlook for nuclear energy has cast uncertainty over Saskatchewan’s uranium industry. On the positive side, Canadian exports of coal to Japan may be further supported by Japan’s inability to supply an adequate amount of energy from nuclear sources. Moreover, the reconstruction process
1.80
Per cent
2-YR AND 10-YR GOVERNMENT OF CANADA BOND YIELDS
Per cent
1.75
3.30 3.25
1.70 3.20
1.65 1.60
3.15
1.55
3.10
1.50
2-Yr Bond Yield -L-
1.45
3.05
10-Yr Bond Yields -R-
MERCHANDISE IMPORTS AND EXPORTS BETWEEN CANADA AND JAPAN 18
Blns of dollars Domestic Exports
16
Imports
14 12 10 8 6 4 2 0 2006
2007
2008
2009
2010
Source: Statistics Canada.
may strengthen the demand for Canadian commodities such as lumber and copper. Abstracting from these sectoral shifts, we are not inclined to mark down our 2011 Canadian real GDP growth forecast of 3% based on the Japan crisis. And, indeed, data this week continued to point to a solid pace of economic momentum early in the year. Manufacturing shipments for the month of January rose by a robust 4.5% relative to the prior month, providing the clearest sign yet that the factory sector is beginning to reap the benefits of a firming U.S. economy. Auto shipments alone shot up by a stunning 26% in the month. This morning’s unexpectedly weak inflation report for February was a bit of a shocker. While headline inflation edged down to 2.2% from 2.3% in the prior month, the story was the slump in core inflation (which excludes the 8 most volatile items) to only 0.9% from 1.4%. February’s reading on the core rate was the lowest since the start of the monthly series in 1985. A closer look shows that the Y/Y decline was driven in large part by the temporary impact on prices a year ago during the Vancouver Olympics. As such, inflation should bounce back in the months ahead as this impact is not repeated. In addition, healthy economic growth and the likelihood of a rising trend in food inflation should act to pull up the core rate of inflation gradually in the months ahead. Still, with core inflation expected to hold below 2% until the remainder of the year, the Bank of Canada is not likely to be in a rush to raise its overnight rate anytime soon.
3.00
1.40 3/11
3/14
3/15
Source: Bloomberg, TD Economics
3/16
3/17
3/18
Shahrzad Fard, Economist 416-944-5729
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U.S.: UPCOMING KEY ECONOMIC RELEASES U.S. Existing Home Sales - February* Release Date: March 21, 2011 January Result: 5.36 million TD Forecast: 5.15 million Consensus: 5.14 million
Existing home sales are expected to end the run of three consecutive monthly gains in February. During the month, the pace of home sales is expected to fall to 5.15 million units, representing a 4.0% M/M pullback on January’s level. This will be consistent with the back-to-back drop in pending home sales in December and January. Both single-family and condo sales are expected to be lower. Notwithstanding the recent strong positive momentum, we expect the pace of existing home sales to remain at very depressed levels given the very stiff headwinds that U.S. households continue to face.
U.S. EXISTING HOME SALES* 8,000
Thousands of units
7,000 6,000 5,000 4,000 3,000 2,000 Dec-09
Feb-10
Business capital investment and household spending on durable goods have both been on the rebound, however, the pace of recovery has been less than stellar. This has been largely reflected in the uneven performance of new durable goods orders, which have lagged the strong bounce-back in overall manufacturing sector activity. In February, we expect new durable goods orders to extend its advance for a second straight month, with a 1.5% M/M advance. Much of this rebound should come from advances in aircraft and vehicle orders, and excluding transports orders should rise at a slightly more modest 0.5% M/M pace. Orders for core capital goods should also rise during the month, retracing some of the sizeable 6.9% M/M plunge the month before. In the coming months, as the economic recovery matures we expect the recovery in this sector to be sustained.
Jun-10
Aug-10
Oct-10
Dec-10
*Seasonally adjusted at annual rates Source: Census Bureau / Haver Analytics
U.S. Durable Goods Orders - February*
Release Date: March 24, 2011 JanuaryResult: Durable Goods Orders 2.7%; Durables ex. Transportation -3.6% TD Forecast: Durable Goods Orders 1.5%; Durables ex. Transportation 0.5% Consensus: Durable Goods Orders 1.1%; Durables ex. Transportation 1.9%
Apr-10
6
M/M % Chg.
U.S. Durable Goods Orders*
5 4 3 2 1 0 -1 -2 -3 -4 Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
*New orders for durable goods industries, seasonally adjusted Source: U.S. Census Bureau
*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 Retail Sales - January*
Release Date: March 22, 2011 December Result: total -0.2% M/M; ex-autos 0.6% M/M TD Forecast: total 1.2% M/M ; ex-autos 1.0% M/M Consensus: total 1.1% M/M ; ex-autos 0.7% M/M After influencing both the January release of international trade, manufacturing shipments and wholesale trade, the automotive sector is also expected to play an important role in the forecasted 1.2% increase in January retail sales. When autos are excluded, retail sales should still show a very respectable 1.0% advance on the strength of rising gasoline prices. After controlling for higher prices across the board, real retail sales are forecast to increase by 0.8%, which speaks to the underlying momentum in the household sector that is starting the first quarter in much the same fashion as finishing the last. At some point we expect that the combination of slower job growth, high levels of indebtedness and higher interest rates will cause growth to slow, but this is starting to look like a story for Q2 and the second half of 2011. When combined with the robust rate of growth observed for both real manufacturing shipments and wholesale sales, monthly real GDP for January is shaping up to be quite strong. Our preliminary tracking suggests a growth rate in the neighbourhood of 0.5%, which would match the increase observed in December. This bodes well for the quarter as a
CANADIAN RETAIL SALES* 2.5
M/M % Chg.
1.5 0.5 -0.5
Total
-1.5
Ex Motor Vehicles
-2.5 Dec-09
Feb-10
Apr-10
Jun-10
Aug-10
Oct-10
Dec-10
*Seasonally Adjusted Source: Statistics Canada / Haver Analytics
whole, where our forecast for annualized real GDP growth stands at 3.8%. In terms of the market impact, this number stands in stark contrast to the current level of yields which have been determined almost exclusively by events in Japan. While it is difficult to stand in the way of the fear in the market, the limited impact that earthquake in Japan will have on the Canadian economy will not alter the conduct of monetary policy and we continue to expect that the next move by the Bank of Canada will occur in July.
*Forecast by Rates and FX Strategy Group. For further information, contact TDRates&FXResearch@tdsecurities.com.
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RECENT KEY ECONOMIC RELEASES AND EVENTS: MARCH 14-18, 2011 Release Date
Economic Indicator/Event
United States
Mar 15 Mar 15 Mar 15 Mar 15 Mar 15 Mar 15 Mar 16 Mar 16 Mar 16 Mar 16 Mar 16 Mar 16 Mar 17 Mar 17 Mar 17 Mar 17 Mar 17 Mar 17 Mar 17 Mar 17 Mar 17
Empire Manufacturing Import Price Index Total Net TIC Flows Net Long-Term TIC Flows NAHB Housing Market Index FOMC Rate Decision MBA Mortgage Applications Housing Starts Building Permits Producer Price Index PPI Ex Food & Energy Current Account Balance Consumer Price Index CPI Ex Food & Energy CPI Core SA Initial Jobless Claims Continuing Claims Industrial Production Capacity Utilization Leading Indicators Philadelphia Fed.
Mar 14 Mar 15 Mar 16 Mar 17 Mar 17 Mar 18 Mar 18
Capacity Utilization Rate Labor Productivity Manufacturing Sales Int'l Securities Transactions Wholesale Sales Consumer Price Index Bank of Canada CPI Core
Mar 14 EC Euro-Zone Ind. Prod. WDA Mar 15 JN BOJ Target Rate Mar 15 EC Eurzone Employment Mar 15 EC ZEW Survey (Econ. Sentiment) Mar 16 UK ILO Unemployment Rate (3mths) Mar 16 EC Euro-Zone CPI - Core Mar 17 EC Construction Output WDA Mar 18 GE Producer Prices Mar 18 EC Euro-Zone Current Account NSA Mar 18 EC Euro-Zone Trade Balance * Eastern Standard Time; Source: Bloomberg, TD Economics
Canada
International
Data for Period
Units
Current
Prior
Mar Feb Jan Jan Mar 15-Mar 11-Mar Feb Feb Feb Feb 4Q Feb Feb Feb 12-Mar 5-Mar Feb Feb Feb Mar
Index M/M % Chg. USD, Blns USD, Blns Index % W/W % Chg. Thousands Thousands M/M % Chg. M/M % Chg. USD, Blns M/M % Chg. M/M % Chg. Index Thousands Thousands M/M % Chg. % M/M % Chg. Index
17.5 1.4 32.5 51.5 17 0.25 -0.7 479 517 1.6 0.2 -113.3 0.5 0.2 223.024 385 3706 -0.1 76.3 0.8 43.4
15.4 1.3 49.7 62.5 16 0.25 15.5 618 563 0.8 0.5 -125.5 0.4 0.2 222.587 401 3786 0.3 76.4 0.1 35.9
4Q 4Q Jan Jan Jan Feb Feb
% Q/Q % Chg. M/M % Chg. CAD, Blns M/M % Chg. M/M % Chg. M/M % Chg.
76.40 0.5 4.5 13.290 1.5 0.3 0.2
76.20 0.4 0.6 9.399 0.9 0.3 0.0
R R R R R
Jan 15-Mar 4Q Mar Jan Feb Jan Feb Jan Jan
Y/Y % Chg. % Y/Y % Chg. Index % Y/Y % Chg. Y/Y % Chg. Y/Y % Chg. Euro, Blns Euro, Blns
6.6 0.10 0.3 31.0 8.0 1.0 -4.5 6.4 -19.6 -14.8
8.8 0.10 -0.2 29.5 7.9 1.1 -14.0 5.7 1.0 -0.5
R
R R R
R R
R
R R R
R
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UPCOMING ECONOMIC RELEASES AND EVENTS: MARCH 21-25, 2011 Release Date
Time*
Mar 21 Mar 21 Mar 22 Mar 22 Mar 22 Mar 22 Mar 23 Mar 23 Mar 23 Mar 24 Mar 24 Mar 24 Mar 24 Mar 24 Mar 25 Mar 25 Mar 25 Mar 25 Mar 25
8:30 10:00 7:30 8:00 10:00 10:00 7:00 10:00 12:00 8:30 8:30 8:30 8:30 16:00 5:00 7:30 8:30 9:15 12:15
Chicago Fed Nat Activity Index Existing Home Sales Fed's Fisher Speaks at Frankfurt Finance Summit Fed's Pianalto Speaks on Economy in Akron, Ohio House Price Index Richmond Fed Manufact. Index MBA Mortgage Applications New Home Sales Bernanke Speaks to Bankers in San Diego Durable Goods Orders Durables Ex Transportation Initial Jobless Claims Continuing Claims RPX Composite 28dy Kocherlakota Speaks at Conference in Marseilles, France Dallas Fed's Fisher Speaks at Think Tank in Brussels Fed's Evans Speaks to Reporters at Chicago Fed Fed's Lockhart Speaks on Economy in Fort Myers, Florida Fed's Plosser Speaks on Monetary Policy in New York
Mar 22 Mar 22 Mar 22 Mar 22 Mar 22 Mar 23
8:30 8:30 8:30 16:00 ---
Leading Indicators Retail Sales Retail Sales Less Autos Federal Budget New Brunswick Budget Saskatchewan Budget
Economic Indicator/Event
United States
Canada
International
Mar 20 20:01 UK Rightmove House Prices Mar 22 17:45 NZ Current Account Balance Mar 22 5:30 UK CPI Mar 22 5:30 UK Core CPI Mar 23 6:00 EC Industrial New Orders NSA Mar 23 19:50 JN Adjusted Merchnds Trade Bal. Mar 23 17:45 NZ GDP Mar 23 5:30 UK Bank of England Minutes Mar 23 8:30 UK Chancellor of the Exchequer Osborne Gives Budget Mar 24 5:00 EC PMI Composite Mar 24 3:45 FR Production Outlook Indicator Mar 24 3:45 FR Business Confidence Indicator Mar 24 19:30 JN Natl CPI Mar 24 19:30 JN Natl CPI Ex Food, Energy Mar 24 19:50 JN Corp Service Price Index Mar 24 5:30 UK Retail Sales w/Auto Fuel Mar 24 5:30 UK Retail Sales Ex Auto Fuel Mar 25 16:15 EC ECB's Gonzalez-Paramo Speaking in Washington Mar 25 3:45 FR Consumer Confidence Indicator Mar 25 5:00 GE IFO - Business Climate Mar 25 5:00 GE IFO - Current Assessment Mar 25 5:00 GE IFO - Expectations * Eastern Standard Time; Source: Bloomberg, TD Economics
Consensus Last Period Forecast
Data for Period
Units
Feb Feb
Index Millions
- 5.12
-0.16 5.36
Jan Mar 18-Mar Feb
M/M % Chg. Index W/W % Chg. Thousands
-0.2 22 -290
-0.3 25 -0.7 284
Feb Feb 19-Mar 12-Mar Jan
M/M % Chg. M/M % Chg. Thousands Thousands Y/Y % Chg.
1.1 1.9 383 3715 --
2.7 -3.6 385 3706 -3.63
Feb Jan Jan
M/M % Chg. M/M % Chg. M/M % Chg.
0.6 1.1 0.7
0.3 -0.2 0.6
Mar 4Q Feb Feb Jan Feb 4Q
Y/Y % Chg. NZD, Billions Y/Y % Chg. Y/Y % Chg. Y/Y % Chg. Yen, Billions Y/Y % Chg.
--4.2 3.1 21.6 676.8 --
0.3 -1.77 4.0 3.0 18.5 191.8 1.5
Mar Mar Mar Feb Feb Feb Feb Feb
Index Index Index Y/Y % Chg. Y/Y % Chg. Y/Y % Chg. Y/Y % Chg. Y/Y % Chg.
57.6 -106 0.0 -0.6 -1.2 2.3 2.4
58.2 19 106 0.0 -0.6 -1.1 5.3 5.3
Mar Mar Mar Mar
Index Index Index Index
-110.5 114.6 106.8
85 111.2 114.7 107.9
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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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