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March 25, 2011
HIGHLIGHTS OF THE WEEK United States • Risk appetite was on the mend this week with stock markets recouping all of last week’s losses. Even the disappointing U.S. housing data released this week did not push markets down. • Existing home sales in February gave up some of their previous gains, but a nascent recovery seems to be taking place as the overall trend remains upwards. In contrast, new home sales do not show any signs of turning around. The divergence in trends is not surprising, as the new market faces fierce competition from foreclosed homes, which sell at a discount. • But, this week also delivered some good news about initial jobless claims. The four-week moving average, a less volatile gauge, dropped to its lowest level since July 2008. Canada • Three government budgets were on tap this week: federal, New Brunswick, and Saskatchewan. The first (our analysis here) is unlikely to pass, bringing about a likely federal election in early May. The other two offer a stark contrast in provincial fortunes, with a slew of fiscal austerity measures in New Brunswick (our analysis here) while further tax relief was provided in Saskatchewan (our analysis here). With few expectations of either tax relief or sharp austerity, the Ontario budget, forthcoming on Tuesday (our preview here), will likely sit somewhere in between. • Canadian retail sales fell by 0.3% M/M in January. Volumes fell by 0.6% M/M. Consumer durables such as vehicles and home-related items led the way down. This was a second consecutive broad-based monthly decline, providing further evidence of consumer fatigue at this stage of the economic recovery – which is a dominant theme in our forecasts. Thankfully, other sources of economic activity such as business investment and exports are still likely to push real GDP growth above 3% in the first quarter. THIS WEEK IN THE MARKETS Current*
Week Ago
52-Week 52-Week High Low
Stock Market Indexes S&P 500 1,313 1,279 1,343 1,023 S&P/TSX Comp. 14,091 13,790 14,253 11,093 DAX 6,928 6,664 7,427 5,670 FTSE 100 5,887 5,718 6,091 4,806 Nikkei 9,536 9,207 11,339 8,605 Fixed Income Yields U.S. 10-yr Treasury 3.39 3.27 3.99 2.38 Canada 10-yr Bond 3.22 3.17 3.72 2.69 Germany 10-yr Bund 3.26 3.19 3.33 2.12 UK 10-yr Gilt 3.59 3.51 4.06 2.83 Japan 10-yr Bond 1.23 1.22 1.41 0.85 Foreign Exchange Cross Rates C$ (USD per CAD) 1.02 1.02 1.03 0.93 Euro (USD per EUR) 1.41 1.42 1.42 1.19 Pound (USD per GBP) 1.61 1.62 1.64 1.43 Yen (JPY per USD) 81.2 80.6 94.6 78.9 Commodity Spot Prices** Crude Oil ($US/bbl) 104.8 101.1 105.4 66.0 Natural Gas ($US/MMBtu) 4.27 4.00 5.17 3.18 Copper ($US/met. tonne) 9704.8 9512.5 10179.5 6067.8 Gold ($US/troy oz.) 1436.6 1418.9 1437.4 1090.5 *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
CRUDE OIL - WEST TEXAS INTERMEDIATE US$ per barrel 110 105 100 95 90 85 80 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 - NEVER-ENDING HOUSING MARKET WOES? The military operation in Libya and tensions in the Middle East continue to inject uncertainty into the global economy. However, their effects on the markets this week were largely confined to oil prices, which surpassed the previous cyclical high of U.S.$105 per barrel. Nonetheless, the financial markets were taking this week’s heightened uncertainly in stride. As of writing, the S&P 500 index was up by 2.5% on the week, while 10-year Treasury bond yields climbed 12 basis points to 3.39%. On the domestic front, even the disappointing U.S. housing data released this week failed to knock equity markets down. In February, existing home sales declined by a massive 9.6%. This was the first decline after three straight months of gains. The median price was also down by 1.1%, reaching its lowest level since April 2002. A decline in sales alongside a drop in prices is definitely a concern. But a month’s data do not make a trend. Taking a step back, the overall trend in existing home sales remains upward. In particular, sales were up 5.2% compared to 3 months ago and 26% from their trough in July 2010. Still, the housing market continues to be the economy’s Achilles heel. The foreclosure pipeline is almost as large as the 3.5 million inventory of unsold existing homes. Distressed sales, which consist of foreclosures and short-sales, accounted for 39% of sales in February. They will continue to make up a large share of existing home sales throughout the year. But, the market clearing process is measured in years, not just months, and is not without its side effects. Declining prices are forestalling demand, weighing on housing wealth and also leaving Americans with larger mortgages than their houses are worth. On top of that, disFHFA HOUSE PRICE INDEX Price Index, 1991=100 240
220
200
180
160
140 2001
2003
2005
2007
Source: Federal Housing Finance Agency
2009
2011
NEW & EXISTING SINGLE FAMILY HOME SALES 1,600
New Units (000s)
Existing Units (000s)
8,000
1,400
7,000
1,200
6,000
1,000
5,000
800
4,000
600
New home sales (lhs)
3,000
400
Existing home sales (rhs)
2,000
200
1,000
0
0
1998
2000
2002
2004
2006
2008
2010
Source: National Association of Realtors, U.S. Census Bureau
tress sales and declining prices have knock-on effects on the new housing market. In February, new home sales fell by a whopping 16.9% to their lowest pace on record. Despite the upward revisions in the previous three months, February’s decline highlighted that the overall trend in new home sales is moving in the opposite direction of that in existing home sales. This is not surprising. February’s data on home starts and building permits, an indicator of future activity, revealed that residential construction will remain at depressed levels this year. Home builders are facing fierce competition from existing homes, which sell 30% lower than the new ones – an attractive markdown for potential buyers. In all likelihood, the new housing market will be the last to recover. Until the massive amount of seriously delinquent mortgages clears the market and the substantial inventory of existing homes is absorbed, the new housing market is unlikely to see any upward movement any time soon. But, inventories will be worked off as long as demand improves. What is important is for job growth to pick up. And the good news is that we are already seeing gains in the labor market. The unemployment rate declined for three straight months. What is more, this week we learnt that fewer Americans filed applications for unemployment benefits. Jobless claims declined by 5,000 to 382,000. All told, the housing data for February was definitely disappointing. Yet, few forecasters are hanging their hat on a recovery led by residential investment. Exports and business investment will lead the way, with some support from the labor market and consumer spending – enough to support a 3% real GDP growth this year. Christos Shiamptanis, Economist 416-982-2556
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CANADA – OTTAWA DRAMA BARELY REGISTERS Government budget season was in full swing this week with three on tap: federal, New Brunswick, and Saskatchewan. The two provincial budgets offered a stark contrast between the spoils of a resource-rich province able to extend further tax relief, namely Saskatchewan, and a salvo of fiscal austerity measures needed to fight deficits in a debtand growth-constrained province, namely New Brunswick. Meanwhile, the federal budget captured more than usual attention this year not because of its stay-the-course nature but from the fact that the opposition parties indicated they would not support it. As of writing, we expect a non-confidence vote in Parliament that would force a spring election. Bond markets pushed back anticipations of an interest rate hike from the Bank of Canada (BoC) on the notion that they would not hike during an election campaign. This reasoning is questionable, but is a moot point from our perspective. Our forecast for the next BoC rate hike to occur in July falls beyond the likely election campaign timeframe. While its shelf-life will undoubtedly be short, the federal budget will still offer plenty of food for thought on the campaign trail. It helps assess the latest status-quo fiscal path and Conservative priorities. While the different political parties will offer variations in platforms, the need to eliminate deficits cuts across nearly all political stripes. Given the commitment to deficit reduction, the orderly nature of elections and Canada’s relatively strong fiscal position, the uncertainty created by this week’s political drama did not create ripples in financial markets. Put another way, Canada’s reputation for stability and as a good place to invest remains intact.
%
WORLDS APART – BENCHMARK 10-YEAR GOVERNMENT BOND YIELDS
9.0 8.0 7.0 Canada
6.0
Germany
5.0
Portugal
4.0 3.0 2.0 1.0 0.0 01/03
01/17
01/31
02/14
Source: Financial Times, TD Economics.
02/28
03/14
NO EASY FEAT, YET POSSIBLE – CHANGE IN REAL* PROGRAM SPENDING 20
% change
Budgeted Average = - 0.7
Actual Average = 2.0
15
Periods of extended restraint
10 5 0 -5 -10 -15 84-85
88-89
92-93
96-97
00-01
04-05
08-09
12-13
* Inflation-adjusted. Source: Department of Finance Canada, Statistics Canada.
Consider that only one day after we learned the Canadian government would likely fall on a benign budget, the Portuguese government suffered the same fate, albeit with considerably more dramatic consequences emanating out of a much smaller country. The Portuguese parliament rejected a fiscal austerity package, increasing the likelihood of a European/IMF bailout package for the country. Consequently, the yield on Portuguese government bonds jumped and the cost of insuring against a default on its sovereign debt climbed. In contrast, even upon news of the Canadian government’s likely fall, the yield on the federal benchmark 10-year bond still held near that of rock-solid Germany, Europe’s safe heaven. Yet one should be careful not to underestimate the extent of Canada’s fiscal challenges. It may still miss this opportunity to further demark itself among the general mess that are developed nations’ public finances. The federal and most provincial governments are targeting minimal spending growth to meet their medium-term budget goals. But in a year with six elections on tap, the risk is that the restraint can gets kicked down the road. Canada will not escape the demographic crunch and associated age-related spending pressures. What is needed is more than a couple of years of flat-lining operational costs. Only deeper structural reform of government services delivery can sustainably balance the books. Political parties of all stripes should explicitly flesh out how they intend to confront this challenge. The electorate is mature enough to digest a refreshing dose of frankness. Pascal Gauthier, Senior Economist 416-944-5730
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U.S.: UPCOMING KEY ECONOMIC RELEASES U.S. Nonfarm Payrolls - March*
Release Date: April 1, 2011 February Result: 192K; unemployment rate 8.9% TD Forecast: 200K ; unemployment rate 9.0% Consensus: 190K; unemployment rate 8.9% The labour market is beginning to show signs of positive momentum, and we expect the 224K gain in private sector employment in February to be followed up with a further 210K expansion in March. This will take the pace of headline payrolls growth to 200K, reflecting the better tone in recent labour market reports. The goods-producing sector is expected to continue adding to payrolls as the increase in manufacturing should offset the modest drop that we expect in construction employment during the month. Service sector employment should continue to provide the bulk of the employment growth as hiring in retail trade, professional services and education more than compensate for the continued decline in public sector employment. However, despite the growth in employment, we expect the unemployment rate to tick marginally higher to 9.0% as previously displaced workers move back in the labour
U.S. LABOR MARKET 500
Thousands of jobs
400
The manufacturing sector continues to enjoy a run of good form, with the headline ISM manufacturing index printing at or above the 50-mark for 19 straight months. In March, we expect the headline index to post a new cyclical high of 62.0, indicating a further acceleration in the pace of growth for manufacturing sector activity. The production, new orders, employment and new export orders sub-components are all expected to remain above the 60 mark, underscoring the breadth and strength of the recovery. The prices paid sub-index should continue to register another above-80 print, reflecting the rising cost of input given the surge in commodity prices. Most of the other sub-components are expected to remain relatively unchanged, with inventories, deliveries and shipments sub-indices all staying above 50. In the months ahead, as
10.5
300
10.0
200
9.5
100
9.0
0
8.5
-100
8.0
Net Job Change* (lhs)
-200 -300
7.5 7.0
Feb-10
Apr-10
Jun-10
Aug-10
Oct-10
Dec-10
Feb-11
Seasonally-adjusted data; * Change in non-farm payrolls Source: U.S. Deptartment of Labor / Haver Analytics
force, undoing some of the improvements of the past few months. In the coming months, with the economic recovery expected to gain further traction, the pace of job growth should accelerate, though the unemployment rate is expected to remain elevated as displaced workers move back into the labour force in search of new jobs.
U.S. ISM Manufacturing Index - March* Release Date: April 1, 2011 February Result: 61.4 TD Forecast: 62.0 Consensus: 61.0
% 11.0
Unemployment Rate (rhs)
U.S. ISM MANUFACTURING INDEX 65
Index
60 55 50 45 40 35 30 2005
2006
2007
2008
2009
2010
Source: U.S. Institute for Supply Management / Haver Analytics
the economic recovery gains further traction we expect the positive momentum in overall manufacturing sector activity to be sustained, though the headline ISM index could ease modestly.
*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 GDP - January* Release Date: March 31, 2011 December Result: 0.5% M/M TD Forecast: 0.5% M/M Consensus: 0.5% M/M
On an industry-level basis, real GDP growth is expected to pick up in January right where it left off at the end of 2010 with a healthy 0.5% gain. The strength can be attributed to the gains already observed in manufacturing shipments and wholesale sales. It is also expected that mining, oil, and gas extraction as well as utilities output will contribute to the headline. At the other end of the spectrum, retail sales did disappoint, which will prevent an even more outsized start to the New Year. When our expectation for January is combined with the handoff from a similarly sized increase in December the first quarter is shaping up to be quite strong. Our most recent quarterly forecast expects that real GDP will grow by an annualized of 3.8% in Q1. This will help to accelerate the absorption of spare capacity that will eventually compel the
CANADIAN REAL GDP* 1.0
M/M % Chg.
0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 Dec-09
Feb-10
Apr-10
Jun-10
Aug-10
Oct-10
Dec-10
*Real GDP at basic prices in 2002 chained dollars Source: Statistics Canada / Haver Analytics
Bank of Canada to resume withdrawing monetary stimulus. We expect the first move to occur in July and target a 2.0% overnight rate at the end of the year.
*Forecast by Rates and FX Strategy Group. For further information, contact TDRates&FXResearch@tdsecurities.com.
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March 25, 2011
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RECENT KEY ECONOMIC INDICATORS: MARCH 21- 25, 2011 Release Date
Economic Indicators
Data for Period
Units
Current
Prior
Feb Feb Jan Mar 18-Mar Feb Feb Feb 19-Mar 12-Mar Jan
Index Millions M/M % Chg. Index W/W % Chg. Thousands M/M % Chg. M/M % Chg. Thousands Thousands Y/Y % Chg.
-0.04 4.88 -0.3% 20 2.7 250 -0.9 -0.6 382 3721 -3.39
-0.01 5.40 -1.0% 25 -0.7 301 3.6 -3.0 387 3723 -3.63
R R R
Feb Jan Jan
M/M % Chg. M/M % Chg. M/M % Chg.
0.8 -0.3 0.0
0.4 -0.2 0.6
R
Mar 4Q Feb Feb Jan Feb 4Q Mar Mar Mar Feb Feb Feb Feb Feb Mar Mar Mar Mar
Y/Y % Chg. NZD, Billions Y/Y % Chg. Y/Y % Chg. Y/Y % Chg. Yen, Billions Y/Y % Chg. Index Index Index Y/Y % Chg. Y/Y % Chg. Y/Y % Chg. Y/Y % Chg. Y/Y % Chg. Index Index Index Index
0.9 -3.524 4.4 3.4 20.9 556.0 0.8 57.5 21 109 0.0 -0.6 -1.0 1.3 1.2 83 111.1 115.8 106.5
0.3 -0.029 4.0 3.0 19.2 191.8 1.5 58.2 19 106 0.0 -0.6 -1.1 5.1 5.0 85 111.3 114.8 107.9
United States Mar 21 Mar 21 Mar 22 Mar 22 Mar 23 Mar 23 Mar 24 Mar 24 Mar 24 Mar 24 Mar 24
Chicago Fed Nat Activity Index Existing Home Sales House Price Index Richmond Fed Manufact. Index MBA Mortgage Applications New Home Sales Durable Goods Orders Durables Ex Transportation Initial Jobless Claims Continuing Claims RPX Composite 28dy
Mar 22 Mar 22 Mar 22
Leading Indicators Retail Sales Retail Sales Less Autos
R R R R R
Canada
International Mar 20 UK Rightmove House Prices Mar 22 NZ Current Account Balance Mar 22 UK CPI Mar 22 UK Core CPI Mar 23 EC Industrial New Orders NSA Mar 23 JN Adjusted Merchnds Trade Bal. Mar 23 NZ GDP Mar 24 EC PMI Composite Mar 24 FR Production Outlook Indicator Mar 24 FR Business Confidence Indicator Mar 24 JN Natl CPI Mar 24 JN Natl CPI Ex Food, Energy Mar 24 JN Corp Service Price Index Mar 24 UK Retail Sales w/Auto Fuel Mar 24 UK Retail Sales Ex Auto Fuel Mar 25 FR Consumer Confidence Indicator Mar 25 GE IFO - Business Climate Mar 25 GE IFO - Current Assessment Mar 25 GE IFO - Expectations Source: Bloomberg, TD Economics
R
R
R R R R
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UPCOMING ECONOMIC RELEASES AND EVENTS: MARCH 28- April 1, 2011 Release Date
Time*
Mar 28 Mar 28 Mar 28 Mar 28 Mar 28 Mar 28 Mar 28 Mar 28 Mar 28 Mar 29 Mar 29 Mar 29 Mar 30 Mar 30 Mar 30 Mar 30 Mar 30 Mar 31 Mar 31 Mar 31 Mar 31 Mar 31 Mar 31 Mar 31 Mar 31 Apr 01 Apr 01 Apr 01 Apr 01 Apr 01 Apr 01 Apr 01 Apr 01 Apr 01
8:30 8:30 8:30 10:00 10:30 12:40 15:40 16:00 18:00 6:00 9:00 10:00 7:00 7:30 8:15 13:00 14:30 8:30 8:30 9:45 9:45 10:00 10:00 10:30 12:30 8:15 8:30 8:30 8:30 8:30 9:00 10:00 10:00 17:00
Personal Income Personal Spending PCE Core Pending Home Sales Dallas Fed Manf. Activity Fed's Lockhart to Speak on U.S. Economy in Atlanta Fed's Evans Speaks to Reporters in South Carolina Fed's Evans Speaks in South Carolina on Economy Fed's Rosengren Speaks in Boston Fed's Bullard Speaks on Monetary Policy in Prague S&P/CS 20 City % SA Consumer Confidence MBA Mortgage Applications Challenger Job Cuts YoY ADP Employment Change Fed's Bullard Speaks at UBS Dinner in London Fed's Hoenig Speaks to London School of Economics Initial Jobless Claims (with Annual Revisions) Continuing Claims Chicago Purchasing Manager Bloomberg Consumer Comfort NAPM-Milwaukee Factory Orders Fed's Lacker to Speak at 2011 Credit Symposium in Charlotte Fed's Tarullo to Speak at 2011 Credit Symposium in Charlotte Fed's Plosser Speaks on Economy in Harrisburg, PA Change in Nonfarm Payrolls Unemployment Rate Avg Hourly Earning All Emp Avg Weekly Hours All Employees Fed's Dudley to Speak in San Juan, Puerto Rico Construction Spending ISM Manufacturing Total Vehicle Sales
Mar Mar Mar Mar Mar Mar
10:30 12:45 8:30 8:30 9:00 8:30
BoC Gov. Carney in a Panel Discussion in Calgary BoC Dep. Gov. Boivin Speaks in Montreal Industrial Product Price Raw Materials Price Index Teranet/National Bank HPI Gross Domestic Product
Economic Indicator/Event
Consensus Last Period Forecast
Data for Period
Units
Feb Feb Feb Feb Mar
M/M % Chg. M/M % Chg. M/M % Chg. M/M % Chg. Index
0.4 0.6 0.2 0.9 --
1.0 0.2 0.1 -2.8 17.5
Jan Mar 25-Mar Mar Mar
M/M % Chg. Index
-65.0 --205
-0.4 70.4 2.7 20 217
26-Mar 19-Mar Mar 27-Mar Mar Feb
Thousands Thousands Index Index M/M % Chg.
--69 --0.5
382 3721 71.2 -63 3.1
Mar Mar Mar Mar
Thousands % M/M % Chg. Hours
190 8.9 0.2 34.3
192 8.9 0.0 34.2
Feb Mar Mar
M/M % Chg. Index Millions
0.5 61 13.40
-0.7 61.4 13.38
Feb Feb Jan Jan
M/M M/M M/M M/M
Chg. Chg. Chg. Chg.
0 -0.5 -0.5
0.2 0.3 0.3 0.5
NZD, Millions % Y/Y % Chg. M/M % Chg. Y/Y % Chg. Index % Index
270 4.9 4.0 0.4 2.3 6 9.9 60.9
11 4.9 3.5 0.4 2.4 5 9.9 61.5
United States
26 28 30 30 30 31
Mar 28 17:45 NZ Trade Balance Mar 28 19:30 JN Jobless Rate Mar 29 19:50 JN Industrial Production Mar 30 20:30 AU Retail Sales s.a. Mar 31 5:00 EC Euro-Zone CPI Estimate Mar 31 19:50 JN Tankan Lge Manufacturers Index Apr 01 5:00 EC Euro-Zone Unemployment Rate Apr 01 4:30 UK PMI Manufacturing * Eastern Standard Time; Source: Bloomberg, TD Economics
Y/Y % Chg. Thousands
Canada
International
Feb Feb Feb P Feb Mar 1Q Feb Mar
% % % %
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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
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