Wage Hikes in the United States Have Pushed Bond Yields Up

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1 WEEKLY NEWSLETTER Wage Hikes in the United States Have Pushed Bond Yields Up #1 BEST OVERALL FORECASTER - CANADA HIGHLIGHTS ff United States: The ISM manufacturing index has reached its highest level since ff United States: Wages accelerated in August. ff The Bank of Canada has opted for the status quo. ff Canada: 51,600 jobs lost in August. ff Canada: Trade balance improved in. A LOOK AHEAD ff United States: Gas should contribute to increased consumer prices and retail sales. ff Canada: Industrial capacity utilization rates should increase further. FINANCIAL MARKETS ff Stock markets are down. ff The Bank of Canada maintains an upbeat tone. ff The Canadian dollar drops back down to around US$6. CONTENTS Key Statistics of the Week... 2 United States, Canada A Look Ahead... 4 United States, Canada, Overseas Financial Markets... 3 Economic Indicators of the Week... 6 Tables Economic indicators... 8 Major financial indicators...10 François Dupuis, Vice-President and Chief Economist Carine Bergevin-Chammah, Economist Mathieu D Anjou, Senior Economist Benoit P. Durocher, Senior Economist Francis Généreux, Senior Economist Hendrix Vachon, Senior Economist, Economic Studies: or , ext desjardins.economics@desjardins.com desjardins.com/economics NOTE TO READERS: The letters k, M and B are used in texts and tables to refer to thousands, millions and billions respectively. IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. The data on prices or margins are provided for information purposes and may be modified at any time, based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. The opinions and forecasts contained herein are, unless otherwise indicated, those of the document s authors and do not represent the opinions of any other person or the official position of Group. Copyright 2018, Group. All rights reserved.

2 Key Statistics of the Week UNITED STATES CANADA ff The establishment survey indicates that there were 201,000 new jobs in August, following gains of 147,000 in (downgraded from 157,000) and 208,000 in (downgraded from 248,000). Construction added 23,000 jobs, but there were 3,000 net layoffs in the manufacturing sector, including 4,900 in the auto sector. There were 178,000 net hires in private sector services, a spurt following the 117,000 new jobs created in. The jobless rate stayed at %. ff After raising its key interest rates by 25 basis points in, the Bank of Canada (BoC) opted to take a break in September by holding the target for the overnight rate at %. This decision falls directly in line with the gradual approach that has been recommended by the Canadian monetary authorities thus far. However, the addition of the verb reinforce in the BoC s assessment of the future direction of interest rates suggests that a further increase is imminent. Therefore, unless negotiations for a new North American Free Trade Agreement (NAFTA) deal hit a snag, the door is wide open for another rate hike announcement at the October meeting. It is also worth noting that the next meeting will entail a Monetary Policy Report, which will enable the BoC to explain its decision in detail while keeping expectations in line with the gradual approach it prefers to take. ff The average hourly wage was up 0.4% in August, posting its highest monthly growth in That brought the annual change up to %, the highest it has been since May ff The ISM manufacturing index surged 3.2 points in August to reach 6, its highest level since May Eight of the ten components are up, with the strongest gains in new orders and current production. The only downturns come from the international trade sector. ff The ISM non-manufacturing index was up 2.8 points in August, its strongest monthly growth since January. It went from 55.7 to 58.5, but is still below the 59.1 level it reached in. The components with the biggest increases are order backlogs, current production and new orders. The only decreases are in prices paid and imports. ff Construction edged up in, following a % decline in. Residential construction saw growth of %, but private non-residential construction was down 1.0%. Public construction rose %. ff In, the U.S. balance of trade in goods and services declined for the second month in a row. The balance went from -US$45.7B in to -US$50.1B. This is the largest deficit since February. Exports dropped 1.0% while imports climbed 0.9%. ff The labour market lost 51,600 jobs in August. Most forecasters were expecting a slight increase instead. The unemployment rate ticked up from 5.8% to 6.0%. The next few months will be decisive for shifts in the employment trend. The August data shows that the 6 month moving average started to decline again, to only 9,700. In theory, this advance is too weak given the growth outlook for Canada s economy. We therefore expect employment to rebound in the months ahead. ff Merchandise exports were up % in after a 4.6% gain in. That is much higher than expected, especially for energy products (+5.0% in ). Imports were down 0.4% in, an astonishing result considering the spike in domestic demand. As such, the trade balance improved during the month, shrinking from -$4B to -$0.11B. Benoit P. Durocher, Senior economist Francis Généreux, Senior economist 2

3 Financial Markets The Tense Situation in Many Emerging Countries Continues Stock markets lost ground this week, with investors worrying about the challenges in emerging markets and the possibility of additional U.S. tariffs on China. The U.S. stock market was not spared from this negative sentiment. The S&P 500 index was down about % for the week at the time of writing. Uncertainty about the future of the North American Free Trade Agreement (NAFTA) also weighed on the Canadian stock market. The S&P/TSX posted a weekly decrease of close to 1.5%. Investors liquidated their assets in emerging countries, as these markets continue to struggle. The MSCI Emerging Markets Index entered a bear market, losing more than 20% since its last peak in January. Bond yields in the United States were boosted early in the week by strong ISM manufacturing index data. However, they retreated Thursday on the back of disappointing numbers in the ADP Employment Report. The acceleration in wages in the United States reported on Friday morning bumped the yields back up. As a result, 2 year and 10 year yields were around 2.70% and 5%, respectively. In Canada, bond yields reacted particularly to the speech by Senior Deputy Governor of the Bank of Canada (BoC), Carolyn A. Wilkins, who remained positive about the Canadian economy and signalled a continuation of the gradual increase in key rates. The fact that the BoC considered raising rates at a faster pace was also viewed positively by the market. Friday morning, the 2 year bond yield was around 0% and the 10 year bond yield was close to 0%. The U.S. dollar seesawed this week. The uncertainty coming out of emerging countries and fears of an escalation in protectionism sustained the greenback at the beginning of the week, before the currency lost some steam on Wednesday and Thursday. A new momentum was observed Friday, supported by good U.S. job numbers, particularly wage growth. All in all, the euro fell below US$6. The common currency appears to still be sensitive to the risk of default in Turkey, which could affect many European banks. The pound sterling benefited from more favourable signals in Brexit negotiations. The negative sentiment on emerging markets also affected the Canadian dollar at the start of the week. However, the hawkish tone by Carolyn A. Wilkins helped the loonie on Thursday. Despite disappointing job numbers, the currency held at close to US$6 on Friday. Hendrix Vachon, Senior Economist Carine Bergevin-Chammah, Economist GRAPH 1 Stock markets Index Index 2,925 16,500 2,900 16,400 2,875 16,300 2,850 16,200 2,825 16,100 2,800 16, /07/ /08/ /08/ /08/ /08/ /09/06 S&P 500 (left) S&P/TSX (right) Sources: Datastream and, Economic Studies GRAPH 2 Bond markets 10-year yield In % points -5 In % /07/ /08/03 Spread (left) 2018/08/ /08/21 United States (right) 2018/08/ /09/06 Canada (right) Sources: Datastream and, Economic Studies GRAPH 3 Currency markets US$/C$ US$/ /07/ /08/ /08/ /08/2018 Canadian dollar (left) 29/08/ /09/2018 Euro (right) Sources: Datastream and, Economic Studies 3

4 A Look Ahead UNITED STATES THURSDAY 13 - August m/m % Consumer price index (August) The consumer price index (CPI) was up % in for the third time in four months. However, this increase conceals the fact that the core CPI, which excludes food and energy, rose 5% in, the strongest monthly gain since January. Once again, energy prices contributed negatively to the CPI s movement. This is the opposite of what should happen in August. Prices at the pump moved little over the past month, but since they tend to drop fairly drastically in August, the seasonally adjusted monthly change should post strong growth of more than 3%, bringing a monthly gain in the total CPI. Excluding food and energy, we can expect prices to rise %. The annual change in the total CPI should slow somewhat to 2.8% after six straight months of acceleration, which pushed it from % to %. Core inflation is expected to slip from % to %. FRIDAY 14 - August m/m % Retail sales (August) Retail sales surged in after a rather modest, which saw growth of just %. We expect a fairly tepid increase in total sales for August. Despite optimistic forecasts, new car sales declined during the month and are expected to contribute negatively to the change in retail sales. However, higher gas prices (once seasonally adjusted) should have a positive effect. Food services are also expected to post further solid growth. Excluding cars and gas, we should see growth of 0.4%. A increase is also expected for total sales, whereas the increase for sales excluding cars alone should reach. FRIDAY 14-9:15 August m/m FRIDAY 14-10:00 September August Industrial production (August) After a sharp 1.0% rise in, industrial production rose slower in with a gain. A third consecutive decrease in energy production weighed heavily on developments in total production. This sector is expected to make a neutral contribution in August. In manufacturing, signs are mixed. The ISM manufacturing index rose sharply in August, but data on hours worked are rather negative. The auto sector is also expected to make a hefty negative contribution, which will be offset by the other sectors. Manufacturing production should therefore see no change. However, we are anticipating strong growth in natural resource production. All in all, industrial production should increase. University of Michigan consumer confidence index (September preliminary) After shedding 0.3 points in, the University of Michigan confidence index retreated 1.7 points in August. This total decline of 2.0 points in two months sank the index to its lowest level since January. This weak performance contrasts with the increase in the Conference Board confidence index during the same month. Since the Conference Board index tends to pre-empt movements in the Michigan index, we can assume that the latter will improve come September. A decline in jobless claims also supports this outlook. However, the stock market s fuzzier performance, especially the recent drop in the TIPP and Bloomberg confidence indexes, makes a steep surge doubtful. A gain of 1.5 points to 97.7 is instead anticipated. CANADA TUESDAY 11-8:15 August ann. rate 216, , ,300 Housing starts (August) The number of housing starts could remain relatively unchanged in August at close to 210,000 units, which has been the trend in recent months. While interest rates have certainly increased, demand is still quite lively with an increase in the number of households. 4

5 WEDNESDAY 12 - Q % 86.9% Q % Industrial capacity utilization rate (Q2) Industrial production was up 6.5% (annualized) in the second quarter. The oil and gas extraction sector performed particularly well with a 2% gain. Under the circumstances, the industrial capacity utilization rate should climb during the period to close to the 87% mark, a very high point from a historical perspective. OVERSEAS THURSDAY 13-7:00 September 5% 5% August 2nd 5% : Bank of England meeting (September) After announcing an interest rate increase at the beginning of August, the Bank of England (BoE) is expected to go back to its wait-andsee approach. It would be surprising for it to open the door to another hike anytime soon, thus staying the course with very gradual monetary tightening. The economic and financial context continues to be very uncertain in the, as Brexit is expected to be finalized in the coming quarters. Many British economic indicators for will be published Monday, particularly the trade balance, industrial production, construction and monthly GDP. Job data will be available Tuesday. THURSDAY 13-7:45 September % % 26 % Euro zone: European Central Bank meeting (September) It seems highly likely that the status quo will be maintained at the end of this monetary policy meeting. The European Central Bank (ECB) is also expected to reiterate its intention to end its securities purchases by the end of the year and not raise interest rates until the end of next summer. However, the ECB s new forecasts should be interesting. Rising oil prices could again nudge the ECB to upgrade its inflation forecasts slightly. On the other hand, the lack of a convincing economic rebound in the second quarter might prompt it to downgrade its forecasts for the zone s real GDP. Among the indicators to be published in the euro zone this week, data on industrial production for will be released Wednesday. French data are positive with a % gain, but German industrial production appears to have declined by a further %. Data on employment in the second quarter will also be released that day. The trade balance for will be published Friday. 5

6 Economic Indicators Week of September 10 to 14, 2018 Day Hour Indicator Period Previous data UNITED STATES MONDAY 10 15:00 12:00 Consumer credit (US$B) Speech of the Atlanta Fed President, R. Bostic TUESDAY 11 10:00 Wholesale inventories final (m/m) % % % % 0.4% % 0.0% 210, , , % % % 2.8% % % % % % % - 0.0% - 0.0% % % 78.2% % 78.1% 97.7 % 78.1% , , ,300 WEDNESDAY 12 Producer price index Total (m/m) Excluding food and energy (m/m) 9:30 Speech of the St. Louis Fed President, J. Bullard 12:45 Speech of a Federal Reserve Governor, L. Brainard 14:00 Release of the Beige Book THURSDAY 13 Initial unemployment claims Consumer price index Total (m/m) Excluding food and energy (m/m) Total (y/y) Excluding food and energy (y/y) 14:00 Federal budget (US$B) FRIDAY 14 Export prices (m/m) Import prices (m/m) Retail sales Total (m/m) Excluding automobiles (m/m) 9:00 Speech of the Chicago Fed President, C. Evans 9:15 Industrial production (m/m) 9:15 Production capacity utilization rates 10:00 Michigan s consumer sentiment index preliminary 10:00 Business inventories (m/m) 3-7 CANADA MONDAY 10 TUESDAY 11 8:15 Housing starts (ann. rate) WEDNESDAY 12 Industrial capacity utilization rate Q2 86.8% 86.9% 86.1% THURSDAY 13 New housing price index (m/m) FRIDAY 14 8:00 National balance sheet Q2 Note:, Economic Studies are involved every week in the Bloomberg survey for Canada and the United States. Approximately 15 economists are consulted for the Canadian survey and a hundred or so for the United States. The abbreviations m/m, q/q and y/y correspond to monthly, quarterly and yearly variation respectively. Following the quarter, the abbreviations f, s and t correspond to first estimate, second estimate and third estimate respectively. The times shown are Daylight Saving Time (GMT - 4 hours). Forecast of, Economic Studies of the Group. 6

7 Economic Indicators Week of September 10 to 14, 2018 Country Hour Indicator Period m/m (q/q) y/y Previous data m/m (q/q) y/y OVERSEAS SUNDAY 9 China China 19:50 19:50 21:30 21:30 Current account ( B) Real GDP final Consumer price index Producer price index 1, ,76 Q2 % % 4.0% MONDAY 10 Trade balance ( M) Construction Index of services Monthly GDP Industrial production -2, % % % % -1, % 0.0% 0.4% TUESDAY 11 Germany Germany 0:30 5:00 5:00 Tertiary industry activity index ILO unemployment rate ZEW survey Current situation ZEW survey Expectations 4.0% % WEDNESDAY 12 Italy Euro zone Euro zone 4:00 5:00 5:00 19:50 Industrial production Net change in employment Industrial production Producer price index Q2 THURSDAY 13 Germany France Euro zone China China 2:00 2:45 7:00 7:45 22:00 22:00 Consumer price index final Consumer price index final Bank of England meeting European Central Bank meeting Industrial production Retail sales 2.0% 2.0% % % 5% 5% % % 6.2% 6.0% 8.8% 8.8% FRIDAY 14 Euro zone Russia 0:30 5:00 6:30 Industrial production final Trade balance ( B) Bank of Russia meeting -0.4% - % % 3.1% % 0.4% -% % % 4.6% % % 1.7% 1.4% 2.5% 3.1% % Note: In contrast to the situation in Canada and the United States, disclosure of overseas economic fi gures is much more approximate. The day of publication is therefore shown for information purposes only. The abbreviations m/m, q/q and y/y correspond to monthly, quarterly and yearly variation respectively. The times shown are Daylight Saving Time (GMT - 4 hours). 7

8 UNITED STATES Quarterly economic indicators REF. QUART. Gross domestic product (2009 $B) Consumption (2009 $B) Government spending (2009 $B) Residential investment (2009 $B) Non-residential investment (2009 $B) Business inventory change (2009 $B)1 Exports (2009 $B) Imports (2009 $B) Final domestic demand (2009 $B) GDP deflator (2009 = 100) Labor productivity (2009 = 100) Unit labor cost (2009 = 100) Employment cost index (Dec = 100) Current account balance ($B)1 1 VARIATION (%) LEVEL 2018 Q1 ANNUAL VARIATION (%) Quart. ann. 1 year ,515 12,841 3, , ,573 3,417 19, Statistics representing the level during the period; * New statistic in comparison with last week. UNITED STATES Monthly economic indicators REF. MONTH Leading indicator (2010 = 100) ISM manufacturing index1 ISM non-manufacturing index1 Cons. confidence Conference Board (1985 = 100)1 Personal consumption expenditure (2009 $B) Disposable personal income (2009 $B) Consumer credit ($B) Retail sales ($M) VARIATION (%) LEVEL -1 month -3 months -6 months -1 year * * ,907 14,372 3, , , * * * * , ,177 1,937 1,168 1, ,340-50, , ,158 1, ,380-45, ,276 1, ,450-45, ,334 1, ,380-52,334 1, ,185 1, ,420-44,221 2, Excluding food and energy Producer price (2009 = 100) Export prices (2000 = 100) Import prices (2000 = 100) Excluding automobiles ($M) Industrial production (2007 = 100) Production capacity utilization rate (%)1 New machinery orders ($M) New durable good orders ($M) Business inventories ($B) Housing starts (k)1 Building permits (k)1 New home sales (k)1 Existing home sales (k)1 Commercial surplus ($M)1 Nonfarm employment (k)2 Unemployment rate (%)1 Consumer price ( = 100) Excluding food and energy Personal cons. expenditure deflator (2009 = 100) 1 Statistic shows the level of the month of the column; 2 Statistic shows the variation since the reference month; * New statistic in comparison with last week. 8

9 CANADA Quarterly economic indicators REF. QUART. Gross domestic product (2007 $M) Household consumption (2007 $M) Government consumption (2007 $M) Residential investment (2007 $M) Non-residential investment (2007 $M) Business inventory change (2007 $M)1 Exports (2007 $M) Imports (2007 $M) Final domestic demand (2007 $M) GDP deflator (2007 = 100) Labour productivity (2007 = 100) Unit labour cost (2007 = 100) Current account balance ($M)1 Production capacity utilization rate (%)1 Disposable personal income ($M) Corporate net operating surplus (2007 $M) 1 VARIATION (%) LEVEL ANNUAL VARIATION (%) Quart. ann. 1 year * * 1,891,153 1,083, , , ,622 14, , ,979 1,882, , , , , , , Q ,248, , Statistics representing the level during the period; * New statistic in comparison with last week. CANADA Monthly economic indicators REF. MONTH Gross domestic product (2007 $M) Industrial production (2007 $M) Manufacturing sales ($M) Housing starts (k)1 Building permits ($M) Retail sales ($M) Excluding automobiles ($M) Wholesale trade sales ($M) Commercial surplus ($M)1 Exports ($M) Imports ($M) Employment (k)2 1 Unemployment rate (%) Average weekly earnings ($) Number of salaried employees (k)2 Consumer price (2002 = 100) Excluding food and energy Excluding 8 volatile items Industrial product price (2002 = 100) Raw materials price (2002 = 100) Money supply M1+ ($M) 1 VARIATION (%) LEVEL -1 month -3 months -6 months -1 year 1,784, ,343 58, ,208 50, , * 63, ,597-1,930-2,598 * * 51,265 51, * 18, * , , * Statistic shows the level of the month of the column; 2 Statistic shows the variation since the reference month; * New statistic in comparison with last week. 9

10 UNITED STATES, CANADA, OVERSEAS Major financial indicators PREVIOUS DATA ACTUAL LAST 52 WEEKS IN % (EXPECTED IF INDICATED) Sep month -3 months -6 months -1 year Higher Average Lower United States Federal funds target Treasury bill 3 months Treasury bonds 2 years Treasury bonds 5 years Treasury bonds 10 years Treasury bonds 30 years S&P 500 index (level) DJIA index (level) Gold price (US$/ounce) CRB index (level) WTI oil (US$/barrel) ,881 25,970 1, ,902 25,965 1, ,833 25,313 1, ,779 25,317 1, ,787 25,336 1, ,461 21,798 1, ,914 26,617 1, ,699 24,508 1, ,488 22,057 1, Canada Overnight target Treasury bill 3 months Treasury bonds 2 years Treasury bonds 5 years Treasury bonds 10 years Treasury bonds 30 years Spread with the U.S. rate (% points) Overnight target -0 Treasury bill 3 months -3 Treasury bonds 2 years -0 Treasury bonds 5 years -1 Treasury bonds 10 years -6 Treasury bonds 30 years S&P/TSX index (level) Exchange rate (C$/US$) Exchange rate (C$/ ) 16, , , , , , , , , Overseas Euro zone ECB Refinancing rate Exchange rate (US$/ ) BoE Base rate Bonds 10 years FTSE index (level) Exchange rate (US$/ ) , , , , , , , , , Germany Bonds 10 years DAX index (level) , , , , , , , , ,787 BoJ Main policy rate Nikkei index (level) Exchange rate (US$/ ) 22, , , , , , , , , CRB: Commodity Research Bureau; WTI: West Texas Intermediate; ECB: European Central Bank; BoE: Bank of England; BoJ: Bank of Note: Data taken at markets closing, with the exeption of the current day where they were taken at 11:00 a.m. 10