The Federal Reserve Starts Reducing its Balance Sheet

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1 WEEKLY NEWSLETTER The Federal Reserve Starts Reducing its Balance Sheet #1 BEST OVERALL FORECASTER - CANADA HIGHLIGHTS ff The Federal Reserve (Fed) announces a gradual wind-down of its balance sheet as of October. ff United States: Hurricane Harvey impacts home resales. ff The free trade agreement between Canada and the European Union takes provisional effect. ff Canada: The total annual inflation rate rose from 1.2% to 1.4%. ff Canada: Wholesale and retail sales ticked up in, while manufacturing sales retreated. A LOOK AHEAD ff United States: Conference Board household confidence index expected to decline. ff Like retail sales and industrial output, real U.S. consumption is likely to bear the brunt of Hurricane Harvey. ff Canada: Real GDP by industry should post another sharp rise in. FINANCIAL MARKETS ff An encouraging week for the S&P/TSX. ff The Fed is beginning to convince the markets of a rate hike in December. ff The U.S. dollar was up briefly after the Fed meeting. 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 Mathieu D Anjou, Senior Economist Benoit P. Durocher, Senior Economist Francis Généreux, Senior Economist Jimmy Jean, 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 2017, Group. All rights reserved.

2 Key Statistics of the Week UNITED STATES CANADA ff The Federal Reserve (Fed) decided to maintain the target range for the federal funds rate at 0% to 1.25%. In October, the Fed will initiate the balance sheet normalization program. It will gradually reduce the Fed s securities holdings by decreasing reinvestment of principal payments from those. Such payments will be reinvested only to the extent that they exceed gradually rising caps (initially US$6B for treasury securities and US$4B for agency debt and mortgage-backed securities). Looking at future rate hikes, the median forecast from Fed leaders indicates one more increase before the end of the year. These forecasts also point to three hikes in 2018 and around two more in ff As announced last, the Comprehensive Economic and Trade Agreement (CETA) has gone into effect Thursday in both Canada and the European Union (EU). As expected, CETA will initially be implemented on an interim basis, meaning that some components of the agreement will not go into effect immediately. That said, the gradual elimination of customs duties is now in effect. That means that close to 98% of all duties have been abolished at this moment in Canada and the EU. ff Existing home sales were down 1.7% in August, after successive declines of % in and % in. This marks the first time since 2013 that resales have contracted for three consecutive months. Annualized sales have fallen to 5,350,000, the lowest level since August Existing home sales plunged by 5.7% in the South, a consequence of Hurricane Harvey s passage in Texas. ff The Philadelphia Fed manufacturing index was up in September, moving from 18.9 to ff Housing starts were down 0.8% in August, after declining % in and surging 7.8% in. Annualized, 1,180,000 starts were recorded in August. Unlike other data like industrial production, retail sales or home resales, housing starts show little impact of Hurricane Harvey, even though a 7.9% decline was recorded in the southern United States. Building permits were up 5.7%, reaching their highest level since January. ff The leading indicator advanced by 0.4% in August, after gaining in. Building permits, the interest rate spread, consumer confidence and the ISM index made the biggest positive contributions. The jump in jobless claims triggered by Hurricane Harvey was a significant blow. Francis Généreux, Senior economist ff The total consumer price index (CPI) rose in August. The total annual inflation rate went from 1.2% to 1.4%. Overall, CPI results for August were consistent with expectations. The increase in gas prices boosted the index s monthly growth, but its impact was offset by a seasonal drop in certain prices, particularly fresh fruit and vegetables. ff The value of retail sales was up 0.4% in, in line with expectations. In addition, the increase in motor vehicle sales was partially offset by a decline in home furnishings and accessories, electronics and appliances. Expressed in real terms, total sales decreased by %. ff Wholesale sales advanced % in, fuelled by significant increases in most areas of activity. Expressed in real terms, sales increased by 2.1% while inventories were up 1.2%. Wholesalers are clearly still feeling the effects of strong domestic demand. As such, wholesale trade stands to make a very positive contribution to economic growth in. ff Highly influenced by the decrease in merchandise exports, manufacturer sales declined 2.6% in. More specifically, sales of automobile products tumbled 16.6% for the month while a slight % increase was recorded in other sectors. Expressed in real terms, manufacturer sales were down 1.4%, while their inventories were up 0.7%, which should soften the impact of the decrease in sales. Benoit P. Durocher, Senior economist 2

3 Financial Markets The Federal Reserve Stays on Course All eyes were on the Federal Reserve (Fed) as it announced Wednesday that it would be starting to pare back its balance sheet as of October. It also maintained its outlook on another key rate increase this year. The S&P 500 immediately dipped on the Fed s announcements, but recovered during the session to end slightly up. The Thursday and Friday sessions were somewhat more difficult for the U.S. stock market, particularly with the escalation of threats between Donald Trump and Kim Jong un. The Canadian stock market, however, was on track for its best week this year. Oil prices spiked above US$50, helping to revive the energy sector. All other S&P/TSX sectors posted gains nonetheless. Bond yields rose Wednesday on the Fed s decision. Yields in the belly of the U.S. curve saw the biggest adjustments, with the 5 year yield hitting its highest point since late. With the Fed s resolve to continue its normalization, futures markets expected a key rate hike in December with greater conviction. Yields nevertheless scaled back their increases Thursday and Friday, as geopolitical fears resurfaced. In Canada, short-term yields reacted down Monday to the speech by Bank of Canada (BoC) Deputy Governor Timothy Lane, who said that the BoC would be keeping a close eye on changes in the currency and on the economic impact of rate hikes. The 2 year yield subsequently recovered, following the U.S. trend. GRAPH 1 Stock markets Index Index 2,520 15,500 2,500 15,400 15,300 2,480 15,200 2,460 15,100 2,440 15,000 2,420 14, /08/ /08/ /08/ /09/ /09/ /09/21 S&P 500 (left) S&P/TSX (right) Sources: Datastream and, Economic Studies GRAPH 2 Bond markets 10-year yield In % points In % The U.S. dollar appreciated after the Fed meeting, owing to some adjustment in monetary firming expectations. The effect was short-lived, however, with the U.S. currency remaining rather flat in the end. The euro was back up to close to US$1.20 Friday, buoyed, among other things, by the publication of indicators suggesting further acceleration in economic activity. The pound stabilized at between US$5 and US$6 after its substantial gain last week on the back of rising monetary firming expectations in the. The Canadian dollar was penalized by Timothy Lane s comments Tuesday. Slightly higher oil prices did not offset this drop, and the loonie was trading Friday at around US$0.81 (C$1.23/US$) /08/ /08/ /08/28 Spread (left) 2017/09/05 United States (right) 2017/09/ /09/21 Canada (right) Sources: Datastream and, Economic Studies GRAPH 3 Currency markets US$/C$ Jimmy Jean, CFA, Senior economist Hendrix Vachon, Senior economist US$/ /08/ /08/ /08/ /09/05 Canadian dollar (left) 2017/09/ /09/21 Euro (right) Sources: Datastream and, Economic Studies 3

4 A Look Ahead UNITED STATES TUESDAY 26-9:00 y/y 5.78% 5.75% 5.65% S&P/Case-Shiller index of existing home prices () Monthly growth in home prices was slow again in. It is part of the yearly phenomenon in which seasonal price fluctuations are poorly captured by S&P/Case-Shiller index adjustments. The index was down % in April and only rose in May and. This effect should dissipate shortly, but s result could remain weak. We are expecting a monthly gain of %, which would take the S&P/Case-Shiller index s annual change to around 5.7%. TUESDAY 26-10:00 September August Conference Board consumer confidence index (September) For a second straight month, the Conference Board index is showing improved household confidence in August. The index went to Except for March 2017 s 124.9, it is the highest level since A downtick is forecast for September, however. Firstly, there is the hurricanes potential impact on confidence, particularly in the places that took a direct hit. The hurricanes have already had a direct impact on the job market, retail sales and industrial production. Secondly, there are also indirect effects, through gas prices. Prices went from an average of US$9 a gallon in the weeks leading up to Hurricane Harvey to more than US$2.60 a gallon afterwards. Thirdly, the University of Michigan confidence index has declined, according to September s preliminary version. The daily Gallup index and weekly Bloomberg index did the same. We expect the Conference Board confidence index to go to 118.5, which is still higher than where it was at the end of last spring. TUESDAY 26-10:00 August ann. rate 590, , ,000 New home sales (August) In, sales of new single-family dwellings posted their biggest monthly drop since August 2016, falling to 571,000 units, their lowest point in Normally, a rebound should follow this kind of poor performance. That does not factor in Hurricane Harvey, however. Harvey has already had a negative impact on existing home sales, which fell 1.7%, 5.7% in the southern United States. We can expect a similar impact for new home sales. Building permits issued for single-family homes also fell % in August. We expect sales to go to 565,000 units. WEDNESDAY 27 - August m/m % 1.7% -6.8% New durable goods orders (August) New durable goods orders have been seesawing lately due to the major fluctuations in the aviation sector. This sector (including military aircraft) jumped 99.1% in, then fell 55.5% in. New durable goods orders therefore retreated 6.8% after posting a 6.4% rise in. We now expect aircraft orders to increase more than 20% in August. Durable goods orders excluding transportation should increase %, less than s %. Total orders should gain 1.7%. What remains to be seen is whether Hurricane Harvey will influence that data, as it did, surprisingly, August s industrial production numbers. FRIDAY 29 - August Consumption spending (August) Real consumption advanced % in, similar to. We can expect it to decline in August. Hurricane Harvey s impact on Texas affected retail sales, which posted their worst drop since January 2016, to which we must add the plunge in energy production, which should also show up in real consumption of services. Real consumption therefore probably fell % in August, which would be the worst monthly pullback since the 2009 recession. On the other hand, nominal consumption should benefit from the forecast increase in the consumption expenditure deflator. A gain of is therefore expected. Nominal personal income should increase by. m/m 4

5 CANADA FRIDAY 29 - m/m 0.4% Real GDP by industry () Some results were disappointing in. Among other things, the drop in merchandise exports triggered a substantial decline in the value of manufacturer sales. That decline is, however, not nearly as steep when expressed in real terms; if we also factor in the substantial increase in the volume of manufacturers inventories, the industry s negative impact on s economic growth will, all in all, be fairly small. In contrast, several other indicators did very well in. For example, the volume of wholesale sales jumped 2.1%, while the volume of inventories advanced 1.2%. Housing starts also remained very high in, at 221,974 units. The number of hours worked in Canada also went up % in. We must conclude that the Canadian economy s very positive momentum persisted in. Under these conditions, we expect real GDP by industry to increase about 0.4%. OVERSEAS DURING THE WEEK : Economic indicators Among the indicators to be released in the euro zone in the coming week, Thursday will give us several confidence indexes for September. Most of them posted modest improvements in August. The flash version of the consumer confidence index posted another gain for September, which augurs well. Moreover, the PMI indexes did well in September, according to the preliminary versions; the euroland composite index even gained a point, going from 55.7 to 56.7, its highest level since May. The inflation flash estimate for September comes out on Friday. The annual change in the total consumer price index slowed this year, going from a recent peak of % in February to only % in. It improved slightly to % in August. s IFO index of corporate confidence comes out Monday. 5

6 Economic Indicators Week of September 25 to 29, 2017 Day Hour Indicator Period Previous data UNITED STATES MONDAY 25 12:40 Speech of the New York Fed President, W. Dudley Speech of the Chicago Fed President, C. Evans TUESDAY 26 9:00 10:00 10:00 10:30 12:30 12:45 S&P/Case-Shiller home price index (y/y) Consumer confidence New home sales (ann. rate) Speech of a Federal Reserve Governor, L. Brainard Speech of the Atlanta Fed President, R. Bostic Speech of the Federal Reserve Chairman, J. Yellen , % , % ,000 WEDNESDAY 27 13:30 19:00 Durable goods orders (m/m) Speech of the St. Louis Fed President, J. Bullard Speech of the Boston Fed President, E. Rosengren % 1.7% -6.8% THURSDAY 28 9:45 10:00 Initial unemployment claims Balance commerciale de biens préliminaire (G$ US) Real GDP (ann. rate) Speech of the Kansas City Fed President, E. George Speech of the Federal Reserve Vice Chairman, S. Fischer 265, % 260, % 259, % % 0.4% % % 1.4% % % 1.4% % 1.4% FRIDAY 29 Personal income (m/m) Personal consumption expenditures (m/m) Personal consumption expenditures deflator Total (m/m) Excluding food and energy (m/m) Total (y/y) Excluding food and energy (y/y) 9:45 Chicago PMI index 10:00 Michigan s consumer sentiment index final 11:00 Speech of the Philadelphia Fed President, P. Harker Août Q2t CANADA MONDAY 25 TUESDAY 26 WEDNESDAY 27 12:00 Speech of the Bank of Canada Governor, S. Poloz THURSDAY 28 Average weekly earnings (y/y) Number of salaried employees (m/m) 2.3% % 1.8% % FRIDAY 29 Real GDP by industry (m/m) Industrial product price index (m/m) Raw materials price index (m/m) 0.4% 0.7% % -% -% 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 25 to 29, 2017 Country Hour Indicator Period m/m (q/q) y/y Previous data m/m (q/q) y/y OVERSEAS MONDAY 25 4:00 4:00 4:00 IFO survey Business climate IFO survey Current situation IFO survey Expectations TUESDAY 26 France France 2:45 2:45 Business confidence Production outlook WEDNESDAY 27 France New Zealand 1:00 2:45 4:00 16:00 Small business confidence Consumer confidence Money supply M3 Reserve Bank of New Zealand meeting % 1.75% % 1.75% THURSDAY 28 Mexico 2:00 8:00 14:00 19:01 19:30 19:30 19:30 19:30 19:50 19:50 Consumer confidence Business climate Consumer confidence final Industrial confidence Services confidence Economic confidence Consumer price index preliminary Bank of Mexico meeting Consumer confidence Household spending Consumer price index Tokyo Consumer price index Tokyo Unemployment rate Industrial production preliminary Retail sales Oct % 7.00% 7.00% % 0.7% % 2.8% 2.8% 1.8% 5.2% -0.8% -0.8% 2.4% 1.1% FRIDAY 29 France France China China 1:00 2:00 2:00 2:45 2:45 4:30 4:30 4:30 21:00 21:00 Housing starts Nationwide house prices Retail sales Personal consumption expenditures Consumer price index preliminary Current account ( B) Index of services Real GDP final Consumer price index estimate PMI manufacturing index PMI non-manufacturing index % % - % 3.2% -1.2% % 1.7% 0.7% -% % % Q % Q2 1.7% 1.6% % -% 0.4% % 4.7% % -2.3% 2.1% % 2.1% 0.9% 1.7% % 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 * ANNUAL VARIATION (%) Quart. ann. 1 year ,030 11,854 2, , ,182 2,796 17, 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 * VARIATION (%) LEVEL month -3 months -6 months -1 year ISM non-manufacturing index Cons. confidence Conference Board (1985 = 100)1 Personal consumption expenditure (2009 $B) Disposable personal income (2009 $B) Consumer credit ($B) Retail sales ($M) ,909 12,823 3, , , Housing starts (k)1 * , ,922 1,874 1, , , , ,164 Building permits (k)1 * 1,300 1,230 1,168 1,219 1,200 New home sales (k) Excluding automobiles ($M) Industrial production (2007 = 100) Production capacity utilization rate (%)1 New machinery orders ($M) New durable good orders ($M) Business inventories ($B) Existing home sales (k)1 * 5,350 5,440 5,620 5,470 5, ,689-43,543-47,375-48,775-41,294 Nonfarm employment (k)2 146, ,097 Unemployment rate (%)1 Consumer price ( = 100) * * Commercial surplus ($M) Excluding food and energy Personal cons. expenditure deflator (2009 = 100) Excluding food and energy Producer price (2009 = 100) Export prices (2000 = 100) Import prices (2000 = 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 $M) VARIATION (%) LEVEL ANNUAL VARIATION (%) Quart. ann. 1 year Current account balance ($M)1 1,849,280 1,061, , , ,940 11, , ,879 1,823, , , , , , ,207 Production capacity utilization rate (%)1 Disposable personal income ($M) Corporate net operating surplus (2007 $M) ,213, , Business inventory change (2007 $M)1 Exports (2007 $M) Imports (2007 $M) Final domestic demand (2007 $M) GDP deflator (2007 = 100) Labour productivity (2007 = 100) Unit labour cost (2007 = 100) 1 Statistics representing the level during the period; * New statistic in comparison with last week. CANADA Monthly economic indicators REF. MONTH VARIATION (%) LEVEL -1 month -3 months -6 months -1 year 1,739, ,194 52, ,922 49, * 36, * 62,382-3,040-3,764-1, ,176 Exports ($M) Imports ($M) 44,139 47, Employment (k)2 18, * , * * , 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 ($M)1 Unemployment rate (%)1 Average weekly earnings ($) 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 * * 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. 22 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) ,498 22,327 1, ,500 22,268 1, ,443 21,814 1, ,438 21,395 1, ,344 20,597 1, ,165 18,261 1, ,508 22,413 1, ,337 20,458 1, ,085 17,888 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 -5 Treasury bill 3 months -3 Treasury bonds 2 years 0.15 Treasury bonds 5 years -6 Treasury bonds 10 years Treasury bonds 30 years S&P/TSX index (level) Exchange rate (C$/US$) Exchange rate (C$/ ) 15, , , , , , , , , Overseas ECB Refinancing rate Exchange rate (US$/ ) BoE Base rate Bonds 10 years FTSE index (level) Exchange rate (US$/ ) 5 6 7, , , , , , , , , Bonds 10 years DAX index (level) , , , , , , , , ,259 BoJ Overnight rate Nikkei index (level) Exchange rate (US$/ ) 20, , , , , , , , , 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