The Bank of Canada Causes a Surprise

Transcription

1 WEEKLY NEWSLETTER The Bank of Canada Causes a Surprise # BEST OVERALL FORECASTER - HIGHLIGHTS ff United States: Hurricane Harvey causes jobless claims to explode. ff The Bank of Canada orders another key rate increase. ff Canada: A ninth straight increase for job growth. ff Canada: The trade balance improved slightly in. A LOOK AHEAD ff Energy prices should trigger an increase in the U.S. consumer price index. ff Will the hurricanes rattle U.S. household confidence? ff Modest upticks expected for industrial output and retail sales, but Hurricane Harvey is adding to the uncertainty. ff Canada: Housing starts could slip in August. FINANCIAL MARKETS ff Hurricanes and geopolitical tensions bear down on stock markets. ff New monetary tightening in Canada drives short-term rates higher. ff The Canadian dollar approaches US$3. 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...0 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 207, Group. All rights reserved.

2 Key Statistics of the Week ff New weekly jobless claims shot up considerably for the week ending September 2, rising from 236,000 to 298,000, the highest level since February 205 an increase due to Hurricane Harvey in Texas. Hurricane Katrina had caused a temporary increase of about 00,000 claims in This spike could possibly continue in the next few weeks, especially if Hurricane Irma packs an equal punch. ff Whereas most forecasters and investors expected the Bank of Canada to maintain the status quo on key rates, this second straight key rate increase announced by the monetary authorities caused some surprise. Canada s sharp economic growth since the start of the year with a real GDP s cumulative annualized performance of 4.% clearly weighed heavily in the balance. Key rate increases are certainly not over. That said, the exact timing of the next hike is not easy to predict. This depends largely on Canada s economic growth, level of inflation and the loonie s value in the next few months. ff The ISM non-manufacturing index moved from 53.9 to 55.3 in August still below the average for the first six months of 207. Six of the ten sub-indexes posted growth. Employment, new orders and exports were the main growth drivers. The sub-indexes tied to inventories showed considerable declines. ff The U.S. trade balance of goods and services deteriorated very slightly in. It moved from -US$43.5B in March to -US$43.7B. This commercial trade deficit is not as sharp as the flash data on the trade in goods published a week earlier had suggested. Exports of goods and services declined %, while imports contracted by. If no major reversal occurs in the coming months, net exports could make a modest contribution to real GDP growth in Q Francis Généreux, Senior economist ff The labour market increased by 22,200 new jobs in August. Since the start of 207, 29,00 workers have joined the Canadian economy. The unemployment rate declined from 6.3% to 6.2%, a low point not seen since October The unemployment rate continued to fall below the equilibrium level estimated at 6.47% for 207 by the Organisation for Economic Co-operation and Development (OECD), confirming that the labour market is in excellent health. What s more, this type of situation could potentially give rise to some upside pressure on inflation, in theory. ff As expected, the value of merchandise exports declined by 4.9% in. That said, imports also deteriorated (-6.0%), a surprising result considering the vitality of domestic demand. As such, the trade balance improved slightly for the month, rising from -$3.76B to -$3.04B. Benoit P. Durocher, Senior economist Hurricane Harvey drives up jobless claims Employment uptrend is still fairly strong Initial jobless claims In thousands Hurricane Katrina Hurricane Sandy 550 and other hurricanes Hurricane Harvey Sources: U.S. Department of Labor and, Economic Studies Monthly change in employment In thousands Employment 6-month moving average Sources: Statistics Canada and, Economic Studies 2

3 Financial Markets Ahead of Expectations, the Bank of Canada Raises Rates Again The return from the Labour Day holiday was a difficult one for stock markets, as further military posturing by North Korea over the long weekend continued to cast a shadow. The S&P 500 posted a 0.7% drop during Tuesday trading. Wednesday and Thursday brought greater stability, but Friday saw a further drop with hurricane Irma approaching the Florida coast. The S&P 500 financials sector came under pressure as it headed towards a weekly drop of 3.6%, as insurance company stocks took a beating from the natural disasters affecting the United States. On the Canadian side, the S&P/TSX took a hit in each trading session. While losses were widespread across all sectors, the financial sector was most affected, posting a weekly drop of 2.6%. GRAPH Stock markets Index Index 2,490 5,300 2,480 5,250 5,200 2,470 5,50 2,460 5,00 5,050 2,450 2,440 5,000 2,430 4,950 2,420 4, /07/27 207/08/04 207/08/4 207/08/22 207/08/30 207/09/07 S&P 500 (left) The most notable development in the bond markets was the decision by the Bank of Canada (BoC) to raise its key rates on Wednesday; most forecasters had expected this decision would not be made until its October meeting. The 2 and 5 year yields saw spectacular increases, and spreads between Canadian and U.S. yields went into positive territory at these maturities. The trend was further consolidated on Friday by slightly higher-thanexpected job creation. After the data was published, investors anticipated a more than 40% probability that a third consecutive increase would be announced at the October meeting. The Canadian dollar had another good week. Because of the decision by the BoC and heightened expectations of monetary tightening, the loonie is now exceeding US$20 (C$.29/$US). An oil price increase to almost US$49 a barrel also helped the currency, along with the general weakness of the greenback. The U.S. dollar continues to be held back by doubts surrounding the outlook for monetary tightening in the United States. The European Central Bank has made known its unease with the euro s recent appreciation. This has forced it to lower its inflation forecasts for 208 and 209. The common currency has yet to be shaken by these revelations and is currently trading at over US$.20. Jimmy Jean, CFA, Senior economist Hendrix Vachon, Senior economist S&P/TSX (right) Sources: Datastream and, Economic Studies GRAPH 2 Bond markets 0-year yield In % points In % /07/ /08/04 Spread (left) 207/08/4 207/08/22 United States (right) 207/08/30 207/09/07 Canada (right) Sources: Datastream and, Economic Studies GRAPH 3 Currency markets US$/C$ US$/ /07/ /08/04 207/08/4 207/08/22 Canadian dollar (left) 207/08/30 207/09/07 Euro (right) Sources: Datastream and, Economic Studies 3

4 A Look Ahead THURSDAY Sept. 4 - August m/m % 0.4% FRIDAY Sept. 5 - August m/m % % FRIDAY Sept. 5-9:5 August m/m 0.4% FRIDAY Sept. 5-0:00 September August Consumer price index (August) After dropping in and stagnating in, the consumer price index (CPI) is expected to rise significantly in August. The increase will largely be due to energy prices. The price of gasoline at the pumps rose 3.9% on average across the country. However, given that fuel prices tend to drop in August, seasonal adjustments will only exacerbate the increase (the impact of Hurricane Harvey on gas prices and inflation will be felt even more in September). Excluding food and energy, the index is expected to rise after a increase over four consecutive months. A sharper increase in housing prices, among other things, is anticipated. The total CPI is expected to rise by 0.4%. The annual change is expected to increase from.7% to %. Core inflation should remain stable at.7%. Retail sales (August) The % rise in retail sales in was the highest monthly change so far in 207. However, sales are expected to slow down in August. First of all, sales of new motor vehicles have declined considerably during the month, a situation that may be linked to Hurricane Harvey s striking Texas. The drop in motor vehicle sales will partially offset the projected rise in service station sales following the increase in gasoline prices. An increase of 0.4% is anticipated in sales excluding autos and gas. As for total sales, an increase of % is expected. Nonetheless, the hurricane hitting at the very end of the month may lead to some surprises in terms of retail sales results. Industrial production (August) Industrial production rose in, but this obscures the drop of in manufacturing output. It should see an increase in August, as indicated by the jump in the number of hours worked in this sector (the highest increase since March 203). The continuing stability of the ISM manufacturing index is also a good sign. Therefore, an increase of % in manufacturing output is expected. However, mining is expected to stagnate and energy production to drop. Industrial production overall should increase by 0.4%. The industrial capacity utilization rate is expected to rise from 76.7% to 77.0%. However, Hurricane Harvey s impact on Texas may have caused fairly significant disruptions in output late in the month that will be reflected in the national numbers. In September 2005, Hurricane Katrina caused a.8% drop in industrial production. University of Michigan consumer confidence index (September preliminary) In August, the University of Michigan confidence index saw its greatest increase so far this year. The 3.4 point gain almost offset the total drop of 3.7 points recorded during the two previous months. Several signs point toward another improvement in confidence in September. For example, the TIPP index rose during the month, and the increase in the Conference Board index in August is also a good sign. However, this does not take into account the effects of Hurricane Harvey, and possibly Hurricane Irma. Since Harvey, gasoline prices have risen significantly, as have new jobless claims. The weekly household confidence indexes compiled by Bloomberg and by Gallup have noticeably declined over the last week. Therefore, a drop in the University of Michigan index from 96.8 to 95.0 is expected. However, the threat of a more significant change remains very high. MONDAY Sept. - 8:5 August ann. rate 26,000 20, ,300 Housing starts (August) At 222,280 units, the number of housing starts was very high in. However, some slowing may become evident over the next few months because of the combined effect of the slight rise in interest rates and the restrictive measures introduced in the Toronto area. The decrease may be felt most keenly in the multi-unit housing market in urban areas, as it reached very high levels over the last few months. 4

5 OVERSEAS WEDNESDAY Sept. 3-5:00 m/m -% Euro zone: Industrial production () From March to May, Euroland industrial production saw strong growth, which culminated in a monthly gain of.2% in May. Nonetheless, a retreat of % was felt in. The level of the ISM indexes suggests that growth may rapidly return. However, German industrial production experienced disappointing stagnation in after dropping.% in, even as the consensus expected an increase of. The increase in French industrial production is nevertheless more encouraging. Among the data coming from the euro zone, the Euroland trade balance for will be published Friday. THURSDAY Sept. 4-7:00 September % % August 3 % : Bank of England meeting (September) The Bank of England (BoE) is expected to maintain the status quo. Even if certain economic indicators have recently sent more positive signals, the basic trend remains moderate and cloaked in significant uncertainty. The BoE is still expected to indicate that it will take a wait-and-see attitude with respect to inflation, provided the economy continues to follow this moderate trend and that inflation projections remain firmly focused on the target. Included in the economic indicators to be published are the price indexes for the month of August. After a sharp rise caused by the depreciation of the pound, inflation seems to have plateaued for now. Retail sales for August will be released Thursday. Despite a leap in, they appear to have weakened somewhat. 5

6 Economic Indicators Week of September to 5, 207 Day Hour Indicator Period Previous data MONDAY TUESDAY 2 WEDNESDAY 3 Producer price index Total (m/m) Excluding food and energy (m/m) 4:00 Federal budget (US$B) THURSDAY 4 Initial unemployment claims Consumer price index Total (m/m) Excluding food and energy (m/m) Total (y/y) Excluding food and energy (y/y) FRIDAY 5 Empire manufacturing index Retail sales Total (m/m) Excluding automobiles (m/m) 9:5 Industrial production (m/m) 9:5 Production capacity utilization rates 0:00 Michigan s consumer sentiment index preliminary 0:00 Business inventories (m/m) % , , ,000 %.8%.6% 0.4% %.7%.7%.7% Sept Sept. 76.8% 95.2 % 0.7% 0.4% 77.0% 95.0 % 76.7% ,000 20, ,300 % Sept. 4-8 MONDAY 8:5 TUESDAY 2 WEDNESDAY 3 Housing starts (ann. rate) THURSDAY 4 New housing price index (m/m) FRIDAY 5 9:00 Existing home sales Note:, Economic Studies are involved every week in the Bloomberg survey for Canada and the United States. Approximately 5 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 to 5, 207 Country Hour Indicator Period m/m (q/q) y/y Previous data m/m (q/q) y/y OVERSEAS SUNDAY 0 Japan 9:50 Machinery orders MONDAY Japan Italy 0:30 4:00 Tertiary industry activity index Industrial production TUESDAY 2 Japan 4:30 4:30 9:50 Consumer price index Producer price index Producer price index WEDNESDAY 3 Germany Euro zone Euro zone China China 2:00 4:30 5:00 5:00 22:00 22:00 THURSDAY 4 Japan France Switzerland FRIDAY 5 Euro zone Russia 4.% -7.8% -% -5.2% - 3.6% %.% 5.3% - % 2.6% 3.2% 2.6% Consumer price index final ILO unemployment rate Industrial production Net change in employment Industrial production Retail sales.8% 4.4% 4.4% 3.3% -% Q2 0,4 % 6.6%.8% 0:30 2:45 3:30 4:30 7:00 Industrial production final Consumer price index final Swiss National Bank meeting Retail sales Bank of England meeting Sept. Sept. 0.9% -0.75%.2% % -% -0.75% % % 5:00 6:30 Trade balance ( B) Bank of Russia meeting Sept % % 2.8% 3.% 3.0% 2.6% % 6.4% 0.4% 4.7% 0.9% % 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 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) Exports (2009 $B) Imports (2009 $B) Final domestic demand (2009 $B) GDP deflator (2009 = 00) Labor productivity (2009 = 00) Unit labor cost (2009 = 00) Employment cost index (Dec = 00) Current account balance ($B) VARIATION (%) LEVEL 207 Q ANNUAL VARIATION (%) Quart. ann. year ,030,854 2, , ,82 2,796 7, Statistics representing the level during the period; * New statistic in comparison with last week. Monthly economic indicators REF. MONTH Leading indicator (200 = 00) ISM manufacturing index ISM non-manufacturing index Cons. confidence Conference Board (985 = 00) Personal consumption expenditure (2009 $B) Disposable personal income (2009 $B) Consumer credit ($B) Retail sales ($M) Excluding automobiles ($M) Industrial production (2007 = 00) Production capacity utilization rate (%) New machinery orders ($M) New durable good orders ($M) Business inventories ($B) Housing starts (k) VARIATION (%) LEVEL month -3 months -6 months - year * ,909 2,823 3, , , * , ,922,869, , , , ,223 Building permits (k),230,275,228,300,75 New home sales (k) ,440 5,50 5,560 5,690 5,330 * -43,689-43,543-47,375-48,775-4,294 Nonfarm employment (k)2 46, ,097 Unemployment rate (%) Consumer price ( = 00) Excluding food and energy Producer price (2009 = 00) Export prices (2000 = 00) Import prices (2000 = 00) Existing home sales (k) Commercial surplus ($M) Excluding food and energy Personal cons. expenditure deflator (2009 = 00) 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 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 $M) VARIATION (%) LEVEL ANNUAL VARIATION (%) Quart. ann. year Current account balance ($M) * *,849,280,06, ,77 27,850 67,940, , ,879,823, , , , , , ,207 Production capacity utilization rate (%) Disposable personal income ($M) Corporate net operating surplus (2007 $M) * 85.0,23, , Business inventory change (2007 $M) Exports (2007 $M) Imports (2007 $M) Final domestic demand (2007 $M) GDP deflator (2007 = 00) Labour productivity (2007 = 00) Unit labour cost (2007 = 00) Statistics representing the level during the period; * New statistic in comparison with last week. Monthly economic indicators REF. MONTH Gross domestic product (2007 $M) Industrial production (2007 $M) Manufacturing sales ($M) Housing starts (k) Building permits ($M) Retail sales ($M) Excluding automobiles ($M) * VARIATION (%) LEVEL,739, ,94 53, ,922 48,992 - month -3 months -6 months - year , * 6,433-3, ,764 -, ,76 Exports ($M) Imports ($M) * * 44,39 47, Employment (k)2 * 8, Unemployment rate (%) Average weekly earnings ($) * , , Wholesale trade sales ($M) Commercial surplus ($M) Number of salaried employees (k)2 Consumer price (2002 = 00) Excluding food and energy Excluding 8 volatile items Industrial product price (2002 = 00) Raw materials price (2002 = 00) Money supply M+ ($M) 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 ,, OVERSEAS Major financial indicators PREVIOUS DATA ACTUAL LAST 52 WEEKS IN % (EXPECTED IF INDICATED) Sep. 8 Sep. - month -3 months -6 months - year Higher Average Lower United States Federal funds target Treasury bill 3 months Treasury bonds 2 years Treasury bonds 5 years Treasury bonds 0 years Treasury bonds 30 years S&P 500 index (level) DJIA index (level) Gold price (US$/ounce) CRB index (level) WTI oil (US$/barrel) ,465 2,823, ,477 2,988, ,44 2,858, ,432 2,272, ,373 20,903, ,28 8,085, ,48 22,8, ,323 20,302, ,085 7,888, Canada Overnight target Treasury bill 3 months Treasury bonds 2 years Treasury bonds 5 years Treasury bonds 0 years Treasury bonds 30 years Spread with the U.S. rate (% points) Overnight target - Treasury bill 3 months -8 Treasury bonds 2 years 3 Treasury bonds 5 years 6 Treasury bonds 0 years -9 Treasury bonds 30 years S&P/TSX index (level) Exchange rate (C$/US$) Exchange rate (C$/ ) 4, , , , , , , , , Overseas Euro zone ECB Refinancing rate Exchange rate (US$/ ) BoE Base rate Bonds 0 years FTSE index (level) Exchange rate (US$/ ) 0 7, , , , , , , , , Germany Bonds 0 years DAX index (level) 2 2, ,43 2,04 7 2, , , ,889 6, ,259 Japan BoJ Overnight rate Nikkei index (level) Exchange rate (US$/ ) 9, ,69 7 9, ,03 5 9, , , , , CRB: Commodity Research Bureau; WTI: West Texas Intermediate; ECB: European Central Bank; BoE: Bank of England; BoJ: Bank of Japan Note: Data taken at markets closing, with the exeption of the current day where they were taken at :00 a.m. 0