Just Sign Here, Ma am by Avery Shenfeld

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1 The Week Ahead August 27-31, 2018 <T_E> <P_E> <T_S> Economics <P_S> Avery Shenfeld (416) Benjamin Tal (416) Andrew Grantham (416) Royce Mendes (416) Katherine Judge (416) Just Sign Here, Ma am by Avery Shenfeld The good news is that the White House has made it a pre-election priority to show that the President s tariffs are a path to better trade deals, and has chosen NAFTA to make that point. We might even see an announcement in the week ahead, at least from the US and Mexican sides. The not-so-good news? This won t be the deal that Canada really wants. Hardline US negotiators could opt to shove a paper in front of Trade Minister Freeland with a message that she has to sign on quickly, or risk being left out of a bilateral deal with Mexico alone, and threatened with auto tariffs ahead. Some of the most egregious US demands will likely disappear to make a deal sufficiently palatable. Canada should win an exemption from steel and aluminum tariffs. The same might be true for threatened uranium tariffs. But odds are that the deal will weaken or even eliminate the Chapter 19 dispute resolution process and reduce Canadian access to US government contracts. Canada will have to cede more dairy product market share to US exporters. Non-NAFTA compliant auto assemblers in Canada (ie. not the US Big 3 ) could face higher tariffs on US-bound exports. And the existing countervailing or antidumping tariffs on products like softwood lumber won t automatically disappear. That said, we had already assumed such a middling outcome in our forecasts. And given the earlier lack of momentum, we had expected talks to drag on for another three quarters. If instead, we get even a preliminary deal, it will reduce the period of uncertainty, one that has been a factor holding back business investment decisions in Canada. Remember that the Bank of Canada ascribed about a 0.7% hit to the level of GDP by the end of 2020 (or roughly 0.2% a year off the annual growth rate) from the trade war, and will be adding some of that back if a NAFTA deal gets announced. As long as Q2 GDP figures don t disappoint, that could be enough to tip the timing of the next rate hike into September, but only if a deal is available by that decision date. If not, why hike in September when you re only weeks away from knowing whether NAFTA is on, or a deeper trade war has been launched? The content of the trade deal will also matter for the number of rate hikes we see over the next few quarters. If we re pleasantly surprised, it could open the door for a quarter-point beyond the 50 bps that we have had in our base case. But a just-signhere-ma am deal, while better than no deal at all and an open trade war, might not be good enough to spark a revival in business capital spending in Canada. As for exports, in volume terms, Canada hasn t seen much growth going all the way back to If Canada is to transition from an economy heavily reliant on household borrowing for growth to a more balanced picture, the Bank of Canada will still have to be careful to keep the Canada-US rate spread at levels that avoid sending the loonie to loftier, and less competitive levels. CIBC Capital Markets PO Box 500, 161 Bay Street, Brookfield Place, Toronto, Canada M5J 2S8 CIBC (416)

2 Week Ahead Calendar And Forecast CANADA UNITED STATES CIBC Consensus Prior CIBC Consensus Prior Monday AUCTION: 3-M BILLS $51B, 6-M BILLS $45B August 27 AUCTION: 2-YR TREASURIES $36B CHICAGO FED NAT.ACTIVITY INDEX (Jul) (M) Tuesday CASH MANAGEMENT BUYBACK (Nov'18 - Feb'20) - $0.5B AUCTION: 4-WEEK BILLS $70B (prev) August 28 AUCTION: 5-YR TREASURIES $37B ADVANCE GOODS TRADE BALANCE (Jul) (M) -$69.4B -$69.0B -$67.9B WHOLESALE INVENTORIES M/M (Jun) (L) 0.1% 9:00 AM S&P CORELOGIC CS INDEX (Jun) (H) S&P CORELOGIC CS Y/Y (Jun) (H) 6.4% 6.5% RICHMOND FED MANUF. INDEX (Aug) (M) CONF.BOARD CONSUMER CONFIDENCE (Aug) (H) Wednesday AUCTION: 7-YR TREASURIES $31B August 29 CURRENT ACCOUNT (Q2) (M) -$15.3B -$15.6B -$19.5B 7:00 AM MBA-APPLICATIONS (Aug 24) (L) 4.2% GDP (annualized) (Q2 P) (H) 4.0% 4.0% 4.1% GDP DEFLATOR (annualized) (Q2 P) (H) 3.0% 3.0% 3.0% PENDING HOME SALES M/M (Jul) (M) 0.5% 0.9% Thursday AUCTION: 2-YR CANADAS $3B August 30 INITIAL CLAIMS (Aug 25) (M) 210K CONTINUING CLAIMS (Aug 18) (L) 1727K GDP M/M (Jun) (H) 0.0% 0.1% 0.5% PCE DEFLATOR Y/Y (Jul) (H) 2.4% 2.3% 2.2% GDP (annualized) (Q2) (H) 3.0% 3.0% 1.3% PCE DEFLATOR Y/Y (core) (Jul) (H) 2.0% 2.0% 1.9% PERSONAL INCOME M/M (Jul) (H) 0.4% 0.4% 0.4% PERSONAL SPENDING M/M (Jul) (H) 0.4% 0.4% 0.4% Friday 9:45 AM August 31 INDUSTRIAL PROD. PRICES M/M (Jul) (M) 0.5% CHICAGO PMI (Aug) (M) RAW MATERIALS M/M (Jul) (M) 0.5% MICHIGAN CONSUMER SENTIMENT (Aug) (H) H, M, L = High, Medium or Low Significance SAAR = Seasonally Adjusted Annual Rate Consensus Source: Bloomberg `

3 Week Ahead s Market Call by Avery Shenfeld In the US, we re expecting a somewhat wider trade deficit in July (nothing to show from protectionism there), but July personal spending should see a reasonable gain. The core PCE price index should be bang on the Fed s 2% inflation target, and while headline inflation could be higher at 2.4%, oil prices seem to have levelled off, so that gap won t persist into None of these results would look to be market moving. In Canada, a solid Q2 result will justify the Bank of Canada s last rate hike. Indeed, there s some upside risk to our 3.0% forecast, since the monthly GDP reports on which we base it can diverge from the quarterly series, and we might be due for a positive gap between the quarterly and monthly series given a negative gap last quarter. We wouldn t read too much into a flat reading for June GDP, which includes an oil sector disruption, and comes after an outsized May gain. Canada s current account balance also improved in Q2, but will still be in the middle of the range seen since we dropped well into the red after 2008, a sign that sustained C$ strength is not yet in the offing. 3

4 Week Ahead s Key Canadian Number: Real GDP Q2 (Thursday, 8:30 a.m.) Royce Mendes (416) Canadian Real GDP (%) CIBC Mkt Prior GDP m/m 0.0% na 0.5% GDP Q2 3.0% na 1.3% :2 16:3 16:4 17:1 17:2 17:3 17:4 18:1 18:2F Quarter/Quarter (saar) Year/Year Source: Statistics Canada, CIBC The economy was racing ahead in the second quarter with growth more than doubling the pace seen in the prior period. A rebound in household spending should see that category leading the way in terms of contributions. On the surface, net trade will also add its fair share to growth, but keep in mind some of the rise in exports probably came out of inventories, and therefore weren t the result of any new production. Still, growth of 3% will make the first half look more respectable, following the only modest increase seen in Q1. Forecast Implications If, and only if, NAFTA negotiations evolve into a deal in the next couple of weeks, expect the 3% Q2 growth rate to be enough for central bankers to raise rates another quarter-point in September. Otherwise, we would need a notable upside surprise in GDP to make the case for September. Other Canadian Releases: Current Account Balance Q2 (Wednesday, 8:30 a.m.) Strong export readings should leave Canada s current account shortfall roughly $4 bn narrower relative to the first quarter, when transportation bottlenecks slowed goods shipments. At $15 bn, the deficit will improve to levels not seen since the first half of 2017, and looks to be sustainable for at least the next few quarters. 4

5 Week Ahead s Key US Number: Advanced Goods Trade Balance July (Tuesday, 8:30 a.m.) Katherine Judge (416) $ Bn US Advance Goods Trade Balance Goods Trade Balance CIBC Mkt Prior -$69.4B -$68.8B -$67.9B Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 A narrowing in the goods trade deficit in the second quarter was helped by a pulling forward of foreign demand in anticipation of tariffs on US goods. But that could have reversed in July, with food and feeds exports likely changing course and adding to the deficit. That would offset any comeback in auto exports that have been dented recently on account of temporary plant closures. Forecast Implications After the outsized advance in exports in Q2, a pullback this quarter should leave the goods trade balance wider in Q3. As exports normalize and global growth slows, import growth should continue to outpace export growth over the rest of the year, making net trade a negative contributor to growth. Market Impact We are below the consensus which would be negative for the greenback and could see bond yields fall. Other U.S. Releases: Personal Income & Outlays July (Thursday, 8:30 a.m.) Consumption lost a bit of momentum over the second quarter in nominal terms but a jump in retail sales in July suggests that there is still some juice left in the American consumer. That should see personal consumption remain at a healthy 0.4% in July leaving real consumption decelerating slightly. Core PCE prices should advance by a trend-like 0.2%, echoing progress in CPI in July. That will be enough to nudge the annual rate up to the Fed s 2% target for the first time since 2012, helping set the stage for a September rate hike. 5

6 Equity Insights Royce Mendes, Avery Shenfeld and Katherine Judge Are Durable Gains Durable? The recent data have looked encouraging, but just how bullish is the environment for American capital goods equipment suppliers? The data don t look nearly as impressive from a longer term perspective, since what we ve really seen in the past couple of years is the easy rebound from energy sector softness in Orders for non-defense core capital goods suppliers aren t any higher than peaks seen decades ago, a reflection of the shift in the US economy towards less capital-intensive services, as well as competition from foreign equipment makers. Now that we ve completed the rebound from the oil price dip, getting the next leg of orders growth might be tougher sledding. Where Surprises Aren t So Surprising Most investors know that roughly 70% of S&P 500 companies generally beat quarterly earnings estimates. But digging just a little bit deeper reveals that earnings outperformance is more likely to come in certain sectors. With roughly 80% of companies posting positive earnings surprises since 2013, information technology and healthcare firms have easily outshined those in other sectors on that metric. The same trend played out again in the first half of this year. IT and healthcare have on average seen more than 90% of companies outperform expectations in 2018, versus 77% for the S&P 500 as a whole. Given the consistency over time, a short-term strategy that focuses on earnings surprises would likely benefit from overweighting those two sectors. Longer Term Trend Not as Impressive Source: TSX, StatCan, CIBC US Earnings Beats More Prevalent in Tech and Health Care Stocks US Core Capital Goods Orders ($Bn.) Average Share of Companies Beating Quarterly Earnings Estimates Since 2013 (%) Source: FactSet, CIBC Time Only Heals Some Wounds As we approach the ten-year anniversary of the financial crisis, it s important to remember that the milestone is more than just symbolic. The cyclically adjusted priceto-earnings (CAPE) ratio uses an average of the past ten years earnings to derive a valuation of the stock market. In the quarters ahead, the losses from the financial crisis will fall out of the calculation. Indeed, even if the price of the S&P 500 and earnings both remain constant for the next six quarters, the CAPE ratio would decline. But, at a level of 27 at the end of 2019 the CAPE ratio for the S&P 500 would still look elevated. So, while time will ease some of the concerns associated with the current CAPE ratio, it alone won t bring valuations all the way back to more sustainable levels. 6 Cyclically Adjusted Price-to-Earnings Ratio Set to Fall, But Not All the Way Back to Long-Term Averages Shiller CAPE Ratio If Prices & Earnings Remain Constant Avg. Since 2007 Avg. Since Source: Robert Shiller, CIBC

7 Currency Currents Andrew Grantham Upside Risk For GDP and CAD? Monthly data have us tracking a 3% pace for Q2 GDP. That s good, but not good enough to force the BoC s hand in September given its MPR forecast was already for 2.8% growth in the quarter. However, there s always the risk of a surprise, particularly in recent years to the upside for Q2. That could be nothing more than chance. But with recent quarterly data running under the pace of monthly figures, there s a more meaningful reason for a catch-up to be in the cards. A better number than consensus expectations or tracking numbers may give a short-term boost to the C$ next week. Q2 GDP Has Often Surprised to the Upside Recently (L), Quarterly Numbers Tracking Below Monthly Ones Recently (R) Average Miss in Quarterly GDP, Consensus vs Actual (Since 2012, %-pts SAAR) Q1 Q2 Q3 Q % SAAR Avg Diff Past 3 Qtr's = 0.66% Monthly GDP By Industry QuarterlyGDP - Expenditure Q Q Q Q Q Q Q Q Q Current Targets of US Trade Ire to Change NAFTA appears to be closer to resolution, while the US and China have had some talks even as new tariffs take effect. President Trump s tweets about currency misalignments could now start to be directed more at other countries he feels have an unfair advantage through the exchange rate. In that light, Trump might draw attention to an undervalued euro, with the Eurozone running record current account surpluses. Such surpluses, as well as those seen in Japan, are a sign in themselves that the currency should appreciate in the quarters ahead, even without the potential for President Trump to weigh in on the action. Add in the likelihood of subzero interest rates ending in Japan and Europe next year, and the euro and yen are two of our top picks against the US$. A Different Sort of Foreign Buyer Problem With low interest rates pushing investors to seek yield in emerging markets, many developing countries (not just Argentina and Turkey) have become dependent on such flows to fund investment and/or large current account deficits. So which other currencies should we expect to see added volatility if there are further safe-haven flows out of EMs? Looking at countries that have a high proportion of foreign investors holding their debt, and have seen that proportion rise recently, suggests South Africa, Indonesia and Colombia could be at risk. 7 Source: Statistics Canada, Bloomberg, CIBC Large and Rising Current Account Surpluses in Japan/Eurozone Current Account Balances (% GDP) 5Y Ago Latest Cda Mex US EZ Jp Source: OECD, Bloomberg, CIBC Some EMs Have a High Proportion of Debt Held Abroad, and Have Seen That Rise Recently Foreign Share of Debt Holders (%) Indonesia SA Colombia Argentina Chg in Foreign Share (Past 5Y, %) Source: BIS, Bloomberg, CIBC

8 CANADIAN RELEASE AND EVENT DATES August/September 2018 MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY WHOLESALE TRADE RETAIL TRADE (Current$) M Y APR MAY JUN BALANCE OF INT L PAYMENTS CURR. ACCT. BAL. $BN(QR) $BN(AR) 17:Q :Q :Q2 QUARTERLY FINANCIAL STATISTICS GDP BY INDUSTRY (2002$) GDP IND.PROD. M M APR MAY JUN NATIONAL ACCTS REAL PRICE GDP DEFLATOR %ch AR %ch AR 17:Q :Q :Q2 PAYROLL EMPLOYMENT, EARNINGS & HOURS INDUSTRIAL PRICES M (NSA) Y MAY JUN LABOUR DAY (HOLIDAY) (Markets Closed) MERCHANDISE TRADE $MN 12 MO. BALANCE MAY -2,724-31,925 JUN ,727 LABOUR PRODUCTIVITY Bank of Canada Interest Rate Announcement INTERNATIONAL RESERVES 8:15 AM $BN $BN CHANGE LEVEL JUN BUILDING PERMITS ($) M M (RES) (NON-RES) MAY JUN LABOUR FORCE SURVEY AVG EMPLOY UNEMP HRLY (HSHOLD) RATE EARN M Y % Y JUN IVEY PURCHASING MANAGERS INDEX Bank of Canada Sr. Dep. Governor Wilkins speaks in Saskatchewan at 2:30 PM ET INT L TRANSACTIONS IN SECURITIES C$BN, NET BONDS MONEY STOCKS TOT MARKET MAY JUN HOUSING STARTS 8:15 AM 000 s (AR) TOTAL SINGLES JUN CAPACITY UTILIZATION LEVEL (%) TOTAL MANUF. 17:Q :Q :Q2 CANADA S INTERNATIONAL INVESTMENT POSITION NEW HOUSING PRICE INDEX SURVEY OF MANUFACTURING SHIPMENTS M Y MAY JUN ADP EMPLOYMENT SURVEY CPI M Y JUN RETAIL TRADE (Current$) M Y MAY JUN All data seasonally adjusted except where noted NSA. M: per cent change from previous month. Q: per cent change from previous quarter at annual rates. Y: per cent change from year earlier. AR: Annual Rate. YTD: Year to date. Release dates are provided by sources outside CIBC World Markets Inc. Dates are subject to change. Sources for historical data: Statistics Canada, CMHC, Human Resources Development Canada and the Bank of Canada. 8

9 U.S. RELEASE AND EVENT DATES August/September 2018 MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY 2-Yr NOTE AUCTION ,5,7-Yr NOTE ANNOUNCEMENT FOMC Minutes BOT (9:00) REDBOOK (8:55) INITIAL JOBLESS CLAIMS (8:30) ADV. TRADE IN INTERNATIONAL GOODS S&P CORE LOGIC/CASE- SHILLER HOUSE PRICE INDEX 9:00 AM CONSUMER CONFIDENCE 5-Yr NOTE AUCTION EXISTING HOME SALES GDP (AR) REAL IMPLICIT GDP DEFLATOR 18:Q1(F) :Q2(A) :Q2(P) CORPORATE PROFITS 7-Yr NOTE AUCTION NEW HOME SALES PERS. INC & OUT. SAVING INCOME CONS RATE M M AR MAY JUN BOT (9:00) REDBOOK (8:55) INITIAL JOBLESS CLAIMS (8:30) DURABLE GOODS ORDERS M Y MAY JUN CHICAGO PMI 9:45 AM MICHIGAN SENTIMENT (F) 2, 5-, 7-Yr NOTE SETTLEMENT LABOR DAY (HOLIDAY) (Markets Closed) ISM MFG SURVEY COMP. PRICES INDEX INDEX JUN LIGHT VEHICLES SALES MIL (AR) Y JUN 17, , GOODS & SERV. BALANCE (BOP) $B GDS SERV TOT MAY JUN ADP SURVEY 8:15 AM NON-FARM PRODUCTIVITY Q/Q (AR) Y/Y 17:Q4 (F) :Q1 (F) :Q2 (F) ISM NON-MFG SURVEY FACTORY ORDERS M(SA) Y(NSA) MAY JUN , 10-Yr NOTE ANNOUNCEMENT 30-Yr NOTE ANNOUNCEMENT EMPLOY. SITUATION NON- CIV AVG FARM UNEMP HRLY PAYROLL RATE EARN JUN CONSUMER CREDIT 3:00 PM BOT (9:00) REDBOOK (8:55) INITIAL JOBLESS CLAIMS (8:30) WHOLESALE TRADE 3-Yr NOTE AUCTION BOT (9:00) REDBOOK (8:55) PPI M (SA) Y (NSA) JUN Beige Book 10-Yr NOTE AUCTION CPI M(SA) Y (NSA) JUN TREASURY BUDGET 2:00 PM 30-Yr BOND AUCTION INITIAL JOBLESS CLAIMS (8:30) RETAIL SALES M Y JUN CAPACITY UTIL/IND. PROD. 9:15 AM LEV M Y JUN BUSINESS INVENTORIES MICHIGAN SENTIMENT (P) , 10-Yr NOTE SETTLEMENT 30-Yr NOTE SETTLEMENT CURRENT ACCOUNT BALANCE HOUSING STARTS Mn. M/M JUN PHILADELPHIA FED INDEX 8:30 PM LEADING INDICATOR EXISTING HOME SALES BOT (9:00) REDBOOK (8:55) INITIAL JOBLESS CLAIMS (8:30) All data seasonally adjusted except where noted NSA. M: per cent change from previous month. Q: per cent change from previous quarter at annual rates. Y: per cent change from year earlier. AR: Annual Rate. YTD: Year to date. Release dates are provided by sources outside CIBC World Markets inc. Dates are subject to change. Sources for historical data: U.S. Department of Commerce, U.S. Department of Labor and U.S. Federal Reserve Board. 9

10 CIBC World Markets Inc., CIBC World Markets Corp., CIBC World Markets Plc., CIBC Australia Limited and certain other corporate banking and capital markets activities of Canadian Imperial Bank of Commerce operate under the brand name CIBC Capital Markets. This report is issued and approved for distribution by (a) in Canada, CIBC World Markets Inc., a member of the Investment Industry Regulatory Organization of Canada, the Toronto Stock Exchange, the TSX Venture Exchange and a Member of the Canadian Investor Protection Fund, (b) in the United Kingdom, CIBC World Markets plc, which is regulated by the Financial Services Authority, and (c) in Australia, CIBC Australia Limited, a member of the Australian Stock Exchange and regulated by the ASIC (collectively, CIBC ) and (d) in the United States either by (i) CIBC World Markets Inc. for distribution only to U.S. Major Institutional Investors ( MII ) (as such term is defined in SEC Rule 15a-6) or (ii) CIBC World Markets Corp., a member of the Financial Industry Regulatory Authority. U.S. MIIs receiving this report from CIBC World Markets Inc. (the Canadian broker-dealer) are required to effect transactions (other than negotiating their terms) in securities discussed in the report through CIBC World Markets Corp. (the U.S. broker-dealer). This report is provided, for informational purposes only, to institutional investor and retail clients of CIBC World Markets Inc. in Canada, and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited. This document and any of the products and information contained herein are not intended for the use of private investors in the United Kingdom. Such investors will not be able to enter into agreements or purchase products mentioned herein from CIBC World Markets plc. The comments and views expressed in this document are meant for the general interests of wholesale clients of CIBC Australia Limited. This report does not take into account the investment objectives, financial situation or specific needs of any particular client of CIBC. Before making an investment decision on the basis of any information contained in this report, the recipient should consider whether such information is appropriate given the recipient s particular investment needs, objectives and financial circumstances. CIBC suggests that, prior to acting on any information contained herein, you contact one of our client advisers in your jurisdiction to discuss your particular circumstances. Since the levels and bases of taxation can change, any reference in this report to the impact of taxation should not be construed as offering tax advice; as with any transaction having potential tax implications, clients should consult with their own tax advisors. Past performance is not a guarantee of future results. The information and any statistical data contained herein were obtained from sources that we believe to be reliable, but we do not represent that they are accurate or complete, and they should not be relied upon as such. All estimates and opinions expressed herein constitute judgments as of the date of this report and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, Internet web sites. CIBC has not reviewed the linked Internet web site of any third party and takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for the recipient s convenience and information, and the content of linked third-party web sites is not in any way incorporated into this document. Recipients who choose to access such third-party web sites or follow such hyperlinks do so at their own risk CIBC World Markets Inc. All rights reserved. Unauthorized use, distribution, duplication or disclosure without the prior written permission of CIBC World Markets Inc. is prohibited by law and may result in prosecution. 10

Will China Use the Yuan to Fight Trump? by Benjamin Tal

Will China Use the Yuan to Fight Trump? by Benjamin Tal The Week Ahead October 8-12, 2018 Economics Avery Shenfeld (416) 594-7356 avery.shenfeld@cibc.com Benjamin Tal (416) 956-3698 benjamin.tal@cibc.com Andrew Grantham (416) 956-3219