THE WEEKLY BOTTOM LINE

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1 THE WEEKLY BOTTOM LINE TD Economics HIGHLIGHTS OF THE WEEK In one of the most highly anticipated FOMC meetings in years, the U.S. Federal Reserve surprisingly stayed the course on its monthly asset purchases. This caught financial markets off guard, as investors were almost universally expecting the Fed to start reining in its QE program. The immediate market reaction led to sharp price changes across the board. For instance, 10-year Treasury yields dropped 16 basis points after the announcement and gold jumped by 4%. Over the last two days, investors have digested the Fed s rationale, causing them to partially reverse previous sharp movements in risk-assets prices. THIS WEEK IN THE MARKETS Current* Week Ago 52-Week High 52-Week Low Stock Market Indexes S&P 500 1,724 1,688 1,726 1,353 S&P/TSX Comp. 12,928 12,723 12,931 11,811 DAX 8,680 8,509 8,694 6,951 FTSE 100 6,610 6,584 6,840 5,606 Nikkei 14,742 14,405 15,627 8,534 Fixed Income Yields U.S. 10-yr Treasury Canada 10-yr Bond Germany 10-yr Bund UK 10-yr Gilt Japan 10-yr Bond Foreign Exchange Cross Rates C$ (USD per CAD) Euro (USD per EUR) Pound (USD per GBP) Yen (JPY per USD) Commodity Spot Prices** Crude Oil ($US/bbl) Natural Gas ($US/MMBtu) Copper ($US/met. tonne) Gold ($US/troy oz.) *as of 10:20 am on Friday, **Oil-WTI, Cushing, Nat. Gas-Henry Hub, LA (Thursday close price), Copper-LME Grade A, Gold-London Gold Bullion; Source: Bloomberg Brazilian real N. Zealand dollar Mexican peso Swiss franc Australian dollar WEEKLY MOVES vs U.S. DOLLAR Euro British pound Canadian dollar Japanese yen % Source: Bloomberg, as at 12:09 pm, 3.44 GLOBAL OFFICIAL POLICY RATE TARGETS Current Target Federal Reserve (Fed Funds Rate) % Bank of Canada (Overnight Rate) 1.00% European Central Bank (Refi Rate) 0.50% Bank of England (Repo Rate) 0.50% Bank of Japan (Overnight Rate) 0.10% Source: Central Banks, Haver Analytics TD ECONOMICS KEY FORECASTS Current Rate /20/13 Q1 Q2 Q3F Q4F Q1F Q2F Q3F Q4F Fed Funds Target Rate (%) yr Govt. Bond Yield (%) yr Govt. Bond Yield (%) yr Govt. Bond Yield (%) Real GDP (Q/Q % Chg, Annualized) 2.5 (Q2) CPI (Y/Y % Chg.) 1.5 (Aug-13) Unemployment Rate (%) 7.3 (Aug-13) Forecast by TD Economics. Source: Bloomberg, TD Economics.

2 THE WONDERS OF EFFECTIVE (MIS)COMMUNICATION In one of the most highly anticipated FOMC meetings in years, the U.S. Federal Reserve surprisingly stayed the course on its monthly asset purchases. This caught financial markets off guard, as investors were almost universally expecting the Fed to start reining in its QE program. To understand why the market misinterpreted the Fed, it is worth revisiting some of the Fed s recent communication against the backdrop of the incoming data. Prior to this week s meeting, most of the messaging from the Fed pointed in the same direction. Expectations for the Fed to start tapering its $85 bn per month asset purchases first become engrained in late May, when Chairman Bernanke said that such an outcome could materialize over the next few meetings. By June, Mr. Bernanke went even further, noting that if the subsequent data were to remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid This message was reinforced in the minutes of the July meeting released on August 21 which stated that almost all participants were broadly comfortable with that characterization of the contingent outlook for asset purchases. The minutes also stated that Generally, participants were satisfied that investors had come to understand the data-dependent nature of the Committee s thinking about asset purchases. Thus, at that time, nothing seemed to be amiss between the economic fundamentals and market expectations. By that July Fed meeting, 10-year Treasuries had already risen 70 basis points from May. Although economic data labor market indicators in particular started to come in somewhat weaker than expected thereafter, financial markets believed it was still consistent with the Fed s spring outlook. Now we know that the Fed did not share that assessment. Moreover, at this week s press conference, Mr. Bernanke made it clear that the Fed was concerned that the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and the labor market. Between July and September, 10-year treasury yields had risen an additional 25 basis points, culminating in a large rate-shock since May. And, to complicate matters further, federal fiscal policy continues to be an important restraint on growth and a source of downside risk. In line with these concerns, the Fed not only postponed tapering, but they also downgraded their economic growth projections. Most FOMC participants saw the fed funds FED INACTION SUPPORT EMs' ASSETS Index, March 2013=100 % MSCI Emerging Markets Stock index 10-year Treasury yield 60 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Source: Bloomberg, TD Economics target rate in 2016 around 75 basis points below what the market had priced in ahead of the meeting. Moreover, Mr. Bernanke also reinforced a more dovish tone on the rate outlook by stating that the first increase in short-term rates might not occur until the unemployment rate is considerably below 6.5%. Taking all these elements into consideration, it seems unlikely that tapering will happen before early next year; and the onus is on the data to show that the recovery s momentum will improve. The immediate market reaction led to sharp price changes across the board. For instance, 10-year Treasury yields dropped 16 basis points after the announcement, gold jumped by 4%, and emerging market currencies saw big gains against the dollar. Over the last two days, investors have digested the Fed s rationale, causing them to partially reverse previous sharp movements in risk-assets prices. In the coming weeks, we expect yields to decline a touch more across the curve. Furthermore, we expect the 10-year yield to remain below 2.9% until the end of this year. This should prove supportive for the economy, as borrowing costs, such as the 30-year mortgage rate, fall in tandem. This will help push against increased uncertainty related to the upcoming fiscal budget and debt limit debates, which can and likely will intensify market volatility. The bottom line is that, although emerging market currencies and other risk-assets might get a temporary reprieve from the Fed s volte-face, the financial turbulence of late served as a trial balloon of just how difficult it will be for central banks to rebalance their extraordinarily stimulative policies in the years ahead Martin Schwerdtfeger, Senior Economist 2

3 UPCOMING KEY ECONOMIC RELEASES U.S. Durable Goods Orders -August* Release Date: September 25, 2013 July Result: -7.3% M/M TD Forecast: 0.5% M/M Consensus: -0.1% M/M The pace of durable goods orders should rebound modestly in August, with headline orders rising at a modest 0.5% m/m pace, undoing some of the 7.4% m/m collapse the month before. Weak transportation orders should continue to weigh on orders activity, with orders ex-transport advancing at a slightly better 1.0% m/m pace. Core orders should also be higher, rising at a relatively decent 1.2% m/m clip. This will mark a modest rebound in capital spending activity following the disappointing performance the month before. In the months ahead, as more clarity is obtained on Fed policy and the fiscal outlook, we expect to see a meaningful uptick in the pace of core capital spending activity. M/M % Chg U.S. Durable Goods Orders* Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 *New orders for durable goods industries, seasonally adjusted Source: U.S. Census Bureau U.S. Personal Income & Spending - August* Release Date: September 27, 2013 July Result: Income 0.1% M/M; Spending 0.1% M/M TD Forecast: Income 0.4% M/M; Spending 0.4% M/M Consensus: Income 0.4% M/M; Spending 0.3% M/M Personal income should post its fourth consecutive monthly gain in August, rising at a fairly decent 0.4% m/m pace. The improvement reflects in part the strong gain in wage growth in recent months, along with the robust 0.4% m/m bounce in the level of aggregate hours worked in August. Spending activity should also rise, posting a 0.2% m/m gain following the meagre advance the month before. The gain is largely consistent with the improved tone in the retail sales report during the month. Real spending activity should also rise, suggesting that personal spending will continue to be a source of favorable support for economic activity this quarter. On the inflation front, the pace of core PCE inflation should remain relatively weak, with a 0.1% m/m rise and on a year-ago basis inflation should remain unchanged at 1.2% y/y, suggesting that core inflationary price pressures remain subdued U.S. PERSONAL INCOME AND SPENDING M/M % Chg. Spending Income Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Source: Bureau of Economic Analysis / Haver Analytics. *Forecast by Rates and FX Strategy Group. 3

4 Release Date RECENT KEY ECONOMIC INDICATORS: SEPTEMBER 16-20, 2013 Economic Indicator/Event Data for Period Units Current Prior United States Sep 16 Empire Manufacturing Sep Index Sep 16 Industrial Production Aug M/M % Chg Sep 16 Capacity Utilization Aug % Sep 16 Manufacturing (SIC) Production Aug M/M % Chg R Sep 17 Consumer Price Index Aug M/M % Chg Sep 17 Consumer Price Index Ex Food and Energy Aug M/M % Chg Sep 17 Total Net TIC Flows Jul USD, Blns R Sep 17 NAHB Housing Market Index Sep Index R Sep 18 Housing Starts Aug Thsd R Sep 18 Building Permits Aug Thsd R Sep 18 FOMC Rate Decision Sep 18 % Sep 18 Fed Pace of MBS Purchase Program Sep USD, Blns Sep 18 Fed Pace of Treasury Purchase Program Sep USD, Blns Sep 19 Current Account Balance Q2 USD, Blns R Sep 19 Philadelphia Fed. Business Outlook Survey Sep Index Sep 19 Existing Home Sales Aug M/M % Chg Sep 19 Conference Board Leading Economic Indicators Aug M/M % Chg R Canada Sep 16 International Securities Transactions Jul CAD, Blns R Sep 16 Existing Home Sales Aug M/M % Chg Sep 17 Manufacturing Sales Jul M/M % Chg R Sep 19 Wholesale Trade Sales Jul M/M % Chg R Sep 20 Consumer Price Index SA Aug M/M % Chg R Sep 20 Core Consumer Price Index SA Aug M/M % Chg International Sep 15 UK Rightmove House Prices Sep Y/Y % Chg Sep 16 EC Labour Costs Q2 Y/Y % Chg R Sep 16 AU New Motor Vehicle Sales Aug Y/Y % Chg Sep 17 EC ECB Current Account SA Jul Euros, Blns R Sep 17 UK Producer Price Index Input NSA Aug Y/Y % Chg R Sep 17 UK Producer Price Index Output NSA Aug Y/Y % Chg Sep 17 UK Consumer Price Index Aug Y/Y % Chg Sep 17 UK Core Consumer Price Index Aug Y/Y % Chg Sep 17 EC ZEW Survey Expectations Sep Index Sep 17 GE ZEW Survey Current Situation Sep Index Sep 17 GE ZEW Survey Expectations Sep Index Sep 17 EC Trade Balance SA Jul Euros, Blns R Sep 17 NZ Current Accout GDP Ratio YTD Q2 % R Sep 18 EC Construction Output Jul Y/Y % Chg R Sep 18 NZ Gross Domestic Product Q2 Y/Y % Chg R Sep 18 JN Trade Balance Adjusted Aug Yen, Blns R Sep 18 JN Exports Aug Y/Y % Chg Sep 18 JN Imports Aug Y/Y % Chg Sep 19 UK Retail Sales Aug Y/Y % Chg Sep 20 EC Consumer Confidence Sep A Index * Eastern Standard Time; Source: Bloomberg, TD Economics 4

5 Release Date UPCOMING ECONOMIC RELEASES AND EVENTS: SEPTEMBER 23-27, 2013 Time* Economic Indicator/Event Data for Period Units Consensus Forecast Last Period United States Sep 23 8:30 Chicago Fed National Activity Index Aug Index Sep 23 8:58 Markit US PMI Preliminary Sep Index Sep 23 9:30 Fed's Dudley to speak to Fordham Wall Street Council Sep 24 9:00 S&P/CS Composite-20 Jul Y/Y % Chg Sep 24 9:00 House Price Index Jul M/M % Chg Sep 2 10:00 Richmond Fed Manufacturing Index Sep Index Sep 24 10:00 Consumer Confidence Index Sep Index Sep 25 8:30 Durable Goods Orders Aug M/M % Chg Sep 25 8:30 Durables Ex Transportation Aug M/M % Chg Sep 25 8:30 Cap Goods Orders Nondef Ex Air Aug M/M % Chg Sep 25 8:30 Cap Goods Ship Nondef Ex Air Aug M/M % Chg Sep 25 10:00 New Home Sales Aug Thsd Sep 25 12:00 Household Change in Net Worth 2Q USD, Blns Sep 26 8:30 Initial Jobless Claims Sep 21 Thsd Sep 26 8:30 Continuing Claims Sep 14 Thsd Sep 26 10:00 Pending Home Sales Aug M/M % Chg Sep 26 10:10 Fed's Stein speaks on Monetary Policy in Frankfurt Sep 26 11:00 Kansas City Fed Manf. Activity Sep Index 8 8 Sep 27 8:30 Personal Income Aug M/M % Chg Sep 27 8:30 Personal Spending Aug M/M % Chg Sep 27 8:30 PCE Deflator Aug M/M % Chg Sep 27 8:30 PCE Core Aug M/M % Chg Sep 27 14:00 Fed's Dudley to speak on the Economy in Syracuse, NY Canada Sep 24 8:30 Retail Sales Jul M/M % Chg Sep 24 8:30 Retail Sales Ex Auto Jul M/M % Chg Sep 27 8:30 Average Weekly Earnings Jul Y/Y % Chg International Sep 23 3:00 FR PMI Manufacturing Sep P Index Sep 23 3:00 FR PMI Services Sep P Index Sep 23 3:30 GE PMI Manufacturing Sep A Index Sep 23 3:30 GE PMI Services Sep A Index Sep 23 4:00 EC PMI Manufacturing Sep A Index Sep 23 4:00 EC PMI Services Sep A Index Sep 24 18:45 NZ Trade Balance Aug AUD, Blns Sep 25 1:00 JN Small Business Confidence Sep Index Sep 25 2:00 GE Gfk Consumer Confidence Oct Index Sep 26 4:00 EC M3 Money Supply Aug Y/Y % Chg Sep 26 4:30 UK Current Account Balance Q2 GBP, Blns Sep 26 19:30 JN National Consumer Price Index Aug Y/Y % Chg Sep 27 2:45 FR Consumer Spending Aug Y/Y % Chg Sep 27 5:00 EC Economic Confidence Sep Index Sep 27 5:00 EC Industrial Confidence Sep Index Sep 27 8:00 GE Consumer Price Index EU Harmonized Sep P Y/Y % Chg * Eastern Standard Time; Source: Bloomberg, TD Economics 5

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