THE WEEKLY BOTTOM LINE

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1 THE WEEKLY BOTTOM LINE TD Economics HIGHLIGHTS OF THE WEEK United States In one of the most highly anticipated meetings in years, the FOMC decided to delay liftoff from zero interest rate policy (ZIRP), delivering a highly dovish statement despite the continuing improvement in the U.S. economy. Global uncertainty appeared to weigh heavily on the Committee members minds, with the Fed suggesting that potential spillovers could restrain U.S. economic activity and put further downward pressure on inflation in the near term. Domestic economic data was broadly supportive of the narrative of robust growth in domestic-oriented sectors (consumption and housing), while externally-exposed sectors (manufacturing and mining) continued to disappoint. Canada This week s data continued to support the view of a pick-up in economic activity over the second half of this year. Manufacturing shipments were up an outsized 1.7% in July and June s figures were revised up substantially. The Canadian real estate market continued to make headlines, with home prices up 8.7% year-over-year and existing home sales holding relatively steady at record high levels. However, economic challenges still remain. The economic recovery will likely prove uneven, with commodity dependent regions still facing a number of headwinds, including low oil prices and rising unemployment. The Federal government posted a fiscal surplus in 2014, but is likely to find finances more strained going forward, due to slower economic growth and rising employment insurance claims. THIS WEEK IN THE MARKETS Current* Week Ago 52-Week High 52-Week Low Stock Market Indexes S&P 500 1,990 1,961 2,131 1,862 S&P/TSX Comp. 13,787 13,461 15,466 13,053 DAX 9,936 10,124 12,375 8,572 FTSE 100 6,096 6,118 7,104 5,899 Nikkei 18,070 18,264 20,868 14,533 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 9:00 am on Friday **Oil-WTI, Cushing, Nat. Gas-Henry Hub, LA (Thursday close price), Copper-LME Grade A, Gold-London Gold Bullion; Source: Bloomberg FED DOT PLOTS CONTINUE TO TRACK LOWER Federal Funds Rate Target, Projections (%) SEP Median (Dec-2014) SEP Median (Mar-2015) SEP Median (Sep-2015) Market (Sep )* current Longer-run Note: Market based on fed funds futures and eurodollar futures (past mid-2017). Source: Federal Reserve Board, Bloomberg, TD Economics GLOBAL OFFICIAL POLICY RATE TARGETS Current Target Federal Reserve (Fed Funds Rate) % Bank of Canada (Overnight Rate) 0.50% European Central Bank (Refi Rate) 0.05% Bank of England (Repo Rate) 0.50% Bank of Japan (Overnight Rate) 0.10% Source: Central Banks, Haver

2 U.S. GLOBAL UNCERTAINTY SPOOKS FED DOVES Markets have been on tenterhooks this week as investors waited for the Federal Reserve s interest rate announcement on Thursday afternoon. The policy statement, economic projections, and press conference from one of the most anticipated FOMC meetings in years were expected to put to rest weeks of speculation over how the Fed views the recent bout of global economic uncertainty and whether it was enough to stay its hand. In the end, the Fed resolved to stand pat, in line with expectations. However, the degree of dovishness in the statement and conference was unexpected. The message boiled down to something like this: the U.S. economy is and should continue to do well, but we are not sure how global developments will play out on domestic growth and inflation, so we re sitting this one out. While investors initially cheered the announcement, equities and commodities reversed course as the Fed appeared to reinforce the notion that global spillovers could restrain U.S. economic activity somewhat and put further downward pressure on inflation in the near term. The Fed also suggested that in light of significant economic and financial interconnections between the United States and the rest of the world, the situation abroad bears monitoring, making yesterday s statement highly internationally oriented. It is not surprising that the Fed wants to monitor global developments. Despite a relatively low exposure to world growth through trade, global weakness and an elevated greenback have already manifested on U.S. manufacturers and exporters. Financial linkages are arguably more significant, while spillovers from commodity prices and exchange rates (through monetary policy expectations) feed directly into U.S. inflation and its projections. At this point, the two elements of the Fed s dual mandate have become increasingly divergent (see chart). The inflation mandate suggests the Fed should be even more accommodative or at least maintain the level of accommodation. Core CPI rose just 0.1% in August as falling import prices kept core goods declining in price (-0.8% m/m), while core services (+0.125%) remained under pressure from lagged effects of oil price declines on transportation and other services. Recent commodity and exchange rate movements suggest that more downward pressure on inflation is still to come over the next few months, giving the Fed plenty of room for keep rates low. On the other side of the mandate, however, the unemployment rate sits at 5.1%, and job growth looks to continue well above the pace necessary to keep it moving further south Jan-05 Jul-05 Jan-06 Jul-06 POLICY PRESCRIPTIONS DIVERGE WITH MANDATE Suggested monetary policy stance (by mandate) UR mandate Inflation mandate Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Less accomodative More accomodative Jan-10 Source: Bureau of Economic Analysis, Bureau of Labor Statistics, TD Economics Jul The Fed admitted as much by dropping their projections for the unemployment rate through the projection period. Moreover, economic data, including retail sales, housing starts, and initial jobless claims have come in healthy this week, indicating that the domestic economy continues to improve at a good pace. The way the Fed seems to have squared the circle is by decreasing (marginally) their projection for the longer-run unemployment rate to a median estimate of 4.9%. Doing so implies a slightly higher degree of labor market slack more consistent with the underperformance in inflation and buys a little more leeway to keep rates on hold. The bottom line is that the U.S. economy looks like it may be ready for a gradual liftoff in rates, and a quarter-point hike was unlikely to derail the recovery. The notion that other central banks in the post-financial crisis era have begun hiking rates only to reverse course, was highly publicized ahead of the FOMC meeting. However, the U.S. case is unique. For one, the American economy is not a small open economy, and is thus more insulated from global weakness. Secondly, the U.S. economic recovery appears to have plenty of momentum with robust job gains, healthy consumer spending, and a recovering housing market. Lastly, given the healthy past job gains, unemployment is nearing its natural rate, with more substantial wage gains likely on the horizon. Still, the Fed chose the more cautious route given the recent uncertainty. At this point, we expect the Fed to sit tight until at least year-end. While this may be a prudent approach at this point, the risk is that it may also necessitate a more rapid response in the future. Michael Dolega, Senior Economist Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul

3 CANADA - An uneven economic course ahead CHART 1: A FEW KEY CANADIAN ECONOMC INDICATORS Indexed at January 2015= Source: Statistics Canada Manufacturing Shipments (2007C$) Canadian Home Sales Beneficiaries Receiving Employment Insurance The past week underscored our view that the economic soft patch is in the rearview mirror, and growth likely resumed in the third quarter of the year. Overall, the longanticipated recovery in manufacturing appears to be taking shape in Q3. The Canadian real estate market continued to see sales hold at record high levels in August, and prices rose 8.7% over last year. However, headwinds remain, with the good news not widespread across the country. Going forward, low interest rates will help to offset the negative economic consequences of low oil prices on the overall Canadian economy. Therefore,Canadian markets heaved a sigh of relief when the Fed announced that it was not yet ready to raise interest rates. Investors are concerned that hikes by the U.S. central bank will result in higher Canadian longer-term consumer borrowing rates, presenting a drag on housing activity and consumer spending. The S&P/TSX price index recouped the last two weeks of losses and the loonie gained a bit of ground following Thursday s announcement. The Canadian inflation report provided further support for the Bank of Canada to keep rates low. Overall consumer prices rose 1.3% year-over-year, held down by lower gasoline prices. The Bank of Canada's core measure of inflation moderated to 2.1% year-over-year in August, following a 2.4% gain in July. Core inflation has been running marginally above the Bank of Canada's 2% target for over a year now. However, inflationary pressures have been largely tied to the depreciation in the loonie since the end of Indeed, a third of the rate of inflation in August can be attributed to items for which prices are tightly tied to the currency, such as clothing and footwear (+2.1% y/y), reading material (+4.6%) and beer prices (+5.2%). The Bank of Canada estimates that stripping away special factors such as currency movements, underlying inflation is running at a more moderate 1.5% to 1.7% year-over-year so there is little need for higher rates in Canada. Manufacturing sales provided some good news in July, with shipments up an outsized 1.7%, and June's figures were revised up substantially. However, the good news was not shared across provinces. Manufacturing shipments fell 1.3% overall in commodity-dependent Alberta, Saskatchewan and Newfoundland, and are 13.7% below their peak reached last summer. Key housing markets in Ontario and B.C. also continue to bolster the headlines, but markets in Calgary, Edmonton, Saskatoon and Regina have weakened considerably through 2015 so far. Combined existing home sales in all 4 markets were down 16% year-to-date in August. With oil prices still hovering below $50 per barrel, the housing downturn in these regions has likely not yet run its course. The bottom will likely only be reached once the unemployment rate starts to improve in mid In addition, the Federal Government announced that it posted the first (albeit small) budget surplus in over 7 years in fiscal However, low oil prices may make maintaining a surplus more of a challenge in the current fiscal year. Despite the expected economic recovery in the second half of this year, nominal GDP growth is still expected to clock in at just below 1% in 2015, less than one quarter of the rate posted in 2014, presenting a much more modest revenue backdrop. Meanwhile, the economic weakness in commodity-driven economies is likely to impose a burden on government coffers. The number of Canadians receiving employment insurance was up 7% year-over-year in July of this year, largely due to a 72% jump in Alberta and 25% increase in Saskatchewan. The Bottom line is that overall the economy may have resumed positive growth in the second half of this year, but headwinds are still strong. Diana Petramala, Economist

4 U.S.: UPCOMING KEY ECONOMIC RELEASES U.S. Durable Goods Orders - August* Release Date: September 24, 2015 July Result: Headline 2.2% M/M; Core 2.1% M/M TD Forecast: Headline -1.3% M/M; Core -0.3% M/M Consensus: Headline -2.1% M/M; Core -0.1% M/M Weaker Boeing orders should push headline durable goods orders down 1.3% m/m in August, as some of the buoyancy during the prior two months are surrendered. Excluding transports, orders should decline at a much more modest 0.5% m/m pace. However, core orders activity should also decline, falling 0.3%, ending two consecutive months of gains. The underlying tone of this report should be relatively weak, reflecting the fallout on business investment intentions from the uncertain global and domestic growth outlook. The subdued tone in business capital investment activity is likely to persist over the next few months as the impact the global growth concerns continue to play out, though the segment of the economy should continue to be supportive to growth. U.S. DURABLE GOODS* M/M % Chg Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 *New orders for durable goods industries, seasonally adjusted Source: U.S. Census Bureau U.S. Existing Home Sales August* Release Date: September 21, 2015 July Result: 5.59 million TD Forecast: 5.52 million Consensus: 5.5 million 6,000 5,500 5,000 U.S. EXISTING HOME SALES* Thousands of units The backdrop for the US housing market remains favorable, and with the strengthening in labor market activity and affordability housing market conditions continuing to be supportive to demand, sales activity has been buoyant. In August, however, the pace of sales should dip modestly, declining 1.3% m/m to 5.52M units, down from 5.59M the month before. This will bring to an end three consecutive monthly gains over which sales have rebounded a robust 10% from their recent lows. However, the pullback in sales activity in August is likely to prove temporary, as the supportive underlying backdrop should continue to support housing demand going forward. Favorable supply dynamics and firming demand should remain supportive to price gains, further underscoring the buoyancy in the housing sector. 4,500 4,000 3,500 3,000 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 *Seasonally adjusted at annual rates Source: Census Bureau / Haver Analytics *Forecast by Rates and FX Strategy Group. For further information, contact TDRates&FXCommoditiesResearch@tdsecurities.com 4

5 CANADA: UPCOMING KEY ECONOMIC RELEASES Canadian Retail Sales July* Release Date: September 21, 2015 June Result: 0.6% M/M, ex-autos 0.8% M/M TD Forecast: 0.9% M/M, ex-autos 0.3% M/M Consensus: N/A Autos and a lift from gasoline prices should help retail sales register a third consecutive monthly gain. We forecast a 0.9% m/m and more tepid 0.3% m/m increase in headline and core (ex. autos) retail sales respectively. The latter is expected to reflect a partial unwind in the electronics sector which surged by nearly 10% m/m in June; this reflected the implementation of new regulations that limits the duration of cell phone contracts. Elsewhere, sales of home furniture are expected to be soft given the pullback in existing home sales. Finally, the rise in CPI during July suggests that retail volumes should be softer but will still provide a moderate lift to industry level real GDP M/M % Chg. CANADIAN RETAIL SALES* -2.5 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 *Seasonally Adjusted Source: Statistics Canada / Haver Analytics Total Ex. Motor Vehicles *Forecast by Rates and FX Strategy Group. For further information, contact TDRates&FXCommoditiesResearch@tdsecurities.com 5

6 Release Date RECENT KEY ECONOMIC INDICATORS: SEPTEMBER 14-18, 2015 Economic Indicator/Event Data for Period Units Current Prior United States Sep 15 Retail Sales Advance Aug M/M % Chg R5 Sep 15 Retail Sales Ex Auto and Gas Aug M/M % Chg R5 Sep 15 Empire Manufacturing Sep Index Sep 15 Industrial Production Aug M/M % Chg R5 Sep 15 Capacity Utilization Aug % Sep 15 Manufacturing (SIC) Production Aug M/M % Chg R5 Sep 15 Business Inventories Jul M/M % Chg R6 Sep 16 MBA Mortgage Applications Sep 11 W/W % Chg Sep 16 Consumer Price Index Aug M/M % Chg Sep 16 CPI Ex Food and Energy Aug M/M % Chg Sep 16 Real Avg Weekly Earnings Aug Y/Y % Chg R6 Sep 16 NAHB Housing Market Index Sep Index Sep 16 Total Net TIC Flows Jul USD, Blns R6 Sep 17 Housing Starts Aug Thsd R6 Sep 17 Building Permits Aug Thsd R5 Sep 17 Initial Jobless Claims Sep 12 Thsd Sep 17 Continuing Claims Sep 05 Thsd R5 Sep 17 FOMC Rate Decision (upper bound) Sep 17 % Sep 18 Leading Index Aug Index R5 Canada Sep 14 Teranet/National Bank HPI Aug Y/Y % Chg Sep 14 Teranet/National Bank HPI Aug M/M % Chg Sep 14 Bloomberg Nanos Confidence Sep 11 Index Sep 15 Existing Home Sales Aug M/M % Chg Sep 16 Manufacturing Sales Jul M/M % Chg R5 Sep 16 Int'l Securities Transactions Jul CAD, Blns R5 Sep 18 Consumer Price Index Aug Y/Y % Chg Sep 18 CPI Core Aug Y/Y % Chg Sep 18 CPI SA Aug M/M % Chg Sep 18 CPI Core SA Aug M/M % Chg International Sep 14 EC Industrial Production WDA Jul Y/Y % Chg R5 Sep 15 FR CPI EU Harmonized Aug Y/Y % Chg Sep 15 UK Consumer Price Index Aug Y/Y % Chg Sep 15 UK Retail Price Index Aug Y/Y % Chg Sep 15 EC Trade Balance SA Jul EUR, Blns Sep 15 EC Employment Q2 Y/Y % Chg Sep 16 UK ILO Unemployment Rate 3Mths Jul % Sep 17 EC Construction Output Jul Y/Y % Chg R5 Sep 18 EC ECB Current Account SA Jul EUR, Blns R6 Source: Bloomberg, TD Economics. 6

7 Release Date UPCOMING ECONOMIC RELEASES AND EVENTS: SEPTEMBER 21-25, 2015 Time* Economic Indicator/Event Data for Period Units Consensus Forecast Last Period United States Sep 21 10:00 Existing Home Sales Aug Mlns Sep 21 10:00 Existing Home Sales Aug M/M % Chg Sep 22 9:00 FHFA House Price Index Jul M/M % Chg Sep 22 10:00 Richmond Fed Manufacturing Index Sep Index Sep 23 7:00 MBA Mortgage Applications Sep 18 W/W % Chg Sep 23 9:45 Markit US Manufacturing PMI Sep P Index Sep 24 8:30 Chicago Fed National Activity Index Aug Index Sep 24 8:30 Initial Jobless Claims Sep 19 Thsd Sep 24 8:30 Continuing Claims Sep 12 Thsd Sep 24 8:30 Durable Goods Orders Aug M/M % Chg Sep 24 8:30 Durables Ex Transportation Aug M/M % Chg Sep 24 8:30 Cap Goods Ship Nondef Ex Air Aug M/M % Chg Sep 24 8:30 Cap Goods Orders Nondef Ex Air Aug M/M % Chg Sep 25 8:30 Personal Consumption Q2 T Q/Q % Chg Sep 25 8:30 Core PCE Q2 T Q/Q % Chg Sep 25 8:30 Gross Domestic Product Annualized Q2 T Q/Q % Chg Sep 25 8:30 GDP Price Index Q2 T Q/Q % Chg Sep 25 9:45 Markit US Composite PMI Sep P Index Sep 25 9:45 Markit US Services PMI Sep P Index Canada Sep 21 8:30 Wholesale Trade Sales Jul M/M % Chg Sep 21 10:00 Bloomberg Nanos Confidence Sep 18 Index Sep 23 8:30 Retail Sales Jul M/M % Chg Sep 23 8:30 Retail Sales Ex Auto Jul M/M % Chg International Sep 21 2:00 GE Producer Price Index Aug Y/Y % Chg Sep 22 10:00 EC Consumer Confidence Sep A Index Sep 23 4:00 EC Markit Eurozone Manufacturing PMI Sep P Index Sep 23 4:00 EC Markit Eurozone Services PMI Sep P Index Sep 23 4:00 EC Markit Eurozone Composite PMI Sep P Index Sep 24 19:30 JN National CPI Aug Y/Y % Chg Sep 25 2:45 FR Consumer Confidence Sep Index * Eastern Standard Time. Source: Bloomberg, TD Economics. 7

8 Contacts at TD Economics Beata Caranci Vice President and Chief Economist CANADIAN Economic ANALYSIS Derek Burleton, Vice President and Deputy Chief Economist Diana Petramala, Economist, Real Estate Dina Ignjatovic, Economist, Autos, Commodities and Other Industries Leslie Preston, Economist, Financial Jonathan Bendiner, Economist, Regional Brian DePratto, Economist, Environmental U.S. & INTERNATIONAL Economic ANALYSIS James Marple, Senior Economist Michael Dolega, Senior Economist Francis Fong, Senior Economist Thomas Feltmate, Economist Ksenia Bushmeneva, Economist Andrew Labelle, Economist Christos Ntantamis, Econometrician Economic AnalystS Admir Kolaj Diarra Sourang Nicole Fillier To Reach Us Mailing Address 66 Wellington Street West 20th Floor, TD Bank Tower Toronto, Ontario M5K 1A2 8

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