THE WEEKLY BOTTOM LINE

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1 THE WEEKLY BOTTOM LINE TD Economics HIGHLIGHTS OF THE WEEK United States The notion of a 2015 Fed liftoff in rates continued to be under pressure this week with markets pricing only a one-in-three chance of a rate hike this year. Much of the repricing was related to dovish comments from two Fed Governors, who questioned the Phillips Curve and highlighted international risks, suggesting that a delay to liftoff is a prudent approach. The cautious approach was further supported by weak retail sales data capping off the third quarter. Still, despite some weakness in regional manufacturing PMIs, with the Empire and Philly indices both disappointing, domestically-oriented data was far more upbeat. Core inflation accelerated, consumer sentiment improved, and jobless claims hit another cyclical low suggesting continued labor market strength. Canada Economic data this week supported the view that the Bank of Canada will remain on hold at next week s FAD meeting. Despite the disappointing headline, the August manufacturing data released this morning fit comfortably with our estimate of real GDP growth of 2.5% annualized in the third quarter, which is significantly stronger than the 1.5% gain the Bank of Canada was expecting back in July. Housing data released this week suggests that the market may be losing some steam, and may potentially alleviate some of the concerns related to keeping rates too low for too long. Existing home sales fell 2.1% in September and were only up 0.7% from year ago levels, while average existing home prices rose by just 6.2% year-over-year in September, following six months of near double-digit gains. THIS WEEK In THE MarKETS Current* Week Ago 52-Week High 52-Week Low Stock Market Indexes S&P 500 2,024 2,015 2,131 1,863 S&P/TSX Comp. 13,829 13,964 15,451 13,005 DAX 10,083 10,097 12,375 8,583 FTSE 100 6,363 6,416 7,104 5,899 Nikkei 18,292 18,439 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 8:35 am on Friday **Oil-WTI, Cushing, Nat. Gas-Henry Hub, LA (Thursday close price), Copper-LME Grade A, Gold-London Gold Bullion; Source: Bloomberg. S&P 500 Dax FT 100 Nikkei 225 US 10Y T-Note USD:EUR USD:JPY USD:GBP USD:CAD USD:MXN Gold WTI Brent VIX* WEEKLY MOVES Weekly % change except (*) which denotes change in index Note: Data as of October 16, 11:50 AM ET. Change from end of prior week. Sources: 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. FOMC s 2015 liftoff consensus BEGINNING TO crack The notion of a 2015 Fed liftoff in rates continued to be under pressure this week. This view was a near certainty in August. But, it has become much less so in recent weeks as weaker job gains and global volatility contributed to the FOMC keeping the status quo in their September decision. In the aftermath of that meeting, investors reduced the odds of a 2015 liftoff to about even despite the Fed s own projections, which suggested that 13 of the 17 members saw a hike by year end. These odds were reduced to just one-third this week, hitting the dollar and bond yields, and helping boost equities despite a weak start to the earnings season. Much of the market repricing was related to dovish comments from two FOMC members and very weak retail sales data. The Committee frequently diverges on policy matters, with differences of opinion sometimes manifesting in policy decision dissents among voting members. These are usually most apparent among the Federal Reserve Bank presidents who sometimes face differing economic conditions on the ground. But, this week s remarks by governors Brainard and Tarullo highlighted that substantial differences of opinion can even be found within the Federal Reserve s Board of Governors. In her speech on Monday, Gov. Brainard suggested that the Phillips Curve relationship between economic slack and inflation is at best, very weak at the moment. Moreover, she heavily referenced international developments, from Chinese stock market bubbles to economic contraction in Canada, suggesting that global risks are tilted to the downside and proposing the Fed wait to see if the risks to the outlook diminish. Lastly, she stated that the recent moves in financial conditions, which include the increase in the value of the U.S. dollar and other financial developments, have already done the Fed s job for them, noting they are comparable to a couple of rate increases. On Tuesday, Gov. Tarullo continued the assault on the Phillips Curve, stating in an interview that the relationship hasn t worked in a decade. Moreover, he appeared to lack confidence that the U.S. economy had enough momentum to warrant higher rates in a globally disinflationary environment at this point. Instead, he suggested the Fed wait for tangible evidence of inflation before liftoff, something he doesn t consider appropriate this year. The case for delaying liftoff was made stronger on Wednesday, with the release of the Census Bureau s September advance retail sales report. Purchases at retail stores rose 0.1% from the previous month, just half the expected pace, with the August figure itself LOWER FOR EVEN LONGER AS 2015 LIFTOFF INCREASINGLY UNLIKELY Number of Fed hikes expected as of FOMC meeting Aug-03 Aug-13 Aug-23 Sep-02 Sep-12 Sep-22 Oct-02 Oct-12 Note: Based on CME fed funds futures prices. Source: Bloomberg, TD Economics Dec-15 Mar-16 downwardly revised from 0.2% to 0.0%. The views of the two Fed Governors are somewhat at odds with remarks from several FOMC members who quantified the September decision to delay liftoff a close call. They are also contradictory to those of the most senior Federal Reserve officials, who recently outlined their case for a hike this year. While noting the current lack of inflationary pressures and Phillips Curve shortcomings, both Chair Yellen and Vice- Chair Fischer expressed the appropriateness of raising rates this year so as to get in front of any inflationary pressures that may arise as the transitory effects of the higher dollar and lower energy prices dissipate. This argument was shored up by Thursday s inflation report from the Bureau of Labor Statistics. While headline CPI inflation was flat, pressured lower by commodity and dollar dynamics, core CPI inflation accelerated from 1.8% to 1.9% y/y. Moreover, core services inflation, which is largely insulated from external factors, picked up to 2.7% y/y. This is its fastest rate since November 2008 and highlights the potential for price pressures as the transitory factors fade. Ultimately, while externally-exposed sectors will be under pressure in the coming quarters, overall economic growth should be quite robust. Consumer confidence remains elevated while businesses are increasingly hesitant to lay-off workers, with initial jobless claims hitting another cyclical low. As such, while global uncertainty may keep the Fed on the sidelines this year, we believe that the FOMC will not wait much longer before pulling the trigger on rate hikes. Michael Dolega, Senior Economist

3 CANADA - no curve balls (or bat flips) in economic data Level, Millions. 56,000 54,000 52,000 50,000 48,000 46,000 44,000 42,000 CANADIAN MANUFACTURING SHIPMENTS 40, Source: Statistics Canada Mil of C$ Mil of 2007C$ CANADIAN EXISTING HOME PRICES Year-over-Year % Change Source: Statistics Canada While global financial markets remain fixated on the exact timing of the first Federal Reserve rate hike in over 9 years, Canadians were also on the edge of theirs seats given the nail-biter finish to the ALDS by the Toronto Blue Jays. Releases of Canadian economic data, on the other hand, were far less nerve-wracking. This week s reports had little in the way of surprises, with economic data overwhelmingly in favour of the Bank of Canada keeping rates steady at next week s interest rate announcement. Nominal manufacturing shipments fell 0.2% in August, but the decline largely reflected lower oil prices. Excluding price swings, manufacturing sales volumes, which are a better measure of real economic activity, were basically flat and remain on track to post a 1.5% gain during the third quarter overall. This performance helps support the notion that strengthening U.S. demand and a lower Canadian dollar is helping to offset some of the negative economic impact from lower oil prices. It also suggests the economy is gradually on the mend, with the economy expected to grow by 2.5% annualized in the third quarter according to our tracking. This is significantly stronger than the 1.5% gain the Bank of Canada was expecting back in July.. he housing data released this week,suggested that the market may be losing some steam, which may help alleviate some of the concern related to keeping rates too low for too long. Existing home sales fell 2.1% in September and were only up 0.7% from year ago levels. Sales in Canada s hottest housing markets have even cooled. Resale activity has fallen for three consecutive months in Toronto and for four of the last five months in Vancouver. Moreover, price pressures moderated somewhat in September, with the average existing home price rising by just 6.2% y/y in September, following six months of near double digit gains. However, on a quality adjusted basis, prices are still growing at a toohot for comfort pace in Toronto and Vancouver. Meanwhile, commodity-dependent markets have weakened considerably over the last few months. Sales are down 34.2% year-overyear in Calgary and 8.3% in Edmonton. While prices have so far held up in Edmonton, the average existing home price was down 3.6% year-over-year in Calgary in September. Home prices are also on a downward trek in Saskatoon (-3.6% y/y) and Regina (-1.7%). Still, as far as monetary policy is concerned, the devil will be in the details, with investors particularly interested in any forecast changes the Bank of Canada may make.while Q3 may outperform the Bank of Canada s expectations, real GDP growth is expected to disappoint in This week oil prices closed nearly $10 below levels expected by the Bank of Canada at the time of the last Monetary Policy report. Moreover, market volatility has picked up on concerns over a slowing Chinese economy. Rising U.S. demand is still expected to be positive for Canada, but the expansion in the U.S. over the second half of this year is proving to be more modest than expected. As such, we expect the Bank of Canada will likely lower its overall economic forecast. In July, the Bank of Canada was forecasting the Canadian economy to grow by 2.3% in We believe that in light of the recent developments, the forecast will be toned down, closer to the 2.0% TD Economics is currently expecting, providing support to the view the Bank of Canada will be on hold through to mid On a final note, Go Jays Go! Diana Petramala, Economist

4 U.S.: UPCOMING KEY ECONOMIC RELEASES U.S. Housing Starts and Permits September* Release Date: October 20, 2015 August Result: 1126K; Permits 1170K TD Forecast: 1155K; Permits 1160K Consensus: 1142K; Permits 1163K Housing construction activity should regain its footing in September, with starts rebounding at a respectable 2.6% m/m pace to 1155K units. This, however, will mark only the second monthly gain in this indicator since April, and it will bring to an end two consecutive monthly declines in building activity. The modest rebound in starts is broadly consistent with the buoyant tone in the NAHB homebuilders confidence, which has risen to aa cycle high in September. Permits approval activity, however, should slip modestly, falling 0.9% m/m, realigning new residential building intentions with a more sustainable path. Overall, we expect the tone of this report to be broadly constructive, reflecting some stabilization in overall housing sector activity after the relatively sluggish performance in recent months. 1,300 1,200 1,100 1, Thousands of units U.S. HOUSInG STarTS* 600 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 *Seasonally adjusted at annual rates Source: U.S. Census Bureau U.S. Existing Home Sales September* Release Date: October 22, 2015 August Result: 5.31 million TD Forecast: 5.26 million Consensus: 5.36 million 6,000 5,500 U.S. EXISTInG HOME SaLES* Thousands of units Despite the supportive fundamental backdrop, the US housing market recovery appears to have hit some turbulence in recent months. We expect this soft patch to persist with home sales activity expected to post its second consecutive monthly decline, with a 0.9% m/m drop to 5.26M units in September. This will bring the pace of sales to its lowest level since April, underscoring the weakening momentum in this crucial segment of the economy. The decline in activity is broadly consistent with the weak performance in pending home sales activity. However, the recent pullback in sales activity should prove temporary, as the supportive underlying backdrop should provide a key underpinning for housing demand going forward. Favorable supply dynamics and firming demand should remain supportive to price gains, further underscoring the buoyancy in the housing sector. 5,000 4,500 4,000 3,500 3,000 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-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 September* Release Date: October 21, 2015 % TD Forecast: 0.50% 5.0 The renewed global headwinds that have already dented global confidence and international trade will challenge the Bank of Canada s growth narrative. But by virtue of an exceptionally conservative forecast that accompanied the decision in July to cut the overnight rate to 50 basis points, the Bank will have the rare benefit of an upside surprise to warrant keeping the overnight rate unchanged next week. Moreover, the updated forecasts to be released with the October Monetary Policy Report (MPR) will become a more realistic benchmark against which the realization of the risks that shroud the outlook will be compared through the end of the year and into BanK OF CanaDa OvErnIGHT rate Source: Bank of Canada / Haver Analytics Canadian Retail Sales August* Release Date: October 22, 2015 July Result: 0.5% M/M, ex-auto 0.0% M/M TD Forecast: 0.3% M/M, ex-auto 0.0% M/M Consensus: N/A Weaker prices at the pump and a softer month for auto sales correspond to a relatively soft 0.3% m/m increase in August retail sales. When the impact of the auto sector is excluded from the calculation, sales are forecast to have remained unchanged in the month. Lower consumer prices should help to improve retail volumes relative to the nominal figure. The pace of consumer spending is expected to slow in tandem with a weaker performance for the labour market and a cooling in the housing market through the final two quarters of the year M/M % Chg. CanaDIan retail SaLES* Total Ex. Motor Vehicles -2.5 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 *Seasonally Adjusted Source: Statistics Canada / Haver Analytics *Forecast by Rates and FX Strategy Group. For further information, contact TDRates&FXCommoditiesResearch@tdsecurities.com 5

6 Canadian CPI September* Release Date: October 22, 2015 August Result: core 0.2% M/M, all-items 0.0% M/M TD Forecast: core 0.2% M/M, all-items 0.0% M/M Consensus: N/A Lower gasoline price are expected to have exerted a sizable drag on consumer prices, as the all-items nonseasonally adjusted price index is forecast to have remained unchanged in September. The inertia in the monthly price series is expected to translate to just a modest deceleration in headline inflation to 1.2%. Core prices are expected to display more momentum in the month, with the nonseasonally adjusted price series increasing by 0.2% m/m. Core inflation is forecast to have remained unchanged at 2.1%. This print will complete Q3 and headline inflation is expected to have rebounded to 1.2% from the 0.9% pace set in the prior quarter while core inflation will most likely remain at 2.2% for the fourth consecutive quarter. Both of these figures are broadly as the Bank of Canada had forecast Y/Y % Chg. CanaDIan COnSUMEr price InDEX (CpI) Core CPI 0.0 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Source: Statistics Canada / Haver Analytics Headline CPI in July and therefore will not be subject to much of a revision with the release of the October MPR on Wednesday. *Forecast by Rates and FX Strategy Group. For further information, contact TDRates&FXCommoditiesResearch@tdsecurities.com 6

7 release Date recent KEY ECOnOMIC InDICaTOrS: OCTOBEr 12-16, 2015 Economic Indicator/Event Data for period Units Current prior United States Oct 13 NFIB Small Business Optimism Sep Index Oct 14 MBA Mortgage Applications Oct 09 W/W % Chg Oct 14 PPI Ex Food and Energy Sep M/M % Chg Oct 14 PPI Ex Food, Energy, Trade Sep M/M % Chg Oct 14 PPI Final Demand Sep M/M % Chg Oct 14 Retail Sales Advance Sep M/M % Chg R6 Oct 14 Retail Sales Control Group Sep M/M % Chg R6 Oct 14 Retail Sales Ex Auto and Gas Sep M/M % Chg R6 Oct 14 Retail Sales Ex Auto Sep M/M % Chg R6 Oct 14 Business Inventories Aug M/M % Chg Oct 15 Continuing Claims Oct 01 Thsd R5 Oct 15 CPI Ex Food and Energy Sep M/M % Chg Oct 15 CPI Index NSA Sep Index Oct 15 Consumer Price Index Sep M/M % Chg Oct 15 Empire Manufacturing Oct Index Oct 15 Initial Jobless Claims Oct 08 Thsd R6 Oct 15 Bloomberg Consumer Comfort Oct 11 Index Oct 15 Philadelphia Fed Business Outlook Oct Index Oct 16 Capacity Utilization Sep % R5 Oct 16 Industrial Production Sep M/M % Chg R5 Oct 16 Manufacturing (SIC) Production Sep M/M % Chg R5 Oct 16 JOLTS Job Openings Aug Thsd Canada Oct 13 Bloomberg Nanos Confidence Oct 09 Index Oct 15 Teranet/National Bank HPI Sep M/M % Chg Oct 15 Existing Home Sales Sep M/M % Chg Oct 16 International Securities Transactions Aug CAD, Blns R5 Oct 16 Manufacturing Sales Aug M/M % Chg International Oct 13 UK Consumer Price Index Sep Y/Y % Chg Oct 13 JN Producer Price Index Sep Y/Y % Chg Oct 14 FR Consumer Price Index Sep Y/Y % Chg Oct 14 UK ILO Unemployment Rate 3Mths Aug % Oct 14 AU Unemployment Rate Sep % Source: Bloomberg, TD Economics. 7

8 release Date UpCOMInG ECOnOMIC releases and EvEnTS: OCTOBEr 19-23, 2015 Time* Economic Indicator/Event Data for period Units Consensus Forecast Last period United States Oct 19 10:00 NAHB Housing Market Index Oct Index Oct 20 8:30 Building Permits Sep Thsd Oct 20 8:30 Building Permits Sep M/M % Chg Oct 20 8:30 Housing Starts Sep Thsd Oct 20 8:30 Housing Starts Sep M/M % Chg Oct 20 9:00 Fed's Dudley, Powell Speak at Market Conference in New York Oct 21 7:00 MBA Mortgage Applications Oct 16 W/W % Chg Oct 22 8:30 Chicago Fed Nat Activity Index Sep Index Oct 22 8:30 Continuing Claims Oct 10 Thsd Oct 22 8:30 Initial Jobless Claims Oct 17 Thsd Oct 22 9:00 FHFA House Price Index Aug M/M % Chg. 0.6 Oct 22 9:45 Bloomberg Consumer Comfort Oct 18 Index Oct 22 10:00 Existing Home Sales Sep Mlns Oct 22 10:00 Existing Home Sales Sep M/M % Chg Oct 22 10:00 Leading Index Sep Index Oct 22 11:00 Kansas City Fed Manf. Activity Oct Index Oct 23 9:45 Markit US Manufacturing PMI Oct P Index Canada Oct 19 10:00 Bloomberg Nanos Confidence Oct 16 Index Oct 20 8:30 Wholesale Trade Sales Aug M/M % Chg Oct 21 10:00 Bank of Canada Rate Decision Oct 21 % Oct 21 10:00 Bank of Canada Releases Monetary Policy Report Oct 22 8:30 Retail Sales Ex Auto Aug M/M % Chg Oct 22 8:30 Retail Sales Aug M/M % Chg Oct 23 8:30 CPI Core Sep M/M % Chg Oct 23 8:30 CPI Core SA Sep M/M % Chg Oct 23 8:30 Consumer Price Index SA Sep M/M % Chg. 0.0 International Oct 20 2:00 GE Producer Price Index Sep Y/Y % Chg Oct 20 4:00 EC ECB Current Account SA Aug EUR, Blns Oct 20 19:50 JN Trade Balance Sep YEN, Blns Oct 22 7:45 EC ECB Marginal Lending Facility Oct 22 % Oct 22 7:45 EC ECB Deposit Facility Rate Oct 22 % Oct 22 7:45 EC ECB Main Refinancing Rate Oct 22 % * Eastern Standard Time. Source: Bloomberg, TD Economics. October Internal 16,

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