Disappointing Start of the Year for Canada s Economy

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1 WEEKLY NEWSLETTER Disappointing Start of the Year for Canada s Economy # BEST OVERALL FORECASTER - HIGHLIGHTS ff U.S. real GDP in Q4 207 was upgraded. ff United States: Real consumption stagnated in. ff Canada: Real GDP by industry fell slightly in January. A LOOK AHEAD ff United States: More modest job creation is expected. ff Canada: The trade balance could remain virtually unchanged in. ff Canada: The employment uptrend should continue in. FINANCIAL MARKETS ff The markets closely followed U.S. China trade relations. ff Investors seek refuge in the bond markets in the wake of renewed fears of protectionism. ff The U.S. dollar recovered last week s losses. 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... 5 Tables Economic indicators... 7 Major financial indicators... 9 François Dupuis, Vice-President and Chief Economist Carine Bergevin-Chammah, Economist Mathieu D Anjou, Senior Economist Benoit P. Durocher, Senior Economist Francis Généreux, 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 208, Group. All rights reserved.

2 Key Statistics of the Week ff After a % pullback in January, real consumption stagnated in. A % increase in durable goods was offset by a 0.3% decrease in non-durable goods and stagnation in services. Real disposable income advanced % following January s % gain due to the tax cuts. The savings rate continued to climb, from 2.4% in December to 3.2% in January and 3.4% in. The monthly change in prices according to the consumer expenditure deflator was % following % growth in January. In terms of the annual change, the total deflator ticked up from.7% to % and the core deflator, which excludes food and energy, stayed put at %. ff Real GDP by industry decreased % in January, while most forecasters expected a slight increase. Much of the decrease comes from the mining and oil and gas extraction sector. Excluding this sector, January would have ended with a gain of about %. The 0.8% drop in mining, but especially the 3.6% decline in oil and gas extraction, had a major impact on the change in real GDP in January. Moreover, the 7.% drop in nonconventional oil extraction is apparently due to unscheduled temporary shutdowns for the maintenance of some facilities. Under these circumstances, one can hope that a return to normal will soon lead to a rebound in production. The real estate services sector also hit some bumps in January with a monthly decrease of % in real estate agent and broker offices and activities related to real estate. The cooling of the housing market since the start of 208 is clearly behind this poor performance. ff The final estimate of the national accounts for the fourth quarter of 207 pegged annualized quarterly growth at %. This is higher than the % gain shown in the preliminary estimate. The revision stems mainly from higher growth in business inventories and in consumption. ff After reaching a cyclical peak in, the Conference Board consumer confidence index declined in, slipping from 30.0 its highest level since November 2000 to 27.7, which is still very high. The drop stems in most part from the consumer expectations component (-3.0 points) than the current situation component (-.3 points). ff The industrial product price index rose by % in, in line with our expectations. Prices for energy products declined by % for the month. Prices for other products were up 0.3%. The raw materials price index was down 0.3% in, after rising 3.4% in January. Benoit P. Durocher, Senior economist ff The S&P/Case-Shiller index of existing home prices in the 20 largest cities posted a monthly change of 0.8% in January. The index s annual change went from 6.3% to 6.4%. Francis Généreux, Senior economist The mining and oil and gas extraction sector contributed negatively to real GDP in January Contributions to the monthly change in real GDP by industry January 208 Agriculture, forestry, hunting and fishing Mining, oil and gas Utilities Construction Manufacturing Trade Transportation and warehousing Information technologies Finance, insurance and real estate Professional and technical services Administrative services Education Health care Arts, entertainment and recreation Accommodation and food services Public administrations Other Goods-producing sectors Service-producing sectors In % Sources: Statistics Canada and, Economic Studies 2

3 Financial Markets Major Technology Corporations Remain Under Pressure News about U.S. China trade relations guided the markets this week. Tensions between the two countries appear to have abated during the past week as negotiations have begun. The U.S. stock market was up during Monday s trading session, but shifted direction on Tuesday when Donald Trump indicated that he might block certain Chinese investments in the United States over national security concerns, particularly in the technology sector. Fears of tighter regulation of major technology firms such as Facebook, Tesla, Amazon and Apple also penalized the stock market. Despite these difficulties, the S&P 500 was headed for a weekly gain of more than % on Friday. The Canadian stock market followed the trend, but with a smaller gain. The U.S. long-term bond yield was down compared with last week, as investors turned toward more secure assets. The 0 year yield lost more than 5 basis points on Tuesday. It was around 2.75% at the time of writing. The 2 year yield seesawed before settling down at close to 5%. The trend in U.S. yields and fears of a trade war significantly weakened Canadian yields. The 2 year bond yield was close to 0% on Friday morning, while the 0 year yield lost around 0 basis points compared with last week, before settling in at close to 2.00%. The U.S. dollar saw a decline at the start of the week, but the trend had reversed as of Tuesday. The best session came in on Wednesday, which allowed most of the previous week s losses to be recovered. The U.S. dollar benefited from the release of good economic data in the United States. The euro reached close to US$5 on Monday in tandem with the greenback s general weakness. The common currency fell back to around US$3, however. The release of lower confidence indexes in Europe contributed to the euro s decline. The yen benefited from a safehaven effect last week. This has subsequently waned and s exchange rate is back over 06/US$. The Canadian dollar showed some strength at the start of the week, then settled around US$75. GRAPH Stock markets Index Index 2,825 5,750 2,775 5,650 5,550 2,725 5,450 2,675 5,350 2,625 5,250 2,575 5,50 208/02/4 208/02/22 208/03/02 208/03/2 208/03/20 208/03/28 S&P 500 (left) S&P/TSX (right) Sources: Datastream and, Economic Studies GRAPH 2 Bond markets 0-year yield In % points - In % /02/ /02/22 Spread (left) 208/03/02 208/03/2 United States (right) 208/03/20 208/03/28 Canada (right) Sources: Datastream and, Economic Studies GRAPH 3 Currency markets Hendrix Vachon, Senior Economist Carine Bergevin-Chammah, Economist US$/C$ US$/ /02/208 22/02/208 02/03/208 2/03/208 Canadian dollar (left) 20/03/208 28/03/208 Euro (right) Sources: Datastream and, Economic Studies 3

4 A Look Ahead MONDAY April 2-0:00 nd ISM manufacturing index () After slipping slightly in January, the ISM manufacturing index reached a new cyclical peak in. At 60.8, this is the highest level since May A modest decline is expected after this strong showing. In fact, shifts in regional manufacturing indexes point to a pullback. The ISM index should fall to WEDNESDAY April 4-0: ISM non-manufacturing index () The ISM non-manufacturing index dipped in, from 59.9 in January to 59.5 still very high. A drop is expected in, as some other indexes in the services industry suggest. The decline in the Conference Board confidence index in is also consistent with this view. FRIDAY April 6-85,000 70,000 33,000 Job creation according to the establishment survey () saw the best monthly job creation since July 206. What s more, the 33,000 new jobs follow the strong showing of 239,000 jobs in January. Weaker growth is expected in primarily due to the usual volatility in job data. Initial jobless claims were also higher in than in. The multiple snowstorms that hammered New England may also pull down the results. The release of the ISM and ADP indexes will help shape the forecast. We expect 70,000 new positions. The jobless rate for should hold steady at 4.%. After ticking up % in, the monthly change in average hourly wages should ramp up to 0.3%. FRIDAY April 6 - January US$B Consumer credit () Consumer credit decelerated once again in January. The monthly change reached US$3.9B, the weakest since September. A modest acceleration is expected for. That is the message we are getting from weekly data on bank loans. The monthly change in consumer credit should reach US$6.50B. THURSDAY April 5 - January FRIDAY April 6 - $B ,000 22,000 5,400 International merchandise trade () Seasonally adjusted and expressed in Canadian dollars, energy prices were down 4.2% in ; this will have a negative impact on the value of exports. Prices for other commodities were up %, however. In addition, U.S. data point to a production increase in the automobile sector in, suggesting that Canadian exports for this industry will rise significantly. All told, exports are expected to come in slightly above % in. Strong domestic demand for the month should drive up imports as well. As a result, the trade balance could remain virtually unchanged. Labour Force Survey () Labour should maintain its uptrend in, with about 22,000 new jobs. This would allow the six-month moving average to stay close to 20,000, a level that is consistent with recent data on output. The unemployment rate could stay put at 5.8%. OVERSEAS THURSDAY April 5 - January m/m 0.3% -% : Retail sales () Retail sales started 208 with a % decline in January. This dip follows a steeper.0% drop in December. This also reflects the modest deterioration in consumer confidence in the last few months. French data, on Friday, 30, and German data, on Tuesday, will provide more information on changes in retail sales in the euro zone for. s unemployment rate will be released on Tuesday and the final versions of the PMI indexes for will also be out. 4

5 Economic Indicators Week of April 2nd to 6, 208 Day Hour Indicator Period Previous data MONDAY 2 0:00 0:00 Construction spending (m/m) ISM manufacturing index 0.3% % % 60.8 Total vehicle sales (ann. rate) 6,90,000 6,900,000 6,960,000 9:45 0:00 0:00 :00 Speech of the St. Louis Fed President, J. Bullard ISM non-manufacturing index Factory orders (m/m) Speech of the Cleveland Fed President, L. Mester % % % 3:00 Initial unemployment claims Trade balance Goods and services (US$B) Speech of the Atlanta Fed President, R. Bostic , , :30 Change in nonfarm payrolls Unemployment rate Weekly worked hours Average weekly earnings (m/m) Speech of the Federal Reserve Chairman, J. Powell Consumer credit (US$B) 85,000 % 34.5 % 70,000 4.% % 33,000 4.% 34.5 % , % 22, % , % 59.6 TUESDAY 3 WEDNESDAY 4 THURSDAY 5 FRIDAY 6 MONDAY 2 TUESDAY 3 WEDNESDAY 4 THURSDAY 5 International trade ($B) 0:00 Net change in employment Unemployment rate PMI-Ivey index FRIDAY 6 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. 5

6 Economic Indicators Week of April 2nd to 6, 208 Country Hour Indicator Period m/m (q/q) y/y Previous data m/m (q/q) y/y OVERSEAS SUNDAY 9:50 20:30 MONDAY 2 Tankan large manufacturers index PMI manufacturing index final Q % 2.4%.50% %.50% TUESDAY 3 Australia Italy --0:30 3:45 3:50 3:55 4:00 4:30 20:30 20:30 Retail sales Reserve Bank of Australia meeting PMI manufacturing index PMI manufacturing index final PMI manufacturing index final PMI manufacturing index final PMI manufacturing index PMI composite index PMI services index April WEDNESDAY 4 Italy 4:00 4:30 Unemployment rate PMI construction index Consumer price index estimate Unemployment rate.0% % % 8.5% 8.6% THURSDAY 5 Italy Italy India 2:00 3:45 3:45 3:50 3:50 3:55 3:55 4:00 4:00 4:30 4:30 Factory orders PMI composite index PMI services index PMI composite index final PMI services index final PMI composite index final PMI services index final PMI composite index final PMI services index final PMI composite index PMI services index Producer price index Retail sales Reserve Bank of India meeting April.5% 6.3% %.5% 0.5% % 6.00% -3.9% % -% 6.00% 8.2% FRIDAY 6 2:00 2:45 2:45 3:30 Industrial production Trade balance ( M) Current account ( B) PMI construction index 0.3% 4.4% -5,33 -% -5, % % %.5% % 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). 6

7 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 ANNUAL VARIATION (%) Quart. ann. year ,286 2,035 2, , ,230 2,884 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 ($B) Housing starts (k) Building permits (k) New home sales (k) Existing home sales (k) Commercial surplus ($M) Nonfarm employment (k)2 Unemployment rate (%) Consumer price ( = 00) Excluding food and energy Personal cons. expenditure deflator (2009 = 00) Excluding food and energy Producer price (2009 = 00) Export prices (2000 = 00) Import prices (2000 = 00) VARIATION (%) LEVEL - month -3 months -6 months - year * * * ,054 2,945 3, , , , ,78,97,236, ,540-56,60 48, ,329, ,380-53, ,299, ,720-49, ,72, ,420-45,385, ,288, ,480-48,692 2, * * 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. 7

8 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),869,857,074,862 36,52 3,385 76,738 3, , ,304,865, , , , , , ,526 Production capacity utilization rate (%) Disposable personal income ($M) Corporate net operating surplus (2007 $M) 86.0,232, , 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 ($M) Wholesale trade sales ($M) Commercial surplus ($M) Exports ($M) Imports ($M) Employment (k)2 Unemployment rate (%) Average weekly earnings ($) 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) VARIATION (%) LEVEL - month -3 months -6 months - year,760,30 376,690 54, ,44 49, , ,286 -,907-3,050 -, , ,839 47, , * * , * * * , * * 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 ,, OVERSEAS Major financial indicators PREVIOUS DATA ACTUAL LAST 52 WEEKS IN % (EXPECTED IF INDICATED) 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) ,633 24,083, ,588 23,533, ,69 24,538, ,674 24,79, ,59 22,405, ,363 20,663, ,873 26,67, ,549 22,90, ,329 20,404, 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 - Treasury bonds 2 years -0.5 Treasury bonds 5 years -2 Treasury bonds 0 years -7 Treasury bonds 30 years S&P/TSX index (level) Exchange rate (C$/US$) Exchange rate (C$/ ) 5, , , , , , , , , Overseas ECB Refinancing rate Exchange rate (US$/ ) BoE Base rate Bonds 0 years FTSE index (level) Exchange rate (US$/ ).35 7, , , , , , , , , Bonds 0 years DAX index (level) 2, ,886 5,94 2 2,98 6 2, ,33 2 3, ,652 8,787 BoJ Main policy rate Nikkei index (level) Exchange rate (US$/ ) 2, , , , , , , , , CRB: Commodity Research Bureau; WTI: West Texas Intermediate; ECB: European Central Bank; BoE: Bank of England; BoJ: Bank of Note: Data taken at markets closing, with the exeption of the current day where they were taken at :00 a.m. 9