Financial Market Turmoil and the Real Economy.

Transcription

1 June 9, 2010 The Canadian Scene: o With a V-Shaped Recovery in Employment LBS Economic Research Carlos Leitao Chief Economist leitaoc@lb-securities.ca Sébastien Lavoie Assistant Chief Economist lavoies@lb-securities.ca Marie-Claude Guillotte Economist guillottemc@lb-securities.ca Emir Coskun coskune@lb-securities.ca o o And in Real GDP. What Does the Bank of Have in Store for us? Financial Market Turmoil and the Real Economy. Subscription: Martine Bérubé berubem@lb-securities.ca Stéphanie Fortin fortins@lb-securities.ca

2 Marie-Claude Guillotte Economist The Monitor The Canadian Scene With a V-Shaped Recovery in Employment Nearly 25,000 jobs were created in during May, a fifth straight increase. The strong performance comes on the heels of April s spectacular 109,000-job surge. Employment is now only 0.6 % (107,600 posts) away from its October 2008 peak. The unemployment rate was unchanged at 8.1%. Besides strong job creation, labour market conditions showed several other signs of strength: Full-time employment increased by 67,000 jobs in May, while part-time employment shrank. In all, since the job market recovery began back in July 2009, 98% of all jobs created were full-time posts. The private sector, which has been particularly active in creating jobs since the recovery began, added another 43,400 posts during May. Furthermore increasing numbers of selfemployed workers are leaving their position and opting for the security of private- or public-sector employment. The job market s strength during recent months has enticed increasing numbers of discouraged workers to start looking for work again. Since March, active labor force participation has been on the upswing : Private Sector Employment (left scale, in 000s) : Full-Time Employment (right scale, in 000s) Sources: Statistics /Haver Analytics : Participation Rate (%) : Unemployment Rate (%) And in Real GDP Real GDP growth came in at a surprisingly strong 6.1% (annualized quarterly growth) during the first quarter of 2010, following solid 4.9% increase during the last quarter of Much of the strength during the first three months of this year is related to strong household consumption, which added 2.8 percentage points to GDP growth. This increased consumption stems in part from a reduction in the savings rate which fell from 3.5% to 2.8%, while personal disposable income grew by just 2.2%, compared to 3.4% during the previous quarter. Households also boosted their mortgage credit to close to what it was at the end of This explains in large part the strong (+24%) growth in residential construction. That said, Canadian households are in an untenable position and consumption growth will almost certainly have to slow during the coming quarters : Real GDP (q/q % change at annual rate) : Personal Consumption Expenditures (q/q % change at annual rate) Sources: Statistics /Haver Analytics What Does the Bank of Have in Store for us? On June 1 st, the Bank of finally raised its policy rate by 0.25 percentage points to 0.50%, on the heels of the release of highly favorable first quarter GDP numbers. The central bank opted for a prudent normalization process due in part to rising financial uncertainty in Europe. The Bank indicated that recent tensions in Europe are likely to result in higher borrowing costs and more rapid tightening of fiscal policy in some countries. On the other hand, real Canadian GDP could both remain robust and become more balanced, if an anticipated pick-up in business investment takes place. In short, forecasts remain particularly uncertain. As a result, the Bank of noted in its rate-announcement communiqué, that the timing and magnitude of future rate increases will depend both on how the domestic and international economies perform. The recently released labour market and GDP data highlighted above are helping to calm market uncertainties related to the Canadian domestic economy. The strong labour market data in particular is one more reason for the Bank of to continue its interest rate normalization process throughout the summer with 25 basis points rate hikes in July and September Sources: Statistics /Haver Analytics

3 Financial Market Turmoil and the Real Economy Last week, financial markets were particularly volatile reflecting heightened risk aversion triggered by uncertainty about the Eurozone s public debt burden. On Friday, these concerns were compounded by what was perceived to be an ugly U.S. employment report. However, in our opinion these concerns are manifestly overblown. First of all, the U.S. non-farm payrolls report was not ugly! Private sector employment did increase by a very modest 41K in May rather than the expected 150K-to-180K, or the 218K of April. However, the statistical relevance of such minor differences is highly debatable. Furthermore, from a macro economic point of view, the total number of people at work is less important than the total income generated by those at work. And, on that front, the information released last Friday was rather upbeat: the payrolls index was up 0.6% in May or 2.9% on a year-over-year basis; the payrolls index is an excellent proxy for labour income as it takes the total number of people at work in the private sector and multiplies it by the average wage and the average workweek. In fact, based on labour market data for April and May and the most recent ISM reports, US real GDP growth is expected to accelerate in Q to 3.5%-to-4.0%, from 3% in Q1. In particular, the employment and new orders components of the Services and Manufacturing ISM reports remain elevated and continue to signal strong overall economic growth ahead; this is hardly the picture of an economy about to roll over into a double-dip recession... Secondly, even before the non-farm payrolls report was published last Friday, financial markets were already in an ugly mood given rumors about potential trading difficulties at French bank Société Générale and a rather odd headline out of Hungary about a possible public debt default, both subsequently (and vigorously) denied. Thirdly, commercial banks in Europe, even those short-sighted enough to have lent fragile, peripheral economies vast sums of money, do not face solvency issues. Some may face severe liquidity constraints but that is nothing the European Central Bank cannot handle. In a word, the European bank situation in 2010 is nothing like the U.S. banking crisis of Moreover, financial markets continue to underestimate the extent to which the ECB is willing to go to stabilize the region s banking system. Ultimately, if the ECB judges it needs to adopt quantitative easing measures, it will not hesitate to do so. For the time being, that is not being contemplated largely because the economic outlook for core Europe (France, Germany and Holland) in 2011 is still relatively robust with real GDP growth expected to accelerate into the 3% range. Finally, as highlighted above, the Canadian employment report also released last Friday was unambiguously positive and in no way correlates with the 242 point drop in the TSX, especially the 2.25% decline in the exchange s financial component, neither does it square with the huge 20 basis points drop in 2-year government of bond yields! The bottom line is that we still expect the North American economy to slow in the second semester of this year but in a gradual and orderly manner, not the quasi-catastrophic double-dip markets currently appear to anticipate. The European debt crisis is important but does not constitute a systemic risk. At worst, it will hurt the global recovery and we still believe it will not derail it. Regarding North America, the Euro-turmoil could have an impact via financial markets rather than directly via international trade linkages. Should equity market losses intensify, consumer and business confidence could decline which would contribute to a slower pace of consumption and investment. Payrolls Index: Total private industries -(y/y % change) Source: Bureau of Labor Statistics /Haver Analytics

4 North American Forecasts This Week's Forecasts (%) This Week Next 4 Weeks In 3 Months 3-Month T-Bills Year Bond Year Bond Canadian Dollar (CAN$/US$) Month T-Bills Year Bond Year Bond Yen (Yen/US$) Euro (US$/Euro) /9/2010 Historical Data Forecasts* Q Q Q Q Q Q Q Q Q Q2 Overnight Rate Month Treasury Bills Year Bond Year Bond Year Bond Federal Funds Rate Month Treasury Bills Year Bond Year Bond Year Bond Canadian Dollar (US$/C$) Canadian Dollar (Euro/C$) Euro (US$/Euro) Yen (Yen/US$) Quarter-end data and annual averages June 4th, 2010 Interest-Rate and Exchange-Rate Forecasts 4

5 Market Review: Bonds and Currencies International 3-Month Rates Current Spreads (b.p.) against U.S. Yield Jun week -4 weeks -1 quarter - 1 year Jan U.S UK France #N/A #N/A International Bonds: Benchmark 10-Year Yield Current Spreads (b.p.) against U.S. Yield Jun week -4 weeks -1 quarter - 1 year Jan U.S UK France Germany Greece Portugal Spain Japan Provincial Bonds: Benchmark 10-Year Yield Current Spreads (b.p.) against Yield Jun week -4 weeks -1 quarter - 1 year Jan Alberta British Columbia Prince Edward Island Manitoba New Brunswick Nova Scotia Ontario Quebec Saskatchewan Newfoundland Currencies Currencies Jun week -4 weeks -1 quarter - 1 year Jan (%) (/US$) (US$/) Australia (Australia/US$) U.K. (US$/ ) Japan (US$/Yen) Euro (US$/Euro) Data updated as at: 6/9/2010 5

6 Market Review: Fixed Income Charts % U.S. Yield on 3-Month T-Bills % Yield on 10-Year Federal Bonds U.S Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 % Yield Curve 04-Jun-10-1 month -1 year 3m 6m 2y 5y 10y % U.S. - Yield Curve 04-Jun-10-1 month -1 year 3m 6m 2y 5y 10y 30y Yield Spreads in basis points ( minus U.S.) 04-Jun-10-1 month -1 year Spreads on 2-Year Federal Bonds (Can-U.S., base pts) m 6m 2y 5y 10y Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 6

7 Market Review: Stocks Exchange and Commodities Stock Market Summary Level Change (%) Jun w HI 52w LOW (-1W) (-4W) (-13W) (-52W) Jan S&P/TSX 11,570 12,281 9, S&P/TSX S&P/TSX Small Cap Index S&P 500 1,065 1, Dow Jones 9,932 11,205 8, Nasdaq 2,219 2,530 1, International U.K. - FTSE 100 5,126 5,825 4, Germany - DAX 5,939 6,332 4, France - CAC 40 3,456 4,066 2, Japan - Nikkei 225 9,901 11,339 9, Hong Kong - Hang Seng 19,780 22,944 17, Russia - RST 1,384 1, Australia - ASX All Ordinaries 4,472 5,024 3, Brazil - Bovespa 61,676 71,785 48, S&P/TSX Sector Summary Level Change (%) Jun w HI 52w LOW (-1W) (-4W) (-13W) (-52W) Jan S&P/TSX 11,570 12,281 9, Energy Materials Industrials Consumers Discretionary Consumers Staples Health Care Financials Information Technology Telecommunication Services Utilities Commodities Level Jun w HI 52w LOW (-1W) (-4W) (-13W) (-52W) Jan London -- Gold (US$/once) London -- Silver (US$/once) Copper (US$/LB) WTI Crude Oil (US$/barrel) Natural Gas (Henry Hub) (US$/MMBTU) Data updated as at: 6/9/2010 7

8 Calendar of Major Economic Indicators KEY ECONOMIC INDICATORS WEEK OF JUNE 7, 2010 Date Time Release Unit Data for: LBS * Consensus Previous Jun 8 8:15 Housing Starts Thousands May Jun 10 8:30 New Housing Price Index April - 0.3% 0.3% Jun 10 8:30 International Merchandise Trade Billions April Jun 11 8:30 Capacity Utilisation Rate - 1Q * Laurentian Bank Securities Forecast Consensus from Bloomberg L.P. Date Time Release Unit Data for: LBS* Consensus Previous Jun 7 15:00 Consumer Credit Billions April - -$1.0 $2.0 Jun 9 10:00 Wholesale Inventories M/M April - 0.6% 0.4% Jun 9 14:00 Fed's Beige Book Jun 10 8:30 Trade Balance Billions April - -$41.0 -$40.4 Jun 10 8:30 Initial Jobless Claims Thousands Jun Jun 11 8:30 Advance Retail Sales M/M May - 0.2% 0.4% Jun 11 8:30 Retail Sales Less Autos M/M May - 0.1% 0.4% Jun 11 9:55 U. of Michigan Confidence - Jun. P Jun 11 10:00 Business Inventories M/M April - 0.5% 0.4% 04/06/2010 8

9 North American Economic Indicators Period Monthly Chg. (% or Level) Cumulative change Current Previous - 3 Month - 1 Year Gross Domestic Product (GDP) March 0.6% 0.2% 1.5% 3.1% Manufacturing Shipments March 1.2% 0.0% 2.8% 10.2% Housing Starts ( ' 000) * April Retail Sales March #N/A #N/A #N/A #N/A Trade Balance (M$) * March 254 1, ,381 Employment ( ' 000) * * May Unemployment Rate * May Wages (avg. hourly earnings) May 2.4% 2.0% 1.8% 3.5% Total CPI inflation April 1.9% 1.6% 1.9% -0.3% Inflation ex-food & energy April 1.9% 1.8% 2.1% 2.0% Industrial Product Price Index April 0.3% -0.4% 0.0% -0.4% Raw Materials Price Index April 1.7% 0.8% 2.9% 17.3% Period Monthly Chg. (% or Level) Cumulative change Current Previous - 3 Month - 1 Year ISM - manufacturing * April ISM - Non-manufacturing * April Industrial Production * April Capacity Utilization Rate * April Consumer Confidence Index * May Retail Sales April 0.4% 2.1% 3.2% 8.8% Trade Balance (M$) * March -40,423-39,427-39,902-28,440 Housing Starts ( ' 000) * April Existing home sales April 7.6% 7.0% 14.3% 22.8% Median price of ex. home sales April 2.1% 3.0% 5.0% 4.0% Non-Farm Payrolls ( ' 000) * * April Unemployment Rate * April Wages (avg. hourly earnings) April 2.3% 2.1% 2.6% 3.3% Total CPI inflation April 2.2% 2.4% 2.8% -0.6% Inflation ex-food & energy April 1.0% 1.2% 1.5% 1.9% Producer Price Index April -0.1% 0.7% 0.0% 5.4% - Ex-Food & Energy April 0.2% 0.1% 0.3% 1.0% * Level * * Change in level for the last month, 3 months and 1 year * * * Annual % change Data updated as at: 07/06/2010 9

10 North American Forecasts Period-Over-Period Annualized Per Cent Change Unless Otherwise Indicated Annual Average 4th Qtr/4th Qtr 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q Real GDP (%) Consumption Private investment Machinery and equipment Residential construction Government spending Exports Imports Inflation (%) Total (y/y) Core (y/y) Unemployment rate (%)* Housing Starts (000s) Before-tax Corp. profits (%, y/y) * Average rate for the quarter or the year. Forecasts as of June 1st, 2010 This document is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author is an employee of Laurentian Bank Securities (LBS), a wholly owned subsidiary of the Laurentian Bank of. The author has taken all usual and reasonable precautions to determine that the information contained in this document has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze it are based on accepted practices and principles. However, the market forces underlying investment value are subject to evolve suddenly and dramatically. Consequently, neither the author nor LBS can make any warranty as to the accuracy or completeness of information, analysis or views contained in this document or their usefulness or suitability in any particular circumstance. You should not make any investment or undertake any portfolio assessment or other transaction on the basis of this document, but should first consult your Investment Advisor, who can assess the relevant factors of any proposed investment or transaction. LBS and the author accept no liability of whatsoever kind for any damages incurred as a result of the use of this document or of its contents in contravention of this notice. This report, the information, opinions or conclusions, in whole or in part, may not be reproduced, distributed, published or referred to in any manner whatsoever without in each case the prior express written consent of Laurentian Bank Securities. 10