Tensions in the United States Affect Stock Markets

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1 WEEKLY NEWSLETTER Tensions in the United States Affect Stock Markets # BEST OVERALL FORECASTER - HIGHLIGHTS ff United States: Retail sales blast past expectations. ff Slight drop in U.S. manufacturing output. ff United States: Housing starts suffer a surprising downturn. ff Consumer confidence improved in according to the University of Michigan index. ff Canada: Total annual inflation rate rose to %. ff Canada: The decrease in existing home sales continued in. A LOOK AHEAD ff An increase in home resales in the United States is expected. ff United States: After rebounding in, new aviation orders are expected to pull back in. ff Canada: Wholesale and retail sales are expected to continue their climb, but at a more moderate pace. FINANCIAL MARKETS ff Donald Trump s latest mess irritates investors. ff The Federal Reserve continues to keep an eye on low inflation. ff The U.S. dollar struggles to regain value. 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 Mathieu D Anjou, Senior Economist Benoit P. Durocher, Senior Economist Francis Généreux, Senior Economist Jimmy Jean, 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 207, Group. All rights reserved.

2 Key Statistics of the Week ff Retail sales were up % in, after a % increase in (upgraded from -%). Automobiles sales jumped % and the value of service-station sales declined by %. Excluding automobiles and gas, sales advanced by % in after growth of % in (upgraded from -0.%). Besides automobiles, renovation centres, nonstore retailers, department stores and stores in the miscellaneous category all recorded noteworthy gains. Along with service stations, only electronics stores and clothing stores posted declines. ff The consumer price index (CPI) remained unchanged in. The total annual inflation rate went from % to %. Seasonally adjusted total CPI advanced % in, which represents an acceleration compared with very weak results in recent months. If this turnaround continues in the coming months, it would dispel doubts about weak inflation. The slight rise in the core indexes is also a step in the right direction in this regard. ff Industrial output increased % in following s % advance. Of particular note is the 0.% decline in manufacturing, which was largely caused by a 3.6% dip in the automotive sector; the fourth retreat in five months. The monthly change in energy production counterbalanced this decrease by gaining.6%. Activity in the mining sector rose %. ff Regional manufacturing indexes maintained good levels in. The Philadelphia Fed s index declined slightly from 9.5 to 8.9. The New York Fed s Empire index shot up from 9.8 to 25.2, its highest level since September 204. ff Housing starts fell 4.8% in after jumping 7.4% in. The annualized level decreased from,23,000 units in to,55,000 in. The retreat primarily stems from multiunit housing, where housing starts plunged 7.%. The new construction of single-family dwellings only fell %. Construction permits were down 4. %, also because of multi-unit housing. (-2.%). ff Sales of existing homes fell 2.% in. This is the fourth consecutive monthly retreat. The decrease is especially evident in Ontario, as the Toronto market continues to adapt to the restrictive measures introduced by the Ontario government in the spring. The average price of an existing home also fell % in. The annual change slipped into negative territory, a first since February 203. ff Manufacturing sales were down.8% in, a performance that is slightly below expectations. The drop in the energy sector was bigger than expected, and the anticipated rebound in the aeronautics sector did not materialize. In addition, many other sectors experienced a drop such that sales, excluding automobiles, energy, and aeronautics, declined.% in, a performance that was sharply weaker than that of previous months. In real terms, sales were down %. Inventories, however, were up %, thereby softening the negative impact of lower sales on s economic growth. Benoit P. Durocher, Senior economist ff The leading indicator edged up % in, following a % gain in. The primary positive contributors were the gap in interest rates, the ISM index, and consumer confidence. However, the drop in building permits was a significant drain. ff For the first time since, the University of Michigan consumer confidence index rose in, according to the preliminary version. It went from 93.4 to 97.6, its highest level since January 207. Total inflation remains in the lower end of the target range Total consumer price index Annual variation in % 3.0 Francis Généreux, Senior economist Sources: Statistics Canada and, Economic Studies 2

3 Financial Markets Donald Trump Loses Support and Investors Lose Confidence The tensions between North Korea and the United States soured the mood of investors last week, but the moderate discourse adopted over the weekend led to gains on Monday morning. The S&P 500 remained flat until the middle of the week. However, on Thursday, it recorded its second-worst session of the year, losing %. Donald Trump s highly criticized response to last weekend s violence caused a series of defections among the business leaders serving as advisors on different economic councils. Some of these councils were disbanded following these defections. Added to this were the terrorist attacks in Barcelona, which caused a surge in risk aversion. The climate remained tense Friday morning, and the U.S. stock market headed for a loss of % for the week. The Canadian stock market also struggled, notably given oil price weakness. GRAPH Stock markets Index Index 5,300 2,480 5,250 5,200 2,460 5,50 2,440 5,00 5,050 2,420 5,000 4,950 2,400 4, /07/06 207/07/4 207/07/24 207/08/0 207/08/09 207/08/7 S&P 500 (left) S&P/TSX (right) Sources: Datastream and, Economic Studies For bond markets, it was a two-faceted week. Yields rebounded during the first half of the week with the help of the more positive turn the North Korean situation took. The 0 year U.S. yield reached 8% on Wednesday from 2.9% on Monday, just prior to the minutes of the Federal Reserve (Fed) being released. Officials indicated that the Fed would soon begin reducing its balance sheet, but they remained somewhat puzzled by the low rate of inflation and, consequently, the pursuit of the rate normalization. The markets reacted more to this last point. Spreads between Canadian and U.S. yields were fairly volatile, but the 2 year yield was on its way to ending the week with a weekly decrease. The rebound in core inflation particularly reinforced the assumption that there would be a new hike in Canadian key interest rates this fall. The U.S. dollar made some gains against several currencies at the beginning of the week, largely helped by the positive retail numbers announced on Tuesday. Nonetheless, the momentum was short-lived, given the uncertainty expressed by Fed officials. The attacks in Catalonia weighed briefly on the euro, which was on its way to closing the week at US$.75, a weekly decrease of %. The Canadian dollar approached the US$00 mark. After consolidating on Thursday, it rose again on Friday following the release of inflation data. Oil was of little help to the loonie this week, as the price of a barrel of oil briefly dropped below US$47 in New York. GRAPH 2 Bond markets 0-year yield In % points -0. In % /07/ /07/4 Spread (left) 207/07/24 207/08/0 United States (right) 207/08/09 207/08/7 Canada (right) Sources: Datastream and, Economic Studies GRAPH 3 Currency markets US$/C$ US$/ Jimmy Jean, CFA, Senior economist Hendrix Vachon, Senior economist /07/ /07/4 207/07/24 207/08/0 Canadian dollar (left) 207/08/09 207/08/7 Euro (right) Sources: Datastream and, Economic Studies 3

4 A Look Ahead WEDNESDAY 23-0:00 ann. rate 60,000 60,000 60,000 New home sales () After dropping in April, sales of single-family dwellings rose in and. However, no increase is expected in. The current purchases of single-family dwellings component of the NAHB home builders confidence index declined slightly last month, while construction permits for single-family dwellings stagnated in. The same thing is expected with respect to sales, which are projected to remain in the area of 60,000 units. THURSDAY 24-0:00 ann. rate 5,560,000 5,580,000 5,520,000 Existing home sales () Since the fall of 206, home resales have seesawed following a series of monthly increases and decreases. Sales fell by.8% in, but were expected to rise in, as suggested by the % increase in pending home sales. The rise in mortgage applications in view of a purchase in is another positive sign for sales. Overall, an increase of 5,580,000 units is projected. FRIDAY 25 - Durable goods orders () A 3.% monthly leap in orders relating to civil aviation significantly underpinned the growth in new orders for durable goods in. Orders rose by 6.4%, their strongest increase since 204. However, a significant pullback is expected as early as. Orders for aircraft fell considerably according to figures from Boeing. In addition, the motor vehicle sector may post a decline. Even a rise in orders for durable goods, excluding transportation, will not save the day. These orders are expected to increase by approximately %, based on the ISM index and on machinery production. Total orders are expected to drop 7.%. m/m -5.9% -7.% 6.4% MONDAY 2 - m/m -% % % Wholesale sales () The trend for wholesale sales has been very positive since last October, with average monthly increases of.%. It should be noted that household consumer spending is fairly strong, which is driving wholesaling. That being said, the upward trend in sales could slow down significantly in because of major export decreases in several economic sectors. TUESDAY 22 - m/m 02% % % Retail sales () The conditions remain very positive for retailing, with significant growth in the labour market and a fairly high level of consumer confidence. Moreover, some of the preliminary data show that sales of new motor vehicles continued to experience strong growth in. On the other hand, the monthly change in retail sales for could be affected by a significant decline in servicestation sales. After seasonal adjustments, gasoline prices recorded a 6.7% drop in, thereby decreasing the value of service-station sales. OVERSEAS WEDNESDAY : PMI indexes () After posting several notable monthly increases in the winter and spring, the Euroland PMI indexes stabilized at the start of summer. The composite index went from a recent high of 56.8 in to 56.3 in, then 55.7 in. Nonetheless, this level remains very positive and suggests that growth will continue to be fairly good in the third quarter. All that remains now is to see if s data will reveal a continuing lull or an upturn. Among the other indicators to be released in the euro zone during the week will be the preliminary version of the consumer confidence index on Wednesday, and the German IFO business climate index on Friday. 4

5 Economic Indicators Week of 2 to 25, 207 Day Hour Indicator Period Previous data MONDAY 2 TUESDAY 22 WEDNESDAY 23 9:05 0:00 Speech of the Dallas Fed President, R. Kaplan New home sales (ann. rate) 0:00 Initial unemployment claims Existing home sales (ann. rate) 0:00 Durable goods orders (m/m) Speech of the Federal Reserve Chairman, J. Yellen Wholesale sales (m/m) Wholesale inventories (m/m) 60,000 60,000 60, ,000 5,560, ,000 5,580, ,000 5,520, % -7.% 6.4% -% n/a % % % % % 0.% % % % -0.% THURSDAY 24 Aug. 4-8 FRIDAY 25 MONDAY 2 TUESDAY 22 Retail sales Total (m/m) Excluding automobiles (m/m) WEDNESDAY 23 THURSDAY 24 FRIDAY 25 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 2 to 25, 207 Country Hour Indicator Period m/m (q/q) y/y Previous data m/m (q/q) y/y OVERSEAS MONDAY 2 0:30 All industry activity index TUESDAY 22 5:00 5:00 WEDNESDAY 23 % -% ZEW survey Current situation ZEW survey Expectations :00 3:00 3:00 3:30 3:30 3:30 0:00 PMI composite index preliminary PMI manufacturing index preliminary PMI services index preliminary PMI composite index preliminary PMI manufacturing index preliminary PMI services index preliminary PMI composite index preliminary PMI manufacturing index preliminary PMI services index preliminary Consumer confidence preliminary THURSDAY 24 United Kingdom United Kingdom :00 :00 2:45 4:30 4:30 9:30 9:30 Leading indicator final Coincident indicator final Production outlook Index of services Real GDP preliminary Consumer price index Consumer price index Tokyo n/a 06.3 n/a 7.2 n/a 2 % % Q2 %.7% % % % FRIDAY 25 2:00 2:45 Real GDP final Consumer confidence IFO survey Business climate IFO survey Current situation IFO survey Expectations Q2 % 2.% % % % 0.% 2.% 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 ,0,840 2, ,292-2,84 2,799 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 ($B) Housing starts (k) * VARIATION (%) LEVEL month -3 months -6 months - year * 2.,850 2,794 3, , * 378, * * * * ,08 245,795,869, , , , ,223 Building permits (k) *,223,275,228,300,75 New home sales (k) ,520 5,620 5,700 5,50 5,480-43,642-46,39-45,283-44,607-43,835 Nonfarm employment (k)2 46, ,074 2,58 Unemployment rate (%) Consumer price ( = 00) Existing home sales (k) Commercial surplus ($M) Excluding food and energy Excluding food and energy Producer price (2009 = 00) Export prices (2000 = 00) Import prices (2000 = 00) * * Personal cons. expenditure deflator (2009 = 00) 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),829,325,048, ,974 30,369 63,843 2, , ,982,806, , , , , , ,207 Production capacity utilization rate (%) Disposable personal income ($M) Corporate net operating surplus (2007 $M) 83.3,90,580 27, 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,733, ,485 53, ,062 48, , ,64-3,602 -, ,990 46,53 50, , * , * * , * 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) Aug. 8 Aug. - 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) ,423 2,687, ,44 2,858, ,473 2,580, ,382 20,805, ,35 20,624, ,84 8,553, ,48 22,8, ,307 20,06, ,085 7,888, 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 -0 Treasury bill 3 months -7 Treasury bonds 2 years -7 Treasury bonds 5 years -8 Treasury bonds 0 years -2 Treasury bonds 30 years S&P/TSX index (level) Exchange rate (C$/US$) Exchange rate (C$/ ) 4, , , , , , , , , Overseas ECB Refinancing rate Exchange rate (US$/ ) United Kingdom BoE Base rate Bonds 0 years FTSE index (level) Exchange rate (US$/ ) 8 7, , , , , , , , , Bonds 0 years DAX index (level) 2,35 2,04 4 2, ,639 0,757 0, ,889 4, ,259 BoJ Overnight rate Nikkei index (level) Exchange rate (US$/ ) 9, , ,00.3 9,59 8 9, , , , ,252 0 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