Table of Contents. Week in review. What we ll be watching... p. 5 Calendar of upcoming releases... p. 6 Annex Economic tables...

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1 June 1, 2018 Table of Contents What we ll be watching... p. 5 Calendar of upcoming releases... p. 6 Annex Economic tables... A1 Week in review CANADA: Real expanded at an annualized pace of just 1.3% in the first quarter of 2018, well below the 1.8% expected by consensus. Trade was a drag on the economy as imports grew faster than exports. Inventories, for their part, shaved one-tenth of a percentage point from growth. These negative contributions were more than offset by a decent contribution from domestic demand, where increases in government spending, business investment and consumption far outweighed a decline in residential investment. While consumption spending did add to real GDP, its growth was the weakest in three years. This was likely due to moderation in employment creation, which hammered real disposable income in Q1. Fading housing wealth effects amid softening home prices might have borne down on consumer outlays as well. In nominal terms, GDP grew 2.6% for a ninth consecutive quarterly increase. Looking ahead to Q2 we take solace in the good handoff from March, where real GDP grew 0.3% m/m. For 2018 as a whole, we still anticipate real GDP to grow about 2.2%, assuming employment and consumption spending growth bounce back. Canada: Growth slackens further in Q1 8 q/q % chg. saar Real and Nominal GDP Nominal GDP Q1 2016Q3 2017Q1 2017Q3 2018Q1 NBF Economics and Strategy (data via Statistics Canada) Real GDP Contributions to real GDP Q Q GDP Consumption Business Investment Nonprofit Sector Residential Investment Government Final Domestic Demand Exports Imports Trade Inventories Statistical discrepancy Also in Q1, the deficit increased by C$3.0 billion to C$19.5 billion, or roughly 3.5% of GDP. This was due largely to wider deficits on the goods trade and investment income accounts, which dwarfed an improvement in services trade. For the first time in years, the deficit was financed not by short-term portfolio flows, which turned negative as foreigners ditched Canadian securities, particularly federal government bonds, but by foreign direct investments (FDI), which are more stable and hence more desirable. Net FDI inflows turned positive in the quarter for the first time since 2015 thanks to a combination of lower Canadian investment abroad (dragged down by slower M&A activity) and stronger FDI into Canada. Canada: FDI net inflows turned positive for first time since 2015 Foreign direct investment C$ billion NBF Economics and Strategy (data via Statistics Canada) Canadian direct investment abroad (R) Foreign direct investment in Canada (R) Net FDI inflows (L) C$ billion In May, rose 0.7 point to 56.2, indicating the steepest rate of expansion for Canadian factories since April New orders, which piled up at the fastest pace in more than a year supported by strong international demand, were a key driver explaining the upswing of the overall index. Factory output also improved, but failed to keep up with new orders. As a result, order books lengthened significantly. The report also evidenced growing capacity constraints as delivery times increased and input prices surged the most since early May marked the 27 th consecutive month of expansion for the Canadian manufacturing sector. According to the, average weekly hours worked were up 0.3% m/m and 0.9% y/y in March. Average weekly earnings, for their part, were flat on a monthly basis but up 3.1% y/y. As widely expected, the left the overnight rate unchanged at 1.25%. The central bank stated that, because of rising gasoline prices, it now anticipated slightly higher inflation in the near term than it had forecast back in April. While acknowledging the uncertainties surrounding Q

2 trade policy and housing (amid the ongoing adjustment to new mortgage guidelines), the BoC nonetheless affirmed that developments since April further reinforce the Governing Council s view that higher interest rates will be warranted to keep inflation near target. The central bank s statement was conspicuously more upbeat about the economy than prior communications. Among other things, the central bank emphasized expectations that solid labour income growth would support housing activity and consumption going forward. Also noticeable in the statement was the change from a cautious to a gradual approach to policy adjustments. Moreover, the reminder that some monetary policy accommodation will still be needed was removed. In getting rid of several dovish passages in its statement, the Bank of Canada clearly opened the door to a July hike. UNITED STATES: The establishment survey showed rising a consensus-topping 223K in May. Adding to the good news were upward revisions to prior months which added a net 15K to payrolls. The private sector added 218K jobs in the month, buoyed by cyclical sectors like construction and manufacturing. Government, meanwhile, added 4K jobs as gains at the state/local levels more than made up for cuts at the federal level. Average hourly earnings rose 0.3% in the month, pushing the year-on-year print to 2.7%. Released at the same time, the suggested 293K new jobs were created in May as solid gains for full time employment (which reached an all-time high in the month and a decade high as a proportion of total employment) dwarfed losses for part-timers. The massive gains in full-time employment more than made up for a one-tick decline in the participation rate (to 62.7%), allowing the jobless rate to fall to just 3.8%, the lowest since April The two employment reports continued to defy expectations of a moderation in employment creation amidst a reported skills shortage and should give the FOMC the green light to raise interest rates in June. The rose 1.4 points in May to an elevated This was above consensus expectations, which had anticipated a 58.2 print. Several key indicators were up in the month, including production (61.5 from 57.2 the prior month), new orders (63.7 from 61.2), and employment (56.3 from 54.2). Moreover, the price tracker (79.5 vs. 79.3) rose for a sixth consecutive month and reached a level not seen since 2011, a sign of growing price pressure in the manufacturing sector. Capacity pressures also appeared to be building, as suppliers delivery time (62.0 vs. 61.1) expanded considerably in the month. Looking ahead, these capacity constraints may limit growth in factory activity barring more business investment. In the meantime, the uptick in employment should help alleviate some pressure. Nominal increased 0.3% in April. The wage/salary component of income sprang 0.4%, as did disposable income. Nominal, for its part, advanced 0.6% after progressing 0.5% in March. Adjusted for inflation, disposable income grew 0.2% in April while spending rose 0.4%. As a result, the slipped two ticks to 2.8%. Still in April, the headline rose 0.2% m/m and 2.0% y/y (same y/y rate as in March). Concurrently, the core PCE measure advanced 0.2% m/m and 1.8% y/y, which was still slightly below the Fed s 2.0% target. In May, the climbed 2.4 points to 128.0, just 2.0 points shy of its cyclical high reached in February. The rise was due in large part to the present situation sub-index, which jumped 4.2 points to 161.7, its highest level in more than 17 years. The expectations gauge, which tracks consumer expectations for the next six months, rose as well albeit to a lesser degree, gaining 1.3 points to The report also showed households remained upbeat about employment as evidenced by the fact that respondents that deemed jobs plentiful exceeded by 26.6 percentage points those that found jobs hard to come by. This was the widest differential since March Overall, the report showed consumer confidence remained robust in early Q2, a fact that should underpin consumption in the quarter. United States: Consumer confidence boosted by tight labour market Index Conference Board s measures of consumer confidence Consumer assessment of present situation at a cyclical high in May 40 Composite 20 Present situation Expectations NBF Economics and Strategy (data via Datastream) 50 % In April, fell 1.3% m/m in seasonally adjusted terms after increasing 0.6% in March. Year on year, contract signings were up 0.4% on an unadjusted basis. According to the, home prices rose 0.53% in March in seasonally adjusted terms after climbing 0.84% the previous month. Nineteen of the 20 cities covered by the index recorded higher prices, Cleveland (-0.20%) being the sole exception. The monthly price hike was particularly strong in Minneapolis (+1.35%), Seattle (+1.27%) and Las Vegas (+1.27%). On a 12-month unadjusted basis, the 20-city index was up a healthy 6.8% thanks to strong gains in Seattle (+13.0%), Las Vegas (+12.4%), and San Francisco (+11.3%). House price growth in the United States continues Labour differential (jobs plentiful jobs hard to get) thanks in part to plenitude of jobs available 16-year high 2

3 to outstrip wage growth, supported by the tightness of the resale market. But there is a limit to how high prices can go, especially in an environment of rising interest rates. According to Freddie Mac, the average rate for a 30-year mortgage is now at its highest level since United States: Home prices forge ahead despite rising mortgage rates y/y % chg. S&P CoreLogic Case-Shiller 20-City Home Price Index Home prices continue to rise at a healthy annual pace NBF Economics and Strategy (data via Datastream and Freddie Mac) The second estimate of came in at 2.2% in annualized terms, one tick below the advance estimate. There were upgrades to business investment but these were offset by a weaker contribution from inventories. Trade s contribution was also a touch smaller than what had initially been reported. Overall, the quarterly revision does not change our outlook for We still see GDP accelerating strongly in Q2 to about 3.2% and clocking in at 2.8% for the year as a whole. According to the latest edition of the, economic activity increased at a moderate pace in most of the 12 Federal districts in late April and early May, an upgrade from the modest to moderate qualification used in the prior report. In the Dallas district, the pace of activity was even Average 30-year fixed mortgage rate regardless of a rather steep increase in mortgage rates in the country Highest since 2011 Contributions to Q1 real GDP growth % 2nd est. Advance est. GDP Consumption Business Investm. Equip./Intell Business Investm. Struct Residential Investm Government Domestic Demand Exports Imports Trade Final Sales Inventories NBF Economics and Strategy (data via Datastream) described as solid, probably owing to the rebound in energy prices. Manufacturing appeared in particularly good shape with one-third of the districts reporting strong activity in the sector. Consumer spending, however, slackened as auto sales stagnated and ex-auto retail sales progressed at a slower pace than in the Beige Book s previous edition. The general outlook of Fed contacts remained favourable, though international trade policy remained a concern for businesses in several sectors. Employment kept growing despite mounting difficulty finding qualified candidates across a broad array of industries and skill levels. To deal with the labour shortage, U.S. businesses said they were enhancing compensation packages. Still, wage increases were characterized as modest in most Districts. As for price inflation, it was deemed moderate in most regions, although there were reports of sharper price hikes for steel, aluminum, and lumber, all of which were hit by tariffs in the past few months. The rapid rise in the price of oil products was noted as well. WORLD: In the, the flash estimate of the showed prices rose 1.9% y/y in May, seven ticks higher than in April and the most in over a year. While a good chunk of the increase was due to a 6.1% spike in energy prices, there were hints that underlying prices were also moving up. The CPI excluding energy, for instance, rose the most since September 2013, climbing 1.4% on an annual basis, up from 1.1% the prior month. Meanwhile, core inflation, which excludes energy, food, alcohol and tobacco, picked up four ticks to 1.1%. Eurozone: Ex-energy CPI at 56-month high Consumer Price Index y/y % chg NBF Economics and Strategy (data via Statistics Canada) Headline Ex-energy Core In May, the European Commission s retreated for a fifth straight month since hitting a 17-year high in December. The index slid 0.2 point to a ninemonth low of but remained high by historical standards (the long-term average of this indicator stands just above 100). Sinking the index was lower confidence in three sectors: manufacturing (6.8 vs. 7.3 the prior month), services (14.3 vs. 14.7) and consumers (0.2 vs. 0.3). Alternatively, confidence improved in two sectors: retail (0.7 vs. -0.7) and construction 3

4 (7.0 vs. 4.6). At the national level, economic confidence sagged in France (108.4 vs ), Italy (108.4 vs ), and Spain (109.4 vs ) but stayed roughly even in Germany (112.7 vs ). Again in the Eurozone, the seasonally adjusted dipped a tick in April to 8.5%, its lowest mark since December At the national level the jobless rate fell to multi-year lows in Germany (3.4% vs. 3.5% the prior month) and Spain (15.9% vs. 16.1%) but held steady in France (9.2%). In Italy, the rate inched up a tick to 11.2%. Eurozone: Unemployment rate at its lowest since late 2008 Eurozone unemployment rate, seasonally adjusted Unemployment rates in selected countries, seasonally adjusted % % Cyclical peak March % Pre-recession trough = 7.3% NBF Economics and Strategy (data via Datastream) 0 Euro DE FR IT ES In, the stayed put at 2.5% in April, a mere tick above the 25-year low struck in January (2.4%). The number of employed persons in the country slid 10K, but this was offset by a 50K contraction in the size of the labour force. The participation rate rose to 61.7% (not seasonally adjusted), its highest mark since The job-to-applicant ratio was unchanged at a 40-year low of 1.59 as the number of applicants (+0.6%) rose apace of job offers (+0.7%). Japan: Participation rate surged to multi-year high Participation rate, seasonally adjusted % NBF Economics and Strategy (Source: Ministry of Internal Affairs via Datastream) Jocelyn Paquet et al. 4

5 What We ll Be Watching In Canada, May s will attract the most attention. Hiring intentions remained high among Canadian businesses according to the CFIB, hinting at a rebound in job creation after a weak showing in April. However, the lack of qualified candidates the unemployment rate stands at a cyclical low of 5.9% - should put a lid on hiring. All in all, we expect a +15K print, in line with the long term average for this indicator. That result should allow the to remain unchanged at 5.8%, assuming no major changes to the participation rate. In other news, may have totaled 225K in annualized terms in May, in line with the rise observed in building permit issuance. We ll also get data on April s. Both energy and non-energy exports may have expanded in the month, boosted by higher prices. The resulting positive impact on the overall trade balance may have been compounded by a slowdown in the growth rate of imports following a rather large increase in March (+6.0% m/m in nominal terms). All told, the trade deficit may have shrunk to -C$3.3 billion. Finally, both and rate will be available for Q1. Previous NBF forecasts LFS employment (May m/m chg.) -1.1K 15.0K Unemployment rate (May) 5.8% 5.8% Housing starts (May, saar) 214.4K 225.0K Merchandise trade balance (April) -C$4.14B -C$3.3B Canada: Job creation may have resumed its upward trend in May Employment and jobless rate % In the U.S, we ll get a better grasp of Q2 economic activity with the release of April data for,, and the (JOLTS). Elsewhere in the world, we ll get the final estimates of for both the Eurozone and Japan. Also in the Eurozone, April s numbers will be published. In China, May s,, and will be available. 100 m/m chg. thousands Employment (L) Unemployment rate (R) 5.8% M M M M M M05 NBF Economics and Strategy (Source: Statistics Canada via Datastream) NBF Forecast +15 K

6 Economic Calendar Canada & U.S. 6

7 Annex Economic Tables A1

8 Annex Economic Tables A2

9 Annex Economic Tables A3

10 Annex Economic Tables A4

11 Annex Economic Tables A5

12 Annex Economic Tables A6

13 Annex Economic Tables A7

14 Annex Economic Tables A8

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