THE WEEKLY BOTTOM LINE

Transcription

1 THE WEEKLY BOTTOM LINE TD Economics HIGHLIGHTS OF THE WEEK United States Markets continued to price in lofty odds for a Fed hike next week, putting further upward pressure on the 2 year treasury yield which remained near a nine-year high. The U.S. dollar also remained relatively well supported up 0.2% on the week. Meanwhile, equity markets took somewhat of a breather, but the S&P500 only ended the week 0.5% lower. There were few domestic data to sift through this week, until today s highly-anticipated jobs report. The labor market added 235k jobs on the month, with some upward revisions to the prior month. Alongside a decline in the jobless rate, these developments have further cemented the case for a rate hike next week. With a March hike highly-expected at this point, markets are turning attention to what is in pipeline from the Fed. Three hikes this year, alongside global central banks that remain in highly-accommodative mode should continue to support the U.S. dollar and act as a weight on economic growth. Nonetheless, we expect economic growth to remain resilient supported by continued domestic strength. Canada Crude oil prices slipped below the US$50 per barrel mark this week for the first time since the end of November when OPEC countries agreed on production targets. Export volumes were up by a solid 1% in January, but were outpaced by a 2.5% increase in imports. Housing starts hit 210k units in February, bringing the 6-month moving average to 205k units the highest level seen since November This morning s employment report showed a net 15k jobs were created in February, with over 100k new full-time positions added. The unemployment rate edged down by 0.2 ppts to 6.6%. THIS WEEK IN THE MARKETS Current* Week Ago 52-Week High 52-Week Low Stock Market Indexes S&P 500 2,376 2,383 2,396 1,990 S&P/TSX Comp. 15,540 15,609 15,922 13,266 DAX 12,000 12,027 12,067 9,269 FTSE 100 7,363 7,374 7,383 5,924 Nikkei 19,605 19,469 19,605 14,952 Fixed Income Yields U.S. 10-yr Treasury Canada 10-yr Bond Germany 10-yr Bund UK 10-yr Gilt Japan 10-yr Bond Foreign Exchange Cross Rates C$ (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 10:10 am on Friday **Oil-WTI, Cushing, Nat. Gas-Henry Hub, LA (Thursday close price), Copper-LME Grade A, Gold-London Gold Bullion; Source: Bloomberg. WEEKLY MOVES Weekly % change except (*) which denotes change in index 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* Note: Data as of March 10, 11:55 AM. Change from end of business on March 3. 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) 0.00% Bank of England (Repo Rate) 0.25% Bank of Japan (Overnight Rate) -0.10% Source: Central

2 U.S. March fed HIKE almost certain on strong jobs report Following last week s relatively hawkish comments from a number of FOMC members, market participants were waiting to see if domestic data out this week would corroborate the notion that the economy is strong enough to withstand a rate hike. Markets continued to price in a hike this week, with the 2 year treasury yield continuing to face upward pressure as a result, moving up another 7bps by the end of it, at the time of writing. The more aggressive take on Fed policy has provided some support to the dollar, but the strength was offset by less-dovish rhetoric from the ECB, with the DXY just 0.2% higher at the end of the week. Globally, the ECB s monetary policy decision on Thursday was in focus. While Draghi hinted at a scenario where the ECB could hike rates while QE is ongoing, it is likely that the central bank will still remain on hold for quite some time. In the context of a Fed that is moving toward a faster tightening cycle when compared to the one and done pace over the last two years, dollar strength will continue to remain an ongoing theme exacerbated by this apparent divergence in monetary policy. Meanwhile, equity markets seemed to take somewhat of a breather. The S&P 500 closed down on three of the five trading sessions, but ended the week only 0.5% lower, at the time of writing. Higher interest rates and some strength in the USD, was partly to blame, as was the slide in oil prices. Moreover, some of the sell-off was likely related to profit taking as investors cashed in after a long winning streak. Apart for today s employment report, there was a scarcity of first-tier domestic data this week. Tuesday s January international trade report (Chart 1) was concerning, but the Jan-16 May-16 Sep-16 Jan-17 CHART 1: ANOTHER MONTH, ANOTHER UNSURPRISING TRADE REPORT Trade balance; billions Source: U.S. Census Bureau, TD Economics 600 Jobs, (000s) Unemployment rate, % CHART 2: HIKE NEXT WEEK IS IN THE BAG AFTER ANOTHER SOLID U.S. JOBS REPORT Change in total nonfarm payrolls (lhs) Unemployment rate (rhs) -1, Source: Bureau of Labor Statistics, TD Economics increase seen in the trade deficit to $48.5 billion was largely expected and came on the back of a strong rise in imports. It has been widely accepted that drag from net-trade will likely continue as a strengthening U.S. dollar makes imports relatively more affordable and exports more expensive. So, while disappointing given that it places a drag on overall economic growth, it only reinforced the notion that the U.S. consumer remains in good shape. Still, while the magnitude of the positive surprise in ADP employment, which reported in the middle of the week, provided markets with a bit of a teaser, it was Friday s payrolls report that stole the show (Chart 2). Non-farm payrolls rose by 235k in February, or well ahead of the 200k expected by the street. Upward revisions also added 9k positions and the unemployment rate ticked down by 0.1% to 4.7%. At this point these developments have cemented the case for a rate hike next week. Wage growth disappointed somewhat, but given the upside revision, accelerated nonetheless from 2.6% to 2.8% in February. Despite the stronger dollar acting as a weight, we expect economic growth will remain resilient. Irrespective of fiscal stimulus, the economy appears to be at a point where it can handle a few hikes per year, with much of the strength hinging on the strength of the U.S. consumer. This is particularly the case if the data continues to come in robust, with wage and income gains boosting disposable incomes. Ultimately, we expect the Fed to raise rates next week, with two more hikes likely later this year should the economic outlook evolve as expected. Neil Shankar, Economist

3 CANADA MORE SIGNS OF MOMENTUM, DESPITE OIL price slide Crude oil prices slipped below the US$50 per barrel mark for the first time since November 30th the day that OPEC member countries came to an agreement on how much production they would cut. Oil took the Canadian dollar down with it with the loonie falling briefly below 74 US cents on Thursday, but recovered most of the week s losses on Friday following a robust jobs report. Since the OPEC agreement, oil prices had been hovering in the low US$50 per barrel range, as markets were optimistic that these cuts, along with additional output cuts agreed upon by a group of non-opec countries, would help to balance the market and work down inventories. Indeed, non-commercial net long positions a benchmark for speculative activity have been hovering at record highs in recent weeks. January data showed that OPEC has nearly met its target, with a high compliance rate of just over 90%. Compliance for the group of non-opec members was about half that. Meanwhile, U.S. production is back above 9 million barrels per day, with rig counts rising by 135 since the start of December, to just over 600. The sharp drop in prices this week was triggered by the U.S. storage report, which showed inventories rose 8.2 million barrels last week, reaching the highest level on record going back to Still rising inventories, in light of the production cuts, has reignited concerns over the supply glut currently hanging over the market. Going forward, there certainly remains a great deal of downside risk for prices depending on how quickly (or not) Rigs Source: Baker Hughes CHART 1: U.S. OIL RIG COUNTS OPEC Announcement Source: CMHC CHART 2: HOUSING STARTS SAAR, 6-month moving average, 000's markets see proof of rebalancing taking shape. Indications on whether or not OPEC will extend the quotas past June will also influence prices. Our baseline forecast is for oil prices to remain around the $50 per barrel mark in the near term, before edging up in the latter part of 2017 and in 2018 as the global market becomes more balanced. This will help to keep the loonie fairly rangebound, lending ongoing support to Canada s exporters. January s trade data showed that export volumes kicked off the year on strong footing, rising 1% during the month. However, an even larger 2.5% jump in real imports means that net trade is unlikely to contribute to growth during the first quarter. On the other hand, residential construction will give growth a boost in Q1, as homebuilding activity continues to gain momentum. Housing starts hit 210k units in February, bringing the 6-month moving average to 205k units the fastest pace seen since November This pace is unlikely to be sustained going forward, but will certainly help to underpin strong current quarter growth. Job creation in Canada has also been gaining traction, with February s employment report showing over 100k full time jobs added during the month. This adds further credence to the view that the Canadian economy is on track for a healthy pace of growth. That said, a considerable amount of slack remains, perhaps reflected in the recent weakness in wage growth. And, with downside risks to oil prices and a great deal of uncertainty surrounding future policy decisions stateside, the Bank of Canada is unlikely to move off the sidelines any time soon. Dina Ignjatovic, Economist,

4 U.S.: UPCOMING KEY ECONOMIC RELEASES U.S. Retail Sales - February* Release Date: March 15, 2017 Previous Result: 0.4%, ex-auto 0.8% TD Forecast: 0.2%, ex-auto 0.3% Consensus: 0.1%, ex-auto 0.1% Following a strong January showing, we expect February retail sales to register more moderate gains. TD expects a 0.2% increase in February, with small negative contributions from auto and gasoline station sales. Light weight vehicle sales were little changed at 17.5m units in February and gasoline prices fell on a seasonally adjusted basis. Outside of these categories, we expect a rebound in the online spending category to boost sales while warmer than normal temperatures bode well for building materials and food & drinking places. Following a weak start to the quarter, soft gains indicated in February retail sales point to Q1 real PCE tracking near a 2% annualized pace vs 3.0% in Q4. U.S. RETAIL AND FOOD SERVICES SALES M/M % Chg. 1.5 Total Excl. Automotive Dealers Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Source: U.S. Department of Commerce / Haver Analytics U.S. Consumer Price Index - February* Release Date: March 15, 2017 Previous Result: 0.6% m/m, core 0.3% m/m TD Forecast: 0.0% m/m, core 0.2% m/m Consensus: 0.0% m/m, core 0.2% m/m Headline CPI inflation is expected to accelerate further to 2.7% y/y in February from 2.3% in January, with prices flat on the month. Gasoline prices are expected to give a negative contribution this month, which should be offset by further gains in food prices and a healthy 0.2% print in the core index. The core CPI as a result is likely to slip back to 2.2% y/y after registering a 5-month high of 2.3% y/y in January. Core goods prices are key in the report following their 0.4% pickup in January the strongest increase since The outsized gain was driven by sharp jumps in apparel and new vehicle prices, though most categories recorded modest to moderate increases. While we expect some pullback in this category, led by the apparel component, we see less scope for an outright negative correction, especially in light of dissipating exchange rate pass-through and rising prices at the producer level. U.S. CONSUMER PRICE INDEX (CPI) Y/Y % Chg. 3.0 All Items All Items Ex. Food and Energy Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Source: Bureau of Labor Statistics / 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 Manufacturing Sales - January* Release Date: March 17, 2017 December Result: 2.3% m/m TD Forecast: -1.0% m/m Consensus: N/A CANADIAN MANUFACTURING SHIPMENTS M/M % Chg. Seasonally Adjusted Ratio Canadian manufacturers are expected begin the year on a softer note with shipments forecast to decline by 1.0% on the month. Petroleum and coal sales will receive a tailwind from rising energy prices though output may be constrained by refinery shutdowns during the month; we are watching energy production for any negative impact from the new carbon tax in Alberta. Motor vehicle shipments are likely to see a pullback following the strong performance last month. We caution against reading too deeply into the surge in export activity as that was largely a recovery from a weak December during which a larger than usual allocation of domestically produced vehicles were designated for sale in Canada. Meanwhile, the sustained momentum in the housing Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Source: Statistics Canada Manufacturing Shipments (lhs) Inventory-to-Shipments Ratio (rhs) market should help to support factory shipments of wood products and home furnishings. Manufacturing volumes should come in slightly weaker than the nominal print due to higher factory prices during the month *Forecast by Rates and FX Strategy Group. For further information, contact TDRates&FXCommoditiesResearch@tdsecurities.com 5

6 Release Date RECENT KEY ECONOMIC INDICATORS: MARCH 6-10, 2017 Economic Indicator/Event United States Data for Period Units Current Prior Mar 06 Factory Orders Jan M/M % Chg Mar 06 Factory Orders Excluding Transportation Jan M/M % Chg R5 Mar 07 Trade Balance Jan Blns Mar 08 ADP Employment Change Feb Thsd R5 Mar 08 Wholesale Trade Sales Jan M/M % Chg R6 Mar 09 Initial Jobless Claims Mar 04 Thsd Mar 10 Change in Nonfarm Payrolls Feb Thsd R5 Mar 10 Unemployment Rate Feb % Mar 10 Average Hourly Earnings Feb M/M % Chg R5 Canada Mar 07 International Merchandise Trade Jan M/M % Chg R6 Mar 07 Ivey Purchasing Managers Index SA Feb Index Mar 08 Housing Starts Feb Thsd R5 Mar 08 Labor Productivity 4Q Q/Q % Chg Mar 09 Capacity Utilization Rate 4Q % R6 Mar 10 Net Change in Employment Feb Thsd Mar 10 Unemployment Rate Feb % International Mar 07 BZ Gross Domestic Product 4Q Y/Y % Chg Mar 08 CH Consumer Price Index Feb Y/Y % Chg Mar 09 EC ECB Main Refinancing Rate Mar 09 % Mar 10 UK NIESR Gross Domestic Product Estimate Feb M/M % Chg R5 Source: Bloomberg, TD Economics. 6

7 Release Date UPCOMING ECONOMIC RELEASES AND EVENTS: MARCH 13-17, 2017 Time* Economic Indicator/Event United States Data for Period Units Consensus Forecast Last Period Mar 14 6:00 NFIB Small Business Optimism Feb Index Mar 14 8:30 Producer Price Index Ex Food and Energy Feb M/M % Chg Mar 14 8:30 Producer Price Index Final Demand Feb M/M % Chg Mar 15 8:30 Empire Manufacturing Mar Index Mar 15 8:30 Consumer Price Index Feb M/M % Chg Mar 15 8:30 Consumer Price Index Ex Food and Energy Feb M/M % Chg Mar 15 8:30 Consumer Price Index Feb Y/Y % Chg Mar 15 8:30 Consumer Price Index Ex Food and Energy Feb Y/Y % Chg Mar 15 8:30 Real Avg Hourly Earning Feb Y/Y % Chg Mar 15 8:30 Retail Sales Advance Feb M/M % Chg Mar 15 8:30 Retail Sales Ex Auto and Gas Feb M/M % Chg Mar 15 10:00 NAHB Housing Market Index Mar Index Mar 15 10:00 Business Inventories Jan M/M % Chg Mar 15 14:00 FOMC Rate Decision (Upper Bound) Mar 15 % Mar 16 8:30 Housing Starts Feb Thsd Mar 16 8:30 Building Permits Feb Thsd Mar 16 8:30 Initial Jobless Claims Mar 11 Thsd Mar 17 9:15 Industrial Production Feb M/M % Chg Mar 17 9:15 Capacity Utilization Feb % Mar 17 9:15 Manufacturing (SIC) Production Feb M/M % Chg Canada Mar 14 8:30 Teranet/National Bank House Price Index Feb Y/Y % Chg Mar 15 9:00 Existing Home Sales Feb M/M % Chg Mar 17 8:30 Manufacturing Sales Jan M/M % Chg International Mar 13 22:00 CH Retail Sales YTD Feb Y/Y % Chg Mar 15 5:30 UK Unemployment Rate Jan % Mar 15 6:00 EC Employment 4Q Y/Y % Chg Mar 16 6:00 EC Consumer Price Index Feb M/M % Chg Mar 16 8:00 UK Bank of England Bank Rate Mar 16 % Mar 16 JN Bank of Japan Policy Balance Rate Mar 16 % * Eastern Standard Time. Source: Bloomberg, TD Economics. 7

8 This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered. 8