Markets Extend Their Rebound

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1 WEEKLY NEWSLETTER Markets Extend Their Rebound #1 BEST OVERALL FORECASTER - HIGHLIGHTS ff United States: Manufacturing output rebounded in December. ff U.S. consumer confidence plunged in January. ff Canada: A surprising rise in the annual inflation rate in December. ff Canada: Existing home sales fall once again. A LOOK AHEAD ff After two months of improvement, home resales are expected to decline in the United States. ff United States: The leading indicator is forecast to go down. FINANCIAL MARKETS ff Stock markets supported by a potential easing between China and the United States. ff Stronger than forecasted Canadian inflation contributes to a rise in bond yields. ff The pound advanced to nearly US$1.30 despite the lack of progress on Brexit. 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... 6 Tables Economic indicators... 8 Major financial indicators...10 François Dupuis, Vice-President and Chief Economist Mathieu D Anjou, Deputy Chief Economist Carine Bergevin-Chammah, 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 2019, Group. All rights reserved.

2 Key Statistics of the Week UNITED STATES ff Industrial output advanced % in December on the heels of a 0.4% gain in (revised from %). Manufacturing output jumped % after nudging up just 0.1% in and dipping % in October. A major part of this gain stemmed from the 4.7% growth in the motor vehicle sector. Activity in the mining sector was up 1.5%. Affected by milder weather, energy production plunged 6.3%, the worst decline since February This contraction could be felt in personal consumer spending on services. ff The total consumer price index (CPI) slipped 0.1% in December, a better result than anticipated, as the consensus forecast was for a decline of 0.4%. A single factor essentially explains the smaller than anticipated decline in December s total CPI: air transportation. Air transportation prices posted an extreme monthly change, gaining 21.7%. The change from December 2017 to December 2018 of total CPI was 2.0%, up from the previous month s 1.7%. Overall for 2018, the total annual inflation rate was an average of %, compared with 1.6% in ff After rising slightly in December, the University of Michigan s consumer confidence index fell once again, according to the preliminary version for January. The index dropped from 98.3 to 9, and the monthly 7.6 point decline is the worst since December The drop is largely attributable to the component tied to consumer expectations (-9.7 points) rather than to consumers current situation (-6.1 points). The decline in the total index caused it to hit its lowest level since October 2016, thereby erasing most of the gain stemming from the election of Donald Trump. It remains to be seen if the stock market s rise in recent weeks will have a positive impact on the upcoming confidence data. ff Existing property sales shrunk for the fourth month in a row in December, falling %. With the exception of Newfoundland and Labrador, all the other provinces saw sales contract during the month. Within the space of a year, the decline has now reached -19.0% for Canada as a whole. The home price index fell % in December. This is its seventh monthly decline in a row. Benoit P. Durocher, Senior economist ff Regional manufacturing indexes went their separate ways in January. The New York Fed s Empire index dropped from 11.5 to 3.9, its lowest level since May 2017; the index lost 17.5 points within a period of two months. In contrast, the Philadelphia Fed s index rose from 9.1 to Francis Généreux, Senior economist A surprise inflation rate increase in December Annual variation in % Total consumer price index Average of three Bank of Canada three benchmark indexes Sources : Statistics Canada and, Economic Studies 2

3 Financial Markets The Markets Welcome Rumours of Easing Protectionism The U.S. stock market got the week off to a bad start with the weak Chinese exports data published overnight from Sunday to Monday. It then took off, rising throughout the week. The drop in the Empire manufacturing index and the confidence index, and the continuing partial U.S. federal government shutdown did not hamper the stock indexes ascent. Rumours that the United States could lift the tariffs recently imposed on China triggered some hope of an improvement in the economy, giving the stock markets in the United States and elsewhere a second wind on Thursday afternoon. The optimism held up on Friday morning. The S&P 500 index was up almost 3% over the week. The Canadian index was also delivering a good weekly performance of nearly %. In Europe, the rejection of the Brexit deal did not keep the stock markets from making gains. GRAPH 1 Stock markets Index Index 2,850 15,300 2,775 15,100 2,700 14,900 14,700 2,625 14,500 2,550 14,300 2,475 14,100 2,400 13,900 2,325 13, /12/ /12/ /12/ /01/ /01/ /01/17 S&P 500 (left) S&P/TSX (right) Sources: Datastream and, Economic Studies U.S. bond yields edged up this week, boosted by a rumour of easing in the trade conflict between the United States and China. The 2 year and 10 year yields were hovering around 0% and 0% respectively on Friday morning. In Canada, inflation posted a surprise increase on Friday, boosting Canadian bond yields, which had already made some gains this week. At the time of writing, the 2 year yield was around 5%, while the 10 year yield was around 2.05%. Currencies saw more volatility during Tuesday s session, especially in Europe. The euro lost US 1 on the heels of remarks made by the European Central Bank s President to the European Parliament in Strasbourg, which were deemed pessimistic. The euro then held close to US$4. The pound was also volatile on Tuesday due to the British parliamentary vote on Brexit. The pound finally rose, even though the future seems uncertain in the near term. Markets seem to be banking on the Brexit deadline being pushed back, or on potential general elections and another referendum in the United Kingdom. As for the other major currencies, the Canadian dollar stayed close to US$55 all week. s yen lost a little ground due to a sign of easing in the trade dispute between the United States and China. Hendrix Vachon, Senior Economist Carine Bergevin-Chammah, Economist GRAPH 2 Bond markets 10-year yield In % points -5 In % /12/ /12/14 Spread (left) 2018/12/ /01/01 United States (right) 2019/01/ /01/17 Canada (right) Sources: Datastream and, Economic Studies GRAPH 3 Currency markets US$/C$ US$/ /12/ /12/ /12/ /01/2019 Canadian dollar (left) 09/01/ /01/2019 Euro (right) Sources: Datastream and, Economic Studies 3

4 A Look Ahead UNITED STATES * Due to the federal government shutdown in the United States, some indicators may not be released as scheduled. TUESDAY January 22nd - 10:00 December ann. rate 5,230,000 5,200,000 5,320,000 Existing home sales (December) After six monthly declines between April and September, home resales appear to be on the upswing again, with back-to-back increases in October (+1.4%) and (+%). However, this trend may come to a sudden stop with December s data, as pending home sales clearly indicate a downward trend. Despite a spike in the middle of the month, mortgage applications in view of a purchase remained weak in December. Existing home sales could drop to 5,200,000 units. THURSDAY January 24-10:00 December m/m % % % Leading indicator (December) In spite of market fears concerning the U.S. economy, the leading indicator continues to point to solid economic growth. Still, its monthly change could end up being in the red in December. The index will be negatively impacted by the market slump, the drop in the ISM index, and the anticipated decrease in the number of building permits (the data was not released because of the shutdown). In addition, the positive contribution of interest rates and consumer confidence has diminished. The leading indicator is expected to dip 0.1%. FRIDAY January 25 - December * New durable goods orders (December) The publication of new manufacturing orders for has already been affected by the federal government shutdown, but an advance estimate of the orders for durable goods was released just prior to the budget standoff. After falling 4.2% in October, orders rose 0.8% in. The aviation sector is expected to contribute strongly to December, based on the data from Boeing. In addition, the rise in motor vehicle production in December indicates an increase in the number of orders in this sector. Durable goods orders excluding transportation are expected to stagnate after declining % in. The fall of the new orders component of the ISM manufacturing index to its lowest point since the summer of 2016 appears to point in this direction. On the whole, total durable goods orders should post a % gain. m/m 0.8% % 0.8% FRIDAY January 25-10:00 December ann. rate October 544,000 * New home sales (December) Because of the shutdown, s data on the sales of new single-family homes was not released. Therefore, it is difficult to predict December s numbers. This is especially true because housing starts and building permits for single-family homes for December were also not released. Falling interest rates in the last few months of 2018 provided some support. Still, builder confidence plummeted in December (and has remained low in January). TUESDAY January 22 - m/m % 0.4% October 1.0% nd Wholesaling () Wholesale sales rose 1.0% in October, regaining the ground lost in September. However, sales are expected to advance once again at a more sustainable pace in, with a 0.4% gain expected. Furthermore, merchandise exports fell 1.5% in, which suggests that several wholesalers ran into difficulties during the month. 4

5 TUESDAY January 22nd - m/m -% -% October % Manufacturing sales () The difficulties in manufacturing sales since August are expected to continue in. According to the export data, several sectors experienced significant slumps during the month. This is especially the case for energy products, motor vehicles and parts, and aircraft and air transportation parts. WEDNESDAY January 23rd - m/m -% -% October % Retail sales () The price of gasoline plummeted 8.8% in after seasonal adjustments, which is expected to reduce service station sales significantly. The preliminary data for new vehicle sales indicates a major decline in the number of vehicles sold in and a slight drop in prices. Under these circumstances, auto dealer sales are also expected to slide during the month. Even if an increase in sales were forecast for most of the other components, mostly due to a price increase, the total value of retail sales could drop in. OVERSEAS SUNDAY January 20-21:00 Q y/y 6.4% Q % China: Real GDP (Q4) Economic growth seems to be slower in China. After peaking at 6.9% in early 2017, the annual variation in real GDP fell to 6.8% in early 2018, then 6.5% in Q3 last year. It remains to be seen if this trend held during the fall. The weakness in retail sales and industrial production in October and suggests that it is possible. The consensus predicts an annual change of 6.4%. THURSDAY January 24-7:45 January % % December 13 % : Meeting of the European Central Bank (January) This will be the first meeting on monetary policy in the euro zone since the securities purchase program ended. It will be interesting to analyze the tone of the statement and Mario Draghi s comments. The risks for the region remain significant, which could justify greater caution on the part of the monetary authorities. However, it would be surprising if the European Central Bank now signalled that interest rates would begin to climb later than currently anticipated, i.e., before the end of this coming summer. Among the economic indicators to be released during the week in the euro zone, the preliminary version of the PMI indexes for January will be released on Thursday. In December, Euroland s composite PMI index fell to its lowest level in recent years. The advance consumer confidence estimate for January will be released on Wednesday. s ifo business climate indexes will come out Friday. 5

6 Economic Indicators Week of January 21st to 25, 2019 Day Hour Indicator Period Previous data UNITED STATES * Due to the federal government shutdown in the United States, some indicators may not be released as scheduled. MONDAY 21 Markets closed (Martin Luther King, Jr. Day) TUESDAY 22 10:00 Existing home sales (ann. rate) 5,230,000 5,200,000 5,320, ,000 % 218,000 % 213,000 % 0.8% % 0.8% % -% 0.4% % -% 1.0% % % -% -0.4% -% -% % 0.0% WEDNESDAY 23 THURSDAY 24 10:00 Initial unemployment claims Leading indicator (m/m) 10:00 * Durable goods orders (m/m) * New home sales (ann. rate) FRIDAY 25 MONDAY 21 TUESDAY 22 Wholesale sales (m/m) Wholesale inventories (m/m) Manufacturing sales (m/m) WEDNESDAY 23 Retail sales Total (m/m) Excluding automobiles (m/m) THURSDAY 24 FRIDAY 25 Note:, Economic Studies are involved every week in the Bloomberg survey for Canada and the United States. Approximately 15 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 Eastern Standard Time (GMT - 5 hours). Forecast of, Economic Studies of the Group. 6

7 Economic Indicators Week of January 21st to 25, 2019 Country Hour Indicator Period m/m (q/q) y/y Previous data m/m (q/q) y/y OVERSEAS SUNDAY 20 China China China 21:00 21:00 21:00 Real GDP Industrial production Retail sales Q4 1.5% 6.4% 1.6% 6.5% 5.3% 5.4% 8.1% 8.1% MONDAY 21 2:00 Producer price index % 2.9% 0.1% TUESDAY 22 United Kingdom 4:30 5:00 5:00 18:50 23:30 ILO unemployment rate ZEW survey Current situation ZEW survey Expectations Trade balance ( B) All industry activity index 4.1% % 4.1% % WEDNESDAY 23 France France --2:45 2:45 10:00 19:30 Bank of meeting Business confidence Production outlook Consumer confidence preliminary PMI manufacturing index preliminary % % THURSDAY 24 South Korea France France France Norway --0:00 0:00 3:15 3:15 3:15 3:30 3:30 3:30 7:45 1 Bank of Korea meeting Leading indicator final Coincident indicator final 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 Bank of Norway meeting European Central Bank meeting Consumer price index Tokyo 1.75% 1.75% % 5% % % % FRIDAY 25 Ifo survey Business climate Ifo survey Current situation Ifo survey Expectations % % 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 Eastern Standard Time (GMT - 5 hours). 7

8 UNITED STATES 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)1 Exports (2009 $B) Imports (2009 $B) Final domestic demand (2009 $B) GDP deflator (2009 = 100) Labor productivity (2009 = 100) Unit labor cost (2009 = 100) Employment cost index ( 2005 = 100) Current account balance ($B)1 1 VARIATION (%) LEVEL ANNUAL VARIATION (%) Quart. ann. 1 year ,665 12,953 3, , ,542 3,492 19, Statistics representing the level during the period; * New statistic in comparison with last week. UNITED STATES Monthly economic indicators REF. MONTH Leading indicator (2010 = 100) ISM manufacturing index1 ISM non-manufacturing index1 Cons. confidence Conference Board (1985 = 100)1 Personal consumption expenditure (2009 $B) Disposable personal income (2009 $B) Consumer credit ($B) Retail sales ($M) Excluding automobiles ($M) Industrial production (2007 = 100) Production capacity utilization rate (%)1 New machinery orders ($M) New durable good orders ($M) Business inventories ($B) Housing starts (k)1 Building permits (k)1 New home sales (k)1 Existing home sales (k)1 Commercial surplus ($M)1 Nonfarm employment (k)2 Unemployment rate (%)1 Consumer price ( = 100) Excluding food and energy VARIATION (%) LEVEL -1 month -3 months -6 months -1 year ,083 14,461 3, , , * * , ,827 1,982 1,256 1, ,320-55, , ,217 1, ,220-54, ,280 1, ,330-50, ,329 1, ,410-45,698 1, ,303 1, ,720-46,986 2, Excluding food and energy Producer price (2009 = 100) Export prices (2000 = 100) Import prices (2000 = 100) * * * Personal cons. expenditure deflator (2009 = 100) 1 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 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 $M) VARIATION (%) LEVEL ANNUAL VARIATION (%) Quart. ann. 1 year Current account balance ($M)1 2,059,104 1,161, , , ,268 6, , ,581 2,048, , , , , , , ,537 Production capacity utilization rate (%)1 Disposable personal income ($M) Corporate net operating surplus (2007 $M) 8 1,230, , Business inventory change (2007 $M)1 Exports (2007 $M) Imports (2007 $M) Final domestic demand (2007 $M) GDP deflator (2007 = 100) Labour productivity (2007 = 100) Unit labour cost (2007 = 100) 1 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)1 Building permits ($M) Retail sales ($M) Excluding automobiles ($M) Wholesale trade sales ($M) Commercial surplus ($M)1 Exports ($M) Imports ($M) Employment (k)2 1 Unemployment rate (%) Average weekly earnings ($) Number of salaried employees (k)2 Consumer price (2002 = 100) Excluding food and energy Excluding 8 volatile items Industrial product price (2002 = 100) Raw materials price (2002 = 100) Money supply M1+ ($M) 1 VARIATION (%) LEVEL -1 month -3 months -6 months -1 year 1,945, ,639 58, ,294 51, , ,833-2, , ,942 48,329 50, , * 5.6 1,009 16, * * ,001, 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. 9

10 UNITED STATES,, OVERSEAS Major financial indicators PREVIOUS DATA ACTUAL LAST 52 WEEKS IN % (EXPECTED IF INDICATED) month -3 months -6 months -1 year Higher Average Lower United States Federal funds target Treasury bill 3 months Treasury bonds 2 years Treasury bonds 5 years Treasury bonds 10 years Treasury bonds 30 years S&P 500 index (level) DJIA index (level) Gold price (US$/ounce) CRB index (level) WTI oil (US$/barrel) ,666 24,650 1, ,596 23,996 1, ,417 22,445 1, ,768 25,444 1, ,802 25,058 1, ,810 26,072 1, ,931 26,828 1, ,734 24,945 1, ,351 21,792 1, Canada Overnight target Treasury bill 3 months Treasury bonds 2 years Treasury bonds 5 years Treasury bonds 10 years Treasury bonds 30 years Spread with the U.S. rate (% points) Overnight target Treasury bill 3 months Treasury bonds 2 years -6 Treasury bonds 5 years -6 Treasury bonds 10 years Treasury bonds 30 years S&P/TSX index (level) Exchange rate (C$/US$) Exchange rate (C$/ ) 15, , , , , , , , , Overseas ECB Refinancing rate Exchange rate (US$/ ) United Kingdom BoE Base rate Bonds 10 years FTSE index (level) Exchange rate (US$/ ) , , , , , , , , , Bonds 10 years DAX index (level) 6 11, , , , , , , , ,382 BoJ Main policy rate Nikkei index (level) Exchange rate (US$/ ) 20, , , , , , , , , 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 11:00 a.m. 10