THE WEEKLY BOTTOM LINE

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1 THE WEEKLY BOTTOM LINE TD Economics HIGHLIGHTS OF THE WEEK The good U.S. data keeps on rolling in, suggesting the American economy is gaining momentum and shrugging off the weakness in the rest of the world. November employment report showed U.S. payrolls expanding by 321k, the fastest pace since January Revisions added another 44k to payrolls. Strength was also evident in ISM indexes, which beat expectations and point to continued economic momentum in the fourth quarter of the year. With the spate of positive news, the data-dependent Federal Reserve s first move to normalize policy can no longer be considered a considerable time away. The probability of a rate hike in the first half of next year has increased measurably. Look for the dollar to keep on moving up. THIS WEEK IN THE MARKETS Current* Week Ago 52-Week High 52-Week Low Stock Market Indexes S&P 500 2,072 2,068 2,074 1,742 S&P/TSX Comp. 14,470 14,745 15,658 13,114 DAX 10,023 9,981 10,029 8,572 FTSE 100 6,740 6,723 6,878 6,196 Nikkei 17,920 17,460 17,920 13,910 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 9:50 am on Friday **Oil-WTI, Cushing, Nat. Gas-Henry Hub, LA (Thursday close price), Copper-LME Grade A, Gold-London Gold Bullion; Source: Bloomberg U.S. DOLLAR A ONE WAY BET U.S. nominal trade-weighted dollar index (Jan 97=100) Source: Federal Reserve GLOBAL OFFICIAL POLICY RATE TARGETS Current Target Federal Reserve (Fed Funds Rate) % Bank of Canada (Overnight Rate) 1.00% European Central Bank (Refi Rate) 0.05% Bank of England (Repo Rate) 0.50% Bank of Japan (Overnight Rate) 0.10% Source: Central Banks, Haver Analytics TD ECONOMICS KEY FORECASTS Current Rate /5/14 Q1 Q2 Q3F Q4F Q1F Q2F Q3F Q4F Fed Funds Target Rate (%) yr Govt. Bond Yield (%) yr Govt. Bond Yield (%) yr Govt. Bond Yield (%) Real GDP (Q/Q % Chg, Annualized) * 3.9 (Q3 A) CPI (Y/Y % Chg.) 1.7 (Oct-14) Unemployment Rate (%) 5.8 (Oct-14) Forecast by TD Economics. Source: Bloomberg, TD Economics.

2 GETTING BETTER ALL THE TIME The rise in U.S. economic momentum is impossible to ignore. For the first time in years, forecasters are having to revise up their forecasts with each new data point. Even then, they have come in under the mark. This week s jobs report was a prime example. Expectations for job growth have been moving steadily upward, with a November consensus call for 230k jobs. This number was blown out of the water by the 321k print. On top of that, it came with upward revisions of 44k over the previous two months. America is now adding jobs at the fastest rate since 1999, and at fifty consecutive months of gains, has been adding them for the longest stretch on record. The strength in job growth is comprehensive. Of the 266 private industries measured by the Bureau of Labor Statistics, the percentage reporting gains is the highest in nearly 17 years (at 69.2%). Strengthening economic momentum is evident in a broadening array of indicators, including the ISM indexes, which also soundly beat expectations this week. The current level of the ISMs is consistent with economic growth in the 4% range in the final quarter of the year. This is echoed in the growth in aggregate hours, which were up 2.9% on a three-month-moving average basis in November. With any labor productivity growth at all, the economy is growing by at least 3%. With productivity growth of 1%, half its long-run trend pace,, the economy is growing by 4%. If headline GDP comes in under this mark in the fourth quarter it will be due to temporary factors, such as a pullback in defense spending, that don t reflect the SHARE OF INDUSTRIES ADDING JOBS IS THE HIGHEST SINCE 1998 Diffusion index; % rising Source: Bureau of Labor Statistics ISM INDEXES CONTINUE TO FORGE AHEAD Indexes: 50+ = Increasing ISM Non-Manufacturing ISM Manufacturing Source: Institute for Supply Management underlying strength in private domestic demand. The pattern of a strengthening private sector, held back by fiscal austerity has been the pattern in America for the last several years. But, it is also coming to a close. The story here is not at the federal level, where the fiscal stance remains tight, but at the state and local governments, which are now adding jobs and reinvesting. Without this government drag holding it back, the strength in private demand will pull the economy to a higher trajectory. The bottom line is that the American economy appears to be moving into a goldilocks position. Just as the labor market is hitting a higher trend line and wages are moving up, the stronger U.S. dollar and weakening commodity prices are sending a disinflationary impulse through consumer prices. The drop in gasoline prices will save the average household $500 a year. This is akin to a tax cut, with the biggest impact on middle-income people who spend the biggest share of their budget on gas. Falling inflation, combined with rising wages, means that real increases in purchasing power the key to unlocking higher consumer spending is in the door. All this to say that the Federal Reserve s first move to normalize policy can no longer be a considerable time away. With the recent spate of data, the probability of a rate hike in the first half of next year has increased measurably. The question is how well that is taken in financial markets. One thing is certain, investors should be prepared for this new phase in the economic recovery. James Marple, Senior Economist 2

3 UPCOMING KEY ECONOMIC RELEASES U.S. Retail Sales - November* Release Date: December 11, 2014 October Result: Total 0.3% M/M; Ex-autos 0.3% M/M TD Forecast: Total 0.3% M/M; Ex-autos 0.0% M/M Consensus: Total 0.3% M/M; Ex-autos 0.1% M/M U.S. RETAIL AND FOOD SERVICES SALES M/M % Chg. Total Excl. Automotive Dealers Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Source: U.S. Department of Commerce / Haver Analytics We expect headline retails sales to post a second consecutive monthly increase in November, with sales rising at a modest 0.3% m/m pace. Strong auto sales are expected to more than compensate for the slip in gasoline sales which has driven by sharp decline on the gasoline prices in the recent months. Core spending activity (which excludes spending on autos, gas and building material, and is a useful gauge on the tone of real spending) should also improve, posting another solid 0.3% m/m gain followed the 0.5% m/m gain the month before. Higher spending on food/beverage, general merchandise and health insurance costs due to the Affordable Care Act are likely to be key sources of the gain in this month. Overall, we expect his report to be encouraging, pointing to further momentum in household spending. In the coming months, we expect spending momentum to drift higher, underpinning in the overall economic recovery. U.S. Michigan Confidence December* Release Date: December 12, 2014 November Result: 88.8 TD Forecast: 89.7 Consensus: 89.3 Consumer sentiment is expected to continue improving in December as the preliminary reading of the Michigan consumer confidence index rises to a new cycle high of 89.7 from 88.8 in November. Ongoing labor market improvement, falling gasoline prices, rising stocks, and continued acceleration in broader US economic momentum should continue to positively influence sentiment. Aside from the headline number, markets will be particularly interested in seeing consumer outlooks on inflation, with both 1yr and 5yr inflation expectations recently slipping to 2.8%. Auto and durable goods purchase intentions will also be closely watched. In the coming months, we expect confidence to continue edging higher, especially as the positive effects of an improving labor market and falling gasoline prices continue to improve consumer moods. U. OF MICHIGAN CONFIDENCE Index Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Source: University of Michigan / Haver Analytics *Forecast by Rates and FX Strategy Group. 3

4 Release Date RECENT KEY ECONOMIC INDICATORS: DECEMBER 1-5, 2014 Economic Indicator/Event Data for Period Units Current Prior United States Dec 01 ISM Manufacturing Nov Index Dec 01 ISM Prices Paid Nov Index Dec 02 ISM New York Nov Index Dec 02 Construction Spending Oct M/M % Chg R5 Dec 02 Total Vehicle Sales Nov USD, Mlns Dec 02 Domestic Vehicle Sales Nov USD, Mlns Dec 03 MBA Mortgage Applications Nov 28 W/W % Chg Dec 03 ADP Employment Change Nov Thsd R5 Dec 03 ISM Non-Manf. Composite Nov Index Dec 04 Challenger Job Cuts Nov Y/Y % Chg Dec 04 Initial Jobless Claims Nov 29 Thsd R5 Dec 04 Continuing Claims Nov 22 Thsd R5 Dec 05 Average Hourly Earnings Nov Y/Y % Chg Dec 05 Unemployment Rate Nov % Dec 05 Underemployment Rate Nov % Dec 05 Change in Manufact. Payrolls Nov Thsd R5 Dec 05 Change in Nonfarm Payrolls Nov Thsd R5 Dec 05 Labor Force Participation Rate Nov % Dec 05 Change in Private Payrolls Nov Thsd R5 Dec 05 Trade Balance Oct USD, Blns R6 Dec 05 Factory Orders Oct M/M % Chg R5 Canada Dec 01 Bloomberg Nanos Confidence Nov 28 Index Dec 03 Bank of Canada Rate Decision Dec 03 % Dec 04 Ivey Purchasing Managers Index SA Nov Index Dec 05 Net Change in Employment Nov Thsd Dec 05 Part Time Employment Change Nov Thsd Dec 05 Labor Productivity Q3 Q/Q % Chg R5 Dec 05 Full Time Employment Change Nov Thsd Dec 05 Participation Rate Nov % Dec 05 Unemployment Rate Nov % Dec 05 International Merchandise Trade Oct CAD, Blns R6 International Dec 01 JN Vehicle Sales Nov Y/Y % Chg Dec 01 UK M4 Money Supply Oct Y/Y % Chg Dec 02 EC PPI Oct Y/Y % Chg Dec 02 AU GDP Q3 Y/Y % Chg R6 Dec 03 EC Retail Sales Oct Y/Y % Chg R6 Dec 04 FR ILO Unemployment Rate Q3 % R6 Dec 04 UK BOE Asset Purchase Target Dec GBP, Blns Dec 04 UK Bank of England Bank Rate Dec 04 % Dec 04 EC ECB Marginal Lending Facility Dec 04 % Dec 04 EC ECB Deposit Facility Rate Dec 04 % Dec 05 JN Leading Index CI Oct P Index Dec 05 GE Factory Orders WDA Oct Y/Y % Chg R5 Source: Bloomberg, TD Economics. 4

5 Release Date UPCOMING ECONOMIC RELEASES AND EVENTS: DECEMBER 8-12, 2014 Time* Economic Indicator/Event Data for Period Units Consensus Forecast Last Period United States Dec 08 12:30 Fed's Lockhart Speaks on Monetary Policy in Atlanta Dec 09 7:30 NFIB Small Business Optimism Nov Index Dec 09 10:00 IBD/TIPP Economic Optimism Dec Index Dec 09 10:00 Wholesale Trade Sales Oct M/M % Chg Dec 09 10:00 Wholesale Inventories Oct M/M % Chg Dec 09 10:00 JOLTS Job Openings Oct Thsd Dec 10 7:00 MBA Mortgage Applications Dec 05 W/W % Chg Dec 10 14:00 Monthly Budget Statement Nov USD, Blns Dec 11 8:30 Retail Sales Advance Nov M/M % Chg Dec 11 8:30 Retail Sales Ex Auto and Gas Nov M/M % Chg Dec 11 8:30 Initial Jobless Claims Dec 06 Thsd Dec 11 8:30 Import Price Index Nov Y/Y % Chg Dec 11 8:30 Continuing Claims Nov 29 Thsd Dec 11 9:45 Bloomberg Consumer Comfort Dec 07 Index Dec 11 10:00 Business Inventories Oct M/M % Chg Dec 11 12:00 Household Change in Net Worth Q3 USD, Blns Dec 12 8:30 PPI Ex Food, Energy, Trade Nov Y/Y % Chg Dec 12 8:30 PPI Final Demand Nov Y/Y % Chg Dec 12 8:30 PPI Ex Food and Energy Nov Y/Y % Chg Dec 12 9:55 Univ. of Michigan Confidence Dec P Index Canada Dec 08 8:15 Housing Starts Nov Thsd Dec 08 8:30 Building Permits Oct M/M % Chg Dec 08 10:00 Bloomberg Nanos Confidence Dec 05 Index Dec 11 8:30 Capacity Utilization Rate Q3 % Dec 11 8:30 New Housing Price Index Oct Y/Y % Chg Dec 12 8:30 Teranet/National Bank HPI Nov Y/Y % Chg Dec 12 8:30 Teranet/National Bank HPI Nov M/M % Chg International Dec 08 2:00 GE Industrial Production WDA Oct Y/Y % Chg Dec 08 4:30 EC Sentix Investor Confidence Dec Index Dec 09 2:00 GE Trade Balance Oct EUR, Blns Dec 09 2:00 GE Current Account Balance Oct EUR, Blns Dec 09 2:00 GE Labor Costs WDA Q3 Y/Y % Chg Dec 09 2:45 FR Trade Balance Oct EUR, Mlns Dec 09 2:45 FR Budget Balance YTD Oct EUR, Blns Dec 09 4:30 UK Industrial Production Oct Y/Y % Chg Dec 09 4:30 UK Manufacturing Production Oct Y/Y % Chg Dec 09 18:50 JN PPI Nov Y/Y % Chg Dec 10 4:30 UK Trade Balance Oct GBP, Mlns Dec 10 19:30 AU Unemployment Rate Nov % Dec 11 2:45 FR CPI Nov Y/Y % Chg Dec 11 4:00 EC ECB Publishes Monthly Report Dec 11 2:00 GE Wholesale Price Index Nov Y/Y % Chg Dec 12 2:45 FR Current Account Balance Oct EUR, Blns Dec 12 4:30 UK Construction Output SA Oct Y/Y % Chg Dec 12 5:00 EC Employment Q3 Y/Y % Chg Dec 12 5:00 EC Industrial Production WDA Oct Y/Y % Chg * Eastern Standard Time; Source: Bloomberg, TD Economics. 5

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