The Bank of Canada Takes a More Neutral Tone

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1 WEEKLY NEWSLETTER The Bank of Canada Takes a More Neutral Tone #1 BEST OVERALL FORECASTER - CANADA HIGHLIGHTS ff U.S. job creation in February retreats. ff United States: The ISM manufacturing index rose in February. ff U.S. housing starts were up in. ff New home sales in the United States went up again in December. ff The Bank of Canada has softened its stance while leaving key rates unchanged. ff Canada: More strong job creation. ff Canada: Major drop in housing starts. ff Canada: Worker productivity worsened in the fourth quarter. A LOOK AHEAD ff United States: No rebound in retail sales expected in after December s decline. ff United States: Inflation is expected to remain stable in February. ff Industrial production should fall again after dropping in. ff Canada: Manufacturing sales could lose more ground. FINANCIAL MARKETS ff Losses on stock markets. ff A re-emergence of risk aversion weakens bond yields. ff The euro falls back to US$2 as the European Central Bank is forced to support the economy even further. 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 CANADA ff The establishment survey shows that only 20,000 new jobs were created in February, after gains of 311,000 in and 227,000 in December. The construction sector shed 31,000 jobs, while manufacturing gained 4,000. There were 57,000 net hires in private sector services, a sharp drop following the 227,000 new jobs created in. The jobless rate fell from 4.0% to 3.8%. The end of the shutdown supported this improvement. The average hourly wage in the private sector jumped 0.4% in February following a increase in. The annual change went from 3.1% to 3.4%, the strongest growth since April ff The Bank of Canada (BoC) left the target for the overnight rate at 5%. As expected, the recent deterioration of economic conditions has prompted monetary authorities to considerably soften their tone. The two consecutive quarters of declining domestic demand have shown that the Canadian economy s adjustments to rising interest rates have been significant. The BoC is no longer saying that interest rates need to be raised to their neutral level. The BoC is nonetheless continuing to indicate that further rate increases are possible, but their magnitude will clearly be less significant. In the meantime, the current pause could last for a few more months until the adjustments have been properly evaluated. ff While the ISM manufacturing index declined in February, the non-manufacturing index saw a surprising hike. It went from 56.7 to 59.7, its highest point since November. This exceeds the average for The components that saw the biggest gains were new orders (+7.5 points), current production (+5.0 points), and export orders (+4.5 points). ff Housing starts jumped 18.6% in. This increase seems significant (the strongest since October 2016), but it comes after a cumulative contraction of 19.0% between September and December Therefore, the number of 1,230,000 units reached in is below the average of 1,240,500 recorded in 2018 and, in particular, is down 7.8% compared with the numbers for Building permits rose 1.4% to reach 1,345,000 units. ff New home sales increased 3.7% in December after rising 9.1% in November. However, these gains came on the heels of a downward trend that lasted several months, bringing the total decline to 18.3% since March. Annualized sales reached 621,000 units, the highest level since September ff The U.S. balance of trade in goods and services worsened significantly in December. This is the sixth time in seven months that the deficit has increased. The balance fell from -US$5B in November to -US$59.8B in December. This is also the worst deficit since October Exports shrunk %, while imports jumped %. ff The labour market saw 55,900 new jobs in February, far more than expected. Job growth has sped up since last June, with a total of 326,100 jobs created for an average of +36,200 jobs per month. That surge in employment is partly due to speedier growth in the labour force, with more and more Canadians entering the labour market. With labour shortage, that will no doubt speed up the rise in employment, even though economic growth has been weaker lately. The unemployment rate stayed at 5.8%. ff As expected, worker productivity fell 0.4% in the fourth quarter of 2018, due to growth in hours worked that exceeded the production rate. Combined with the hike in wages, the drop in productivity contributed to a 1.2% increase in unit labour costs. ff The number of housing starts decreased significantly in February, falling from 206,809 to 173,153 units. Ontario was hit especially hard by this decline because of a major drop in multi-unit housing. ff As expected, the industrial capacity utilization rate lost ground in the fourth quarter, falling from 82.8% to 8%. The biggest decline occurred in the construction sector, which saw a huge drop in output in the fall. Benoit P. Durocher, Senior economist Francis Généreux, Senior economist 2

3 Financial Markets Uncertainty Returns to Markets Worries about the global economy s strength dispelled last week s optimism from the markets. After a decline on Monday, the U.S. stock market paused for breath on Tuesday as new home sales took a surprising upturn. But the downward trend was back in the next few days with the more negative tone taken by the European Central Bank (ECB) and disappointing data on the U.S. trade balance and employment. The S&P 500 posted a weekly loss of almost 3% on Friday morning. The Canadian market was also affected by concerns over the global economy, although it was up slightly on Tuesday and Wednesday, bolstered by the expansionist measures announced by China, despite the softening of its economic growth target, and the indication that the Bank of Canada (BoC) could be more patient in its monetary policy tightening. The S&P/TSX index, however, did not avoid the fall experienced on global markets on Thursday and Friday. Declining oil prices also added downward pressure on the Canadian market, which had lost about 1% for the week at the time of writing. Greater risk aversion affected bond yields, which were considerably lower. The 2 year and 10 year yields were around 2.45% and 2.60% respectively on Friday morning. The BoC s tone lowered expectations of key rate increases in Canada, putting more downward pressure on Canadian bond yields. The 2 year and 5 year yields are now close to 1.65% and the 10 year yield is around 5%. GRAPH 1 Stock markets Index Index 2,825 16,200 2,800 16,000 2,775 2,750 15,800 2,725 15,600 2,700 2,675 15,400 2,650 2,625 15, /01/ /02/ /02/ /02/ /02/ /03/07 S&P 500 (left) S&P/TSX (right) Sources: Datastream and, Economic Studies GRAPH 2 Bond markets 10-year yield In % points In % The U.S. dollar got a boost from the more negative feelings on the markets, although it lost some ground against several currencies on Friday after the release of disappointing job figures. The euro was particularly shaken on Thursday when the ECB revised its growth and inflation estimates strongly downward, forcing it to announce new measures to support the economy. The common currency was trading at close to US$2 at the time of writing. The pound fell alongside the euro on Thursday, ending below US$1.31. The Canadian dollar fell to close to US$0.74 on Wednesday after the BoC meeting. It was less volatile on Thursday, and appreciated slightly on Friday despite a drop in oil prices. Hendrix Vachon, Senior Economist Carine Bergevin-Chammah, Economist /01/ /02/01 Spread (left) 2019/02/ /02/19 United States (right) 2019/02/ /03/07 Canada (right) Sources: Datastream and, Economic Studies GRAPH 3 Currency markets US$/C$ US$/ /01/ /02/ /02/ /02/2019 Canadian dollar (left) 27/02/ /03/2019 Euro (right) Sources: Datastream and, Economic Studies 3

4 A Look Ahead UNITED STATES MONDAY March 11 - December -1.2% TUESDAY March 12 - February Retail sales () In December, retail sales suffered their greatest monthly decline since the recession. A rebound in may be possible, but certain signs suggest that we may have to wait a while. To start, the federal government shutdown was in full swing in and lasted almost the entire month. This should limit retail sales growth. We also note a 4.7% drop in new vehicle sales that will also affect retail sales. Gas prices continued to pull back in, which should undermine the value of service station sales. Overall, confidence remained weak in (the rebound occurred mainly in February) and this likely put a damper on sales excluding motor vehicles and gas. However, generally milder weather prevailed in the United States. Excluding motor vehicles and gas, growth may be up. However, total sales should post a decrease. Consumer price index (February) The consumer price index (CPI) has not posted any significant increase since October. In fact, prices have been stagnant since November. A increase is expected for February, however. This should be helped by the 3.6% gain in gas prices at the pump. We expect the core CPI, which excludes food and energy, to rise, continuing the trend of the previous five months. The annual change in total CPI is expected to remain at 1.6%, while core inflation should remain at %. WEDNESDAY March 13 - December 1.2% New durable goods orders () For the first time since winter 2018, new durable goods orders saw two consecutive increases in November and December. These gains were largely due to the transportation sector. Data from Boeing suggest that aviation will make a further positive contribution to new orders. However, the drop in automobile production in recent months and falling new car sales suggest there will be a drastic drop in new orders for the auto sector. Transportation s net contribution should be more or less neutral in. We also do not expect a significant increase in orders excluding transportation, while industrial production and the ISM index gave contradictory indications in. On the whole, total durable goods orders should post a gain of just. THURSDAY March 14-10:00 ann. rate 625, ,000 December 621,000 New home sales () For the first time since winter 2018, new single-family home sales increased for two months in a row, that is, in November (+9.1%) and December (+3.7%). These gains followed a drop of more than 18% between March and October. A slight decrease in new home sales is now expected for. This is signalled by the 2.0% drop in building permits for single-family homes for. Yet, the improvement in builders confidence in, following significant drops at the end of 2018, is a positive development. Sales are expected to fall to 610,000 units. FRIDAY March 15-9:15 February Industrial production (February) Against all expectations, manufacturing output fell 0.9% in. The overall effect on industrial production, which was down 0.6%, was mitigated by slight gains in mining and energy. A further increase in energy production is expected in February, but the resources sector should see a drop. No manufacturing rebound is expected in. Hours worked suggest another downturn in production. The drop in the ISM manufacturing index in February is also a negative sign. Manufacturing output should contract by, while industrial production is expected to go down by. FRIDAY March 15-10:00 March February 0.4% University of Michigan consumer confidence index (March preliminary) After tumbling in, the University of Michigan confidence index partly recovered in February. However, February s final version level (93.8) is slightly lower than the preliminary version level (95.5), signalling maybe a negative direction in March. The gain by the Conference Board index in February (which often predates changes in the Michigan index), the continued rise of the weekly Bloomberg index and the increase in the TIPP index are also good news. However, gas prices have been rapidly increasing for the past few weeks and the stock market s rebound in the first few weeks of the year appears to have ended. We also expect the Michigan confidence index to stagnate at around

5 CANADA FRIDAY March 15 - December % Manufacturing sales () Once again, the delayed publication of international merchandise trade data complicates the estimate of the change in manufacturing sales for. However, U.S. data indicate that industrial production was down 0.6% during the month south of the border due largely to an 8.8% drop in the automobile industry. These preliminary results do not bode well for Canadian manufacturing sales, which could see a third consecutive monthly drop. OVERSEAS TUESDAY March 12-5:30 December -0.4% : Monthly real GDP () Britain s real GDP saw a modest increase of in the fourth quarter of This gain happened despite December s 0.4% drop in monthly GDP, the worst result since March It now remains to be seen on what footing the first quarter of 2019 began. If the gain is still weak, or even negative, the carryover could suggest a very limited progression in real GDP or even a contraction. 5

6 Economic Indicators Week of March 11 to 15, 2019 Day Hour Indicator Period Previous data UNITED STATES MONDAY 11 Retail sales Total () Excluding automobiles () 10:00 Business inventories () 0.6% 0.6% -1.2% -% - TUESDAY 12 Consumer price index Total () Excluding food and energy () Total (a/a) Excluding food and energy (y/y) 1.6% % 1.6% % 1.6% % WEDNESDAY 13 Producer price index Total () Excluding food and energy () Durable goods orders () 10:00 Construction spending () 0.4% 0.4% - 1.2% 225, , , , , , % 78.6% 95.5 n/a % 94.0 n/a % % THURSDAY 14 10:00 Initial unemployment claims Export prices () Import prices () New home sales (ann. rate) FRIDAY 15 9:15 9:15 10:00 16:00 Empire manufacturing index Industrial production () Production capacity utilization rates Michigan s consumer sentiment index preliminary Net foreign security purchases (US$B) March 4-8 March March CANADA MONDAY 11 TUESDAY 12 WEDNESDAY 13 THURSDAY 14 FRIDAY 15 18:50 National balance sheet Q4 New housing price index () Speech of the Bank of Canada Senior Deputy Governor, C. Wilkins 9:00 Manufacturing sales () Existing home sales 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, 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. 6

7 Economic Indicators Week of March 11 to 15, 2019 Country Hour Indicator Period (q/q) y/y Previous data (q/q) y/y OVERSEAS MONDAY 11 Germany Germany Germany 3:00 3:00 3:00 Trade balance ( B) Current account ( B) Industrial production % 3.4% % TUESDAY 12 Japan 5:30 5:30 5:30 5:30 5:30 19:50 Trade balance ( M) Construction Index of services Monthly GDP Industrial production Producer price index -3, % - 0.7% -3, % % % 0.6% WEDNESDAY 13 Japan Euro zone China China 0:30 6:00 22:00 22:00 Tertiary industry activity index Industrial production Industrial production Retail sales % -% -0.9% 5.5% 8.1% -4.2% 5.7% 8.2% THURSDAY 14 Germany France 3:00 3:45 Consumer price index final Consumer price index final FRIDAY 15 Japan Euro zone --6:00 Bank of Japan meeting Consumer price index March -3.9% -2.4% 1.6% 1.3% 1.6% 1.3% 0% 1.5% 0% -% 1.4% 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, q/q and y/y correspond to monthly, quarterly and yearly variation respectively. The times shown are Daylight Saving Time (GMT - 4 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 * * 2018 Q3 ANNUAL VARIATION (%) Quart. ann. 1 year ,785 13,044 3, , ,552 3,515 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 * * ,015 14,636 4, , , Nov. * * * * * * , ,126 1,981 1,230 1, ,940-59, , ,037 1, ,000-50, ,209 1, ,220-55, ,184 1, ,390-46,978 1, ,334 1, ,400-51,889 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 CANADA 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 * * 2,063,439 1,166, , , ,315 13, , ,843 2,036, , , , , , , ,882 Production capacity utilization rate (%)1 Disposable personal income ($M) Corporate net operating surplus (2007 $M) * 8 1,237, , 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. CANADA 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 1,943, ,801 56, ,379 50, , * 63,142-4,593-1, ,082 * * 46,309 50, * 18, * 5.8 1,012 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, CANADA, OVERSEAS Major financial indicators PREVIOUS DATA ACTUAL LAST 52 WEEKS IN % (EXPECTED IF INDICATED) March 8 March 1-1 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) ,733 25,347 1, ,804 26,026 1, ,708 25,106 1, ,633 24,389 1, ,872 25,917 1, ,787 25,336 1, ,931 26,828 1, ,733 24,962 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 Treasury bonds 5 years Treasury bonds 10 years Treasury bonds 30 years S&P/TSX index (level) Exchange rate (C$/US$) Exchange rate (C$/ ) 15, , , , , , , , , Overseas Euro zone ECB Refinancing rate Exchange rate (US$/ ) BoE Base rate Bonds 10 years FTSE index (level) Exchange rate (US$/ ) 9 7, , , , , , , , , Germany Bonds 10 years DAX index (level) 7 11, , , , , , , , ,382 Japan BoJ Main policy rate Nikkei index (level) Exchange rate (US$/ ) 0 21, , , , , , , , , CRB: Commodity Research Bureau; WTI: West Texas Intermediate; ECB: European Central Bank; BoE: Bank of England; BoJ: Bank of Japan Note: Data taken at markets closing, with the exeption of the current day where they were taken at 11:00 a.m. 10