Federal Reserve Holds Off on Key Rate Hikes for 2019

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1 WEEKLY NEWSLETTER Federal Reserve Holds Off on Key Rate Hikes for 2019 #1 BEST OVERALL FORECASTER - CANADA HIGHLIGHTS ff The Federal Reserve suggests maintaining the status quo throughout the year and will stop reducing its balance sheet. ff United States: Home resales soared in February. ff Canada: Inflation rose a little in February. ff Canada: A slight reduction in retail sales in. ff The federal and Quebec governments tabled their 2019 budgets. A LOOK AHEAD ff Like retail sales, U.S. consumption for should show a slight rebound. ff United States: a new increase in housing starts is expected. ff Canada: Real GDP by industry could be back in positive territory. ff Canada: The trade balance could improve somewhat in. FINANCIAL MARKETS ff Risk aversion resurfaces on markets. ff The Federal Reserve s highly cautious tone pushes bond yields even lower. ff The loonie falls once again on disappointing data in Canada. 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 Federal Reserve (Fed) decided to maintain the target range for the federal funds rate at 5% to 0%. New federal funds forecasts from the Fed leaders for the end of 2019 now points to no key rate hikes, whereas two had been expected last December. This would be the first year since 2014 that U.S. key rates have not gone up. A single increase is still predicted for 2020, followed by a new status quo in Moreover, The Fed intends to slow the reduction of its holdings of Treasury securities by reducing the cap on monthly redemptions from the current level of US$30B to US$15B beginning in May The Fed intends to conclude the reduction of its aggregate securities holdings at the end of September ff The federal government tabled its 2019 budget on Tuesday, and its budget projections were not far off the fall update. After an estimated deficit of $19.8B in , the budgetary balance could gradually improve, with a projected deficit of $9.8B in For , the fiscal position is a little better than the prognosis in the update last November, thanks to more favourable economic conditions in The government used part of this room to manoeuvre to finance several new initiatives in its 2019 budget. The economic outlook for 2019 has darkened recently, however, which may have negative consequences for the federal government s financial projections. ff The leading indicator was up in February, its first climb since September 2018 after a series of stagnations and % drops from October to. February s rise in the leading indicator is mainly due to the stock market rebound. Positive contributions were also made by household confidence, credit conditions and interest rate spreads, but hours worked and jobless claims took a bite out of them. Last month s gain pushed the 3 month change for the leading indicator back into the black. However, 6 month and 1 year changes have slowed again. ff After temporarily dipping in February, the Philadelphia Fed s regional manufacturing index bounced back from -4.1 to 13.7 in, the highest it has been since October. The New York Fed s Empire index, meanwhile, fell from 8.8 to 3.7 during the same period. ff Sales of existing homes soared 1% in February, the strongest monthly gain since December But that came on the heels of a heavy downward trend and, at 5,510,000 units (annualized), the level of sales remains % lower than a year ago. February s upturn is due solely to single-family homes (+13.3%), as resales of multi-unit dwellings were stagnant. ff Quebec s 2019 budget came out on Thursday. The Finance Department inherited an excellent financial situation that has allowed it to introduce a number of new measures and still maintain a balanced budget for and the following years. The total financial impact of the new budget measures will be $16.2B to , with a significant emphasis on health, education, reducing Quebecers tax burden and improving the long-term growth potential of the economy and the environment. ff The total consumer price index (CPI) rose % in February. The total annual inflation rate went from 1.4% to 1.5%. With inflation below the median target of 2%, the Bank of Canada will have greater flexibility in managing its monetary policy. This is especially true in light of our projections that the annual change in total CPI should not exceed the 2% mark on a persistent basis in 2019 and Under these circumstances, the status quo on key rates could last a very long time. ff The value of retail sales was down in, a disappointing result because most forecasters expected a slight uptick. In real terms, retail sales were flat. Benoit P. Durocher, Senior economist Francis Généreux, Senior economist 2

3 Financial Markets An Extremely Cautious Federal Reserve The U.S. stock market seesawed this week. Investor sentiment was mixed amid weakening economic conditions, China U.S. trade talks postponed until late April, renewed uncertainties about Brexit and the caution shown by central banks. The Federal Reserve s (Fed) decision to hold off on key rate hikes in 2019 lifted the markets only temporarily on Wednesday, as lower growth forecast worried investors. The major U.S. stock indexes were back up on Thursday, but disappointing purchasing manager indexes (PMI) released in Europe on Friday rekindled concerns about the global economy, putting downside pressure on equities. The S&P 500 posted a weekly loss of almost 1% Friday morning. The S&P/TSX fared worse, as renewed uncertainty, especially on Wednesday, and the decline in Canadian retail sales released on Friday dealt a heftier blow to the Canadian stock market. European stock markets also ended the week in negative territory. The Fed s decision on Wednesday was especially tough on bond yields. The market is even starting to price in a greater probability of key rate cuts. U.S. bond yields fell as well Friday morning, on disappointing European data. The 10 year yield fell below the 3 month yield on Friday for the first time since Canadian yields followed suit with the 10 year 3 month slope inverting on Wednesday. At the time of writing, the 10 year bond yield in Canada was about 6 basis points below the 3 month yield. GRAPH 1 Stock markets Index Index 2,875 16,300 2,850 16,100 2,825 2,800 15,900 2,775 2,750 15,700 2,725 2,700 15, /02/ /02/ /02/ /03/ /03/ /03/21 S&P 500 (left) S&P/TSX (right) Sources: Datastream and, Economic Studies GRAPH 2 Bond markets 10-year yield In % points -0,74 In % 2,8-0,76 2,6-0,78 2,4-0,80 2,2-0,82 The Fed s very cautious tone on Wednesday also generated much volatility on currency markets. This caused the greenback to lose some ground, enabling the loonie to climb back above US$5 and the euro to reach more than US$4. The U.S. dollar recovered quickly however, and even gained a bit. The return of the possibility of a no-deal Brexit and disappointing data in the euro zone harmed several currencies. At the time of writing, the euro was trading at roughly US$3 and the pound was below US$1.32. The Canadian dollar was also down on Friday morning. Disappointing statistics on retail sales in Canada pushed the loonie back down to below US$5. The yen and Swiss franc were among the few currencies to make gains against the greenback, helped by their safe-haven status. Hendrix Vachon, Senior Economist Carine Bergevin-Chammah, Economist 2,0-0,84-0,86 1,8-0,88 1,6-0, /02/07 1,4 2019/02/15 Spread (left) 2019/02/ /03/05 United States (right) 2019/03/ /03/21 Canada (right) Sources: Datastream and, Economic Studies GRAPH 3 Currency markets US$/C$ US$/ 0,765 1,145 0,760 1,140 1,135 0,755 1,130 0,750 1,125 0,745 0,740 07/02/2019 1,120 1,115 15/02/ /02/ /03/2019 Canadian dollar (left) 13/03/ /03/2019 Euro (right) Sources: Datastream and, Economic Studies 3

4 A Look Ahead UNITED STATES TUESDAY 26 - February ann. rate 1,225,000 1,275,000 1,230,000 Housing starts (February) Housing starts shot up 18.6% in, their sharpest monthly growth since October 2016, although that followed an accumulated drop of 22.3% since the last peak in Another gain is expected for February. Recent building permit levels, which have held steady around 1,320,000 units since November, point to an improvement. However, a decline in construction sector jobs in February is not such a good sign. Housing starts are expected to reach 1,275,000 units in February. TUESDAY 26-9:00 y/y 4.0% 3.8% December 4.2% S&P/Case-Shiller index of existing home prices () The monthly growth in existing home prices was in December, following an increase of in November and 0.4% in October. Somewhat faster growth of 0.4% is expected for, although monthly growth may be weaker than a year ago. This would slow the monthly change in the S&P/Case-Shiller index from 4.2% to 3.8%. TUESDAY 26-10: February Conference Board consumer confidence index () After shrinking for four months in a row, the Conference Board index bounced back in February. It gained 9.7 points, the strongest monthly growth since August However, it is still below its recent peak of 137.9, recorded in October There may be more gains in. Both the University of Michigan and TIPP indexes continued to rise during the month, but recent changes in the Bloomberg weekly index have been rather tepid. The rise in the markets cooled down as well, and gas prices rose considerably in recent weeks. The Conference Board index could increase modestly. We expect it to reach points. WEDNESDAY 27 - m/m December Trade balance () The United States ended 2018 with the worst trade deficit since October 2008, i.e., US$59.8B. We expect a slight improvement in, although the preliminary version of the merchandise trade balance will not be released to support our forecast. After a monthly decline of %, exports should go up, whereas imports are expected to fall after a % increase in December. All in all, the deficit should reach US$56.3B. FRIDAY 29 - December Consumer spending () In December, real consumption posted its worst monthly decline since September This decline had been heralded by the drop in retail sales for the same month, although they partially bounced back in. An increase in consumer spending is expected. The automobile sector should keep going down, however. An average increase of over % is expected for both durable and non-durable goods. Growth in services will be limited by a monthly reduction in demand for heating, but this will be offset by the expected rebound in food services. Overall, real consumption should see an increase of. The gain should reach in current dollars. The annual change in the deflator should fall from 1.7% to 1.4%, while the core deflator, which excludes food and energy, should stay at %. m/m -% FRIDAY 29-10:00 February ann. rate 620, , ,000 New home sales (February) After two consecutive monthly increases in November and December, which had not happened since the winter of 2018, sales of new single-family homes declined 6.9% in. No significant swings are expected in February. The most positive factor is the modest climb in homebuilder confidence for the month. Conversely, there is lower demand for mortgage loans in anticipation of purchases, although we still expect home sales to edge up to 612,000 units. Tuesday s release of the number of building permits for single-family homes will give us more information on the progress of sales of such dwellings. 4

5 CANADA WEDNESDAY 27 - $B December International merchandise trade () Seasonally adjusted and expressed in Canadian dollars, commodity prices were up around 2% in, which included an increase of about 4% in energy prices. This should boost several export values for the month. After some difficulties in December, we can also expect exports of machinery and equipment to bounce back in. All told, total exports should rise about 1% for. If the change in imports is quite weak, the trade balance should improve during the month. FRIDAY 29 - December Real GDP by industry () In theory, the reduction in oil production imposed by the Alberta government in should have negative consequences on real GDP by industry. However, a number of economic indicators performed well in ; these included manufacturing and retail sales. Under those circumstances, real GDP by industry could rise slightly during the month, putting an end to two negative months in a row. m/m % % % OVERSEAS DURING THE WEEK : Confidence indicators Among the indicators to be released in the euro zone in the coming week, Thursday will give us several confidence indexes for. Some of them continued to fall in February, but there was stabilization among consumers and businesses in the services sector. The consumer confidence index was up slightly in, according to the preliminary version, but the PMI indexes declined again, in the manufacturing sector in particular. On the same subject, s confidence indexes will come out on Tuesday, following s Ifo index on Monday. Friday will bring us the advance estimate for s inflation. The annual change in the total consumer price index was 1.5% in February. DURING THE WEEK : Economic indicators Several major indicators for February will be released starting Thursday evening. The results for were rather disappointing, auguring poorly for growth in Q The new information will show whether this trend continued in February. Retail sales (which fell 2.3% in ) will be released during the evening of 28. Industrial production, which was down 3.4% in, will also be released on Thursday evening, as will housing starts. 5

6 Economic Indicators Week of 25 to 29, 2019 Day Hour Indicator Period Previous data UNITED STATES MONDAY 25 20:30 Speech of the Philadelphia Fed President, P. Harker Speech of the Boston Fed President, E. Rosengren TUESDAY 26 8:00 9:00 10:00 Speech of the Philadelphia Fed President, P. Harker Housing starts (ann. rate) Building permits (ann. rate) S&P/Case-Shiller home price index (y/y) Consumer confidence WEDNESDAY 27 10:00 17:30 Trade balance Goods and services (US$B) Current account (US$B) Speech of the Kansas City Fed President, E. George THURSDAY 28 10:00 Initial unemployment claims Real GDP (ann. rate) Pending home sales (m/m) FRIDAY 29 Personal income (m/m) Personal consumption expenditures (m/m) Personal consumption expenditures deflator Total (m/m) Excluding food and energy (m/m) Total (a/a) Excluding food and energy (y/y) 9:45 Chicago PMI index 10:00 Michigan s consumer sentiment index final 10:00 New home sales (ann. rate) 12:45 Speech of a Federal Reserve Vice Chair, R. Quarles 1,225,000 1,308, % ,275,000 1,305, % ,230,000 1,317, % , % 0.0% 226, % n/a 221, % 4.6% % -% 0.0% 1.4% % , % 1.4% % ,000 % 1.7% % , n/a n/a % % % % n/a n/a % 1.2% % - 3.8% % Q Q4t Mach CANADA MONDAY 25 TUESDAY 26 WEDNESDAY 27 THURSDAY 28 FRIDAY 29 International trade ($B) Average weekly earnings (y/y) Number of salaried employees (m/m) --Industrial product price index (m/m) Raw materials price index (m/m) Real GDP by industry (m/m) 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 Daylight Saving Time (GMT - 4 hours). Forecast of, Economic Studies of the Group. 6

7 Economic Indicators Week of 25 to 29, 2019 Country Hour Indicator Period m/m (q/q) y/y Previous data m/m (q/q) y/y OVERSEAS MONDAY 25 0:30 5:00 5:00 5:00 All industry activity index Ifo survey Business climate Ifo survey Current situation Ifo survey Expectations -0.4% % TUESDAY 26 New Zealand 3:00 21:00 Consumer confidence Business confidence Production outlook Real GDP final Reserve Bank of New Zealand meeting April Q % % WEDNESDAY 27 Consumer confidence 96 THURSDAY 28 Mexico United Kingdom 3:00 5:00 9:00 15:00 19:30 19:30 19:50 19:50 20:01 Retail sales Money supply M3 Business climate Consumer confidence final Industrial confidence Services confidence Economic confidence Consumer price index preliminary Bank of Mexico meeting Consumer price index Tokyo Unemployment rate Industrial production preliminary Retail sales Consumer confidence -1.0% FRIDAY 29 United Kingdom Italy 1:00 5:30 Housing starts Real GDP final Consumer price index estimate Consumer price index preliminary Personal consumption expenditures Consumer price index preliminary Q4 % SATURDAY 30 China China 21:00 21:00 PMI manufacturing index PMI non-manufacturing index % 8.25% % 95 % 3.9% 1.5% % % 1.3% -1.2% % % % 3.3% % 8.25% 2.6% 3.8% 1.5% % % -3.4% -2.3% -13 % % 1.3% 1.5% 1.0% -1.2% 1.2% 1.2% 0.0% % 1.3% 1.5% % 1.0% 1.3% 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 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, , , * * , ,307 1,994 1,230 1, ,510-59, , ,037 1, ,930-50, ,209 1, ,210-55, ,184 1, ,350-46,978 1, ,334 1, ,610-51,889 2, Excluding food and energy 11 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) ,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 57, ,379 50, * 36, * 63,547-4,593-1, ,082 46,309 50, , * 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) 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) ,807 25,558 1, ,822 25,849 1, ,793 26,032 1, ,417 22,445 1, ,930 26,744 1, ,588 23,533 1, ,931 26,828 1, ,737 25,006 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 -5 Treasury bill 3 months -0 Treasury bonds 2 years -8 Treasury bonds 5 years -6 Treasury bonds 10 years -5 Treasury bonds 30 years S&P/TSX index (level) Exchange rate (C$/US$) Exchange rate (C$/ ) 16, , , , , , , , , Overseas ECB Refinancing rate Exchange rate (US$/ ) United Kingdom BoE Base rate Bonds 10 years FTSE index (level) Exchange rate (US$/ ) , , , , , , , , , Bonds 10 years DAX index (level) , , , , , , , , ,382 BoJ Main policy rate Nikkei index (level) Exchange rate (US$/ ) 0 21, , , , , , , , , CRB: Commodity Research Bureau; WTI: West Texas Intermediate; ECB: European Central Bank; BoE: Bank of England; BoJ: Bank of Note: Data taken at markets closing, with the exeption of the current day where they were taken at 11:00 a.m. 10