Uncertainty Lowers Bond Yields

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1 WEEKLY NEWSLETTER Uncertainty Lowers Bond Yields #1 BEST OVERALL FORECASTER - HIGHLIGHTS ff U.S. home sales were down in. ff Canada: Wholesale sales return to positive territory. A LOOK AHEAD ff U.S. hires will likely accelerate in. ff United States: A slight increase in ISM manufacturing is expected. ff The Bank of Canada should again opt to maintain the status quo on its key interest rates. ff Canada: Real GDP by industry should continue to rise in. ff Canada: The first quarter is expected to end with real GDP growth of around 1.7%. FINANCIAL MARKETS ff The stock market suffers from renewed tensions with China and North Korea. ff Bond yields are retreating, as uncertainty hits the markets once again. ff The U.S. dollar is capitalizing on risk aversion. 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 Carine Bergevin-Chammah, Economist Mathieu D Anjou, Senior 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 2018, Group. All rights reserved.

2 Key Statistics of the Week UNITED STATES ff After jumping 3.0% in February and increasing % in, home resales dropped 2.5% in. Annualized sales slid from 5,600,000 to 5,460,000 units in, down % from a year ago. Sales of existing single-family homes pulled back 3.0%, while sales of multi-unit housing increased 1.6%. ff Wholesale sales inched up % in after retreating in February. Much of the increase comes from wholesalers of automotive products as well as building materials and supplies, with the other sectors posting a downtick in. In real terms, total sales rose 0.8%. However, inventories shrank. The total effect of wholesale trade on economic growth in will therefore be slightly positive. ff Sales of new single-family homes fell 1.5% in after gaining % in. Annualized sales declined from 672,000 to 662,000 units. The slump comes mainly from the Western United States (-7.9%), while an 1% increase was recorded in the Northeast. ff New durable goods orders declined 1.7% in, following a 2.7% gain in. The civil aviation sector contributed to the retreat with a 29.0% tumble in civil aircraft orders, after a 60.7% surge in. Excluding transportation, growth was 0.9%. New capital goods orders not including aviation and defence were up % after falling 0.9% in. ff Corporate profits rose 2.7% in the first quarter. Non-financial sectors inched up %, while the financial and insurance sectors grew 7.5%. Over one year, operating profits are up 7.0% for all sectors. Profit margins went from 9.39% to 9.57%. Benoit P. Durocher, Senior economist Francis Généreux, Senior economist Corporate profit margins remain high Corporate profit margins In % 10 9 Average Sources: Statistics Canada and, Economic Studies 2

3 Financial Markets Uncertainty Returns to the Markets The stock market began the week on a high note, as it appeared that a China U.S. trade war had been averted. However, these hopes were dashed by the negative comments made by Donald Trump with respect to the negotiations with China, followed by the cancellation of the meeting with North Korea. The upswing late Wednesday, following the minutes of the Federal Reserve (Fed), was fleeting. Despite everything, the S&P 500 index still managed to maintain some of the gains recorded at the beginning of the week, posting a weekly increase of approximately on Friday morning. The Canadian stock market stabilized after the drop on Tuesday afternoon. The uncertainty surrounding international trade and the rise in oil inventories in the United States seemed to have weakened the stock market. By Friday morning, the S&P/TSX index had lost roughly over the course of the week. Stock markets in Europe were penalized by the formation of a Eurosceptic coalition government in, thereby adding to the fears regarding s high public debt. Increasingly sharp geopolitical tensions caused U.S. bond yields to lose recent gains. The optimistic tone of the minutes of the Fed, which appears to be announcing another key rate hike in June, did not have any lasting impact. On Friday morning, the Organization of Petroleum Exporting Countries (OPEC) announced the possibility of an increase in oil output, thereby easing inflationary expectations. The 2-year bond yield was then under 2.50%, while the 10-year yield was under 2.95%. Canadian yields reacted similarly, posting a significant weekly drop in short and long-term maturities. The Canadian 2-year and 10-year yields are now around 1.95% and 5% respectively. The U.S. dollar and the yen were buoyed by the return of risk aversion. The euro dropped below the US$7 mark. The common currency was penalized by new signs that European economic growth is slowing down and by the uncertainty surrounding the establishment of a Eurosceptic government in. The pound sterling mostly depreciated on Wednesday following the publication of an inflation rate that had decreased more than anticipated. The British currency now trades at nearly US$3. The drop in the price of oil affected the Canadian dollar, which fell to US$0.77. GRAPH 1 Stock markets Index Index 2,750 16,200 2,725 16,050 15,900 2,700 15,750 2,675 15,600 2,650 15,450 2,625 15,300 2,600 15, /04/ /04/ /04/ /05/ /05/ /05/24 S&P 500 (left) S&P/TSX (right) Sources: Datastream and, Economic Studies GRAPH 2 Bond markets 10-year yield In % points In % /04/ /04/20 Spread (left) 2018/04/ /05/08 United States (right) 2018/05/ /05/24 Canada (right) Sources: Datastream and, Economic Studies GRAPH 3 Currency markets US$/C$ US$/ Hendrix Vachon, Senior Economist Carine Bergevin-Chammah, Economist /04/ /04/ /04/ /05/2018 Canadian dollar (left) 16/05/ /05/2018 Euro (right) Sources: Datastream and, Economic Studies 3

4 A Look Ahead UNITED STATES TUESDAY 29-9:00 February y/y 6.50% 6.40% 6.80% TUESDAY 29-10:00 m/m S&P/Case-Shiller index of existing home prices () With February s 0.83% growth, existing home prices made their steepest monthly climb since September. should see further strong growth, around 0.8%. After speeding up in February, the annual S&P/Case-Shiller index change should falter a bit, dropping from 6.8% to 6.4%. Conference Board consumer confidence index () The Conference Board confidence index was up 1.7 points in after losing 3.0 points in. That is still lower than the cyclical peak of reached in February. A slowdown is expected in, however. Some of the other confidence indexes have already posted downturns for the same month, including the weekly Bloomberg index and the TIPP. The University of Michigan confidence index held steady between and, although the markets have gone up since mid-. However, that positive effect could be partially offset by the spike in gas prices, which are at their highest since summer All in all, the Conference Board confidence index is expected to drop back down to around THURSDAY 31st - m/m Consumer spending () The increase in real consumption in was the strongest since November. It contrasts with the consecutive drops of 0.1% in January and in February, a disappointing showing as taxes went down. We expect a increase for. Automobile purchases should contribute negatively, but retail sales suggest fairly good results for other durable goods as well as non-durable goods. The demand for heating, which seems to have remained high, should bolster the service sector. Nominal consumption should reach, as it did in, due to the forecast increase in the consumption expenditure deflator. The annual change in the consumption expenditure deflator should stay around %, while the core deflator, which excludes food and energy, could edge down from 1.9% to %. FRIDAY June 1st - Job creation according to the establishment survey () After a strong start to the year, job creation slowed down since the end of the winter with gains of 135,000 in and 164,000 in. Stronger growth is expected for, but not a great rebound. Initial jobless claims were low at the beginning of the month, but increased later. The release of the Conference Board confidence index and the ADP index will help shape the forecast. We expect 190,000 new positions. The jobless rate could go as high as 4.0% in. FRIDAY June 1st - 10:00 190, , , ISM manufacturing index () The ISM index went down 1.5 points in and points in, a departure from February s 60.8 cyclical peak. The 57.3 level in was the lowest since July A slight increase is expected for, however. That is what the movements of the leading regional manufacturing indexes suggest, especially the 1-point gain in the Philadelphia index and the 19-point gain in the Richmond index. The ISM index should go from 57.3 to WEDNESDAY 30 - Q $B Q Current account (Q1) The value of goods exports increased % in the first quarter, while imports were up %. That will likely lead to a decline in the trade balance for goods. Under these circumstances, the current account deficit can only increase during Q1. 4

5 WEDNESDAY 30-10:00 % % 18 % Meeting of the Bank of Canada () The monetary authorities may have to wait a while longer before they continue with monetary tightening. The extent of housing market adjustments to the new restrictive measures and to the gradual rise in interest rates is still uncertain. Nor is there any real urgency to act now, since economic growth has been progressing at a more sustainable pace for some quarters. Under these circumstances, the target overnight rate will stay at %. What we need to know now is how wide the monetary authorities will open the door to higher key rates when they meet in July. THURSDAY 31st - m/m February Real GDP by industry () Generally speaking, economic performance was fairly positive for. The volume of manufacturing, wholesale and retail sales increased significantly, but those good results could be partially offset by certain difficulties, like the 0.1% drop in hours worked in the service sectors. We therefore expect an increase of about in real GDP by industry for. THURSDAY 31st - Q q/q 1.9% 1.7% Q % Real GDP (Q1) The first quarter started on a sour note with a 0.1% drop in real GDP by industry. However, a rebound started in February with a increase, and we expect a further or so climb for. Overall, the first quarter should end with an annualized 1.7% increase in real GDP, similar to the previous quarter. Consumer spending and non-residential investment should continue to make positive contributions to the real GDP change. Residential investment may be in difficulty, as sales of existing homes declined sharply after new restrictive measures were introduced in January. A significant spike in imports means the trade balance should also go down in Q1 and make a negative contribution to real GDP. OVERSEAS DURING THE WEEK : Economic indicators The ese economy was disappointing in Q1 of 2018, with an annualized drop of % in real GDP. It is hoped that it will do better in the spring. We will have preliminary indications on the start of Q2 when several indicators come out. The unemployment rate will be released on Monday evening, followed by retail sales on Tuesday evening. Industrial production and housing starts will come out the next day. WEDNESDAY 30 - : Confidence indicators Several confidence indexes for will be released on Wednesday. The preliminary version of the consumer confidence index was down again in, as were the Euroland PMI indexes. That means the confidence indexes are likely to decline further. Among the other indicators to be released next week will be the Euroland unemployment rate for and the advance estimate of inflation in, both on Thursday. 5

6 Economic Indicators Week of 28 to June 1st, 2018 Day Hour Indicator Period Previous data UNITED STATES MONDAY 28 TUESDAY 29 9:00 10:00 S&P/Case-Shiller home price index (y/y) Consumer confidence 6.50% % % WEDNESDAY 30 1 Goods trade balance preliminary (US$B) Real GDP (ann. rate) Retail inventories preliminary (m/m) Wholesale inventories preliminary (m/m) Release of the Beige Book Q1s -7 % % % -0.5% 230, , , % % % 58.0 % 0.1% % % % % 1.9% 57.6 Markets closed (Memorial Day) THURSDAY 31 Initial unemployment claims Personal income (m/m) Personal consumption expenditures (m/m) Personal consumption expenditures deflator Total (m/m) Excluding food and energy (m/m) Total (y/y) Excluding food and energy (m/m) 9:45 Chicago PMI index 10:00 Pending home sales (m/m) 13:00 Speech of a Federal Reserve Governor, L. Brainard FRIDAY 1 10:00 10:00 Change in nonfarm payrolls Unemployment rate Weekly worked hours Average weekly earnings (m/m) Construction spending (m/m) ISM manufacturing index , % % , % % , % % -1.7% 57.3 MONDAY 28 TUESDAY 29 WEDNESDAY 30 10:00 Current account balance ($B) Industrial product price index (m/m) Raw materials price index (m/m) Bank of Canada meeting Q % % % % % % % THURSDAY 31 Real GDP by industry (m/m) Real GDP (ann. rate) Q1 1.9% 1.7% 1.7% FRIDAY 1 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 28 to June 1st, 2018 Country Hour Indicator Period m/m (q/q) y/y Previous data m/m (q/q) y/y OVERSEAS MONDAY 28 19:30 Unemployment rate TUESDAY 29 France 2:45 19:50 Consumer confidence Money supply M3 Consumer confidence Economic confidence Retail sales % WEDNESDAY 30 Germany France France Germany United Kingdom China China 1:00 2:00 2:45 2:45 8:00 19:01 19:50 21:00 21:00 Consumer confidence Retail sales Personal consumption expenditures Real GDP preliminary Business climate Consumer confidence final Industrial confidence Services confidence Economic confidence Consumer price index preliminary Consumer confidence Industrial production preliminary PMI manufacturing index PMI non-manufacturing index Q1 THURSDAY 31 United Kingdom France 1:00 2:00 2:45 20:30 Housing starts Nationwide house prices Consumer price index preliminary Unemployment rate Consumer price index estimate Unemployment rate Consumer price index preliminary PMI manufacturing index final -8.9% 3.0% % 10.9% 1% 1.6% 8.4% 8.5% 0.8% 0.1% 52.5 FRIDAY 1 France Germany United Kingdom 3:45 3:50 3:55 4:30 PMI manufacturing index PMI manufacturing index final PMI manufacturing index final PMI manufacturing index final Real GDP final PMI manufacturing index Q1 2.5% 2.5% % % -0.7% % 1.7% 1.6% % % -8 % 3.6% % % 0.1% % -9 % % % % % % 1.6% % -8.3% 2.6% 1.6% % 0.5% % 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 $B) GDP deflator (2009 = 100) Labor productivity (2009 = 100) Unit labor cost (2009 = 100) Employment cost index (Dec = 100) Current account balance ($B)1 1 VARIATION (%) LEVEL ANNUAL VARIATION (%) Quart. ann. 1 year ,386 12,067 2, , ,256 2,902 17, 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 Personal cons. expenditure deflator (2009 = 100) Excluding food and energy Producer price (2009 = 100) Export prices (2000 = 100) Import prices (2000 = 100) 1 VARIATION (%) LEVEL -1 month -3 months -6 months -1 year ,094 12,957 3, , , * * * , ,496 1,930 1,287 1, ,460-48, , ,336 1, ,600-57, ,334 1, ,380-53, ,265 1, ,500-45,298 1, ,165 1, ,540-44,729 2, 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 1,869,857 1,074, , , ,738 13, , ,304 1,865, , , , , , ,526 Production capacity utilization rate (%)1 Disposable personal income ($M) Corporate net operating surplus (2007 $M) ,232, , 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 Feb. Feb. VARIATION (%) LEVEL -1 month -3 months -6 months -1 year 1,767, ,661 57, ,400 50, , * 62,834-4,140-2,932-3, , ,584 51, , Feb. Feb , , 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) ,723 24,814 1, ,713 24,715 1, ,670 24,311 1, ,747 25,310 1, ,602 23,558 1, ,416 21,080 1, ,873 26,617 1, ,596 23,483 1, ,410 21,009 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 -0 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$/ ) 16, , , , , , , , , Overseas ECB Refinancing rate Exchange rate (US$/ ) United Kingdom BoE Base rate Bonds 10 years FTSE index (level) Exchange rate (US$/ ) 3 7, , , , , , , , , Germany Bonds 10 years DAX index (level) , , , , , , , , ,787 BoJ Main policy rate Nikkei index (level) Exchange rate (US$/ ) 22, , , , , , , , , 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