Sharp Rise in Prices in January in Canada

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1 WEEKLY NEWSLETTER Sharp Rise in Prices in January in Canada # BEST OVERALL FORECASTER - HIGHLIGHTS ff Canada: Inflation Rising Faster than Expected. ff Canada: December saw a drop in wholesale and retail sales. A LOOK AHEAD ff United States: The ISM manufacturing index has likely remained fairly stable in February. ff United States: Real consumption probably stagnated in January, but lower taxes boosted household disposable income. ff Canada: Real GDP by industry should continue to rise in December. ff Canada: The fourth quarter as a whole should end with real GDP growth of 2.0%. FINANCIAL MARKETS ff The stock markets have been volatile, posting losses in the United States and gains in Canada. ff The markets are anticipating four key interest rate hikes in the United States in 208, following the Federal Reserve minutes. ff The Canadian dollar was penalized by the country s mixed data. 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...0 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 208, Group. All rights reserved.

2 Key Statistics of the Week UNITED STATES ff The leading indicator was up % in January, which comes on the heels of gains of % in December and in November. In the first month of 208, the main positive contributors were building permits, the ISM index and the stock market (the effect of recent declines in stock indexes will be felt more in February). The annual change in the leading indicator reached 6.2% in January, the highest level since July 204. We have to go back to April 20 to see stronger six-month growth. These movements are an indication that the sound economic growth in the United States is expected to continue. ff The total consumer price index (CPI) rose % in January. The total annual inflation rate went from.9% to.7%. The % increase in the total CPI seen in January is higher than expected. The main surprise was the seasonally adjusted total CPI, which rose % during the month. It may not seem like much, but the upward trend in the total CPI noticeably quickened over the last few months. This may be a sign that the upside effects caused by the disappearance of excess capacity are starting to be felt more and more. ff For the first time since last summer, existing home sales saw two monthly declines in a row, shrinking 3.2% in January. Annualized sales dropped from 5,560,000 in December to 5,380,000 units, the lowest level since September. All major areas saw a decline in sales. Single-family home resales retreated 3.8%, but condo resales increased.6%. Francis Généreux, Senior economist ff The value of retail sales fell % in December, which was below expectations. For 207 as a whole, the value of retail sales was up 6.7%. This was the strongest annual growth in retail trade in the past 20 years. Although disappointing, December s drop in retail sales is no cause for concern. Monthly results for retail trade have always been quite volatile. In addition, this poor performance comes on the heels of an exceptional past few months. ff The value of wholesale sales slid % in December. Most major sectors saw a decline during the month. In real terms, sales are down 0.9%. However, inventory volume rose.3%. The net effect of wholesale trade on economic growth in December will therefore be slightly in the black. Benoit P. Durocher, Senior economist Inflation is expected to continue to accelerate over the coming months Total consumer price index Annual variation in % forecast Sources: Statistics Canada and, Economic Studies 2

3 Financial Markets Fed Leaders Seem More Optimistic Volatility returned to the U.S. stock market this week, as trading tended to start out strongly, then weaken over the course of the day. The contents of the Fed s minutes released Wednesday were considered more optimistic, which worried the stock market, as it does not want to see interest rates rise too quickly. At the time of writing, the S&P 500 was down by approximately 0.25% for the week. In Canada, the S&P TSX was ending the week on a positive note, buoyed by the solid corporate results, including in the financial sector. The cumulative gain for the week hovered around %. GRAPH Stock markets Index Index The ten-year bond rate in the United States reacted strongly to the Fed s optimistic minutes, rising 6 basis points by the end of the day on Wednesday. It then dropped again to below 2.90% on Friday morning. The two-year rate remained stable during the week except for a jump during the night between Tuesday and Wednesday. It ended the week around 3%. Canadian bond rates followed U.S. rates on Wednesday before weakening after disappointing Canadian retail sales figures were announced. The stronger-than-expected inflation posted Friday morning temporarily raised the two-year and ten-year rates, but these dropped to below the level reached last week, i.e. approximately.78% and 6% respectively S&P 500 (left) S&P/TSX (right) Sources: Datastream and, Economic Studies GRAPH 2 Bond markets 0-year yield In % points In % Stock market volatility and the increasing expectations of monetary tightening in the United States helped the U.S. dollar achieve some gains this week. The euro, which was worth a little more than US$.24 on Monday, was worth US$.23 at the time of writing. Some of the European economic data was disappointing, with the drop in the consumer and business confidence indexes. The pound fared better as it remained near US$.40. The Canadian dollar was also penalized by disappointing data. Wholesale and retail sales failed to meet expectations. This followed last week s disappointing number of houses sold. That being said, the good inflation figures released Friday lifted the loonie back to US$ Spread (left) United States (right) Canada (right) Sources: Datastream and, Economic Studies GRAPH 3 Currency markets Hendrix Vachon, Senior Economist Carine Bergevin-Chammah, Economist US$/C$ US$/ Canadian dollar (left) Euro (right) Sources: Datastream and, Economic Studies 3

4 A Look Ahead UNITED STATES MONDAY February 26 - January ann. rate 650, ,000 December 625,000 New home sales (January) Sales of new single-family homes posted their biggest monthly drop in December since August 206. However, the 9.3% decline followed a leap of 5.0% in November, so the 625,000-unit level at the end of 207 is still above the average for the six previous months. We expect some slight growth for January. December s extremely cold weather certainly affected sales, and the milder days of January should lead to a bit of a rebound. The number of building permits, coupled with the NAHB confidence index, also point to growth, although the 3.2% drop in existing home sales is casting a pall. We expect sales to go to 655,000 units. TUESDAY February 27 - January m/m -% -% December % New durable goods orders (January) New orders for durable goods in December capitalized on the second consecutive month of strong growth in the aviation sector. The military sector contributed to the growth alongside civil aviation. However, all aviation sectors should slow down a bit in January if we are to judge from Boeing s monthly figures. Automobiles are expected to post more energetic growth. The increase of durable goods orders not including transportation should speed up, based on the level of the new orders component of the ISM manufacturing index. It will also be interesting to see whether the lower corporate taxes and the chance to completely write off investments in new equipment have had an effect on new orders. All told, a 0.9% gain is expected for new orders not including transportation, although there will be a % drop in total durable goods orders. TUESDAY February 27-9:00 December y/y 6.30% 6.52% November 6.4% S&P/Case-Shiller index for existing homes (December) The S&P/Case-Shiller index was up % in November for the second month in a row. Somewhat faster growth of 0.9% is expected for the end of 207. That will bring the annual change in the S&P/Case-Shiller index to 6.5%, compared with 6.4% in November. In terms of yearly averages, the prices of existing homes should be up 6.0% in 207 compared with 5.2% in 206 and 5.0% in 205. TUESDAY February 27 - February January 25.4 Conference Board consumer confidence index (February) After losing 5.5 points in December, the Conference Board confidence index rose points in January. Despite difficulties in the stock markets at the beginning of the month, we expect another increase in February. Consumer confidence is already on the upswing, according to other confidence indexes like the University of Michigan, Bloomberg weekly and the TIPP. The tax reductions introduced at the end of December have become more and more popular. That would seem to be enough to offset the 5% decline in the S&P 500 since its peak in January (at time of writing, the New York stock exchange had already gained back half of the roughly 0% hit it took from January 26 to its lowest point on February 9). The recent drop in gas prices and the job market s strong performance are also keeping confidence afloat. We expect the Conference Board index to gain 2 points and reach THURSDAY March st - January December Consumer spending (January) Real consumption was up in December, slightly less than November s gain of %. However, the most recent figures on retail sales suggest that December s results could be revised downward. They also indicate that consumption was sluggish in January. The slump in sales of new automobiles could even be pointing the way to an overall decline in the consumption of durable goods. We also expect a decline in real consumption of non-durable goods and a more modest increase in services. Overall, real consumption seems to have stagnated, although nominal consumption should reach with the addition of the forecast increase in the consumption expenditure deflator. Nominal personal income should grow %, but it remains to be seen what effect the granting of special bonuses related to lower corporate taxes coupled with lower personal income tax rates will have on personal disposable income. m/m 4

5 THURSDAY March er - February January 59. ISM manufacturing index (February) The ISM manufacturing index hardly moved from December to January; it went from 59.3 to 59.. A similar result is expected for February. That is also what the rather limited movements of leading regional manufacturing indexes suggest. The ISM index should be back to THURSDAY March st - Q4 207 $B Q Current account (Q4) According to the data on international merchandise trade, the value of exports rose 4.6% in 207 Q4. Since that increase is higher than the growth of imports (+3.%), the trade balance for goods improved slightly during the quarter. That should open the door to a lower current account balance deficit for the fourth quarter. FRIDAY March 2nd - December November Real GDP by industry (December) At first glance, the economic results for December were not very good. Furthermore, manufacturing, wholesale and retail sales all went down during the month. However, that was partially offset by increases in inventory and some other indicators take a more positive tack. For example, the number of hours worked soared.2% in December due to significant hikes in the goods and services sectors. All in all, real GDP by industry could grow by about in December. m/m 0.% FRIDAY March 2nd - Q4 207 ann. rate 2.% 2.0% Q % Real GDP (Q4) After remaining stable in October, real GDP by industry was up in November. Factoring in the increase expected for December, Q4 should close with an annualized real GDP gain of 2.0%. Domestic demand should continue to grow significantly, boosted by fairly strong consumer spending, a surge in the housing market and rising non-residential investments. On the other hand, the foreign trade balance should worsen over the quarter, which will have a negative effect on the change in real GDP. OVERSEAS DURING THE WEEK : Economic indicators Among the indicators to be released in the euro zone in the coming week, Tuesday will give us several confidence indexes for February. A downturn is possible, because we have recently noted drops in the preliminary version of the consumer confidence index and the PMI indexes. The advance estimate for February s inflation will be released on Wednesday. The annual change in the total consumer price index was.3% in January. The unemployment rate for January comes out on Thursday. It was 8.7% in December. DURING THE WEEK : Economic indicators Several monthly indicators for January will be released in this week. Retail sales will be released on Tuesday evening. They had gone up 0.9% in December. Industrial production and housing starts will also be released on Tuesday. The unemployment rate and the consumer price index will be released on Thursday. 5

6 Economic Indicators Week of February 26 to March 2nd, 208 Day Hour Indicator Period Previous data UNITED STATES MONDAY 26 8:00 8:00 Speech of the St. Louis Fed President, J. Bullard New home sales (ann. rate) Speech of a Federal Reserve Governor, R. Quarles 650, , ,000 TUESDAY 27 9:00 Goods trade balance preliminary (US$B) Durable goods orders (m/m) -% Retail inventories preliminary (m/m) Wholesale inventories preliminary (m/m) S&P/Case-Shiller home price index (y/y) 6.30% Consumer confidence 26.0 Testimony of the Federal Reserve Chairman, J. Powell, before a House committee % 6.52% % 6.4% 25.4 WEDNESDAY 28 9:45 Real GDP (ann. rate) Chicago PMI index Pending home sales (m/m) % 65.0 % % 65.7 % 226, ,000 % 222,000.7% % ,200,000.7% % ,950,000 0.%.7% % % 59. 7,070, THURSDAY Initial unemployment claims Personal income (m/m) Personal consumption expenditures (m/m) Personal consumption expenditures deflator Total (m/m) Excluding food and energy (m/m) Total (y/y) Excluding food and energy (y/y) Construction spending (m/m) ISM manufacturing index --Total vehicle sales (ann. rate) FRIDAY 2 Michigan s consumer sentiment index final Q4s 9-23 MONDAY 26 TUESDAY Federal Budget WEDNESDAY 28 Industrial product price index (m/m) Raw materials price index (m/m) % % -0.% -0.9% THURSDAY Current account balance ($B) Q FRIDAY 2 Real GDP by industry (m/m) Real GDP (ann. rate) Q4 0.% 2.% 2.0%.7% Note:, Economic Studies are involved every week in the Bloomberg survey for Canada and the United States. Approximately 5 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 February 26 to March 2nd, 208 Country Hour Indicator Period m/m (q/q) y/y Previous data m/m (q/q) y/y OVERSEAS MONDAY 26 South Korea Bank of Korea meeting ,6 % % % -% -4.2% 5.2% 2.9% -% % 0.9% TUESDAY 27 France Germany United Kingdom China China 2:45 4:00 8:00 8:50 8:50 9:0 20:00 20:00 Consumer confidence Money supply M3 Business climate Consumer confidence final Industrial confidence Services confidence Economic confidence Consumer price index preliminary Industrial production preliminary Retail sales Consumer confidence PMI manufacturing index PMI non-manufacturing index WEDNESDAY 28 Germany France France France 0:00 2:00 2:45 2:45 2:45 20:30 Housing starts Consumer confidence Personal consumption expenditures Consumer price index preliminary Real GDP preliminary Consumer price index estimate PMI manufacturing index final THURSDAY United Kingdom Italy France Germany Italy United Kingdom --3:45 3:50 3:55 4:00 4:00 4:30 FRIDAY 2 Germany Italy United Kingdom 2:00 4:00 4:30 0% March 0.9 Q4 % 0% 4,6 %.6% 4.4% 3.6% -4.7%.% -.2% -0.% 2.4% %.2% % Nationwide house prices PMI manufacturing index PMI manufacturing index final PMI manufacturing index final PMI manufacturing index final Unemployment rate PMI manufacturing index Unemployment rate Household spending Consumer price index Tokyo Unemployment rate 2.6% % % % 55.0% % 8.7% -.4% % % 3.2% Retail sales Real GDP final PMI construction index Producer price index Q4 % 3.3%.6% 5.6% -.9% 50.2 %.3% 2.4%.3% -0.%.3% -.9%.6% % 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) Exports (2009 $B) Imports (2009 $B) Final domestic demand (2009 $B) GDP deflator (2009 = 00) Labor productivity (2009 = 00) Unit labor cost (2009 = 00) Employment cost index ( 2005 = 00) Current account balance ($B) VARIATION (%) LEVEL 207 Q4 207 Q4 207 Q4 207 Q4 207 Q4 207 Q4 207 Q4 207 Q4 207 Q4 207 Q4 207 Q4 207 Q4 207 Q4 207 Q3 ANNUAL VARIATION (%) Quart. ann. year ,272 2,028 2, , ,229 2,882 7, Statistics representing the level during the period; * New statistic in comparison with last week. UNITED STATES Monthly economic indicators REF. MONTH Leading indicator (200 = 00) ISM manufacturing index * VARIATION (%) LEVEL month -3 months -6 months - year ISM non-manufacturing index Cons. confidence Conference Board (985 = 00) Personal consumption expenditure (2009 $B) Disposable personal income (2009 $B) Consumer credit ($B) Retail sales ($M) ,07 2,839 3,84 492, , , ,32,902, , , , ,236,300 Excluding automobiles ($M) Industrial production (2007 = 00) Production capacity utilization rate (%) New machinery orders ($M) New durable good orders ($M) Business inventories ($B) Housing starts (k) Building permits (k),396,300,36,230 New home sales (k) * 5,380 5,560 5,500 5,420 5,650 Existing home sales (k) Commercial surplus ($M) -53,8-50,435-44,830-45,626-44, , ,082 2, Nonfarm employment (k) Unemployment rate (%) Consumer price ( = 00) Excluding food and energy Excluding food and energy Producer price (2009 = 00) Export prices (2000 = 00) Import prices (2000 = 00) Personal cons. expenditure deflator (2009 = 00) 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 $M) VARIATION (%) LEVEL ANNUAL VARIATION (%) Quart. ann. year Current account balance ($M) 207 Q3 207 Q3 207 Q3 207 Q3 207 Q3 207 Q3 207 Q3 207 Q3 207 Q3 207 Q3 207 Q3 207 Q3 207 Q3,860,679,07, ,066 27,395 7,508 7, , ,543,847, , , , , , ,779 Production capacity utilization rate (%) Disposable personal income ($M) Corporate net operating surplus (2007 $M) 207 Q3 207 Q3 207 Q3 85.0,208, , Business inventory change (2007 $M) Exports (2007 $M) Imports (2007 $M) Final domestic demand (2007 $M) GDP deflator (2007 = 00) Labour productivity (2007 = 00) Unit labour cost (2007 = 00) 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) Building permits ($M) Retail sales ($M) Excluding automobiles ($M) Wholesale trade sales ($M) Commercial surplus ($M) Exports ($M) Imports ($M) Employment (k)2 Unemployment rate (%) Average weekly earnings ($) Number of salaried employees (k)2 Consumer price (2002 = 00) Excluding food and energy Excluding 8 volatile items Industrial product price (2002 = 00) Raw materials price (2002 = 00) Money supply M+ ($M) VARIATION (%) LEVEL - month -3 months -6 months - year,759, ,929 55, ,059 49, * 36, * 62,994-3, ,70-3,344-3, ,50 49, , * * * , * * , Nov. Nov. * 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 - year Higher Average Lower United States Federal funds target Treasury bill 3 months Treasury bonds 2 years Treasury bonds 5 years Treasury bonds 0 years Treasury bonds 30 years S&P 500 index (level) DJIA index (level) Gold price (US$/ounce) CRB index (level) WTI oil (US$/barrel) ,728 25,38, ,732 25,29, ,873 26,67, ,602 23,558, ,443 2,84, ,367 20,822, ,873 26,67, ,57 22,554, ,329 20,404, Canada Overnight target Treasury bill 3 months Treasury bonds 2 years Treasury bonds 5 years Treasury bonds 0 years Treasury bonds 30 years Spread with the U.S. rate (% points) Overnight target Treasury bill 3 months -9 Treasury bonds 2 years -5 Treasury bonds 5 years -5 Treasury bonds 0 years -2 Treasury bonds 30 years S&P/TSX index (level) Exchange rate (C$/US$) Exchange rate (C$/ ) 5, , , , , , , , , Ov erseas ECB Refinancing rate Exchange rate (US$/ ) United Kingdom BoE Base rate Bonds 0 years FTSE index (level) Exchange rate (US$/ ) 0 2 7, , , , , , , , , Germany Bonds 0 years DAX index (level) 5 2, , , , ,68 0.9, , ,635,823 BoJ Main policy rate Nikkei index (level) Exchange rate (US$/ ) , , , , , , , , , 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 :00 a.m. 0