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1 FX Team Montreal Customer Service FX Team Toronto Customer Service Development Team Fixed Income & Commodity Major News this Week Last week brought encouraging news about the Canadian real estate market. First, the Building Permits figure for July was up 20.7% in dollar terms. Also, the Teranet National Bank National Composite House Price Index rose 0.6% in August, and the New Housing Price Index increased 0.2%. All this data surpassed analysts expectations. The news were more mixed in the U.S. Initial Jobless Claims, released on Thursday, was a low 292,000, the best figure seen in seven years. On Friday, the data on Retail Sales for August and the Michigan Consumer Sentiment Index were lower than expected. Australia s employment figures for August were very disappointing, with a net loss of over 10,000 jobs for a second month in a row. Have a good week! Philippe Shebib Wednesday Canada Previous Forecast Speech by Stephen Poloz, Governor of the Bank of Canada, in Vancouver. - - Friday Consumer Price Index for August (MoM) 0.1% 1.3% United States Previous Forecast Mardi Consumer Price Index for August (MoM) 0.2% 0.2% Housing Starts for August 921, ,000 Wednesday Key Rate Decision by the U.S. Federal Reserve: most economists expect that the Fed will announce that it will begin tapering bond purchases from the current $85 billion per month. 0.25% 0.25% Thursday Initial Jobless Claims: last week saw the best weekly figures since Existing Home Sales for August 330, million 292, million International Previous Forecast Monday Eurozone s Consumer Price Index for August (MoM) 0.1% -0.5% Tuesday England s Consumer Price Index for August (MoM) 0.5% 0.0% Wednesday Bank of England MPC Minutes - - 1

2 The Loonie Better mad with the rest of the world than wise alone. - Baltasar Gracian Foreign exchange markets, and in particular the USD/CAD pairing, appeared relatively flat last week, as participants waited for the U.S. Federal Reserve s decision on its monetary easing policy. Many analysts believe that the Fed will begin tapering its injections of capital into the market. The main point of contention surrounds the best time to start doing this, in synch with the health of the economy. As we explain below, the U.S. economy is sending signals that are, at the least, slightly contradictory. Investors just can t get a break! *Source: Bloomberg, National Bank of Canada, The above graph shows fluctuations in the weekly U.S. Initial Jobless Claims figure (the white curve), over which we have charted the Michigan Consumer Sentiment Index (the yellow curve). Staring with the good news, we see that initial jobless claims have reached their lowest level since the financial crisis. While this may seem to be very good news for the job market, it appears that this gust of job creation was unable to fill the sails of consumer confidence. Furthermore, on Friday morning the forecasters were humbled somewhat when we learned that this index was at 76.8, the lowest level in five months. The markets were expecting a figure of around 82. This suggests that, despite the fact that more and more workers are entering the market, the quality of the work they are obtaining does not allow U.S. consumers to develop a strongly positive outlook, given the recent growth in part-time versus full-time jobs. With respect to Canada, since we are depending heavily on export growth to compensate for slowing credit demand and a lull in the real estate market, it will be important that U.S. consumers don t throw in the towel, as they are the driving force behind their economy. Have a good week. Xavier Villemaire 2

3 Technical Analysis: (Monday 16, September, 2013) USD: The we talked about last week is there and brings interesting opportunities for USD buyers. Downward pressure on the USD seems to strengthen: close below the 100-day moving average (green line) and close below the rising channel (red line). A clear breack of (low of the Sept 12 th doji) could send the USDCAD to test the long term upward trend line (lows of September 2012, January 2013 and October 2013 as well as 61.8% Fibo of ) at To sum up: USD buyers, this is your market, enjoy it; USD sellers, be a little more patient before throwing the towel. Olivier Cosialls, CMT USD/CAD Res. levels Supports levels

4 Fixed Income With the latest economic data falling below analysts forecasts, most experts now believe that the Fed s approach to tapering its bond purchases will be less radical than initially thought. It will also be interesting to see how the Fed will respond, should more disappointing economic indicators be released. According to a Bloomberg survey of 34 economists, the government s bond purchases can be expected to fall by $10 billion per month. These same economists expect purchases of mortgage debt to remain unchanged at $40 billion per month. Meanwhile, the latest data show that the debt ratio of Canadian households continues to rise. This could eventually have an adverse effect on economic growth in Canada. Analysts expect economic growth in Canada and the U.S. to be roughly the same in 2013, but growth in the U.S. should be more pronounced in 2014 and This, combined with the Fed s gradual withdrawal from the money markets, will support rising bond yields in the markets. Wishing you a great week! Emmanuel Tessier-Fleury Canada Key short-term rates Weekly change Yearly change % 5 yr CAD Goverment Bond Yield 12-Sep-13 5-Sep-13 Change (pbs) 12-Sep-12 C hange (pbs) 2.2 Overnight Rate % % % M Bill (Federal) % % % month CDOR % % % Prime rate % % % Government bonds Weekly change Yearly change 12-Sep-13 5-Sep-13 Change (pbs) 12-Sep-12 C hange (pbs) year 1.286% 1.304% % year 2.132% 2.162% % year 2.782% 2.804% % /17/13 30 year 3.262% 3.258% % /31/13 8/14/13 8/28/13 9/11/13 United States Key short-term rates Weekly change Yearly change 12-Sep-13 5-Sep-13 Change (pbs) 12-Sep-12 C hange (pbs) Fed Funds target 0.250% 0.250% % M Tbill 0.015% 0.020% % month LIBOR 0.182% 0.182% % Prime rate 3.250% 3.250% % Government bonds Weekly change Yearly change 12-Sep-13 5-Sep-13 Change (pbs) 12-Sep-12 C hange (pbs) year 0.445% 0.520% % year 1.713% 1.850% % year 2.910% 2.995% % /17/13 30 year 3.853% 3.886% % /31/13 8/14/13 8/28/13 9/11/13 % yr US Government Bond Yield 4

5 Commodities This week-end, the Assad regime agreed to the Russian-American plan made last week. This agreement suggests that they will arrive at a political solution to the Syrian crisis as this should prevent a military intervention in the region. Russia s proposal to place Syria s chemical weapons under international control was well received by the international community, and this placed downward pressure on energy prices, which were down at the end of the week after reaching the highest levels seen in over two years. The strength of the Canadian dollar also helped drive down fuel prices for businesses that purchase fuel in Canada. The continued rise of the Canadian dollar, combined with lower prices for oil and refined products, has been good news for our clients. Energy prices could also be affected by the FOMC meeting on September 17 and 18, The Fed is expected to begin tapering its bond purchases, and this should eventually place downward pressure on energy prices by strengthening the U.S. dollar. Despite the drop we have seen over the last few days, we believe that other declines will materialize over the next few weeks and that a good opportunity will appear later this fall. We will be closely tracking the market and will contact our clients as soon as such an opportunity is at hand. Have a great week! Emmanuel Tessier-Fleury Open Prior Year to Variation 16-Sep-13 9-Sep-13 date WTI Crude Oil (USD/Barrel) % 20.87% Brent Crude Oil (USD/Barrel) % 5.27% Heating Oil (Cad/Liter) % 5.27% Rack Diesel Quebec (Cad/Liter) Rack Diesel, Toronto (Cad/Liter) Rack Diesel, Vancouver (Cad/Liter) Gasoline, Nym ex (Cad/Liter) % -2.16% % -0.07% % -2.16% % 0.75% Natural Gas (Usd/Mmbtu) % 11.01% $USD / Baril Energy charts Brent Crude Oil WTI Crude Oil Swap Heating Oil (CAD/Liter) Gasoline (CAD/Liter) WTI Crude Oil (CAD/Liter) Brent Crude Oil (CAD/Liter) 3 Months Months Months CAD/Liter Rack Diesel Heating Oil 12 Months Months

6 Last Week at a Glance Canada Building permits in dollar terms were up 20.7% in July after falling 10.6% the prior month. The jump exceeded by far consensus expectations, which were calling for an advance of no more than 3.5%. The strong results were attributable primarily to the non-residential sector (+45.5%), which saw permits for commercial buildings soar 89.2%. The residential sector, for its part, posted a gain of 4.1%. Six of the ten provinces registered strong progressions in permits issuance, including Quebec (33.4%), Ontario (31.5%), Manitoba (36.9%) and Alberta (19.1%). In British Columbia, the value of building permits shrank by $72.8 million (-8.2%), more than reversing the previous month s growth. At the national level, the increase in residential permits was split evenly between single units and multiples. In real terms, residential permits declined 0.7% as a 3% drop for multiples more than offset a 3.7% increase for singles. Housing starts retreated 6.6% to a seasonally adjusted annual rate of 180.3K in August from 193K the month before. This was worse than expected by consensus, which had set its sights on 190K. The decrease in August was split between rural (-13.2%) and urban areas (-5.8%). The softness in urban residential construction occurred primarily in the multiples segment (-8.4%), although there were fewer single starts as well (- 0.9%). On a regional basis, urban starts were down in BC (-19.4%), the Prairies (-23.9%), Atlantic Canada (-0.7%), and Quebec (-4.5%). These declines more than counterbalanced a 14.1% increase observed in Ontario. Multiple starts fell sharply in both BC and Alberta. In the latter province, it will be some time before economic activity returns to normal after the June/July floods. The awful housing start numbers for August are emblematic of the situation. In Ontario, instead, starts remained strong, with activity up 25% in the multiples segment. However, this will exacerbate the problem of growing inventories in the condo market in the GTA. Consequently, while we can expect a rebound in Western Canada in the months ahead, this will likely be offset by a slowdown in Ontario. Based on two months of data, Canadian housing starts are tracking an annualized contraction of about 6% in Q3 (after expanding at a pace of 39% in Q2). Hence, residential construction will probably be a drag on GDP in Q3 after contributing positively the previous quarter. This, together with an expected moderation in consumption spending growth, should keep Canadian GDP growth below 2% for a second straight quarter in Q3. In August, the Teranet National Bank National Composite House Price Index rose 0.6% month on month. It was up in six of the 11 regions covered, with five exceeding the national average: Toronto (1.2%), Calgary (1.0%), Victoria and Hamilton (0.8%), and Vancouver (0.7%). Prices advanced 0.2% in Ottawa-Gatineau. They sagged in five regions: Edmonton and Winnipeg (-0.2%), Montreal (-0.3%), Quebec City (-0.9%), and Halifax (-1.6%). According to our survey of 12 major real estate boards, existing-home sales were up 18% from a year earlier. Therefore, it is hard to believe that nationwide monthly price drops are in the offing. Also, a base effect, namely, price declines that started in September 2012, should cause 12-month home price inflation to accelerate in the coming months. Year on year, the Teranet National Bank National Composite House Price Index rose 2.3% in August. Industrial capacity utilization decreased in the second quarter to 80.6% from 80.8% in the previous quarter. United States Retail sales rose 0.2% in August, much weaker than the 0.5% increase expected by consensus. However, the prior month was revised up two ticks to +0.4% (from +0.2%). Sales of autos and parts rose 0.9% in August, more than making up for the prior month s drop. Excluding autos, sales rose just 0.1% (after a 0.6% 6

7 increase in the prior month), also disappointing consensus which was expecting a 0.3% increase. Gasoline sales were flat. Restraining ex-auto sales were declines in sales of clothing, sporting goods, general merchandise, and building materials which partly offset gains elsewhere including furniture and electronics. Discretionary spending, i.e. retail sales excluding gasoline, groceries, health/personal care, rose 0.2%, the smallest monthly increase in five months. The NFIB Small Business Optimism Index weakened marginally in August, dipping 0.1 point to 94 from the month before. Over the past four months, the index has held in the range between 93.5 and The last time the index topped 95 was in October It peaked at in November 2004 and fell to a cyclical low of 81 in March Initial jobless claims for the week of September 7 came in at 292K, down from an unrevised 323K the week before. This marked a new low since April 2006 and ran counter to consensus, which expected claims to increase to 330K. However, Labor Department officials attributed most of the decline to computer-network conversions in two states, which resulted in fewer reported applications. On the last business day of July there were 3.7 million job openings. This means that there were about 3.1 unemployed persons for each opening. The job openings rate (i.e., number of openings divided by total employment plus openings) slid to 2.6% in July from 2.8% in June. The hire rate (3.2%) and separation rate (3.0%) changed little in the month. So far in the recovery, the hiring rate has been soft compared with its 2006 average of 3.9%. Looking ahead, provided that Congress does not create further uncertainties to fan employer concerns about the future (e.g., with the upcoming debt-ceiling debate), a better economy in Q4 (as the impact of the sequester fades somewhat) should help boost growth and net hiring. Separately, the producer price index (PPI) rose 0.3% in August. That took the year-on-year rate down seven ticks to 1.4% (from 2.1%). The price increase in August was driven by the 2.6% increase in gasoline prices, although there was also a 0.2% increase in food prices. Excluding food and energy, producer prices were flat, taking the year-onyear core PPI down one tick to 1.1% (consensus was expecting an increase to 1.3%). Import prices held steady in August after rising 0.1% in July. Export prices fell 0.5% in the month. Wholesales inventories grew 0.1% in July, their first increase in four months. Inventories were large enough to last 1.7 months at the current sales pace. The preliminary estimate of the Michigan consumer sentiment indicator showed a sharp drop to 76.8 in September (from 82.1 in the prior month). That was well below consensus which was looking for roughly no change at 82. The Michigan index is now at its lowest point since April. Consumers were feeling less confident than in the prior month about both current conditions (sub-index dropping more than three points to 91.8, the lowest since April) and the economic outlook (sub-index down more than six points to 67.2, the lowest since January). Inflation expectations for the next year and five years ahead, ticked up a bit but remain close to 3%. The Michigan index has now seen the biggest two-month drop since January. Back then it was Congress and the payrolls tax hike that weighed on the mood consumers. This time out, the drop in confidence can be attributed to a combination of bad news ranging from Congress (e.g. already bad signals concerning the debt ceiling debate), Syria, stock market correction, and of course the economy. And by the looks of August soft retail report, it seems that the drop in confidence is affecting consumption spending. Assuming some of those uncertainties are lifted in Q4 (fiscal policy is probably the major factor here) consumer confidence and the economy should be able to rebound. Paul André Pinsonnault, Strategy and Economic department NBC 7

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