The Escalation of Protectionism Incites Worries

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1 WEEKLY NEWSLETTER The Escalation of Protectionism Incites Worries #1 BEST OVERALL FORECASTER - HIGHLIGHTS ff United States: Jerome Powell starts his mandate as Federal Reserve s Chairman with a rate hike. ff New orders are rebounding in the United States. ff Canada: The total annual inflation rate rises from to %. ff Canada: January saw an uptick in wholesale and retail sales. A LOOK AHEAD ff United States: Real consumption likely stagnated in February. ff Canada: Real GDP should be up slightly in January. FINANCIAL MARKETS ff The possibility of a trade war between the United States and China penalized the stock market. ff The Federal Reserve increased its key rate by 5%. ff The value of the Canadian dollar rose slightly. 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... 5 Tables Economic indicators... 7 Major financial indicators... 9 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 Desjardins, 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 Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins 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. Desjardins 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 Desjardins Group. Copyright 2018, Desjardins Group. All rights reserved.

2 Key Statistics of the Week ff Now headed by Jerome Powell, President Donald Trump s choice to succeed Janet Yellen, the Federal Reserve (Fed) raised rates at the meeting that ended Wednesday. The increase does not come as a surprise: 92 of 95 respondents in the Bloomberg survey expected rates to go to 1.75%, while the futures market had it 96.2% priced in. The statement released by the Fed notes the fairly disappointing recent data for the first quarter of However, Fed leaders remain optimistic, explicitly signalling that the economic outlook has strengthened. ff The total consumer price index (CPI) rose % in February. The total annual inflation rate went from to %. All signs appear to indicate that the inflation rate will continue to rise over the next few months. On the one hand, the downward impact of previous electricity rate reductions in Ontario will continue to diminish. On the other hand, the upward pressure on prices is expected to increase gradually as excess production capacity disappears. Under these circumstances, the total annual inflation rate may soon exceed %. Moreover, this projection has been confirmed by the rise in the core inflation rate, while the average of the three indexes went from % last September to % in February. ff After declining two months in a row, home resales rose 3.0% in February. Annualized sales increased from 5,380,000 units in January to 5,540,000. This is still lower than what we saw at the end of Sales of existing single-family homes jumped 4.1%, while sales of multi-unit housing dropped 6.5%. ff Sales of new single-family homes slid slightly in February. However, this decline is largely offset by the upward revision in the January numbers. Annualized sales therefore reached 618,000 units in February, after being revised from 593,000 to 622,000 in January. While this represents a decrease of %, a comparison with the unrevised January data shows a gain of 4.2%. ff Retail sales rose % in January, coming in below expectations. New car sales were weaker than expected, as was the increase in service station sales. In real terms, sales are up just. ff Wholesale sales inched up a mere in January after retreating in December. Automotive product wholesalers posted a 1.6% decline. In real terms, however, sales grew 0.5%, while inventories increased %. The wholesale sector will therefore make quite a positive contribution to economic growth in January. ff New durable goods orders rebounded in February. After falling % in January, orders rose 3.1%. Much of the increase comes from the aviation sector, which jumped 27.9%. The automobile sector posted a 1.6% gain. Excluding transportation, growth was %, the strongest it has been since last October. ff The leading indicator was up for a fifth straight time in February. The % increase comes on the heels of gains of 0.8% in January and % in December. Last month, the main positive contributors were higher hours worked, lower jobless claims and a good ISM index level. Only building permits and the stock market contributed negatively. Benoit P. Durocher, Senior economist Inflation may remain above the target median throughout 2018 Total consumer price index Annual variation in % Francis Généreux, Senior economist 4.0 Desjardins forecasts Sources: Statistics Canada and Desjardins, Economic Studies 2

3 Financial Markets Fears of a Trade War Have Come Back to Haunt the Markets It was another challenging week for the stock markets. The Facebook data scandal on Monday weighed on the technology sector on the main stock markets. The Federal Reserve s (Fed) optimistic tone on Wednesday concerning the U.S. economic outlook temporarily lifted spirits on both the U.S. and Canadian stock markets. However, stock markets fell once again following Donald Trump s assertion that US$50B in tariffs will be imposed on imports from China. The increasing likelihood of a trade war between the two global powers worried investors. At the time of writing, the S&P 500 posted a weekly loss of nearly 4%, while the S&P/TSX in Canada lost around %. The rise in the price of oil and the modest progress made in the North American Free Trade Agreement (NAFTA) negotiations limited the drop on the Canadian stock market. GRAPH 1 Stock markets Index Index 2,825 15,750 2,775 15,550 2,725 15,350 2,675 15,150 2,625 2,575 14, /02/ /02/ /02/ /03/ /03/ /03/22 S&P 500 (left) S&P/TSX (right) Sources: Datastream and Desjardins, Economic Studies U.S. bond yields lost the gain recorded earlier in the week after the protectionist measures against China were announced. Short-term and long-term yields began rising on Monday, while the markets were expecting monetary tightening from the Fed. However, they dropped on Thursday amid renewed fears of a trade war. Friday morning, bond yields regained some of the ground lost, finishing near the levels reached last week, i.e. around 0% for the 2 year yield and 5% for the 10 year yield. The bond market in Canada echoed the U.S. trend. The 2 year and 10 year yields trended upward again after strongerthan-expected inflation data were published on Friday morning. They hovered around 5% and 0% respectively. The U.S. dollar dropped following the Fed s meeting, as some investors were expecting more positive comments from Jerome Powell. The growing fear of a trade war involving the United States may have also had a negative impact on the dollar, as investors turned to the yen as a safe haven. The euro remained relatively stable, while the pound took advantage of the fact that two of the nine directors of the Bank of England would have wanted an immediate key rate hike. Despite the increased anxiety of the markets, the loonie rebounded at the end of the week to close at nearly US$8. The Canadian currency benefited from the encouraging signs regarding the NAFTA negotiations, the surge in oil prices, and the recent rise in inflation in the country. Mathieu D Anjou, Senior Economist Carine Bergevin-Chammah, Economist GRAPH 2 Bond markets 10-year yield In % points /02/ /02/16 Spread (left) 2018/02/ /03/06 United States (right) 2018/03/14 In % /03/22 Canada (right) Sources: Datastream and Desjardins, Economic Studies GRAPH 3 Currency markets US$/C$ US$/ /02/ /02/ /02/ /03/2018 Canadian dollar (left) 14/03/ /03/2018 Euro (right) Sources: Datastream and Desjardins, Economic Studies 3

4 A Look Ahead TUESDAY 27-9:00 January y/y 6.10% Desjardins 6.19% December 6.30% S&P/Case-Shiller index of existing home prices (January) Monthly growth in home prices slowed down slightly in December. The monthly gain was % after rising % in November and October, but we expect some progress in the first month of 2018 and a return to a monthly change of %. However, that would lead to a slight slowdown in the S&P/Case-Shiller index s annual change, taking it from 6.3% in December to 6.2% in January. TUESDAY 27-10:00 13 Desjardins February Conference Board consumer confidence index () The Conference Board confidence index rose 6.5 points in February. That is the strongest monthly gain since 2017, and it propelled the index to 130.8, way above November s cyclical high. We would have to go back as far as November 2010 to find a higher index level. Some stabilization is to be expected after a spike like that, but we cannot rule out further gains. The index could be bolstered by the very good performance of the job market and the increasing popularity of the tax overhaul, as it was in February. Nevertheless, the stock markets are still volatile and are even declining from February s peak. Gasoline prices went up slightly in recent weeks. We are getting mixed signals from the other confidence indexes: the University of Michigan and Bloomberg are up, but the TIPP is down. All in all, we expect a slight downturn, ending up with THURSDAY 29 - February m/m Desjardins January % Consumer spending (February) We might have thought that more disposable income resulting from the direct and indirect effects of the tax reform would greatly boost consumption, but in fact it slowed down in January. Real consumption declined, the first significant contraction in a year. It is hard to imagine a real rebound starting in February. Retail sales were disappointing again last month, and the volume of new auto sales was down. Warmer weather in February than January probably pushed the consumption of heating services down. So we expect real consumption to stagnate and nominal consumption to increase. THURSDAY 29 - January Desjardins December m/m Real GDP by industry (January) Generally speaking, January s results were positive. The manufacturing sales volume dropped slightly, but that was more than offset by a rise in inventories. For wholesalers, the volume of both sales and inventories rose sharply in January. The same is true for retailers; their sales expressed in real terms were slightly up for the month. However, those good results were tainted by a decrease in the number of hours worked in January, leading us to believe that some service sectors were in difficulty. All in all, real GDP by industry could grow in January. OVERSEAS TUESDAY 27 - : Confidence indicators Several confidence indexes for will be released this week. The preliminary version of the consumer confidence index remained unchanged from February to, but it is down from its cyclical peak in January. The Euroland PMI indexes were also down in, with the composite index dropping two points. We are likely to see contractions in the other confidence indexes as well. DURING THE WEEK : Economic indicators Several monthly indicators for February will be released in this week. Retail sales will be made public Wednesday evening. They had dropped by % in January. Thursday evening will bring us industrial production, housing starts, unemployment rates and the consumer price index. 4

5 Economic Indicators Week of 26 to 30, 2018 Day Hour Indicator Period Previous data MONDAY 26 12:30 16:30 19:10 Speech of the New York Fed President, W. Dudley Speech of the Cleveland Fed President, L. Mester Speech of a Federal Reserve Governor, R. Quarles TUESDAY 27 9:00 10:00 11:00 S&P/Case-Shiller home price index (y/y) Speech of the Atlanta Fed President, R. Bostic 6.10% % % WEDNESDAY 28 10:00 12:00 Goods trade balance preliminary (US$B) Real GDP (ann. rate) Retail inventories preliminary (m/m) Wholesale inventories preliminary (m/m) Pending home sales (m/m) Speech of the Atlanta Fed President, R. Bostic Q4t % % % % % 0.8% -4.7% THURSDAY 29 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) Chicago PMI index Michigan s consumer sentiment index final Speech of the Philadelphia Fed President, P. Harker 230, , , % 6 10 % 6 10 % % % % % 9:45 10:00 13:00 FRIDAY 30 Markets closed (Good Friday) MONDAY 26 TUESDAY 27 16: Quebec Budget WEDNESDAY 28 16: Ontario Budget THURSDAY 29 Real GDP by industry (m/m) Industrial product price index (m/m) Raw materials price index (m/m) FRIDAY 30 Markets closed (Good Friday) Note: Desjardins, 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 Desjardins, Economic Studies of the Desjardins Group. 5

6 Economic Indicators Week of 26 to 30, 2018 Country Hour Indicator Period m/m (q/q) y/y Previous data m/m (q/q) y/y OVERSEAS DURING THE WEEK Nationwide house prices 2.6% -% % Q4 % % % % MONDAY 26 France 2:45 Real GDP final TUESDAY 27 Italy Italy 4:00 4:00 4:00 Money supply M3 Economic confidence Business climate final Industrial confidence Services confidence Economic confidence WEDNESDAY 28 Germany France 2:00 2:45 19:01 19:50 Retail sales April % % THURSDAY 29 Germany 4:30 4:30 4:30 8:00 19:30 19:30 19:50 Current account ( B) Real GDP final Index of services Consumer price index preliminary Consumer price index Tokyo Unemployment rate Industrial production preliminary Q4 Q % % 2.4% -6.8% FRIDAY 30 France France Italy China China 1:00 2:45 2:45 21:00 21:00 Housing starts Personal consumption expenditures Consumer price index preliminary Consumer price index preliminary PMI manufacturing index PMI non-manufacturing index -4.2% % 1.9% 0.8% % -1.9% % SATURDAY 31 0:00 Vehicle production 4.6% 2.6% 5.0% % 4.6% -2 % 0.5% 1.6% % -13.2% -1.9% % % -3.8% 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). 6

7 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 ,272 12,028 2, , ,230 2,883 17, Statistics representing the level during the period; * New statistic in comparison with last week. 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 ($M) VARIATION (%) LEVEL -1 month -3 months -6 months -1 year * ,049 12,915 3, , , * * * , ,718 1,917 1,236 1, ,540-56, , ,329 1, ,380-53, ,299 1, ,720-49, ,172 1, ,420-45,385 1, ,288 1, ,480-48,692 2, Excluding food and energy Producer price (2009 = 100) Export prices (2000 = 100) Import prices (2000 = 100) Excluding automobiles ($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) 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. 7

8 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) Business inventory change (2007 $M)1 Exports (2007 $M) Imports (2007 $M) Final domestic demand (2007 $M) GDP deflator (2007 = 100) Labour productivity (2007 = 100) Unit labour cost (2007 = 100) Current account balance ($M)1 Production capacity utilization rate (%)1 Disposable personal income ($M) Corporate net operating surplus (2007 $M) 1 VARIATION (%) LEVEL ANNUAL VARIATION (%) Quart. ann. 1 year , , , , , ,869,857 1,074, , , ,738 13, , ,304 1,865, , ,232, ,320 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 ($M) Employment (k)2 Unemployment rate (%)1 Average weekly earnings ($) 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 1,760, ,355 54, ,414 49, * 36, * 63,286-1,907-3,050-1,442-2, ,839 47, Dec. Dec. * 18, , * * , Dec. Dec. * 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 ,, 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) ,647 24,013 1, ,752 24,947 1, ,747 25,310 1, ,683 24,754 1, ,502 22,350 1, ,344 20,597 1, ,873 26,617 1, ,545 22,860 1, ,329 20,404 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 -3 Treasury bonds 2 years -2 Treasury bonds 5 years Treasury bonds 10 years -4 Treasury bonds 30 years S&P/TSX index (level) Exchange rate (C$/US$) Exchange rate (C$/ ) 15, , , , , , , , , Overseas ECB Refinancing rate Exchange rate (US$/ ) BoE Base rate Bonds 10 years FTSE index (level) Exchange rate (US$/ ) , , , , , , , , , Germany Bonds 10 years DAX index (level) , , , , , , , , ,914 BoJ Main policy rate Nikkei index (level) Exchange rate (US$/ ) -0 20, , , , , , , , , 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. 9