THE WEEKLY BOTTOM LINE

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1 THE WEEKLY BOTTOM LINE TD Economics HIGHLIGHTS OF THE WEEK United States Domestic data took a backseat to this week s developments out of the oval office, where several executive orders were signed by President Donald Trump. Markets cheered on the approval of the Keystone XL and Dakota Access pipelines, but were less thrilled about the administration s withdrawal from the TPP and signal to open negotiations on NAFTA. Data out of the U.S. was somewhat less inspiring, with several misses in December following very strong prints in the prior month. The most noteworthy release, U.S. fourth quarter GDP, fell shy of expectations, but nonetheless painted a picture of a solid domestic demand, with consumer spending growing by 2.5%. Next week will be much more exciting, with the FOMC convening for their first meeting of the year. Additionally, a slew of first-tier economic data will be released, including the highly anticipated employment report due out next Friday. Canada Of the many executive orders signed by U.S. President Donald Trump this week, one could prove meaningful for Canada - reopening the request to build the Keystone Pipeline. If approved, the pipeline could be a positive for Canadian economic growth, whereas the re-opening of NAFTA provides a bit more uncertainty and downside risk. Communication suggests that renegotioating NAFTA is on the docket. However, with NAFTA still in place, the near-term outlook for the Canadian economy remains upbeat, particularly as strong underlying momentum in the U.S. consumer will help boost Canadian exports. As such, despite the rhetoric around NAFTA, markets and businesses remained relatively upbeat in Canada. THIS WEEK IN THE MARKETS Current* Week Ago 52-Week High 52-Week Low Stock Market Indexes S&P 500 2,295 2,271 2,298 1,829 S&P/TSX Comp. 15,609 15,548 15,644 12,087 DAX 11,811 11,630 11,849 8,753 FTSE 100 7,173 7,198 7,338 5,537 Nikkei 19,467 19,138 19,594 14,952 Fixed Income Yields U.S. 10-yr Treasury Canada 10-yr Bond Germany 10-yr Bund UK 10-yr Gilt Japan 10-yr Bond Foreign Exchange Cross Rates C$ (USD per CAD) Euro (USD per EUR) Pound (USD per GBP) Yen (JPY per USD) Commodity Spot Prices** Crude Oil ($US/bbl) Natural Gas ($US/MMBtu) Copper ($US/met. tonne) Gold ($US/troy oz.) *as of 10:15 am on Friday **Oil-WTI, Cushing, Nat. Gas-Henry Hub, LA (Thursday close price), Copper-LME Grade A, Gold-London Gold Bullion; Source: Bloomberg. WEEKLY MOVES Weekly % change except (*) which denotes change in index S&P 500 Dax FT 100 Nikkei 225 US 10Y T-Note USD:EUR USD:JPY USD:GBP USD:CAD USD:MXN Gold WTI Brent VIX* Note: Data as of Jan. 27, 11:25 AM. Change from end of business on Jan. 20. Sources: Bloomberg, TD Economics GLOBAL OFFICIAL POLICY RATE TARGETS Current Target Federal Reserve (Fed Funds Rate) % Bank of Canada (Overnight Rate) 0.50% European Central Bank (Refi Rate) 0.00% Bank of England (Repo Rate) 0.25% Bank of Japan (Overnight Rate) -0.10% Source: Central

2 U.S. All eyes on potus Economic data did little to set the tone for markets this week. Instead, market participants globally paid close attention the new President s executive orders and Twitter messages in an attempt to discern President Donald Trump s agenda. To kick things off, the administration directed its attention towards the America first trade agenda, with President Trump signing an executive order to withdraw the U.S. from the previously signed Trans Pacific Partnership. Adding fuel to the fire, the President also put NAFTA partners on alert, signaling that steps would be taken to open negotiations up in the coming days. Nonetheless, the deterioration in risk sentiment that followed proved short-lived. President Trump quickly switched gears towards his mandate on deregulation, signing an executive order approving the Keystone XL and Dakota Access pipelines while putting forth a list of potential infrastructure projects. Markets applauded this development, and a rally in U.S. equities ensued, helped in part by strong earnings, which pushed the Dow Jones Industrial Average above the coveted 20,000 mark by mid-week. While developments out of the oval office were still unclear as far as their precise impacts on the economy, domestic economic data was somewhat less inspiring, albeit still strong. For one, U.S. existing home sales fell by 2.8% to 5.49 million annualized in December, a pace slightly below the estimated 5.52 million level. The pullback, was largely anticipated as buyers rushed to lock in rates before they climbed any further, and in doing so, brought demand forward at the expense of future sales (Chart 1). Furthermore, initial jobless claims also disappointed, rising by 9k Thousands CHART 1: UPWARD TREND STILL IN TACT, DESPITE HOME SALES SLIP IN DECEMBER Housing starts; millions Existing homes sales; millions Housing starts Existing home sales 0.85 Jan-14 Sep-14 May-15 Jan-16 Sep-16 Source: Census Bureau, National Association of Realtors, TD Economics Percent CHART 2: Q4 GDP MISSES EXPECTATIONS, BUT DOMESTIC DEMAND STILL REMAINS STRONG Inventory investment Final domestic demand Net exports Real GDP Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Forecast by TD Economics. Source Bureau of Economic Analysis more than what was expected to 259k in the week ended Jan. 21, and new home sales tumbled 10.4% in December. Global data out this week was more positive. Growth for the fourth quarter in the UK came in a hair above consensus at 0.6% q/q and PMIs across Europe broadly beat expectations. Perhaps the most noteworthy data release this week was the scorecard for the American economy at the end of The first reading on fourth quarter GDP came in at 1.9%. While falling short of the median consensus estimate of 2.2%, much of the weakness stemmed from a largerthan-expected rebound in imports (Chart 2). The details on domestic demand were much stronger, with consumer spending growing by 2.5% as spending on durable goods posted a third consecutive stellar quarter (10.9%). While there were some minor speedbumps in this week s data, the good news is that the domestic economy still appears to be on a good footing. Nonetheless, uncertainty will certainly cloud the outlook as policy changes continue to make their way out of Washington D.C. This theme will likely be highlighted next week in the statement following the Federal Reserve s first FOMC meeting of the year. This provides further reason to maintain a gradual hiking cycle, something Janet Yellen recently reiterated. Despite the Fed moving ever closer to its dual-objectives of full-employment and medium-price inflation of 2%, the Fed Chair believes that moving earlier but at a more measured pace is the preferred path, while waiting too long risks more rapid rate rises in the future something that could potentially tip the economy into recession. Neil Shankar, Economist

3 CANADA one step forward for oil, one step back for trade President Donald Trump has been in office just five short days and he s already signed many executive orders, one of which could prove meaningful for Canada reopening the request to build the Keystone Pipeline. And, communication so far suggests that the renegotion of NAFTA is on teh docket. The pipeline issue is less of a black box. The project still needs to go through a review process and perhaps meet new hurdles, but appears more likely to be approved. If so, it will give Canadian oil companies better access to the U.S. market. Still, even if it is not approved, the Canadian economy is likely no worse off than it was before and attention will turn back to other pipeline projects. The re-opening of NAFTA provides a bit more uncertainty and downside risk. So far, the focus of the Trump administration has been on Mexico and the size of America s trade deficit with the country. Fortunately, Canada, has, for the most part, been left out of the discussion. As we point out in a report this week, the United States does not have a trade deficit with Canada. While Canada has a slight surplus in goods exports, it has a deficit in services, which pushes the overall balance in the U.S. s favour. Still, we have to pay attention. Exports to the United States represent one fifth of the entire Canadian economy and any thickening of the border would represent a meaningful downside risk to the outlook. For all the rhetoric around NAFTA, markets and businesses remained relatively upbeat in Canada. The Canadian dollar ended the week around 76 U.S. cents, following a CHART 1: CFIB SMALL BUSINESS BAROMETER Index, where >50 = stronger in next year Source: CFIB Total Manufacturing Retail CANADIAN TRADE AND US GDP (YEAR-OVER-YEAR % CHANGE) Canadian Exports** Source: Bureau of Economic Analysis and Statistics Canada US Real GDP small dip late last week. The S&P/TSX has risen to historically high levels, and didn t skip a beat with Trump s executive order re-opening NAFTA this week. The CFIB small business barometer showed that small business sentiment remained relatively stable in January. The index remained at 60, which is higher than the lows hit in 2015 following the collapse of oil, but still significantly lower than the highs reached in 2014 (Chart 1). Digging deeper into the details of the report suggests that businesses tied to domestic demand (construction and retail) remained more somber about the outlook, whereas optimism among industries tied to trade (wholesale, manufacturing and transport and warehousing) saw significant improvements in confidence in January. With NAFTA still in place, the outlook for the Canadian economy looks fairly bright in the near-term. Exports picked up significant momentum towards the end of last year, and next week s monthly real GDP report is expected to show a healthy gain in economic activity tied to international trade. Overall, it is estimated that the Canadian economy grew by over 2% annualized in the fourth quarter of the year, building on a strong 3.5% gain in the prior quarter. More importantly, the U.S. economic data out on Friday showed continued momentum in consumer spending and a rebound in investment, areas of the economy that are generally positive for demand for Canadian made goods. For now, trade will remain a positive story in Canada for We will revisit the trade story once more details on NAFTA renegotiations become available Diana Petramala, Economist,

4 U.S.: UPCOMING KEY ECONOMIC RELEASES U.S. ISM Manufacturing Index - January* Release Date: February 1, 2017 December Result: 54.5 TD Forecast: 54.9 Consensus: 55.0 Momentum in the manufacturing sector is expected to strengthen in January with the ISM Manufacturing Index forecast to increase from 54.5 to Performance in regional PMI surveys has been robust when measured on an ISM basis and while the index has firmed in the months following the Presidential election, the advance has been fairly orderly in contrast to the surge in other survey based indicators. Moreover, the PMI remains well below previous highs from late 2014, indicating further upside potential. We do see a risk of a modest pullback in both the production and new orders indexes, though they too can expect to see further gains in the months ahead should the President follow through on his mandate on infrastructure spending and deregulation ISM MANUFACTURING INDEX Source: Institute for Supply Management / Haver Analytics U.S. ISM Non-Manufacturing Index - January* Release Date: February 3, 2017 December Result: 56.6 TD Forecast: 56.8 Consensus: ISM NON-MANUFACTURING INDEX We think the ISM non-manufacturing PMI has room to run and forecast a 56.8 reading in January vs 56.6 in December. The release will draw less attention this month given its release following payrolls. Stronger growth recorded across regional Fed surveys (Richmond and Philly) and the national Markit PMI all point to a firmer read in January. The latter in particular was more upbeat, citing buoyant domestic demand, ongoing job creation and increased optimism over the outlook Source: Institute for Supply Management / Haver Analytics 4

5 U.S. Employment - January* Release Date: February 3, 2017 December Result: 156k; unemployment 4.7% TD Forecast: 175k; unemployment 4.7% Consensus: 170k; unemployment 4.7% We expect a 175k gain in nonfarm payrolls, slightly above its 3-month average pace. Labor market indicators on balance remain supportive of monthly payroll gains well above its breakeven rate of roughly k. In particular, the past upturn in ISM and regional Fed employment indices and new recorded lows in jobless claims indicates the labor demand remains healthy. That said, job growth is slowing, as 6- and 12-month moving averages indicate, as should be expected with the labor market at the cusp of full-employment. While 200k+ gains are still possible, such strength is expected to be less frequent such that payroll prints are more likely to run in the k range over the first half of this year. By industry, we look for a pickup in private services employment to drive the January acceleration, with manufacturing jobs lending a positive contribution for the second month as presaged by the past recovery in the ISM employment index and sustained improvement in regional Fed survey indicators in January. A few things to flag in the release are the annual benchmark revisions and updated seasonal adjustment procedures. The preliminary estimate of the revisions indicates a minor downward adjustment to March 2016 total nonfarm employment of -150k (or -0.1%). Barring a significant downside surprise on payrolls, we believe the unemployment rate and earnings data are more important inputs to the Fed s labor market outlook. The unemployment rate is expected to be unchanged at 4.7% in January, assuming a stable labor force participation rate. If realized, the unemployment rate would remain below the Fed s median estimate of the natural rate (4.8%) for the third consecutive month. If anything, we see risk for the unemployment rate to inch higher to 4.8%, which would U.S. LABOR MARKET Thousands of jobs % 350 Net Job Change* (lhs) 300 Unemployment Rate (rhs) 0 Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Seasonally-adjusted data; * Change in non-farm payrolls Source: U.S. Deptartment of Labor / Haver Analytics likely be accompanied by a move higher in the labor force participation rate. Over the coming months, we do not anticipate further declines below 4.6% in the unemployment rate given our expectations for the participation rate to be relatively range bound this year, in line with CBO projections, but to resume its descent thereafter. Average hourly earnings have the potential to drive the market response if the upside risk we envision is realized. We expect a 0.3% m/m increase in January, resulting in a small step down in the year-on-year pace to 2.8% due to base effects. With the reference week ending on a Thursday, calendar week distortions are relatively benign. Hence, the strong monthly increase we project draws from the minimum wage hikes implemented across the country in January along with accumulating anecdotal evidence of rising wage pressures. Hikes to minimum wages across 19 states are estimated to affect 4.3 million workers, or 3.5% of private sector workers, with the potential to add a few cents on the dollar to the January average hourly wage. Altogether this suggests at least a 0.3% m/m increase, leaving the year-onyear pace at 2.8% y/y vs its cycle high of 2.9% in December *Forecast by Rates and FX Strategy Group. For further information, contact TDRates&FXCommoditiesResearch@tdsecurities.com 5

6 Canadian Real GDP - November* Release Date: January 31, 2017 October Result: -0.3% m/m TD Forecast: 0.4% m/m Consensus: 0.3% m/m Canada: UPCOMING KEY ECONOMIC RELEASES M/M % Chg CANADIAN REAL GDP* Industry-level growth is forecast to rise by 0.4% m/m in November, fully correcting the prior month s pullback. Reinforcing a fairly strong increase is a broad increase in export volumes, a likely bounce back in energy-related activity and sharp broad-based rebounds in hours worked. We look for goods-producing industries to outperform, with resources and manufacturing two key sources of strength. Manufacturing activity is bouncing off a dismal performance in October while materials were one of the key drivers behind the surge in exports. Energy output is sitting near all-time highs, but the moderate advance in oil export volumes and continued improvement in the rig count indicate some scope for further gains. On the services side, we see downside risks stemming from real estate due to the sharp deceleration in home sales though stronger retail activity should provide an offset. Overall, this report should help solidify the Bank of Canada s position on the sidelines, and Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16 *Real GDP at basic prices in 2007 chained dollars Source: Statistics Canada / Haver Analytics our November projection if realized would be consistent with Q4 GDP growth tracking near a 2% pace vs the BoC s estimate of 1.5%. However, a downside miss coupled with downward revisions to October could revive concerns over the slowdown in core inflation and persistent output gap. *Forecast by Rates and FX Strategy Group. For further information, contact TDRates&FXCommoditiesResearch@tdsecurities.com 6

7 Release Date RECENT KEY ECONOMIC INDICATORS: JANUARY 23-27, 2017 Economic Indicator/Event United States Data for Period Units Current Prior Jan 24 Markit US Manufacturing PMI Jan P Index Jan 24 Existing Home Sales Dec Mlns R5 Jan 26 Initial Jobless Claims Jan 21 Thsd R5 Jan 26 Retail Inventories Dec M/M % Chg R6 Jan 26 Advance Goods Trade Balance Dec USD, Blns Jan 26 Markit US Services PMI Jan P Index Jan 26 New Home Sales Dec Thsd R5 Jan 27 Gross Domestic Product Annualized Q4 A Q/Q % Chg Jan 27 Personal Consumption Q4 A Q/Q % Chg Jan 27 Core PCE Q4 A Q/Q % Chg Jan 27 Durable Goods Orders Dec P M/M % Chg R6 Jan 27 Durables Ex Transportation Dec P M/M % Chg R5 Jan 27 Cap Goods Orders Nondef Ex Air Dec P M/M % Chg R5 Jan 27 Cap Goods Ship Nondef Ex Air Dec P M/M % Chg R5 Canada Jan 23 Wholesale Trade Sales Nov M/M % Chg R5 Jan 26 CFIB Business Barometer Jan Index International Jan 24 EC Markit Eurozone Manufacturing PMI Jan P Index Jan 26 UK Gross Domestic Product Q4 A Y/Y % Chg Jan 26 JN Consumer Price Index Dec Y/Y % Chg Source: Bloomberg, TD Economics. 7

8 UPCOMING ECONOMIC RELEASES AND EVENTS: JANUARY 30 - FEBRUARY 3, 2017 Release Date Time* Economic Indicator/Event United States Data for Period Units Consensus Forecast Last Period Jan 30 8:30 Personal Consumption Expenditure Core Dec Y/Y % Chg Jan 30 8:30 Personal Consumption Expenditure Deflator Dec Y/Y % Chg Jan 30 8:30 Real Personal Spending Dec M/M % Chg Jan 30 8:30 Personal Income Dec M/M % Chg Jan 30 10:00 Pending Home Sales Dec M/M % Chg Jan 31 8:30 Employment Cost Index 4Q Q/Q % Chg Jan 31 9:00 S&P CoreLogic CS US HPI NSA Nov Index Jan 31 9:00 S&P CoreLogic CS US HPI NSA Nov Y/Y % Chg Jan 31 10:00 Conf. Board Consumer Confidence Index Jan Index Feb 01 8:15 ADP Employment Change Jan Thsd Feb 01 9:45 Markit US Manufacturing PMI Jan F Index Feb 01 10:00 ISM Employment Jan Index Feb 01 10:00 ISM Manufacturing Jan Index Feb 01 14:00 FOMC Rate Decision (Upper Bound) 1-Feb % Feb 01 Wards Total Vehicle Sales Jan Mlns Feb 02 8:30 Unit Labor Costs 4Q P Q/Q % Chg Feb 02 8:30 Initial Jobless Claims 28-Jan Thsd Feb 03 8:30 Change in Nonfarm Payrolls Jan Thsd Feb 03 8:30 Unemployment Rate Jan % Feb 03 8:30 Average Hourly Earnings Jan M/M % Chg Feb 03 9:15 Fed's Evans Speaks in Olympia Fields Feb 03 9:45 Markit US Services PMI Jan F Index Feb 03 10:00 ISM Non-Manf. Composite Jan Index Feb 03 10:00 Factory Orders Dec M/M % Chg Feb 03 10:00 Factory Orders Excluding Transportation Dec M/M % Chg Canada Jan 31 8:30 Industrial Product Price Dec M/M % Chg Jan 31 8:30 Gross Domestic Product Nov M/M % Chg Jan 31 17:20 BoC's Poloz speaks at University of Alberta Feb 01 7:00 MLI Leading Indicator Dec M/M % Chg Feb 01 9:30 Markit Canada Manufacturing PMI Jan Index International Jan 30 18:30 JN Jobless Rate Dec % Jan 30 JN BOJ Policy Rate 31-Jan % Jan 31 5:00 EZ Consumer Price Index Core Jan A Y/Y % Chg Jan 31 5:00 EZ Consumer Price Index Estimate Jan Y/Y % Chg Jan 31 5:00 EZ Unemployment Rate Dec % Jan 31 5:00 EZ Gross Domestic Product SA 4Q A Y/Y % Chg Jan 31 9:00 MX Gross Domestic Product NSA 4Q P Y/Y % Chg Jan 31 19:30 JN Nikkei Japan Manufacturing PMI Jan F Index Jan 31 20:00 CH Manufacturing PMI Jan Index Jan 31 20:00 CH Non-manufacturing PMI Jan Index Jan 31 JN Official Reserve Assets Jan USD, Blns Feb 01 4:30 UK Markit UK PMI Manufacturing SA Jan Index Feb 02 7:00 UK Bank of England Bank Rate 2-Feb % * Eastern Standard Time. Source: Bloomberg, TD Economics. 8

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