A TSX Moment in the Sun? Or at Least, Less Shade by Avery Shenfeld

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1 The Week Ahead April 2-6, 2018 <T_E> <T_S> Economics <P_S> <P_E> A TSX Moment in the Sun? Or at Least, Less Shade by Avery Shenfeld Avery Shenfeld (416) avery.shenfeld@cibc.com Benjamin Tal (416) benjamin.tal@cibc.com Andrew Grantham (416) andrew.grantham@cibc.com Royce Mendes (416) royce.mendes@cibc.com Canadian equity investors who get their financial news from CNBC can be forgiven for thinking that stocks have only seen a mild correction. That s true for the S&P 500, where the setbacks have been modest relative to 2017 s gains, but not for the TSX, which has corrected off a much less rosy base last year. But we could be due for a spell where the Canadian benchmark outperforms its US counterpart, if not necessarily for the reasons we would like to see. US stocks have lost some ground, in part because they got expensive early in the year on the tax cut hoopla, and because markets were initially unwilling to recognize the Fed s determination to send interest rates (and then bond yields) higher. But of late, there s also an America-centric story at play, in a regulatory shadow being cast over the handful of tech giants that were earlier responsible for much of the American market s outperformance. Regulators in both the US and Europe, and individual users of their services, are zeroing in on privacy, and just how much personal data is being given away with each click on a cell phone. The tech giants are in turn pledging to be more transparent, and more careful with personal information. But what s unclear is how much revenue growth they would give up in the process. As the saying goes, if you re not paying for it, you are the product. Justified or not, there are also issues related to government concerns over the monopoly power of some of these players. Another key source of Canadian underperformance has been found in the oil and gas sector, with negative price differentials against Canadian heavy oil and nat-gas having plagued valuations, relative to companies participating in a more vibrant US sector. It s not that those made-in-canada issues are going to disappear soon, although there was one more step taken towards getting a pipeline built in the latest court ruling. But it s hard to see Canadian natural gas pricing, or the transportation bottlenecks from Alberta getting any worse, and they might get very gradually better. CIBC s energy analysts have shown that markets have already heavily beaten up on relative valuations for Canadian names. So another source of Canadian underperformance may now be behind us. NAFTA fears? Again, not going away, but not getting worse these days. Economic growth this year still favours the US, given the huge fiscal stimulus being delivered stateside. But as markets look ahead to 2019, both economies will be facing the constraints of full employment, and running at a sub-2% pace. If the Canadian market does manage to outperform, it might not represent a true moment in the sun. Perhaps just a bit less shade than what s being cast over the American market in the near term. Investors might want to rebalance their US and Canadian weights, rather than rush into an overall higher weighting in stocks overall. CIBC Capital Markets PO Box 500, 161 Bay Street, Brookfield Place, Toronto, Canada M5J 2S8 CIBC (416)

2 Week Ahead Calendar And Forecast CANADA UNITED STATES CIBC Consensus Prior CIBC Consensus Prior Monday AUCTION: 3-M BILLS $51B, 6-M BILLS $45B (prev) April 2 9:45 AM KIT US MANUFACTURING PMI Mar P (L) ISM - MANUFACTURING (Mar) (H) CONSTRUCTION SPENDING M/M (Feb) (M) 0.3% 0.0% Tuesday CASH MANAGEMENT BUYBACK (Aug'18 - Sep'19) - $0.5B AUCTION: 4-WEEK BILLS $65B (prev) April 3 AUCTION: 3-M BILLS $5.0B, 6-M BILLS $2.0B, 1-YR BILLS $2.0B NEW VEHICLE SALES (Mar) (M) 16.9M 17.0M Wednesday AUCTION: 5-YR CANADAS $3B April 4 7:00 AM MBA-APPLICATIONS (Mar 30) (L) 4.8% 8:15 AM ADP EMPLOYMENT CHANGE (Mar) (M) 203K 235K 9:45 AM KIT US SERVICES PMI Mar P (L) KIT US COMPOSITE PMI Mar P (L) 54.3 ISM - NON-MANUFACTURING (Mar) (M) FACTORY ORDERS M/M (Feb) (M) 1.9% 1.7% -1.4% Speaker: 11:00 AM Loretta Mester (President, Cleveland) Speaker: 9:45 AM James Bullard (President, St Louis) Thursday April 5 MERCHANDISE TRADE BALANCE (Feb) (H) -$1.8B -$1.9B INITIAL CLAIMS (Mar 31) (M) 230K 215K CONTINUING CLAIMS (Mar 24) (L) 1870K 1871K GOODS & SERVICES TRADE BALANCE (Feb) (H) -$56.7B -$56.0B -$56.6B Speaker: 1:00 PM Raphael Bostic (President, Atlanta) Friday April 6 EMPLOYMENT CHANGE (Mar) (H) 15.0K 15.4K NON-FARM PAYROLLS (Mar) (H) 164K 185K 313K UNEMPLOYMENT RATE (Mar) (H) 5.8% 5.8% UNEMPLOYMENT RATE (Mar) (H) 4.0% 4.0% 4.1% AVERAGE HOURLY EARNINGS ALL EMPLOYEES M/M (Mar) (H) 0.2% 0.2% 0.1% AVERAGE WEEKLY HOURS ALL EMPLOYEES (Mar) (H) IVEY PMI (Mar) (L) 59.6 MANUFACTURING PAYROLLS (Mar) (H) 25K 31K 3:00 PM CONSUMER CREDIT (Feb) (L) $15.0B $13.9B H, M, L = High, Medium or Low Significance SAAR = Seasonally Adjusted Annual Rate Consensus Source: Bloomberg `

3 Week Ahead s Market Call by Avery Shenfeld In the US, core PCE inflation is closing in on the Fed s target, so how many rates hikes we get is now a question of growth. We re marginally below consensus on non-farm payrolls, since the last set of jobs numbers looked out of sync with a more sluggish pace to Q1 GDP. But even so, the unemployment rate could dip to a lean 4.0%. The ISM indexes have been too strong relative to hard data, so we re expecting a bit of convergence with the ISM indexes both cooling in March. In Canada, export volumes and the trade deficit looked ugly in January, but we re expecting a bit better news in February as part of our call for a firmer GDP print that month. We re always on thin ice in trying to project the labour force survey given its large random error term, so for this month, we will assume a trend-like 15K jobs gain and wait to be surprised one way or the other. 3

4 Week Ahead s Key Canadian Number: Labour Force Survey March (Friday, 8:30 a.m.) 60 Canadian Employment 000s % Royce Mendes (416) CIBC Mkt Prior Employment 15K na 15.4K Unemployment Rate 5.8% na 5.8% Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 F Month/Month Chg (L) Jobless Rate (R) Source: Statistics Canada, CIBC For a second month in a row, we re looking for a calmer reading on the Canadian employment situation. The swings observed around the turn of the year were historically large, and shouldn t be expected to persist. Look for a trend-like increase of 15K jobs in March to come alongside an unchanged, but still low, 5.8% unemployment rate. Keep an eye on the wage number too. While this is likely the least meaningful of the four wage series that are available in Canada, a further deceleration from its previous peak would be in line with our view that the recent hot readings were more a product of volatility in the data. Forecast Implications January got 2018 off on the wrong foot in terms of job creation, but February s modest rebound, coupled with a similar gain in March, should represent nascent signs of a decent, if not spectacular, year for job creation. Other Canadian Releases: Merchandise Trade Balance February (Thursday, 8:30 a.m.) A pick-up in US imports would usually indicate a gain for Canadian exporters, but other factors suggest we weren t the main beneficiaries. We didn t send many more barrels of crude oil stateside in February, and any increase was likely offset by weakness in Canadian benchmark prices. In a similar vein, natural gas prices also tumbled during the month. Look for only a modest narrowing in the deficit to $1.8 bn when February s data is released. 4

5 Week Ahead s Key US Number: Employment Situation March (Friday, 8:30 a.m.) Andrew Grantham (416) CIBC Mkt Prior Employment (change) 164K 185K 313K Unemployment rate 4.0% 4.0% 4.1% Average Hourly Earnings (%) 0.2% 0.2% 0.1% US Payroll Employment 000s % Monthly Payroll Chg (L) -100 Unemployment Rate (R) 4.0 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18F We re faced with the familiar early-year conundrum of weakening growth figures but strong job gains in the US. While we tend to place more weight on the employment figures regarding the underlying track of the economy, we have seen previously that part of the convergence will likely come from more moderate employment growth. That s particularly likely after such a blockbuster prior month, and as such we forecast a 164K gain for March. That would still be enough for the unemployment rate to tick down to 4.0%, and drive somewhat stronger wage gains than those seen in February. A 0.2% monthly advance would see the annual rate tick up slightly to 2.7%. Forecast Implications A job gain more in keeping with the recent trend in economic growth wouldn t have us altering our view for the economy ahead. Solid employment growth and a slight acceleration in wages, combined with the impact on incomes from tax cuts, still provides solid support for consumer spending ahead. Market Impact Our call for employment growth is a little below the consensus, however market reaction has tended to be driven more by the wage figures recently. Other U.S. Releases: ISM Manufacturing Survey March (Monday, 10:00 a.m.) Survey of manufacturing sectors have been easing globally, and while a weaker US$ should help US companies, these surveys tend to be very correlated and it wouldn t be a surprise to see a pull-back in the ISM as well. That s particularly true given it is running at historically high levels. We see the index falling to 58.8, from 60.8 in the prior month. 5

6 Currency Currents Royce Mendes Canadian Wages: Not So Fast According to both the LFS and yesterday s SEPH data, Canadian wages are speeding ahead. So why aren t we calling for a faster pace of rate hikes? Well, unlike their American cousins, our monthly data on wages can exhibit an alarming level of volatility. As a result, we can t rely on any single measure, rather we look to a range which include more delayed releases from the National Accounts and the Productivity Accounts, both of which still show more tame wage pressures. Even with a bump from Ontario s minimum wage hike in January, it s highly questionable that the SEPH series moved from tracking just above 2% in December to 4% in January. So we re recommending not selling bonds or becoming looniebulls on the back of yesterday s wage data. Canadian Housing Slump Continues A drop-off in housing activity to begin the new year was only the opening salvo. A second shot came from a further decline in February. Now those weaker readings are beginning to show up in GDP data. Since the B20 rules took effect, unit sales have dived to their slowest pace in more than five years, which in turn has caused housing inventory to actually begin rising again. Data on the Canadian housing market is now concerning enough that the Bank of Canada will want to wait until there s some stabilization in residential real estate to nudge rates higher. We re still looking for BoC officials to hike rates only once more this year, leaving the loonie vulnerable to the slightly faster pace of rate increases stateside. Canadian Wages Looking Hotter (L), But It Could Just Be Volatility in the Data (R) Jan Source: Statistics Canada, CIBC Weak Housing Activity Now Showing Up in GDP Data (L), Housing Inventory on the Rise (R) Canadian Wages (YoY, %) Jun-15 Nov-15 LFS Apr-16 Sep-16 Feb-17 Jul-17 SEPH Dec-17 Industry GDP: Real Estate (MoM, %) Monthly Standard Deviation of Annual Wage Gains (%) US Cdn. (LFS) Cdn. (SEPH) Months of Housing Inventory Source: Statistics Canada, CREA, CIBC Emerging Markets Holding Up Well Not Fed normalization, not equity market volatility, not even the threat of protectionism has done much to scare investors away from emerging markets. Sovereign spreads for EMs haven t done much and currencies have continued to appreciate against safe havens like the US dollar. A healthy global backdrop, with rising growth forecasts and higher commodity prices, is supporting the risk appetite for these jurisdictions. Even if forecasts have run a bit ahead of where we see global growth ending up, we continue to expect that emerging market currencies, particularly those in Asia, will shrug off temporary concerns and benefit from underlying fundamentals this year. 6 EM Currencies Benefitting From Higher Global Growth Forecasts (L) And Rising Commodity Prices (R) Jan-17 Mar-17 Consensus Forecast: Global Growth May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar Thomson/Reuters Commodity Index Source: Bloomberg, CIBC

7 CANADIAN RELEASE AND EVENT DATES March/April 2018 MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY PAYROLL EMPLOYMENT, EARNINGS & HOURS GDP BY INDUSTRY (2002$) GDP IND.PROD. M M NOV DEC JAN INDUSTRIAL PRICES M (NSA) Y DEC JAN GOOD FRIDAY (HOLIDAY) (Markets Closed) INTERNATIONAL RESERVES 8:15 AM $BN $BN CHANGE LEVEL JAN MERCHANDISE TRADE $MN 12 MO. BALANCE DEC -3,050-23,746 JAN -1,907-25,396 LABOUR FORCE SURVEY AVG EMPLOY UNEMP HRLY (HSHOLD) RATE EARN M Y % Y JAN IVEY PURCHASING MANAGERS INDEX HOUSING STARTS 8:15 AM 000 s (AR) TOTAL SINGLES JAN BUILDING PERMITS ($) M M (RES) (NON-RES) DEC JAN NEW HOUSING PRICE INDEX Bank of Canada Business Outlook Survey SASKATCHEWAN BUDGET INT L TRANSACTIONS IN SECURITIES C$BN, NET BONDS MONEY STOCKS TOT KET DEC JAN SURVEY OF MANUFACTURING SHIPMENTS M Y DEC JAN Bank of Canada Interest Rate Announcement Bank of Canada Monetary Policy Report Bank of Canada Governor Poloz & Sr. Dep. Gov. Wilkins speak at 11:15 AM ET ADP EMPLOYMENT SURVEY CPI M Y JAN RETAIL TRADE (Current$) M Y DEC JAN WHOLESALE TRADE All data seasonally adjusted except where noted NSA. M: per cent change from previous month. Q: per cent change from previous quarter at annual rates. Y: per cent change from year earlier. AR: Annual Rate. YTD: Year to date. Release dates are provided by sources outside CIBC World Markets Inc. Dates are subject to change. Sources for historical data: Statistics Canada, CMHC, Human Resources Development Canada and the Bank of Canada. 7

8 U.S. RELEASE AND EVENT DATES March/April 2018 MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY S&P CORE LOGIC/CASE- SHILLER HOUSE PRICE INDEX 9:00 AM CONSUMER CONFIDENCE GDP (AR) REAL IMPLICIT GDP DEFLATOR 17:Q3(F) :Q4(F) ADV. TRADE IN INTERNATIONAL GOODS CORPORATE PROFITS 2-Yr NOTE AUCTION 5-Yr NOTE AUCTION 7-Yr NOTE AUCTION ISM MFG SURVEY COMP. PRICES INDEX INDEX JAN , 5-, 7-Yr NOTE SETTLEMENT RETAIL SALES M Y JAN PERS. INC & OUT. SAVING INCOME CONS RATE M M AR DEC JAN CHICAGO PMI 9:45 AM MICHIGAN SENTIMENT (F) GOOD FRIDAY (HOLIDAY) (Markets Closed) ADP SURVEY 8:15 AM GOODS & SERV. BALANCE (BOP) $B GDS SERV TOT DEC JAN LIGHT VEHICLES FACTORY ORDERS SALES MIL (AR) Y M(SA) Y(NSA) JAN 17, DEC , JAN , 10-Yr NOTE ANNOUNCEMENT ISM NON-MFG SURVEY 30-Yr BOND ANNOUNCEMENT EMPLOY. SITUATION NON- CIV AVG FARM UNEMP HRLY PAYROLL RATE EARN JAN CONSUMER CREDIT 3:00 PM PPI M (SA) Y (NSA) JAN , 10-Yr NOTE AUCTION CPI M(SA) Y (NSA) JAN FOMC Minutes TREASURY BUDGET 2:00 PM 30-Yr BOND AUCTION MICHIGAN SENTIMENT (P) HOUSING STARTS Mn. M/M JAN PHILADELPHIA FED INDEX 8:30 PM BUSINESS INVENTORIES NET CAPITAL INFLOWS TICS 4:00 PM CAPACITY UTIL/IND. PROD. 9:15 AM LEV M Y JAN LEADING INDICATOR 2, 5-, 7-Yr NOTE ANNOUNCE. Beige Book EXISTING HOME SALES 2-Yr NOTE AUCTION S&P CORE LOGIC/CASE- SHILLER HOUSE PRICE INDEX 9:00 AM NEW HOME SALES CONSUMER CONFIDENCE 5-Yr NOTE AUCTION 7-Yr NOTE AUCTION All data seasonally adjusted except where noted NSA. M: per cent change from previous month. Q: per cent change from previous quarter at annual rates. Y: per cent change from year earlier. AR: Annual Rate. YTD: Year to date. Release dates are provided by sources outside CIBC World Markets inc. Dates are subject to change. Sources for historical data: U.S. Department of Commerce, U.S. Department of Labor and U.S. Federal Reserve Board. 8 ADV. TRADE IN INTERNATIONAL GOODS DURABLE GOODS ORDERS M Y JAN GDP (AR) REAL IMPLICIT GDP DEFLATOR 17:Q3(F) :Q4(F) :Q1(A) ECI WAGES & TOTAL SALARY BEN. 17:Q :Q :Q1 CHICAGO PMI 9:45 AM MICHIGAN SENTIMENT (F)

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I ll Get Back to You Later by Avery Shenfeld

I ll Get Back to You Later by Avery Shenfeld The Week Ahead January 7-11, 2019 Economics Avery Shenfeld (416) 594-7356 avery.shenfeld@cibc.com Benjamin Tal (416) 956-3698 benjamin.tal@cibc.com Andrew Grantham (416) 956-3219