Canada Spared from New U.S. Tariffs... for Now

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1 WEEKLY NEWSLETTER Canada Spared from New U.S. Tariffs... for Now #1 BEST OVERALL FORECASTER - CANADA HIGHLIGHTS ff United States: 313,000 new jobs created in February! ff The U.S. balance of trade deteriorated more than expected in. ff Canada: Employment back in positive territory. ff The Bank of Canada left the target for the overnight rate at %. ff Canada: The trade balance improved in. ff Canada: The number of housing starts remains fairly high. A LOOK AHEAD ff United States: Better retail sales and manufacturing output performance is expected for February. ff United States: After a surprise increase in, consumer price index growth should be more modest in February. ff Canada: Manufacturing sales could hit some bumps again in. FINANCIAL MARKETS ff The flexibility of steel and aluminum tariffs reassured the markets. ff The Bank of Canada adopts a more cautious tone. ff The Canadian dollar ended the week on a high note. 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...10 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 2018, Group. All rights reserved.

2 Key Statistics of the Week UNITED STATES CANADA ff The establishment survey shows that 313,000 new jobs were created in February following s 239,000 new jobs (revised from 200,000). This marks the strongest monthly growth since July The construction sector created 61,000 jobs and manufacturing gained 31,000. There were 187,000 net hires in private sector services, a spurt following the 166,000 new jobs created in. Governments created 26,000 jobs. Unemployment remained at 4.1% in February, for the fifth consecutive month. ff As expected, the Bank of Canada left its key interest rates unchanged during its Wednesday decision. After raising the target for the overnight rate from 0% to % in, a status quo was appropriate in a context where key interest rate increases should be gradual. Wednesday s press release seems to indicate that the monetary authorities have a greater concern about the uncertainties, particularly those surrounding U.S. protectionism. ff The average hourly wage edged up 0.1% in February, or less than in (+) and December (+). The annual change went from % (revised from %) to 2.6%. ff The ISM non manufacturing index slid slightly in February from a cyclical peak of 59.9 to This modest decline comes on the heels of an 3.9 point increase in. Despite this decrease, five of the ten non-manufacturing index components were up, including current production, order backlogs and new orders. The employment component, which dropped from 61.6 to its lowest level since July of 55.0, saw the most notable contraction. ff The U.S. balance of trade in goods and services deteriorated more than expected in, decreasing from -US$53.9B in December to -US$56.6B. This fifth consecutive month of a ballooning trade deficit has led to the worst balance since October Exports fell %, while imports stagnated. ff Monthly growth in consumer credit decelerated again in. The monthly change went from +US$30.94B in November to +US$19.21B in December and then to +US$13.91 in. Growth in term loans remained fairly stable, but growth in revolving credit (lines of credit and credit cards) was the weakest since Francis Généreux, Senior economist ff The labour market benefited from the creation of 15,400 jobs in February, thus regaining some of the 88,000 jobs lost in. The 6 month moving average, which provides a good overview of the employment trend, remained around 20,000 for the second month in a row. This is a clear slowdown from the trend of nearly 40,000 recorded a few months ago. However, this deceleration is a good thing because the employment trend now more closely matches the rate at which the Canadian economy is growing, thereby helping to calm the concerns associated with an overheated labour market. The unemployment rate dropped from 5.9% to 5.8%. ff The number of housing starts edged up in February from 215,600 to 229,737 units. This gain was observed mainly in multi-unit housing in urban areas. ff Against all expectations, the value of merchandise exports lost ground in with a drop of %. On the one hand, the increase in energy products was weaker than expected. On the other hand, many other sectors struggled during the month. However, the value of imports was also down 4.3% in, paving the way for a slight improvement in the trade balance. ff Canadian labour productivity rose just in Q4 2017, in line with expectations. Given the 1.7% increase in remuneration per hour worked, unit labour costs rose 1.5% during the quarter. ff The industrial capacity utilization rate continued its upward movement in Q with a gain of 0.9 percentage points. At 86.0%, it is well above its historic average. Benoit P. Durocher, Senior economist 2

3 Financial Markets An Eventful Week The week ended with the U.S. stock market trending upwards. The departure of Gary Cohn, President Donald Trump s principal economic advisor, caused some concern on the markets, but it quickly faded with the announcement of a temporary exemption for Canada and Mexico from the tariffs on steel and aluminum. The surprising employment data published Friday indicated, all the same, that the U.S. economy remained strong. The S&P 500 posted a weekly increase of nearly 3% on Friday morning. The Canadian stock market also rose this week, while the S&P/TSX gained approximately % at the time of writing. Despite Canada s temporary exclusion from the new U.S. tariffs, uncertainty surrounding U.S. protectionism remained elevated and penalized the stock market. GRAPH 1 Stock markets Index Index 2,875 16,350 2,825 16,150 15,950 2,775 15,750 2,725 15,550 2,675 15,350 2,625 15,150 2,575 14, /01/ /02/ /02/ /02/ /02/ /03/08 S&P 500 (left) U.S. and Canadian bond yields also rose compared to last Friday, but the events and rumours surrounding the increase in tariffs led to volatility. U.S. employment figures also caused short- and long-term yields to jump, while 2 year and 10 year yields reached the % and % mark, respectively. In Canada, the BoC s more cautious tone caused bond yields to drop, but they quickly recovered following the rumours of tariff exemptions. Friday morning, the 2 year yield hovered around % and the 10 year yield around 5%. The diplomatic breakthrough in Korea at the beginning of the week negatively impacted the U.S. dollar briefly. Nevertheless, the greenback ended the week on a high note by benefiting from the euro s drop and the very strong job growth in the United States in February. The advances made by the populist parties during the Italian election did not hurt the euro, which began the week on an upward trajectory. However, Mario Draghi s very cautious tone following the meeting of the Central European Bank caused the euro to plunge on Thursday. The yen was negatively impacted by the improvement in investor sentiment. The BoC also published a cautiously worded statement that clipped the loonie s wings temporarily on Wednesday. However, the movement of the Canadian dollar mostly reflected the rumours concerning U.S. protectionism. The exclusion of Canada from tariffs on aluminum and steel imported into the United States allowed the loonie to end the week strongly. Mathieu D Anjou, Senior Economist Carine Bergevin-Chammah, Economist S&P/TSX (right) Sources: Datastream and, Economic Studies GRAPH 2 Bond markets 10-year yield In % points /01/ /02/02 Spread (left) 2018/02/ /02/20 United States (right) 2018/02/28 In % /03/08 Canada (right) Sources: Datastream and, Economic Studies GRAPH 3 Currency markets US$/C$ US$/ /01/ /02/ /02/ /02/2018 Canadian dollar (left) 28/02/ /03/2018 Euro (right) Sources: Datastream and, Economic Studies 3

4 A Look Ahead UNITED STATES TUESDAY 13 - February m/m 0.1% % Consumer price index (February) Prices created a big surprise in, adding to concerns about inflation risks triggered by the wage boost recorded in the same month. The monthly change in the consumer price index (CPI) reached % the highest growth since February The core CPI, which excludes food and energy, jumped by, a peak since We expect both indexes to show weaker growth in February. First of all, energy should make a slight negative contribution with gas prices edging up less than they usually do in. What s more, some items that pushed up the core CPI, like clothing (+1.7% in ) are not expected to post a second straight jump. The total CPI should tick up by only 0.1%, while the core CPI is expected to come in higher. The annual changes should show somewhat faster growth, however. Total inflation should shift up from % to %, while core inflation should come in at 1.9% compared with % in. WEDNESDAY 14 - February m/m - Retail sales (February) Retail sales in were very disappointing. With the jump in household confidence levels and the income boost due to tax cuts, household spending could have shown solid growth. Retail sales slipped instead. The drop in automobile sales is one reason for this decline. We expect this sector to make another negative contribution in February, albeit more modest. That said, service stations are expected to make a slight positive contribution. Excluding automobiles and gas, a better showing than the decline in is expected. The better weather should have given some industries an edge, especially food services. We also expect the lofty confidence levels and tax cuts to have a greater impact in February, with a % gain expected. Total sales should show monthly growth of. FRIDAY 16 - February ann. rate 1,290,000 1,350,000 1,326,000 Housing starts (February) After dropping 6.9% in December, housing starts jumped by 9.7% in. Starts reached 1,326,000 units, the highest annualized level since October Even after this solid showing, another advance is expected in February. The milder weather this month and the solid showing for building permits in point to another improvement. The downturn in sales of new single-family homes in is the only dark cloud on the horizon. Builder confidence remains very high, despite this setback. The 61,000 new jobs in the construction sector in February is also good news. In closing, housing starts should rise to 1,350,000 units. FRIDAY 16-9:15 February Industrial production (February) The data on industrial production was disappointing. After rising in December (downgraded from 0.9%), output was down 0.1%, the first decline since August. However, we expect a sharp rebound in February. The stagnation in manufacturing recorded in should give way to a marked increase of more than 1%, going by the number of hours worked. The gains in the automobile sector should be particularly decisive. The solid reading of the ISM manufacturing index is also a good sign. We also expect a better performance from mining, after the unexpected % contraction in. For energy producers, the milder weather could pave the way for a major pullback. A 4.0% decline is expected. Overall, industrial production should increase %, with manufacturing output rising 1.2%. On Thursday, the results of the New York Fed s Empire index and the Philadelphia Fed s index will provide preliminary indications on the strength of the manufacturing sector in. m/m % -0.1% 4

5 FRIDAY 16 - February University of Michigan consumer confidence index ( preliminary) Despite the somewhat worrisome fluctuations in the stock market in early February, the mood in households was still very upbeat, according to the University of Michigan index. This index was up by four points, to 99.7, its highest level since October. Another improvement in is difficult to predict, however. The increasingly perceptible impact of the tax cuts is one of the reasons behind the upturn in February. It would be surprising if this factor triggered a second consecutive increase, however. The tax cuts should help stabilize this index instead. Other positive elements are propping up this high level of confidence: a vigorous job market, the recent drop in gas prices, and the new cyclical peak in the Conference Board s confidence index in February. The stock market is being rattled by new difficulties however, with the protectionist threats of the Trump administration fanning the flames. The TIPP monthly index dipped slightly in, and we expect the University of Michigan index to follow suit. CANADA FRIDAY 16 - December m/m -% -% - Manufacturing sales () After declining in December, the value of manufacturing sales could dip again slightly in. Moreover, merchandise exports were down % for the month, mostly due to the significant pullbacks in the automobile and aerospace industries. The energy sector could continue to benefit from the uptrend in recent months, which should soften the decline in total manufacturing sales. OVERSEAS WEDNESDAY 14-6:00 m/m - December Euro zone: Industrial production () Euroland industrial production expanded by in December, a solid if not stellar result, and much lower than the % gain recorded in November. That said, the annual change in industrial production reached 5.2% the best result since August The downside risks for the monthly change in have increased, however, given the 2.0% decline in French industrial production and the 0.1% drop in Germany s output. 5

6 Economic Indicators Week of 12 to 16, 2018 Day Hour Indicator Period Previous data UNITED STATES MONDAY 12 14:00 Federal budget (US$B) TUESDAY 13 Consumer price index Total (m/m) Excluding food and energy (m/m) Total (y/y) Excluding food and energy (y/y) WEDNESDAY 14 Producer price index Total (m/m) Excluding food and energy (m/m) Retail sales Total (m/m) Excluding automobiles (m/m) 10:00 Business inventories (m/m) THURSDAY 15 10:00 16:00 Initial unemployment claims Philadelphia Fed index Empire manufacturing index Export prices (m/m) Import prices (m/m) NAHB housing market index Net foreign security purchases (US$B) FRIDAY 16 9:15 9:15 10:00 Housing starts (ann. rate) Building permits (ann. rate) Industrial production (m/m) Production capacity utilization rates Michigan s consumer sentiment index preliminary % % 0.1% % 1.9% % % % 0.1% % % % - % 228, , % % 231, % % ,290,000 1,328, % ,350,000 1,315,000 % 78.0% ,326,000 1,377, % 77.5% % % CANADA MONDAY TUESDAY 13 10:30 WEDNESDAY Speech of the Bank of Canada Governor, S. Poloz --- THURSDAY 15 9:00 National balance sheet Existing home sales Q4 FRIDAY 16 International transactions in securities ($B) Manufacturing sales (m/m) Note:, 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, Economic Studies of the Group. 6

7 Economic Indicators Week of 12 to 16, 2018 Country Hour Indicator Period m/m (q/q) y/y Previous data m/m (q/q) y/y OVERSEAS MONDAY 12 Japan 19:50 Producer price index % TUESDAY 13 Japan China China 0:30 22:00 22:00 Tertiary industry activity index Industrial production Retail sales % 1% 6.6% 1 WEDNESDAY 14 Germany Italy Euro zone Euro zone 3:00 5:00 6:00 6:00 Consumer price index final Retail sales Net change in employment Industrial production Q4 THURSDAY 15 France Switzerland Norway 3:45 4:30 5:00 Consumer price index final Swiss National Bank meeting Bank of Norway meeting FRIDAY 16 Japan Euro zone 0:30 6:00 Industrial production final Consumer price index % - % 1.4% 4.6% % - 1.4% -0.1% 1.7% 5.2% -0.1% 1.2% -5% 0% -0.1% -5% 0% 1.2% -6.6% -0.9% % % 1.2% 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). 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)1 Exports (2009 $B) Imports (2009 $B) Final domestic demand (2009 $B) GDP deflator (2009 = 100) Labor productivity (2009 = 100) Unit labor cost (2009 = 100) Employment cost index ( 2005 = 100) Current account balance ($B)1 1 VARIATION (%) LEVEL 2017 Q3 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. UNITED STATES 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 ($M) VARIATION (%) LEVEL -1 month -3 months -6 months -1 year * * ,049 12,915 3, , , * * * * , ,029 1,902 1,326 1, ,380-56, , ,209 1, ,560-53, ,261 1, ,500-49, ,185 1, ,420-45,385 1, ,236 1, ,650-48,692 2, Excluding food and energy Producer price (2009 = 100) Export prices (2000 = 100) Import prices (2000 = 100) Excluding automobiles ($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. 8

9 CANADA 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. CANADA 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 55, ,414 49, , * 62,994-1, , ,442-2, * * 45,839 47, * * 18, , * , * * 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, CANADA, 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) ,767 25,146 1, ,691 24,538 1, ,620 24,191 1, ,652 24,329 1, ,461 21,798 1, ,373 20,903 1, ,873 26,617 1, ,531 22,711 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 -7 Treasury bonds 2 years -6 Treasury bonds 5 years -0 Treasury bonds 10 years -5 Treasury bonds 30 years S&P/TSX index (level) Exchange rate (C$/US$) Exchange rate (C$/ ) 15, , , , , , , , , Overseas Euro zone ECB Refinancing rate Exchange rate (US$/ ) United Kingdom BoE Base rate Bonds 10 years FTSE index (level) Exchange rate (US$/ ) 0 7, , , , , , , , , Germany Bonds 10 years DAX index (level) 5 12, , , , , , , , ,904 Japan BoJ Main policy rate Nikkei index (level) Exchange rate (US$/ ) 21, , , , , , , , , CRB: Commodity Research Bureau; WTI: West Texas Intermediate; ECB: European Central Bank; BoE: Bank of England; BoJ: Bank of Japan Note: Data taken at markets closing, with the exeption of the current day where they were taken at 11:00 a.m. 10