The Bank of Canada Raises Its Rates and Appears Confident

Transcription

1 WEEKLY NEWSLETTER The Bank of Canada Raises Its Rates and Appears Confident #1 BEST OVERALL FORECASTER - CANADA HIGHLIGHTS ff United States: Another strong real GDP growth in Q3. ff United States: A new drop in new home sales. ff The Bank of Canada is raising its key rates again and abandoning the idea of gradual increases. A LOOK AHEAD ff United States: After Florence, did Hurricane Michael also have an impact on hiring? ff United States: A drop in consumer confidence and the ISM manufacturing index is expected. ff Canada: Real GDP by industry could increase somewhat in August. ff Canada: The employment rebound should continue in October. FINANCIAL MARKETS ff The stock market is in negative territory after disappointing corporate earnings were published. ff Greater risk aversion has sapped bond yields. ff The increase in risk aversion has also hurt the Canadian dollar. 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 Mathieu D Anjou, Deputy Chief Economist Carine Bergevin-Chammah, 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 Real GDP rose 3.5% (annualized) in the third quarter of 2018, according to the advance estimate for national accounts. This is slightly lower than the 4.2% gain recorded in the spring. Real consumption rose 4.0% in the third quarter, its best result since the fall of Non-residential fixed investment by businesses slowed, with an increase of only %. This slower rate of growth since the end of 2016 was largely due to a 7.9% slide in non-residential construction. The change in inventories added 2.07 percentage points to real GDP growth, while net exports contribution was points. ff As expected, the Bank of Canada (BoC) continued its monetary tightening on Wednesday by raising the target for the overnight rate to 1.75%. In general, the BoC s new economic scenario is very consistent with our latest projections. Replacing the North American Free Trade Agreement (NAFTA) with the United States Mexico Canada Agreement (USMCA) does substantially reduce the uncertainty; this will boost business investment growth. The BoC is also reassured by the slowdown in household debt and stabilizing housing market. Note, however, that the prior key interest rate hikes have not yet been fully incorporated into households effective interest rates. Clearly, the adjustments are far from over. Despite this, the monetary authorities seem determined to keep taking the target for the overnight rate up to neutral, i.e. between 2.50% and 3.50%. Against all expectations, the concept of future rate increases being gradual has dropped out of the BoC s statement. As the uncertainties over international trade, household debt and the housing market have lessened, the BoC is more inclined to raise its key interest rates. Under these conditions, the door seems to be open for another increase at the start of ff New durable goods orders rose % in after a gain of 4.6% in August. Since the previous increase was recorded mainly in the aviation sector, a contraction had been anticipated, but the pullback was much smaller than expected thanks to the defence industry. There was also a 1.3% increase in motor vehicle sales. Excluding transportation, new orders were up by only. New capital goods orders, excluding aviation and defence, were down after dropping in August. This is the first time since November 2017 that they posted two consecutive declines. ff The sales of new single-family homes declined 5.5% in following a % drop in August after a significant downward correction. This is the fifth monthly sales contraction in six months for a total of -17.7%. Annualized sales reached 553,000 units in, the lowest level since December Francis Généreux, Senior economist ff Wholesale sales dropped in August. Automotive products saw a 1.4% decline while the other sectors recorded a meagre increase. In real terms, sales also declined, while inventories fell %. The wholesaling sector is therefore expected to slow down economic growth in August. Benoit P. Durocher, Senior economist 2

3 Financial Markets Stock Indexes Head Down Again The U.S. stock market performed unevenly this week. Volatility, as measured by the VIX index, was up in markets, with investors increasingly worried about ongoing monetary policy tightening and trade tensions. Disappointing corporate earnings took the market down on Tuesday and Wednesday. More and more investors are starting to think that profits may have peaked. The market rebounded on Thursday, then headed back down on Friday. The strong economic growth posted in the United States does not seem to have helped reassure investors, as it could turn into an argument for further interest rate hikes. At the time of writing, the S&P 500 index was down almost 4% over the week. The Canadian stock market had more trouble this week, as the Bank of Canada s (BoC) very optimistic tone suggested that monetary policy tightening could potentially accelerate, while oil prices continued to head downwards. By Friday morning, the S&P/TSX index had lost roughly 4% over the course of the week. The risk aversion in the stock market supported a drop in bond yields. In the United States, the 2 and 10 year yields lost about 10 basis points, ending at around 2.80% and 3.10% respectively on Friday. The key rate increase from the BoC and its more optimistic than expected stance pushed Canadian bond yields up on Wednesday, especially in the shorter maturities. The momentum did not last, however, as the stock market s volatility took Canadian bond yields down. At the time of writing, the Canadian 2 and 10 year yields were at around 0% and 0%, respectively. The U.S. dollar was the big winner in this tumultuous week for financial markets. The Canadian dollar was unable to capitalize on the BoC s increased optimism, trading at just under US$0.76 on Friday morning. The euro continues to be shaken by fears over Italy s debt, and slid below US$4. Italy s financial situation also dominated much of the press conference that followed the European Central Bank s monetary policy meeting on Thursday. The pound sterling also dropped substantially. It is now at US$1.28, mainly because of the lack of progress on Brexit negotiations. GRAPH 1 Stock markets Index Index 2,950 16,500 2,900 16,250 16,000 2,850 15,750 2,800 15,500 2,750 15,250 2,700 15,000 2,650 14, /09/ /09/ /10/ /10/ /10/ /10/25 S&P 500 (left) S&P/TSX (right) Sources: Datastream and, Economic Studies GRAPH 2 Bond markets 10-year yield In % points -6 In % /09/ /09/21 Spread (left) 2018/10/ /10/09 United States (right) 2018/10/ /10/25 Canada (right) Sources: Datastream and, Economic Studies GRAPH 3 Currency markets US$/C$ Hendrix Vachon, Senior Economist Carine Bergevin-Chammah, Economist US$/ /09/ /09/ /10/ /10/2018 Canadian dollar (left) 17/10/ /10/2018 Euro (right) Sources: Datastream and, Economic Studies 3

4 A Look Ahead UNITED STATES TUESDAY October 30-9:00 August y/y 5.80% 5.90% July 5.92% S&P/Case-Shiller index of existing home prices (August) For the last four months, the monthly changes in the S&P/Case-Shiller index have been smaller than they were a year ago. As a result, the annual change has also slowed, slipping from 6.8% in March to 5.9% in July. We expect the index to remain flat for, as it did a year ago. The annual change should stay at 5.9%. TUESDAY October 30-10:00 October Conference Board consumer confidence index (October) The Conference Board s confidence index posted another good increase in, rising to 138.4, its highest point since Having gained 11.3 points over three months, we can now expect the index to slow a little. One factor pointing to a decline in confidence is the stock market, which has dropped over 8% in the last month. Jobless claims are up from last month s lows. Bloomberg s weekly confidence index has also declined in recent weeks. On the other hand, gas prices have been stable for the last month. All told, the Conference Board s consumer confidence index should hit THURSDAY November 1st - 10:00 October ISM manufacturing index (October) After reaching its highest level since May 2004 in August, the ISM manufacturing index slid from 61.3 to 59.8 in. A further pullback is expected for October, which is what the leading regional manufacturing indicators are signalling. Their levels suggest a pullback that could take the ISM index to around 58. FRIDAY November 2nd - US$B August Trade balance () In August, the U.S. trade balance posted its third consecutive erosion. The deficit went from -US$42.6B in May to -US$53.2B. The deficit could rise again in, but only slightly. The preliminary figures for the trade in goods point to a 1.8% increase in exports and a 1.5% rise in imports. The balance of trade in goods and services should go from -US$53.2B to -US$53.7B. FRIDAY November 2nd - October 190, , ,000 Job creation according to the establishment survey (October) Hires dropped by half between August (270,000) and (134,000). Last month s weakness was largely due to Hurricane Florence, which struck during the week of the labour market survey. The problem is that another hurricane, Michael, hit the southern United States during the week of October s survey. The positive impact from the post-florence return to work will therefore be partially offset by new temporary losses. Note also that weekly jobless claims have gone up in recent weeks from last month s low. Bottom line: we are expecting 180,000 hires. The release of the ISM manufacturing index, Conference Board consumer confidence index and the ADP index will help shape the forecast. Movements by the labour force, also affected by the hurricanes, could trigger another drop in the jobless rate, taking it to 3.6%. CANADA WEDNESDAY Octobre 31 - August m/m % July st Real GDP by industry (August) August s economic results were fairly mixed. The volume of manufacturing, wholesale and retail sales declined, while manufacturing inventories increased substantially over the month. Hours worked also increased in August. As with July s results, the month s heat wave could have boosted output by utilities somewhat. All in all, real GDP by industry could grow by about in August. 4

5 FRIDAY November 2nd - October 10,000 31,000 63,300 Labour force survey (October) Given the 63,300 jobs created in, the employment trend (established based on a 6 month moving average) went up by 14,800. However, this remains overly low in comparison with the economic growth we are currently seeing. Under the circumstances, we could see further catching up in October, although not as extensive. The unemployment rate could go from 5.9% to 5.8%. FRIDAY November 2nd - $B 0 8 August 3 International merchandise trade () Following seasonal adjustments and expressed in Canadian dollars, base product prices rose % in, primarily because of a 1.5% increase in energy. That should boost export values for the month. Also, according to U.S. data, automobile production posted solid growth in, suggesting that trade between Canada and the United States strengthened in this industry. Export growth of around % is forecast for. However, we are expecting a similar increase in imports, so the trade balance should not fluctuate significantly for the month. OVERSEAS DURING THE WEEK : Economic indicators Several monthly indicators for will be released this week in. Retail sales will be released on Sunday evening. They went up % in August. The unemployment rate will be revealed on Monday evening and industrial production and housing starts on Tuesday. The Bank of will hold its monetary policy meeting on October 30 and 31st. No change of course is expected. DURING THE WEEK : Economic indicators Among the indicators to be released in the euro zone in the coming week are a number of confidence indexes for October, to be released Tuesday. Early signs are fairly negative. Although the flash version ticked up, going from - to -2.7, the trend for the consumer confidence index is downward. Moreover, the Euroland composite PMI index deteriorated again, according to October s preliminary version. A first estimate of euro zone s GDP for Q3 will also be posted on Tuesday. The consensus expects growth to remain modest, in line with the nonannualized % increase posted last spring. The flash estimate for October s inflation will be released on Wednesday. The annual change in the total consumer price index was % in. MONDAY November 1st - 8:00 November 0.75% 0.75% % : Bank of England meeting (November) It would be astounding for the Bank of England (BoE) to move ahead with another interest rate increase right now. The uncertainty surrounding Brexit has increased, with the and Europe having a hard time agreeing on several points. The greater volatility in the financial markets also argues for caution, bolstered by the fact that inflation has declined in the. Nonetheless, the BoE could show a little more concern about the pound s slide, as a further decline could trigger new inflation pressure. Among the economic indicators to be released this week are consumer confidence and October s PMI indexes for manufacturing and construction. 5

6 Economic Indicators Week of October 29 to November 2nd, 2018 Day Hour Indicator Period Previous data UNITED STATES MONDAY 29 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) 9:45 Speech of the Chicago Fed President, C. Evans % % % % % % TUESDAY 30 9:00 10:00 S&P/Case-Shiller home price index (y/y) Consumer confidence 5.80% % % WEDNESDAY 31 9:45 Employment cost index (q/q) Chicago PMI index Q3 0.7% % 59.8 % 6 THURSDAY 1 10:00 10:00 Initial unemployment claims Nonfarm productivity preliminary (ann. rate) Unit labor costs preliminary (ann. rate) Construction spending (m/m) ISM manufacturing index Total vehicle sales (ann. rate) 213,000 % 1.2% ,000, ,000 % % -% ,100, ,000 % -% ,400,000 FRIDAY 2 10:00 Trade balance Goods and services (US$B) Change in nonfarm payrolls Unemployment rate Weekly worked hours Average hourly earnings (m/m) Factory orders (m/m) , % % , % 34.5 % , % 34.5 % n/a n/a % -% -% -4.6% 0 10, % 8 31, % 3 63, % Q3 Q3 CANADA MONDAY 29 TUESDAY 30 WEDNESDAY 31 THURSDAY 1 FRIDAY 2 -- Industrial product price index (m/m) Raw materials price index (m/m) Real GDP by industry (m/m) --International trade ($B) Net change in employment Unemployment rate 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 October 29 to November 2nd, 2018 Country Hour Indicator Period m/m (q/q) y/y Previous data m/m (q/q) y/y OVERSEAS SUNDAY 28 19:50 Retail sales MONDAY 29 19:30 Unemployment rate TUESDAY 30 France France Italy Germany China China --2:30 3:45 5:00 9:00 19:50 20:01 21:00 21:00 WEDNESDAY 31 Brazil Germany France Italy - % % % % Bank of meeting Real GDP preliminary Personal consumption expenditures Real GDP preliminary Business climate Consumer confidence final Industrial confidence Services confidence Economic confidence Real GDP preliminary Consumer price index preliminary Industrial production preliminary Consumer confidence PMI manufacturing index PMI non-manufacturing index Q3 T3 Q3 % % 1.5% -% % % % 1.8% % - -% % % % % :00 3:00 3:45 Bank of Brazil meeting Housing starts Retail sales Consumer price index preliminary Consumer price index estimate Unemployment rate Consumer price index preliminary 6.50% 6.50% -% % % - % - % 8.1% 8.1% 1.8% -% THURSDAY 1 3:00 5:30 8:00 8:00 Nationwide house prices PMI manufacturing index Bank of England meeting Release of the Bank of England Inflation Report Nov % % FRIDAY 2 France Germany 4:50 4:55 5:00 5:30 PMI manufacturing index final PMI manufacturing index final PMI manufacturing index final PMI construction index % 1.7% 1.3% 1.2% % % 1.6% 1.6% % % 1.5% 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 $B) GDP deflator (2009 = 100) Labor productivity (2009 = 100) Unit labor cost (2009 = 100) Employment cost index (Dec = 100) Current account balance ($B)1 1 VARIATION (%) LEVEL ANNUAL VARIATION (%) Quart. ann. 1 year ,671 12,969 3, , ,551 3,490 19, 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 ($M) VARIATION (%) LEVEL -1 month -3 months -6 months -1 year ,953 14,398 3, , , * * , ,098 1,961 1,201 1, ,150-53, , ,268 1, ,330-50, ,177 1, ,380-42, ,327 1, ,600-54,963 1, ,158 1, ,370-44,163 2, Excluding food and energy Producer price (2009 = 100) Export prices (2000 = 100) Import prices (2000 = 100) Excluding automobiles ($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 $M) VARIATION (%) LEVEL ANNUAL VARIATION (%) Quart. ann. 1 year Current account balance ($M)1 1,891,153 1,083, , , ,622 14, , ,979 1,882, , , , , , ,526 Production capacity utilization rate (%)1 Disposable personal income ($M) Corporate net operating surplus (2007 $M) ,248, , 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) 1 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 ($M) Employment (k)2 1 Unemployment rate (%) Average weekly earnings ($) 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 July July VARIATION (%) LEVEL -1 month -3 months -6 months -1 year 1,789, ,151 58, ,148 50, , * 63, ,692-2, ,872 50,549 50, , * * 5.9 1,006 16, , 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) ,655 24,675 1, ,768 25,444 1, ,914 26,458 1, ,819 25,451 1, ,670 24,311 1, ,581 23,434 1, ,931 26,828 1, ,741 24,949 1, ,565 23,271 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 -0 Treasury bill 3 months -0 Treasury bonds 2 years -4 Treasury bonds 5 years -7 Treasury bonds 10 years -9 Treasury bonds 30 years S&P/TSX index (level) Exchange rate (C$/US$) Exchange rate (C$/ ) 14, , , , , , , , , Overseas ECB Refinancing rate Exchange rate (US$/ ) BoE Base rate Bonds 10 years FTSE index (level) Exchange rate (US$/ ) , , , , , , , , , Germany Bonds 10 years DAX index (level) , , , , , , , , ,192 BoJ Main policy rate Nikkei index (level) Exchange rate (US$/ ) 21, , , , , , , , , CRB: Commodity Research Bureau; WTI: West Texas Intermediate; ECB: European Central Bank; BoE: Bank of England; BoJ: Bank of Note: Data taken at markets closing, with the exeption of the current day where they were taken at 11:00 a.m. 10