GLOBAL ECONOMICS DAILY POINTS

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1 @ 8:05 EST ON DECK FOR THURSDAY, JANUARY 25 Country Date Time Indicator Period BNS Consensus Latest CA 01/25 08:30 Retail Sales (m/m) Nov CA 01/25 08:30 Retail Sales ex. Autos (m/m) Nov US 01/25 08:30 Initial Jobless Claims (000s) JAN US 01/25 08:30 Continuing Claims (000s) JAN US 01/25 08:30 Wholesale Inventories (m/m) Dec P US 01/25 10:00 Leading Indicators (m/m) Dec US 01/25 10:00 New Home Sales (000s a.r.) Dec CONTACTS Derek Holt, VP & Head of Capital Markets Economics Scotiabank Economics derek.holt@scotiabank.com KEY POINTS: Markets await Draghi ECB largely repeats prior policy guidance states that QE will continue until inflation sustainably rises with Draghi s press conference ahead and he could well flag weak inflation and euro strength with a neutral-dovish stance that avoids early exit signals BoC s Poloz repeats core messages Ontario bonds shake off fresh election uncertainty CDN retail sales expected to climb again US PCE inflation could hit a record next month US new home sales will drop NZ CPI reduces RBNZ bets Won shakes off first South Korean GDP drop since 2008 Bank Negara Malaysia hikes, ringgit rallies on guidance Norges Bank stands pat, leaves guidance unchanged German business confidence rises but expectations soften Final ITC ruling on aircraft spat due today US to auction 7s today INTERNATIONAL The ECB s communications will dominate the global market tone today including with President Draghi s pending press conference. Other developments are of a decidedly regional market nature including in Canada where retail sales are on tap. The USD is weaker against several but not all crosses this morning. US Treasury Secretary Mnuchin tried to alter the reaction to his comments yesterday by stating he believes in long-term dollar strength. The Euro is flat versus the dollar ahead of Draghi. CAD is also vulnerable into an expected strong retail sales report. Sovereign bond yields are a little lower across Europe and North America. Early communications from the ECB are playing a part but, like the euro, global sovereign bonds are sensitive to what Draghi says (see below). Oil prices are higher with WTI over US$66 and Brent is at $71. Yesterday s decline in US oil inventories is helping. US equity futures are rallying by ¼% - ½% across the indices this morning. TSX futures are slightly higher. European cash markets are rallying somewhat across all exchanges. 1

2 The ECB left its core policy variables unchanged as expected but guided that QE will continue until the inflation path has sustainably adjusted. The 7:45amET announcements repeated that bond buying will go to September or beyond if needed. President Draghi s press conference is at 8:30amET. Markets will be sensitive to any guidance further on what to do after September when current bond purchases may end. With supercore CPI inflation stuck at 1% y/y and euro strength catching the attention of doves, I wouldn t be surprised to see Draghi acknowledge firm growth readings and momentum arguments against continued disappointment on inflation with currency pressures pointed to the downside for both sustainable growth and inflation. That would err on the side of a neutral/dovish take that defers a policy exit discussion until later. New Zealand s CPI inflation was softer than expected at 0.1% q/q in Q4 (0.4% consensus, 0.5% prior). A large 11.2% decline in fruit/vegetable prices was the biggest downside movement. That pushed out expectations for a hike. OIS markets are pricing about even odds of a 25bps hike or a hold by the end of the year. Bank Negara Malaysia hiked its policy rate by 25bps to 3.25% as expected overnight. Because the central bank also guided that further hikes may come, the bias drove the ringgit to be one of the strongest Asian currencies versus the USD overnight. The central bank had guided such expectations in November on the back of strong growth that equaled 6.2% y/y in Q3 and that has been on an upward trend since mid Inflation at 3.5% y/y has held steady recently after trending higher also since mid Norges Bank left its policy deposit rate at 0.5% as expected overnight. Governor Oystein Olsen remarked that The outlook and the balance of risks for the Norwegian economy do not appear to have changed substantially since the December Report. Last month, Governor Olsen guided that he is biased to have a slightly earlier first increase in the policy rate given improving inflation and growth but that 2018 could be too early to begin tightening and that late year would be the earliest point at which to expect a hike. That bias was not further informed today. German business confidence increased only because of a firmer take on present conditions. The expectations component slipped by just over a full point and has declined for two consecutive months while nevertheless remaining toward the upper end of the post-gfc range. South Korea s economy disappointed expectations overnight. Q4 GDP fell by 0.2% q/q after a large 1.5% prior gain and against consensus expectations for a slight increase. That s the first quarterly dip since 2008Q4. A 5.4% drop in exports significantly driven by autos and that outpaced a 4.1% decline in imports played a role while business investment tumbled. Consumer spending grew solidly. The won shook off the disappointment and is leading major crosses versus the dollar on another morning of broad dollar weakness. An anonymous South Korean official remarked that won movements are being monitored. CANADA Governor Poloz s interview on CNBC from Davos (here) yielded no material shifts in his stance. He reiterated that the number one thing keeping him awake at night is cyber risk. He also repeated references to how NAFTA outcomes cannot be prejudged, there is a higher rate sensitivity today at higher levels of debt, and the BoC is fully data dependent. Canada releases retail sales for November this morning (8:30amET). Because it will coincide with ECB President Draghi s press conference, it s possible the market effects will get buried. A large gain in auto sales and higher gasoline prices are expected to drive retail sales higher by almost 1% m/m after a 1.5% gain the prior month. There is always enormous two-tail risk to a retail call because there are so many components that are unobservable in advance. I would not be surprised by either an upside or downside result relative to expectations. Ontario s opposition PC Leader Patrick Brown resigned overnight amidst a scandalous blend of allegations centered upon sexual misconduct involving a pair of individuals one of whom was a minor at the time. This clearly throws election uncertainty into the mix given his party was strongly leading over the incumbent Liberal Party. It is unclear how quickly the PCs will move toward determining a new leader and the exact steps but this raises the odds that Premier Wynne may be re-elected largely by default. Ontario bonds The final ITC ruling on the Bombardier-Boeing trade tensions will be issued sometime today in the backdrop to ongoing NAFTA negotiations in Montreal. UNITED STATES US markets get new home sales (10amET) for the month of December that are pretty much guaranteed to drop following a massive 17.5% m/m rise the prior month. That was the highest tally since July The US also auctions 7s at 1pmET. 2

3 Either in the January print or more likely in February, U.S. PCE inflation is probably going to pop higher by possibly the biggest percentage amount on record. The catalyst is the 20% tariff on imported washing machines and 50% on imported parts. Quantifying this effect is complicated by a number of factors. So far we have limited company guidance on pass-through of the higher tariffs (e.g. LG) and there are a lot of key missing details beyond just general guidance of higher prices to come (like what %, when, and offsets like features or promotions etc). We don't know if more companies directly affected by the tariffs will raise prices and by how much. We don't know if companies not directly affected by the tariffs like Whirlpool will use it as an opportunity to raise their own prices (imagine that headline ) and if so by how much. We don't know how consumers may substitute across options or defer purchases and recall that PCE uses dynamic spending weights. But, even with a very small weight in total consumer spending (all major appliances carry only just over a 0.3% weight) it wouldn't take much of a percentage swing in that subcategory to exceed the record single-month increase in the PCE deflator of 1.2% m/m that was set way back in March That would only require a mid-single digits percentage hike in the all major appliances category with all else constant (but all else would likely add a little more to headline PCE m/m). So stay tuned, watch the info we get from the company pricing decisions, and think ahead to a large pop higher which is usually how protectionist measures work: higher near-term inflation, softer later. Higher softwood lumber prices and the impact on housing from the US protectionist duties on Canadian softwood lumber may also play into this through housing costs within the PCE deflator. 3

4 Fixed Income Government Yield Curves (%): Central Banks 2-YEAR 5-YEAR 10-YEAR 30-YEAR Current Rate Last 1-day 1-wk Last 1-day 1-wk Last 1-day 1-wk Last 1-day 1-wk U.S Canada - BoC 1.25 CANADA GERMANY US - Fed 1.50 JAPAN U.K England - BoE 0.50 Spreads vs. U.S. (bps): CANADA Euro zone - ECB 0.00 GERMANY JAPAN Japan - BoJ U.K Equities Level Mexico - Banxico 7.25 Last Change 1 Day 1-wk 1-mo 1-yr S&P/TSX Australia - RBA 1.50 Dow S&P New Zealand - RBNZ 1.75 Nasdaq DAX Next Meeting Date FTSE Nikkei Canada - BoC Mar 07, 2018 Hang Seng CAC US - Fed Jan 31, 2018 Commodities Level WTI Crude England - BoE Feb 08, 2018 Natural Gas Gold Euro zone - ECB Jan 25, 2018 Silver CRB Index Japan - BoJ Mar 09, 2018 Currencies Level USDCAD Mexico - Banxico Feb 08, 2018 EURUSD USDJPY Australia - RBA Feb 05, 2018 AUDUSD GBPUSD New Zealand - RBNZ Feb 07, 2018 USDCHF Source: Bloomberg. All quotes reflect Bloomberg data as at the time of publishing. While this source is believed to be reliable, Scotiabank cannot guarantee its accuracy. 4

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