Page 1 Markets React to Dovish Rate Hike Robert Kavcic, Senior Economist robert.kavcic@bmo.com 416-359-8329 Sell the news, as they say (except this time, it was buy the news). Markets reacted to the Federal Reserve rate hike by pulling down bond yields (the 10-year Treasury yield fell to 2.5%), lifting stocks and sparking a rally in the Canadian dollar (back to 75 US cents). Of course, the rate hike was fully priced in, and markets were more tuned into the dot plot and press conference, perhaps bracing for another more hawkish shift. But that didn t happen, with the median path for tightening unchanged for 2017 and 2018, and the statement reiterating a gradual pace of rate hikes.
Page 2 High, High, American CPI Douglas Porter, CFA, Chief Economist douglas.porter@bmo.com 416-359-4887 A long, long time ago (two years back), I can still remember how that zero inflation used to make me smile. But February s result made me shiver, with every price report it delivered. Bad news on the headline, it almost reached 2.9. (Year-on-year, % change). I can t remember if bonds cried, when they read about how core also rised. But something touched the Fed deep inside, the day low inflation died. While U.S. CPI was no big shock, it shows the steady rebound in headline inflation continues now 2.7% y/y, a five-year high. However, core CPI remains quite stable, with the yearly rate holding in a tight range just above 2% for more than a year now. Speaking of stable, while U.S. headline inflation has jumped from a standing start to 2.7%, Canadian CPI has seen much less amplitude.
Page 3 Retail Charge Michael Gregory, CFA, Deputy Chief Economist michael.gregory@bmo.com 416-359-4747 Today s retail sales data for February were in line with market expectations, give or take a tenth, but the big news was the huge upward revisions to January. This means there was much more underlying momentum to start the year. Two-month cumulative increases are now 0.7% for headline retail sales, and 1.3% for both the ex-autos and ex-autos-and gas aggregates. The solid start to 2017 is being supported by growth in income (payroll jobs have perked up) and wealth (record equity and near-record home prices), against the background of surging consumer confidence.
Page 4 Why Home Construction is Poised to Pick Up Michael Gregory, CFA, Deputy Chief Economist michael.gregory@bmo.com 416-359-4747 The NAHB s Housing Market Index jumped a hefty 6 pts in March to match its second highest level since 1999 (the highest was in June 2005). The demand for new homes is surging. Part of this reflects the strong fundamentals supporting demand for homes in general (such as sturdy job/income growth, still-attractive affordability, and easing mortgage lending standards). Part of this also reflects the fact that existing homes available for sale are hovering at record lows in terms of months supply. This all points to higher housing starts in the months ahead.
Page 5 East Bound and Down? Alex Koustas, Senior Economist Alexandros.koustas@bmo.com 416-359-4624 Medium and Heavy Truck sales have been a very simple and reliable leading indicator of economic activity for the past several business cycles. With that in mind, February s 15% y/y decline continuing a brutal 11 month trend may make some a little queasy. Weakening truck sales typically signal wavering business sentiment and declining capital investment, but this stands strictly at odds with recent confidence surveys which include: a record print for the NFIB confidence index, a big upswing in the Business Roundtable CEO Economic Outlook survey and an upswing in the manufacturing PMI. Furthermore, industry level statistics such as the Cass Truckload Line haul index indicate strong shipping activity. But, indicators of pricing activity are weak, hinting at some industry level issues that are affecting purchasing. Bottom Line: While rare, the economy has managed to cruise past poor truck sales in previous cycles, most notably in the late 80s and mid-90s (both very strong periods of growth). So keep your foot hard on the pedal. Never mind them brakes. Let it all hang out 'cause we got a run to make.
A daily snapshot of economic trends and events Home Prices Melting Up Across Ontario Robert Kavcic, Senior Economist robert.kavcic@bmo.com 416-359-8329 Moving beyond Toronto for a change, home prices are now melting up pretty much across Southern Ontario inside or outside the Greenbelt, supply constraints or not. Note that cities like St. Catharines-Niagara, Guelph and Barrie began to detach from their long-running (we re talking more than a decade) trends around early-2016, about the same time we began to see Toronto prices break away from their (strong) fundamentals. The evidence mounts. And this is no longer just a Toronto issue. A publication of BMO Capital Markets Economic Research Douglas Porter, CFA, Chief Economist economics.bmocapitalmarkets.com 416-359-6372
Page 7 Netherlands or France: Spot the More Worrisome Election Jennifer Lee, Senior Economist jennifer.lee@bmo.com 416-359-4092 The results of the Netherlands election will be known early Thursday but judging by the direction of the country s government bond yields compared to those in France, financial markets seem to be moving on to the next election. One only need look at the spread between France s 10- year OATs and Dutch yields to arrive at that conclusion. While the focus will be how much of the vote Geert Wilders wins, his chances of becoming PM are slim given that no party wants to work with him. Meantime, Marine Le Pen s chances of victory are far greater and thus, she poses much more of a threat to European political stability than the next Dutch government. 10-year spread, France less Netherlands (ppts)
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