TD Economics The Weekly Bottom Line December 14, 2018 Highlights of the Week United States After some optimism early in the week, financial market sentiment soured as focus shifted back to fears of an escalation in trade tensions, Brexit uncertainty, and a potential economic downturn in 2019. The U.S. consumer remained unbowed in November, with consumer spending now tracking above 3% annualized in Q4. Inflation has cooled in line with oil prices, which should help to support real spending going forward. The FOMC makes its final decision of 2019 next week, and a hike is universally expected. We will be watching closely to see how members views have changed about how many hikes will ultimately be required in this cycle. Canada Canadian builders broke ground on a few more homes in November, as starts beat expectations, reaching 216k in November, a 4.4% increase on the month. This week also revealed that Canadians are more stretched than previously thought. Statistics Canada reported the household debt-to-income ratio at 177.5% in Q3, revising the level up markedly on downward revisions to household incomes. TD Economics revised quarterly forecast sees real GDP growth slowing from 2.1% this year to 1.8% in 2019 in the face of mounting headwinds, notably oil sector disruptions. This Week in the Markets Current* Week Ago Stock Market Indexes 52-Week High 52-Week Low S&P 500 2619 2633 2931 2581 S&P/TSX Comp. 14656 14795 16567 14656 DAX 10851 10788 13560 10622 FTSE 100 6834 6778 7877 6704 Nikkei 21375 21679 24271 20618 Fixed Income Yields U.S. 10-yr Treasury 2.88 2.85 3.24 2.35 Canada 10-yr Bond 2.10 2.07 2.60 1.84 Germany 10-yr Bund 0.25 0.25 0.77 0.23 UK 10-yr Gilt 1.25 1.27 1.73 1.15 Japan 10-yr Bond 0.04 0.06 0.16 0.02 Foreign Exchange Cross Rates C$ (USD per CAD) 0.75 0.75 0.82 0.75 Euro (USD per EUR) 1.13 1.14 1.25 1.12 Pound (USD per GBP) 1.26 1.27 1.43 1.25 Yen (JPY per USD) 113.4 112.7 114.5 104.7 Commodity Spot Prices** Crude Oil ($US/bbl) 51.3 52.6 76.4 50.2 Natural Gas ($US/MMBtu) 4.31 4.51 7.13 2.52 Copper ($US/met. tonne) 6158.5 6149.0 7330.5 5759.0 Gold ($US/troy oz.) 1239.7 1248.4 1358.5 1174.2 *as of 11:37 am on Friday. **Oil-WTI, Cushing, Nat. Gas-Henry Hub, LA (Thursday close price), Copper-LME Grade A, Gold-London Gold Bullion; Source: Bloomberg. S&P/TSX S&P 500 DAX USD:EUR USD:JPY USD:CAD DXY WTI -3.0-2.0-1.0 0.0 1.0 2.0 Federal Reserve (Fed Funds Rate) Bank of Canada (Overnight Rate) European Central Bank (Refi Rate) Bank of England (Repo Rate) Pessimism Rules Markets Weekly % Change Note: Data as of 11:40 AM ET, December 14, 2018 Sources: Bloomberg, TD Economics Global Official Policy Rate Targets Current Target 2.00-2.25% 1.75% 0.00% 0.75% Bank of Japan (Overnight Rate) -0.10% Source: Central Banks.
2 U.S. - Bah! Humbug! After some optimism early in the week, supported by positive headlines about the lessening of U.S.-China trade tensions, sentiment turned sour to end the week. Markets seem to be channeling Dickens s curmudgeonly character Ebenezer Scrooge, saying Bah! Humbug! to any good news that comes along. Markets are down roughly 10% in the fourth quarter of this year as investors fret about prospects for 2019, focusing on the potential for escalating trade tensions, uncertainty about the path of Brexit, and a potential economic downturn. 5 4 3 2 1 Chart 2: U.S. Growth Set to Slow Real GDP Growth, Quarter/Quarter % Change (Annualized) 4.2 Forecast 3.5 2.2 2.3 2.5 2.3 2.1 2.0 2.0 1.7 1.6 1.8 Our latest outlook did feature a small downgrade to global growth (Chart 1). However, the selloff in global risk assets in the fourth quarter has been outsized relative to the magnitude of the economic slowdown. The selloff likely reflects the build-up of unresolved global risks, coupled with a delayed adjustment in growth expectations from lofty levels. Taking a step back from the downturn in equity markets, there are few signs that the economic expansion is nearing an end, other than the fact that the expansion is approaching the longest on record. One worry is that negative sentiment can become self-fulfilling (see our Perspective). We remain vigilant in monitoring signals of an impending downturn, such as yield curves, business confidence, riskassets, and labor market conditions. Financial market pessimism certainly hasn t yet filtered down to the U.S. consumer. The holiday shopping season appears to have gotten off to a good start in November, as 4.0 3.5 3.0 2.5 2.0 Chart 1: Global Growth Slowing Toward Trend Real GDP Growth, % 3.8 3.7 2017 2018F 2019F 2020F Advanced Economies Emerging Markets World (2017 PPP) World Trend Advanced and emerging market growth rates are stated as contributions to global growth based on International Monetary Fund (IMF) estimates of the 2017 purchasing-power-parity (PPP) valuation from the IMF s October 2018 World Economic Outlook. Source: TD Economics. Forecasts as at December 13, 2018. 3.4 3.5 0 Q1 Q2 Q3 Q4F Q1F Q2F Q3F Q4F Q1F Q2F Q3F Q4F 2018 2019 2020 Source: Bureau of Economic Analysis, TD Economics retail sales were up more than expected, on top of upward revisions to October. In our latest U.S. Outlook, we also expect the overall economy to moderate towards a sustainable pace in 2019 (Chart 2). This process is already underway in the fourth quarter, where growth is tracking 2.3% after averaging 3.5% through the middle of the year. However, the consumer has more momentum. Today s retail sales report places expectations for consumer spending in the fourth quarter to 3.5%, from our recently published 2.9%. The consumer is in pretty good shape. The job market is strong and inflation is contained. Economy-wide growth in wages and salaries has averaged roughly 4% over the past six months. And, headline inflation has cooled in line with lower oil prices. CPI inflation was at 2.2% year-on-year in November s data. Our forecast is for inflation to remain around that level through 2019. That sets the consumer up for some decent real income gains. Therefore, we expect consumer spending to slow only modestly in 2019, as the windfall from tax cuts fades, but still running at a very healthy 2-2 ½% clip in real terms. Overall, the U.S. economy is strong, and the Federal Reserve is well justified in raising rates another quarter point at its meeting next Wednesday. The real question is how the FOMC s views have changed about how much further rates need to rise. Given the fairly benign inflation backdrop recently, we expect the Fed to hike rates more gradually in 2019. Leslie Preston, Senior Economist 416-983-7053
3 Canada - Stretch That Loonie (You Have To) This week saw generally soft performances across major markets, with the S&P/TSX composite index looking to end the week slightly lower. This movement comes in spite of another constructive week for Canadian energy prices, as both Albertan heavy and light benchmarks held onto recent gains. 160 140 Chart 2: Canadian Household Debt has Leveled off Below U.S. Pre-Crisis Levels Household Debt/Disposable Income, % 180 The reversal of pricing pressures in the wake of government-mandated curtailment plans has been remarkable. In a few short weeks, the Western Canada Select heavy oil benchmark has gone from the doldrums to among the best performing commodities this year. If current pricing holds, this contract is set to end 2018 more than 5% above where it began, making it one of just a few major commodities set to end the year up. Away from markets, it was a relatively light week in terms of Canadian economic data before next week s pre-holiday deluge. Housing starts were released early in the week, with Canadian builders breaking ground on 216k new units (Chart 1). This came in ahead of market expectations, and was strong enough to bend the trend measure upwards. Encouragingly, while much of the gain came from the volatile multi-family segment, single-detached starts also rose a healthy 7.8%. Less encouraging was Statistics Canada s release of national wealth accounts. We got a preview of what was coming with the Q3 GDP figures, which reported a household saving rate of just 0.9%, revised down by more than two Chart 1: November Housing Starts Recovery Brings Trend Higher Thousands of Units 270 250 230 210 190 170 150 Source: CMHC, TD Economics Starts Trend (6mma) 120 100 80 U.S.A. Canada 60 2002 2004 2006 2008 2010 2012 2014 2016 2018 Source: Statistics Canada, Federal Reserve Board, TD Economics Note that the Canadian data has been adjusted for comparability with the U.S. percentage points. This revision came from updated tax data that revealed a much weaker household income story than initially reported. This also means that households are more stretched than previously thought. In the event, even as borrowing decelerated slightly, the household debt-to-income ratio rose to 177.5%, meaning households owe, on average, $1.78 for every dollar of disposable income. This is roughly four percentage points higher than what had been reported previously, on a likefor-like basis. Certain to garner much attention, it may be instructive to compare this with where things sat in the U.S. pre-crisis. Once we adjust the data for comparability, we see that not only are debt ratios lower than they were in the U.S. precrisis, but the dynamics are different as well, with the Canadian ratio effectively flat over the past two years (Chart 2). That said, there is no arguing that household debt levels are anything but high, and stretched Canadian households are a key factor holding back the pace of consumer spending in our Quarterly Economic Forecast. The impact of oil curtailments, alongside headwinds such as the closure of GM s Oshawa plant, is a mark-down of growth expectations. We now anticipate that output growth will decelerate from 2.1% this year to 1.8% next, before picking up again in 2020. Brian DePratto, Senior Economist 416-944-5069
4 U.S.: Upcoming Key Economic Releases U.S. FOMC Statement* Release Date: December 19, 2018 Previous: 2.25% TD Forecast: 2.50% Consensus: 2.50% 6 5 4 3 % Fed Funds Target Rate TD and the wider market look for the Fed to hike to 2.50% in December. Changes to the FOMC statement language should remove the last vestiges of forward guidance, making policy even more data dependent and hinting that policy may be approaching the end of the cycle. In his press conference we expect Chair Powell to continue to sound cautiously optimistic on the outlook and to try to calm market concerns about over-tightening. It will only take one FOMC participant to move the median dots in most years; we think a decline in the 2019 median dot to two hikes from three is slightly more likely than staying 2 1 0 2006 2008 2009 2010 2011 2012 2013 2015 2016 2017 2018 Source: U.S. Federal Reserve Board, TD Economics put. Conversely, we expect the median longer-run dot to remain at 3%. The overall tone of the meeting should be modestly dovish. U.S. Personal Income & Spending - October* Release Date: December 21, 2018 Previous: Income 0.5%; spending 0.6% TD Forecast: Income 0.4%; spending 0.3% Consensus: Income 0.3%; spending 0.3% We expect core PCE inflation to rise 0.2% m/m, pushing the y/y rate higher to 1.9%. But the past disappointment and downward revisions will still leave Q4 core inflation tracking below FOMC estimates at 1.9%, with risk for 1.8%. On a more upbeat note, we expect a strong showing for personal spending (0.4%), reinforcing another robust quarter for consumer spending above 3%. U.S. Personal Income and Spending Month/Month % Change 0.8 Spending 0.7 Income 0.6 0.5 0.4 0.3 0.2 0.1 0.0-0.1-0.2 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Source: Bureau of Economic Analysis, TD Economics *Forecast by Rates and FX Strategy Group. For further information, contact TDRates&FXCommoditiesResearch@tdsecurities.com
5 Canada: Upcoming Key Economic Releases Canadian Manufacturing Sales - October* Canadian Manufacturing Shipments Release Date: December 18, 2018 4 Month/Month % Change Seasonally Adjusted Ratio 1.45 Previous: 0.2% 3 TD Forecast: -0.8% Consensus: N/A 2 1 1.40 Manufacturing sales are forecast to decline by 0.8% in October as a sharp pullback in petroleum production outweighs higher durable goods sales. The energy sector lost roughly 300k bpd of refining capacity in early October, roughly 20% of the Canadian total, due to shutdowns at the Irving facility in Saint John which will provide a significant headwind to manufacturing activity as a whole. Motor vehicles should provide a key offset on higher reported production figures, while a rebound in machinery manufacturing could add another source of strength after registering the largest decline since 2012 in the month 0-1 Manufacturing Shipments (lhs) -2 Inventory-to-Shipments Ratio (rhs) -3 1.30 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Source: Statistics Canada, TD Economics before the CUSMA agreement. Real manufacturing sales should see a slightly larger decline on higher factory prices and should energy provide the primary source of downside we would be inclined to fade any reaction given a likely rebound next month. 1.35 Canadian CPI - November* Release Date: December 19, 2018 Previous: 0.3% m/m, 2.4% y/y TD Forecast: -0.4% m/m, 1.7% y/y Consensus: N/A November inflation is set to moderate significantly, from 2.4% to 1.7%. The main driver is energy prices, with gasoline prices down 10% m/m on the oil rout. That pushes the energy component into deflationary territory (-1.4% y/y vs +7.9% y/y previously). Food prices should provide a partial offset but beyond that the picture is not upbeat. We look for the ex-food and energy index to slide back below 2%, partially reflecting mean reversion from the strength in October. We also eye weakness in travel services and airfares, which skew risks to the downside. The recent currency depreciation (-4.5% since early October) is a net tailwind but 3.0 2.5 2.0 1.5 1.0 0.5 Year/Year % Change Canadian Consumer Price Index (CPI) Core CPI 0.0 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Source: Statistics Canada, TD Economics Headline CPI we don t expect a noticeable lift to materialize until next month. Looking ahead, headline CPI should fall further in December on the back of lower oil prices, leaving inflation tracking below BoC s forecasts at 2.0% in Q4 (BoC: 2.3%).
6 Canadian Retail Sales - October* Release Date: December 21, 2018 Previous: 0.2%, ex-auto: 0.1% TD Forecast: 0.4%, ex-auto: 0.2% Consensus: N/A 3.0 2.0 1.0 0.0 Month/Month % Change Canadian Retail Sales* TD looks for retail sales to rise by 0.4% in October on further gains in motor vehicle sales along with more modest increase in ex-auto sales. Preliminary data, while volatile, showed higher sales for both trucks and passenger vehicles although ongoing softness in home sales calls into question the durability of any gains. However, residential construction has picked up through Q4 which should support a rebound in building materials following a cumulative 4% drop over the last three months. Gasoline station sales should provide a slight drag on the headline print owing to lower prices at the pump although higher prices as a whole will leave real retail sales to underperform the nominal print. -1.0-2.0-3.0 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 *Seasonally adjusted Source: Statistics Canada, TD Economics Total Ex. Motor Vehicles Canadian Real GDP - October* Canadian Real GDP Release Date: December 21, 2018 Previous: -0.1% TD Forecast: 0.1% Consensus: N/A 6 4 Annualized Quarter/Quarter % Change Industry-level GDP is forecast to rise by 0.1% in October on a rebound in energy and a pickup in services. A sharp pullback in oil and gas production shaved 0.1pp from growth last month and we expect to get roughly half of that back before production cuts take effect in November. Manufacturing output will be constrained by refinery shutdowns, offsetting strength in durable goods manufacturing, while residential construction will benefit from the recovery in housing starts. On the services side, we expect a pickup from a muted 0.1% increase in September, with retail activity providing a tailwind on a recovery in auto sales 2 0 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Source: Statistics Canada, TD Economics although ongoing softness in home sales will weigh on real estate. This would leave Q4 growth tracking in the mid 1% range, below estimates from the October MPR.
7 Canadian Business Outlook Survey* Release Date: December 21, 2018 Index 35 30 Business Outlook: Future Sales Survey The December Business Outlook Survey should weigh increased confidence in the industrial sector against a more cautious tone from energy-producing firms. The former should feed into sustained capacity pressures and capex intentions on the heels of the CUSMA agreement and expectations of forthcoming tax relief. Previous survey periods suggest that most consultations took place before the Fall Economic Statement but anecdotal evidence of delayed investments would be hawkish and help explain Q3 weakness. The survey timing also puts it during a period of plunging crude oil prices and voluntary shut-ins. These will weigh on both the future sales outlook and inflation expectations, leading to a more balanced tone. 25 20 15 10 5 0 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Source: Bank of Canada, TD Economics *Forecast by Rates and FX Strategy Group. For further information, contact TDRates&FXCommoditiesResearch@tdsecurities.com
8 Release Data for Economic Indicator/Event Date Period Units Current Prior United States Dec 11 NFIB Small Business Optimism Nov Index 104.8 107.4 Dec 11 Producer Price Index Ex Food and Energy Nov M/M % Chg. 0.3 0.5 Dec 11 Producer Price Index Final Demand Nov M/M % Chg. 0.1 0.6 Dec 12 Consumer Price Index Ex Food and Energy Nov M/M % Chg. 0.2 0.2 Dec 12 Consumer Price Index Ex Food and Energy Nov Y/Y % Chg. 2.2 2.1 Dec 12 Consumer Price Index Nov M/M % Chg. 0.0 0.3 Dec 12 Consumer Price Index Nov Y/Y % Chg. 2.2 2.5 Dec 12 Real Avg Hourly Earning Nov Y/Y % Chg. 0.8 0.6 Dec 13 Export Price Index Nov M/M % Chg. -0.9 0.5 Dec 13 Export Price Index Nov Y/Y % Chg. 1.8 3.1 Dec 13 Import Price Index ex Petroleum Nov M/M % Chg. -0.3 0.2 Dec 13 Initial Jobless Claims Dec 08 Thsd 206.0 233.0 Dec 14 Retail Sales Advance Nov M/M % Chg. 0.2 1.1 Dec 14 Retail Sales Ex Auto and Gas Nov M/M % Chg. 0.5 0.7 Dec 14 Capacity Utilization Nov % 78.5 78.1 Dec 14 Industrial Production Nov M/M % Chg. 0.6-0.2 Dec 14 Manufacturing (SIC) Production Nov M/M % Chg. 0.0-0.1 Dec 14 Markit US Manufacturing PMI Dec Index 53.9 55.3 Dec 14 Markit US Services PMI Dec Index 53.4 54.7 Dec 14 Business Inventories Oct M/M % Chg. 0.6 0.3 Canada Dec 10 Housing Starts Nov Thsd 215.9 206.8 Dec 12 Capacity Utilization Rate 3Q % 82.6 84.1 Dec 12 Teranet/National Bank HPI Nov Y/Y % Chg. 3.1 2.8 International Dec 10 UK Industrial Production Oct Y/Y % Chg. -0.8 0.0 Dec 11 UK ILO Unemployment Rate 3Mths Oct % 4.1 4.1 Dec 13 EZ ECB Main Refinancing Rate Dec 13 % 0.00 0.00 Dec 13 JN Nikkei Japan PMI Mfg Dec Index 52.4 52.2 Dec 13 CH Retail Sales Nov Y/Y % Chg. 8.1 8.6 Dec 13 JN Industrial Production Oct Y/Y % Chg. 4.2 4.2 Dec 14 EZ Markit Eurozone Composite PMI Dec Index 51.3 52.7 Dec 14 EZ Markit Eurozone Manufacturing PMI Dec Index 51.4 51.8 Dec 14 EZ Markit Eurozone Services PMI Dec Index 51.4 53.4 Source: Bloomberg, TD Economics. Recent Key Economic Indicators: Dec 10-14, 2018
9 Upcoming Economic Releases and Events: Dec 17-21, 2018 Release Data for Consensus Time* Economic Indicator/Event Units Date Period Forecast Last Period United States Dec 17 8:30 Empire Manufacturing Dec Index 20.0 23.3 Dec 17 10:00 NAHB Housing Market Index Dec Index 60.0 60.0 Dec 18 8:30 Building Permits Nov Thsd 1265.0 1265.0 Dec 18 8:30 Housing Starts Nov Thsd 1230.0 1228.0 Dec 19 8:30 Current Account Balance 3Q Blns - -101.5 Dec 19 10:00 Existing Home Sales Nov Mlns 5.2 5.2 Dec 19 14:00 FOMC Rate Decision (Upper Bound) Dec 19 % 2.5 2.3 Dec 19 14:00 Interest Rate on Excess Reserves Dec 20 % - 2.2 Dec 20 8:30 Initial Jobless Claims Dec 15 Thsd - 206.0 Dec 21 8:30 Gross Domestic Product Annualized 3Q Q/Q % Chg. 3.5 3.5 Dec 21 8:30 Personal Consumption 3Q Q/Q % Chg. - 3.6 Dec 21 8:30 Core Personal Consumption Expenditure 3Q Q/Q % Chg. - 1.5 Dec 21 8:30 Durable Goods Orders Nov M/M % Chg. 2.3-4.3 Dec 21 8:30 Durables Ex Transportation Nov M/M % Chg. 0.3 0.2 Dec 21 8:30 Cap Goods Orders Nondef Ex Air Nov M/M % Chg. - 0.0 Dec 21 10:00 Personal Income Nov M/M % Chg. 0.3 0.5 Dec 21 10:00 Real Personal Spending Nov M/M % Chg. - 0.4 Dec 21 10:00 Personal Consumption Expenditure Deflator Nov Y/Y % Chg. - 2.0 Dec 21 10:00 Personal Consumption Expenditure Core Nov Y/Y % Chg. 1.8 1.8 Canada Dec 17 9:00 Existing Home Sales Nov M/M % Chg. - -1.6 Dec 18 8:30 Manufacturing Sales Oct M/M % Chg. - 0.2 Dec 19 8:30 Consumer Price Index Core- Common Nov Y/Y % Chg. - 1.9 Dec 19 8:30 Consumer Price Index Nov Y/Y % Chg. - 2.4 Dec 19 8:30 Consumer Price Index NSA Nov M/M % Chg. - 0.3 Dec 19 8:30 Consumer Price Index Core- Trim Nov Y/Y % Chg. - 2.1 Dec 19 8:30 Consumer Price Index Core- Median Nov Y/Y % Chg. - 2.0 Dec 20 8:30 Wholesale Trade Sales Oct M/M % Chg. - -0.5 Dec 21 8:30 Gross Domestic Product Oct M/M % Chg. - -0.1 Dec 21 8:30 Retail Sales Ex Auto Oct M/M % Chg. - 0.1 Dec 21 8:30 Retail Sales Oct M/M % Chg. - 0.2 Dec 21 10:30 BoC Overall Business Outlook Survey 4Q Index - 2.8 Dec 21 10:30 BoC Business Outlook Future Sales 4Q Index - 15.0 Dec 21 10:30 BoC Senior Loan Officer Survey 4Q Index - -10.9 International Dec 17 5:00 EZ Consumer Price Index Nov Index 2.0 2.2 Dec 19 4:30 UK Consumer Price Index Nov Index 1.9 1.9 Dec 20 7:00 UK Bank of England Bank Rate Dec 20 % 0.75 0.75 Dec 20 18:30 JN Natl Consumer Price Index Nov Y/Y % Chg. 0.8 1.4 Dec 21 4:30 UK Gross Domestic Product 3Q Y/Y % Chg. 1.5 1.5 * Eastern Standard Time. Source: Bloomberg, TD Economics.
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