TD Economics The Weekly Bottom Line January 26, 2018 Highlights of the Week U.S. economic data was relatively constructive this week; existing home sales remained near their multiyear highs, while real GDP expanded by a robust 2.6% (annualized) to cap off last year. The IMF upgraded its global economic forecast to 3.9% for this year and next. Managing Director Lagarde hailed it the broadest synchronised global growth upsurge since 2010. This year s Davos meetings were focused on trade, with Trump, Ross and Mnuchin forming the core of the U.S. delegation. The Treasury Secretary grabbed headlines saying that a weak dollar is good for the U.S. The ECB and BoJ stood pat on rates, with the Fed likely to follow suit next week at Chair Yellen s last meeting. THIS WEEK IN THE MARKETS Current* Week Ago 52-Week High 52-Week Low Stock Market Indexes S&P 500 2851 2810 2851 2279 S&P/TSX Comp. 16198 16353 16413 14952 DAX 13334 13434 13560 11510 FTSE 100 7661 7731 7779 7099 Nikkei 23632 23808 24124 18336 Fixed Income Yields U.S. 10-yr Treasury 2.65 2.66 2.66 2.04 Canada 10-yr Bond 2.27 2.24 2.27 1.39 Germany 10-yr Bund 0.62 0.57 0.62 0.16 UK 10-yr Gilt 1.43 1.34 1.52 0.93 Japan 10-yr Bond 0.08 0.09 0.12-0.01 Foreign Exchange Cross Rates C$ (USD per CAD) 0.81 0.80 0.83 0.73 Euro (USD per EUR) 1.24 1.22 1.24 1.05 Pound (USD per GBP) 1.42 1.39 1.42 1.22 Yen (JPY per USD) 108.7 110.8 115.1 107.8 Commodity Spot Prices** Crude Oil ($US/bbl) 65.5 63.4 65.7 42.3 Natural Gas ($US/MMBtu) 3.63 3.20 5.46 2.66 Copper ($US/met. tonne) 7100.8 6999.3 7253.8 5461.8 Gold ($US/troy oz.) 1351.1 1331.9 1358.5 1188.6 *as of 10:30 am on Friday **Oil-WTI, Cushing, Nat. Gas-Henry Hub, LA (Thursday close price), Copper-LME Grade A, Gold-London Gold Bullion; Source: Bloomberg. Current Rate Weekly % Change S&P/TSX S&P 500 DAX USD:EUR USD:JPY USD:CAD DXY WTI Federal Reserve (Fed Funds Rate) Bank of Canada (Overnight Rate) European Central Bank (Refi Rate) Bank of England (Repo Rate) Bank of Japan (Overnight Rate) Source: Central Banks. USD SELLS OFF AS U.S. TREASURY'S STRONG DOLLAR MANTRA REVERSING -3.0-2.0-1.0 0.0 1.0 2.0 3.0 4.0 5.0 Note: Data as of January 26, 11:25 AM ET. Sources: Bloomberg, TD Economics. GLOBAL OFFICIAL POLICY RATE TARGETS Current Target 1.25-1.5% 1.25% 0.00% 0.50% -0.10% 1/26/18 Q1 Q2 Q3 Q4 Q1F Q2F Q3F Q4F Q1F Q2F Q3F Q4F Fed Funds Target Rate (%) 1.50 1.00 1.25 1.25 1.50 1.75 2.00 2.25 2.25 2.50 2.50 2.75 2.75 2-yr Govt. Bond Yield (%) 2.12 1.27 1.38 1.47 1.89 2.10 2.25 2.40 2.55 2.65 2.70 2.70 2.70 10-yr Govt. Bond Yield (%) 2.65 2.40 2.31 2.33 2.40 2.65 2.75 2.85 2.95 3.00 3.00 3.00 3.00 30-yr Govt. Bond Yield (%) 2.91 3.02 2.84 2.86 2.74 2.95 3.10 3.20 3.30 3.30 3.30 3.30 3.30 Real GDP (Q/Q % Chg)* 2.6 (Q4-17) 1.2 3.1 3.2 2.6 2.0 2.6 2.4 2.3 2.2 2.3 2.2 2.1 CPI (Y/Y % Chg.) 2.1 (Dec-17) 2.5 1.9 2.0 2.1 1.7 2.1 2.1 1.9 1.8 2.0 2.1 2.1 Unemployment Rate (%) 4.1 (Dec-17) 4.7 4.3 4.3 4.1 4.0 3.9 3.9 3.9 3.8 3.8 3.8 3.9 Forecast by TD Economics as of December. Source: Bloomberg, TD Economics. *Annualized TD ECONOMICS KEY FORECASTS 2017 2018 2019
2 Greenback Takes a Beating on Davos Comments The week got off to a good start, with Congress on Monday voting to end the 69-hour government shutdown. Still, the vote extends funding for the federal government until only February 8th a mere eighteen days. Markets, having shrugged off the shutdown threat (the new modus operandi in Washington), were neither elated nor surprised about the can being kicked down the road again. U.S. data was also relatively constructive. Existing home sales remained near multi-year records. Housing markets will have to contend with rising rates and lack of forsale inventory, but will remain supported by above-trend growth and diminishing slack. U.S. real GDP capped the year with growth of 2.6% (annualized) in Q4 - more than half a point above its potential rate. Robust U.S. growth comes alongside a solid global backdrop. This week, the IMF updated its global economic forecast to 3.9% for this year and next 0.2 pp higher than before. The Fund s Managing Director Lagarde, speaking in Davos, hailed this the broadest synchronised global growth upsurge since 2010, also highlighting that trade remains a significant engine of growth. Trade was a key focus of Davos this year. On the eve of the signing of the new TPP-11, which the U.S. pulled out of, Japanese Economy Minister Motegi said the pact would be an engine to overcome protectionism, while Canada s Prime Minister Trudeau called it the right deal. President Trump, defending his stance, indicated that America is open for business and suggested the U.S. may join the TPP if the terms are better. 8,000 7,000 6,000 5,000 4,000 CHART 1: HOME SALES ROBUST AS PRICE MOMENTUM SUPPORTED BY LOW INVENTORY Thousands 3,000 2005 2007 2009 2011 2013 2015 2017 Source: NAR, TD Economics. Sales (LHS) Price growth (RHS) Year/Year % Change 20 15 10 5 0-5 -10-15 -20 120 110 100 90 CHART 2: DOLLAR WEAKNESS ONGOING Index, Nov. 8, 2016 = 100 80 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Source: Bloomberg, TD Economics. USDEUR USDCAD USDJPY Still, America s protectionist policies remain a worry. The U.S. this week levied tariffs on washing machines and solar panels. Defending the move, Commerce Secretary Ross stated that the U.S. approach to trade policy is dated, indicating that he is trying to right past wrongs and that the U.S. is done being a sucker or a patsy on trade. But, it was Treasury Secretary Mnuchin that grabbed most headlines, stating that a weaker dollar is good, a reversal of U.S. Treasury mantra. A broad U.S. dollar selloff followed, despite attempts by Ross and Trump to repair the damage. Mnuchin s comments were criticized by ECB President Draghi who referred to an international agreement last October not to talk down currencies. Speaking after the ECB kept policy rates unchanged this week, Draghi insisted that the bank would consider loosening policy to offset unwarranted tightening related to exchange rate. The ECB is unlikely to tighten policy until mid-2019, but is expected to let is bond-buying program lapse in September. The BoJ also kept rates steady, only altering its inflation outlook wording from weaker than expected to broadly unchanged. And in what will be the last meeting headed by Chair Yellen, the Fed is also likely to stand pat next week. The incoming Chair, Jerome Powel, will take over on February 3rd, having been confirmed by the Senate this week. We don t expect the policy to be dramatically altered by the change at the top, with our current view for three Fed hikes this year. Michael Dolega, Senior Economist
3 Upcoming Key Economic Releases U.S. Employment - January* Release Date: February 2, 2018 Previous Result: 148k, unemployment rate 4.1% TD Forecast: 175k, unemployment rate 4.0% Consensus: N/A We expect nonfarm payrolls to advance by a respectable 175k in January, below its 3-month average pace as adverse winter weather and some deceleration in employment surveys bias the figure lower in our view. We expect the unemployment rate to slip to 4.0% after holding at 4.1% in the prior three months, as robust job growth and a stabilizing participation rate suggest we are due for a drop. But the focus is more on wages this month, and markets will eye an upside surprise on the back of announcements of wage hikes and bonus increases by firms after the tax reform passage and the scheduled minimum wage hikes in 18 states and 20 cities. The increases on balance point to less than a 0.1pp m/m contribution to January average hourly earnings in our 350 300 250 200 150 100 50 U.S. LABOR MARKET Thousands of Jobs Net Job Change* (lhs) % Unemployment Rate (rhs) 0 3 Apr-16 Sep-16 Feb-17 Jul-17 Dec-17 Seasonally-adjusted data; * Change in non-farm payrolls Source: U.S. Deptartment of Labor, Haver Analytics, TD Economics. view, similar to the impact in January 2017. Meanwhile, calendar effects introduce a downward bias this month. Taken together, we expect a 0.2% m/m increase, leaving earnings unchanged at 2.5% y/y. 10 9 8 7 6 5 4 *Forecast by Rates and FX Strategy Group. For further information, contact TDRates&FXCommoditiesResearch@tdsecurities.com
4 Release Data for Economic Indicator/Event Date Period Units Current Prior United States Jan 24 Markit US Services PMI Jan P Index 53.3 53.7 Jan 24 Markit US Manufacturing PMI Jan P Index 55.5 55.1 Jan 24 Existing Home Sales Dec Mlns 5.57 5.78 Jan 25 Retail Inventories Dec M/M % Chg. 0.2 0.1 Jan 25 Advance Goods Trade Balance Dec Blns -71.6-70.0 Jan 25 Initial Jobless Claims Jan 20 Thsd 233.0 216.0 Jan 25 New Home Sales Dec Thsd 625.0 689.0 Jan 26 Cap Goods Orders Nondef Ex Air Dec P M/M % Chg. -0.3 0.2 Jan 26 Gross Domestic Product Annualized 4Q A Q/Q % Chg. 2.6 3.2 Jan 26 Core Personal Consumption Expenditure 4Q A Q/Q % Chg. 1.9 1.3 Jan 26 Personal Consumption 4Q Q/Q % Chg. 3.8 2.2 Jan 26 Durable Goods Orders Dec P M/M % Chg. 2.9 1.7 Jan 26 Durables Ex Transportation Dec P M/M % Chg. 0.6 0.3 Canada Jan 22 Wholesale Trade Sales Nov M/M % Chg. 0.7 1.6 Jan 25 Retail Sales Nov M/M % Chg. 0.2 1.6 Jan 25 Retail Sales Ex Auto Nov M/M % Chg. 1.6 0.8 Jan 25 CFIB Business Barometer Jan Index 62.7 59.7 Jan 26 Consumer Price Index Dec Y/Y % Chg. 1.9 2.1 Jan 26 Consumer Price Index NSA Dec M/M % Chg. -0.4 0.3 Jan 26 Consumer Price Index Core- Median % Dec Y/Y % Chg. 1.9 1.9 Jan 26 Consumer Price Index Core- Common % Dec Y/Y % Chg. 1.6 1.5 Jan 26 Consumer Price Index Core- Trim % Dec Y/Y % Chg. 1.9 1.8 International Jan 23 JN Nikkei Japan PMI Mfg Jan P Index 54.4 54.0 Jan 23 JN BOJ Policy Balance Rate Jan 23 % -0.1-0.1 Jan 24 EZ Markit Eurozone Manufacturing PMI Jan P Index 59.6 60.6 Jan 24 UK ILO Unemployment Rate 3Mths Nov % 4.3 4.3 Jan 25 EZ ECB Main Refinancing Rate Jan 25 % 0.0 0.0 Jan 25 JN Natl Consumer Price Index Dec Y/Y % Chg. 1.0 0.6 Jan 26 UK Gross Domestic Product 4Q A Y/Y % Chg. 1.5 1.7 Source: Bloomberg, TD Economics. RECENT KEY ECONOMIC INDICATORS: JANUARY 22-26, 2018
5 UPCOMING ECONOMIC RELEASES AND EVENTS: JANUARY 29 - FEBRUARY 2, 2018 Release Data for Consensus Time* Economic Indicator/Event Units Date Period Forecast Last Period United States Jan 29 8:30 Real Personal Spending Dec M/M % Chg. - 0.4 Jan 29 8:30 Personal Consumption Expenditure Deflator Dec Y/Y % Chg. 1.7 1.8 Jan 29 8:30 Personal Consumption Expenditure Core Dec Y/Y % Chg. 1.6 1.5 Jan 29 8:30 Personal Income Dec M/M % Chg. 0.3 0.3 Jan 30 9:00 S&P CoreLogic CS US HPI NSA Nov Y/Y % Chg. - 6.2 Jan 30 10:00 Conf. Board Consumer Confidence Jan Index 123.1 122.1 Jan 30 President Trump s First State of the Union Address Jan 31 8:15 ADP Employment Change Jan Thsd 185.0 250.0 Jan 31 8:30 Employment Cost Index 4Q Q/Q % Chg. 0.5 0.7 Jan 31 10:00 Pending Home Sales Dec M/M % Chg. 0.5 0.2 Jan 31 14:00 FOMC Rate Decision (Upper Bound) Jan 31 % 1.5 1.5 Feb 01 8:30 Unit Labor Costs 4Q P Q/Q % Chg. 1.0-0.2 Feb 01 8:30 Initial Jobless Claims Jan 27 Thsd - 233.0 Feb 01 10:00 ISM Manufacturing Jan Index 59.0 59.7 Feb 01 10:00 ISM Employment Jan Index - 57.0 Feb 01 Wards Total Vehicle Sales Jan Mlns 17.30 17.76 Feb 02 8:30 Change in Nonfarm Payrolls Jan Thsd 175.0 148.0 Feb 02 8:30 Unemployment Rate Jan % 4.1 4.1 Feb 02 8:30 Average Hourly Earnings Jan M/M % Chg. 0.3 0.3 Feb 02 10:00 Factory Orders Dec M/M % Chg. 0.7 1.3 Feb 02 10:00 Factory Orders Ex Trans Dec M/M % Chg. - 0.8 Feb 02 15:00 Fed's John Williams Speaks in San Francisco Canada Jan 31 8:30 Industrial Product Price Dec M/M % Chg. - 1.4 Jan 31 8:30 Gross Domestic Product Nov M/M % Chg. - 0.0 Feb 01 7:00 MLI Leading Indicator Dec M/M % Chg. - 0.5 Feb 01 9:30 Markit Canada Manufacturing PMI Jan Index - 54.7 International Jan 29 18:30 JN Jobless Rate Dec % 2.7 2.7 Jan 29 18:50 JN Retail Trade Dec Y/Y % Chg. 2.3 2.2 Jan 30 5:00 EZ Gross Domestic Product SA 4Q A Y/Y % Chg. - 2.6 Jan 30 9:00 MX Gross Domestic Product NSA 4Q P Y/Y % Chg. - 1.5 Jan 30 20:00 CH Manufacturing PMI Jan Index 51.5 51.6 Jan 31 5:00 EZ Consumer Price Index Core Jan A Y/Y % Chg. 1.0 0.9 Jan 31 5:00 EZ Unemployment Rate Dec % 8.7 8.7 Jan 31 7:00 IN Gross Domestic Product Annual Estimate 2017 Y/Y % Chg. - 8.0 Feb 01 4:30 UK Markit UK PMI Manufacturing SA Jan Index 56.5 56.3 * Eastern Standard Time. Source: Bloomberg, TD Economics.
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