The Weekly Bottom Line TD Economics www.td.com/economics March 25, 2011 HIGHLIGHTS OF THE WEEK United States • Risk appetite was on the mend this week with stock markets recouping all of last week’s losses. Even the disappointing U.S. housing data released this week did not push markets down. • Existing home sales in February gave up some of their previous gains, but a nascent recovery seems to be taking place as the overall trend remains upwards. In contrast, new home sales do not show any signs of turning around. The divergence in trends is not surprising, as the new market faces fierce competition from foreclosed homes, which sell at a discount. • But, this week also delivered some good news about initial jobless claims. The four-week moving average, a less volatile gauge, dropped to its lowest level since July 2008. Canada • Three government budgets were on tap this week: federal, New Brunswick, and Saskatchewan. The first (our analysis here) is unlikely to pass, bringing about a likely federal election in early May. The other two offer a stark contrast in provincial fortunes, with a slew of fiscal austerity measures in New Brunswick (our analysis here) while further tax relief was provided in Saskatchewan (our analysis here). With few expectations of either tax relief or sharp austerity, the Ontario budget, forthcoming on Tuesday (our preview here), will likely sit somewhere in between. • Canadian retail sales fell by 0.3% M/M in January. Volumes fell by 0.6% M/M. Consumer durables such as vehicles and home-related items led the way down. This was a second consecutive broad-based monthly decline, providing further evidence of consumer fatigue at this stage of the economic recovery – which is a dominant theme in our forecasts. Thankfully, other sources of economic activity such as business investment and exports are still likely to push real GDP growth above 3% in the first quarter. Current* Week Ago 52-Week High 52-Week Low Stock Market Indexes S&P 500 1,313 1,279 1,343 1,023 S&P/TSX Comp. 14,091 13,790 14,253 11,093 DAX 6,928 6,664 7,427 5,670 FTSE 100 5,887 5,718 6,091 4,806 Nikkei 9,536 9,207 11,339 8,605 Fixed Income Yields U.S. 10-yr Treasury 3.39 3.27 3.99 2.38 Canada 10-yr Bond 3.22 3.17 3.72 2.69 Germany 10-yr Bund 3.26 3.19 3.33 2.12 UK 10-yr Gilt 3.59 3.51 4.06 2.83 Japan 10-yr Bond 1.23 1.22 1.41 0.85 Foreign Exchange Cross Rates C$ (USD per CAD) 1.02 1.02 1.03 0.93 Euro (USD per EUR) 1.41 1.42 1.42 1.19 Pound (USD per GBP) 1.61 1.62 1.64 1.43 Yen (JPY per USD) 81.2 80.6 94.6 78.9 Commodity Spot Prices** Crude Oil ($US/bbl) 104.8 101.1 105.4 66.0 Natural Gas ($US/MMBtu) 4.27 4.00 5.17 3.18 Copper ($US/met. tonne) 9704.8 9512.5 10179.5 6067.8 Gold ($US/troy oz.) 1436.6 1418.9 1437.4 1090.5 THIS WEEK IN THE MARKETS *as of 10 am on Friday, **Oil-WTI, Cushing, Nat. Gas-Henry Hub, LA (Thursday close price), Copper-LME Grade A, Gold-London Gold Bullion; Source: Bloomberg 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, Haver Analytics GLOBAL OFFICIAL POLICY RATE TARGETS Current Target 0.00% 0.50% 0 - 0.25% 1.00% 1.00% CRUDE OIL - WEST TEXAS INTERMEDIATE 80 85 90 95 100 105 110 Jan-2011 Feb-2011 Mar-2011 Source: Haver Analytics, TD Economics US$ per barrel
Transcript
The Weekly Bottom Line TD Economicswww.td.com/economics
March 25, 2011
HIGHLIGHTS OF THE WEEK
United States• Riskappetitewasonthemendthisweekwithstockmarketsrecoupingalloflastweek’slosses.Eventhedisappointing
*as of 10 am on Friday, **Oil-WTI, Cushing, Nat. Gas-Henry Hub, LA (Thursday close price), Copper-LME Grade A, Gold-London Gold Bullion; Source: Bloomberg
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, Haver Analytics
The military operation in Libya and tensions in the Middle East continue to inject uncertainty into the global economy. However, their effects on the markets this week were largely confined to oil prices, which surpassed the previous cyclical high of U.S.$105 per barrel. Nonetheless, the financial markets were taking this week’s heightened uncertainly in stride. As of writing, the S&P 500 index was up by 2.5% on the week, while 10-year Treasury bond yields climbed 12 basis points to 3.39%.
On the domestic front, even the disappointing U.S. housing data released this week failed to knock equity markets down. In February, existing home sales declined by a massive 9.6%. This was the first decline after three straight months of gains. The median price was also down by 1.1%, reaching its lowest level since April 2002. A decline in sales alongside a drop in prices is definitely a concern. But a month’s data do not make a trend. Taking a step back, the overall trend in existing home sales remains upward. In particular, sales were up 5.2% compared to 3 months ago and 26% from their trough in July 2010.
Still, the housing market continues to be the economy’s Achilles heel. The foreclosure pipeline is almost as large as the 3.5 million inventory of unsold existing homes. Dis-tressed sales, which consist of foreclosures and short-sales, accounted for 39% of sales in February. They will continue to make up a large share of existing home sales throughout the year. But, the market clearing process is measured in years, not just months, and is not without its side effects.
Declining prices are forestalling demand, weighing on housing wealth and also leaving Americans with larger mortgages than their houses are worth. On top of that, dis-
tress sales and declining prices have knock-on effects on the new housing market. In February, new home sales fell by a whopping 16.9% to their lowest pace on record. Despite the upward revisions in the previous three months, February’s decline highlighted that the overall trend in new home sales is moving in the opposite direction of that in existing home sales. This is not surprising. February’s data on home starts and building permits, an indicator of future activity, revealed that residential construction will remain at depressed levels this year. Home builders are facing fierce competition from existing homes, which sell 30% lower than the new ones – an attractive markdown for potential buyers. In all likelihood, the new housing market will be the last to recover. Until the massive amount of seriously delinquent mortgages clears the market and the substantial inventory of existing homes is absorbed, the new housing market is unlikely to see any upward movement any time soon.
But, inventories will be worked off as long as demand improves. What is important is for job growth to pick up. And the good news is that we are already seeing gains in the labor market. The unemployment rate declined for three straight months. What is more, this week we learnt that fewer Americans filed applications for unemployment benefits. Jobless claims declined by 5,000 to 382,000.
All told, the housing data for February was definitely disappointing. Yet, few forecasters are hanging their hat on a recovery led by residential investment. Exports and business investment will lead the way, with some support from the labor market and consumer spending – enough to support a 3% real GDP growth this year.
Christos Shiamptanis, Economist 416-982-2556
NEW & EXISTING SINGLE FAMILY HOME SALES
0
200
400
600
800
1,000
1,200
1,400
1,600
1998 2000 2002 2004 2006 2008 2010
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
New home sales (lhs)
Existing home sales (rhs)
New Units (000s) Existing Units (000s)
Source: National Association of Realtors, U.S. Census Bureau
FHFA HOUSE PRICE INDEX
140
160
180
200
220
240
2001 2003 2005 2007 2009 2011
Price Index, 1991=100
Source: Federal Housing Finance Agency
The Weekly Bottom LineMarch 25, 2011
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3
CANADA – OTTAWA DRAMA BARELY REGISTERS
Government budget season was in full swing this week with three on tap: federal, New Brunswick, and Saskatch-ewan. The two provincial budgets offered a stark contrast between the spoils of a resource-rich province able to extend further tax relief, namely Saskatchewan, and a salvo of fiscal austerity measures needed to fight deficits in a debt- and growth-constrained province, namely New Brunswick. Meanwhile, the federal budget captured more than usual at-tention this year not because of its stay-the-course nature but from the fact that the opposition parties indicated they would not support it. As of writing, we expect a non-confidence vote in Parliament that would force a spring election.
Bond markets pushed back anticipations of an interest rate hike from the Bank of Canada (BoC) on the notion that they would not hike during an election campaign. This reasoning is questionable, but is a moot point from our per-spective. Our forecast for the next BoC rate hike to occur in July falls beyond the likely election campaign timeframe.
While its shelf-life will undoubtedly be short, the federal budget will still offer plenty of food for thought on the cam-paign trail. It helps assess the latest status-quo fiscal path and Conservative priorities. While the different political parties will offer variations in platforms, the need to elimi-nate deficits cuts across nearly all political stripes. Given the commitment to deficit reduction, the orderly nature of elections and Canada’s relatively strong fiscal position, the uncertainty created by this week’s political drama did not create ripples in financial markets. Put another way, Canada’s reputation for stability and as a good place to invest remains intact.
Consider that only one day after we learned the Cana-dian government would likely fall on a benign budget, the Portuguese government suffered the same fate, albeit with considerably more dramatic consequences emanating out of a much smaller country. The Portuguese parliament re-jected a fiscal austerity package, increasing the likelihood of a European/IMF bailout package for the country. Conse-quently, the yield on Portuguese government bonds jumped and the cost of insuring against a default on its sovereign debt climbed. In contrast, even upon news of the Canadian government’s likely fall, the yield on the federal benchmark 10-year bond still held near that of rock-solid Germany, Europe’s safe heaven.
Yet one should be careful not to underestimate the extent of Canada’s fiscal challenges. It may still miss this oppor-tunity to further demark itself among the general mess that are developed nations’ public finances. The federal and most provincial governments are targeting minimal spend-ing growth to meet their medium-term budget goals. But in a year with six elections on tap, the risk is that the restraint can gets kicked down the road. Canada will not escape the demographic crunch and associated age-related spending pressures. What is needed is more than a couple of years of flat-lining operational costs. Only deeper structural reform of government services delivery can sustainably balance the books. Political parties of all stripes should explicitly flesh out how they intend to confront this challenge. The electorate is mature enough to digest a refreshing dose of frankness.
Pascal Gauthier, Senior Economist416-944-5730
NO EASY FEAT, YET POSSIBLE –CHANGE IN REAL* PROGRAM SPENDING
-15
-10
-5
0
5
10
15
20
84-85 88-89 92-93 96-97 00-01 04-05 08-09 12-13
% change
* Inflation-adjusted. Source: Department of Finance Canada, Statistics Canada.
BudgetedAverage = - 0.7
ActualAverage = 2.0
Periods of extended restraint
WORLDS APART – BENCHMARK 10-YEARGOVERNMENT BOND YIELDS
The labour market is beginning to show signs of posi-tive momentum, and we expect the 224K gain in private sector employment in February to be followed up with a further 210K expansion in March. This will take the pace of headline payrolls growth to 200K, reflecting the better tone in recent labour market reports. The goods-producing sector is expected to continue adding to payrolls as the in-crease in manufacturing should offset the modest drop that we expect in construction employment during the month. Service sector employment should continue to provide the bulk of the employment growth as hiring in retail trade, professional services and education more than compensate for the continued decline in public sector employment. However, despite the growth in employment, we expect the unemployment rate to tick marginally higher to 9.0% as previously displaced workers move back in the labour
The manufacturing sector continues to enjoy a run of good form, with the headline ISM manufacturing index printing at or above the 50-mark for 19 straight months. In March, we expect the headline index to post a new cyclical high of 62.0, indicating a further acceleration in the pace of growth for manufacturing sector activity. The production, new orders, employment and new export orders sub-components are all expected to remain above the 60 mark, underscoring the breadth and strength of the recovery. The prices paid sub-index should continue to register another above-80 print, reflecting the rising cost of input given the surge in commodity prices. Most of the other sub-components are expected to remain relatively unchanged, with inventories, deliveries and shipments sub-indices all staying above 50. In the months ahead, as
the economic recovery gains further traction we expect the positive momentum in overall manufacturing sector activ-ity to be sustained, though the headline ISM index could ease modestly.
U.S. ISM Manufacturing Index - March* Release Date: April 1, 2011February Result: 61.4TD Forecast: 62.0Consensus: 61.0
force, undoing some of the improvements of the past few months. In the coming months, with the economic recovery expected to gain further traction, the pace of job growth should accelerate, though the unemployment rate is expected to remain elevated as displaced workers move back into the labour force in search of new jobs.
U.S. LABOR MARKET
-300
-200
-100
0
100
200
300
400
500
Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.0
Net Job Change* (lhs)
UnemploymentRate (rhs)
Thousands of jobs %
Seasonally-adjusted data; * Change in non-farm payrollsSource: U.S. Deptartment of Labor / Haver Analytics
U.S. ISM MANUFACTURING INDEX
30
35
40
45
50
55
60
65
2005 2006 2007 2008 2009 2010
Source: U.S. Institute for Supply Management / Haver Analytics
On an industry-level basis, real GDP growth is expected to pick up in January right where it left off at the end of 2010 with a healthy 0.5% gain. The strength can be attributed to the gains already observed in manufacturing shipments and wholesale sales. It is also expected that mining, oil, and gas extraction as well as utilities output will contribute to the headline. At the other end of the spectrum, retail sales did disappoint, which will prevent an even more outsized start to the New Year.
When our expectation for January is combined with the handoff from a similarly sized increase in December the first quarter is shaping up to be quite strong. Our most recent quarterly forecast expects that real GDP will grow by an annualized of 3.8% in Q1. This will help to accelerate the absorption of spare capacity that will eventually compel the
Bank of Canada to resume withdrawing monetary stimulus. We expect the first move to occur in July and target a 2.0% overnight rate at the end of the year.
Canadian GDP - January*Release Date: March 31, 2011December Result: 0.5% M/MTD Forecast: 0.5% M/MConsensus: 0.5% M/M
CANADIAN REAL GDP*
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10
*Real GDP at basic prices in 2002 chained dollarsSource: Statistics Canada / Haver Analytics
RECENT KEY ECONOMIC INDICATORS: MARCH 21- 25, 2011
Mar 21 Chicago Fed Nat Activity Index Feb Index -0.04 -0.01 RMar 21 Existing Home Sales Feb Millions 4.88 5.40 RMar 22 House Price Index Jan M/M % Chg. -0.3% -1.0% RMar 22 Richmond Fed Manufact. Index Mar Index 20 25Mar 23 MBA Mortgage Applications 18-Mar W/W % Chg. 2.7 -0.7Mar 23 New Home Sales Feb Thousands 250 301 RMar 24 Durable Goods Orders Feb M/M % Chg. -0.9 3.6 RMar 24 Durables Ex Transportation Feb M/M % Chg. -0.6 -3.0 RMar 24 Initial Jobless Claims 19-Mar Thousands 382 387 RMar 24 Continuing Claims 12-Mar Thousands 3721 3723 RMar 24 RPX Composite 28dy Jan Y/Y % Chg. -3.39 -3.63
Mar 22 Leading Indicators Feb M/M % Chg. 0.8 0.4 RMar 22 Retail Sales Jan M/M % Chg. -0.3 -0.2Mar 22 Retail Sales Less Autos Jan M/M % Chg. 0.0 0.6
Mar 20 UK Rightmove House Prices Mar Y/Y % Chg. 0.9 0.3Mar 22 NZ Current Account Balance 4Q NZD, Billions -3.524 -0.029 RMar 22 UK CPI Feb Y/Y % Chg. 4.4 4.0Mar 22 UK Core CPI Feb Y/Y % Chg. 3.4 3.0Mar 23 EC Industrial New Orders NSA Jan Y/Y % Chg. 20.9 19.2 RMar 23 JN Adjusted Merchnds Trade Bal. Feb Yen, Billions 556.0 191.8Mar 23 NZ GDP 4Q Y/Y % Chg. 0.8 1.5Mar 24 EC PMI Composite Mar Index 57.5 58.2Mar 24 FR Production Outlook Indicator Mar Index 21 19Mar 24 FR Business Confidence Indicator Mar Index 109 106Mar 24 JN Natl CPI Feb Y/Y % Chg. 0.0 0.0Mar 24 JN Natl CPI Ex Food, Energy Feb Y/Y % Chg. -0.6 -0.6Mar 24 JN Corp Service Price Index Feb Y/Y % Chg. -1.0 -1.1Mar 24 UK Retail Sales w/Auto Fuel Feb Y/Y % Chg. 1.3 5.1 RMar 24 UK Retail Sales Ex Auto Fuel Feb Y/Y % Chg. 1.2 5.0 RMar 25 FR Consumer Confidence Indicator Mar Index 83 85Mar 25 GE IFO - Business Climate Mar Index 111.1 111.3 RMar 25 GE IFO - Current Assessment Mar Index 115.8 114.8 RMar 25 GE IFO - Expectations Mar Index 106.5 107.9
Source: Bloomberg, TD Economics
International
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The Weekly Bottom LineMarch 25, 2011
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7
UPCOMING ECONOMIC RELEASES AND EVENTS: MARCH 28- April 1, 2011Release
DateTime* Economic Indicator/Event
Data for Period
UnitsConsensus
ForecastLast Period
United StatesMar 28 8:30 Personal Income Feb M/M % Chg. 0.4 1.0Mar 28 8:30 Personal Spending Feb M/M % Chg. 0.6 0.2Mar 28 8:30 PCE Core Feb M/M % Chg. 0.2 0.1Mar 28 10:00 Pending Home Sales Feb M/M % Chg. 0.9 -2.8Mar 28 10:30 Dallas Fed Manf. Activity Mar Index - - 17.5Mar 28 12:40 Fed's Lockhart to Speak on U.S. Economy in AtlantaMar 28 15:40 Fed's Evans Speaks to Reporters in South CarolinaMar 28 16:00 Fed's Evans Speaks in South Carolina on EconomyMar 28 18:00 Fed's Rosengren Speaks in BostonMar 29 6:00 Fed's Bullard Speaks on Monetary Policy in PragueMar 29 9:00 S&P/CS 20 City % SA Jan M/M % Chg. - - -0.4Mar 29 10:00 Consumer Confidence Mar Index 65.0 70.4Mar 30 7:00 MBA Mortgage Applications 25-Mar - - 2.7Mar 30 7:30 Challenger Job Cuts YoY Mar Y/Y % Chg. - - 20Mar 30 8:15 ADP Employment Change Mar Thousands 205 217Mar 30 13:00 Fed's Bullard Speaks at UBS Dinner in LondonMar 30 14:30 Fed's Hoenig Speaks to London School of EconomicsMar 31 8:30 Initial Jobless Claims (with Annual Revisions) 26-Mar Thousands - - 382Mar 31 8:30 Continuing Claims 19-Mar Thousands - - 3721Mar 31 9:45 Chicago Purchasing Manager Mar Index 69 71.2Mar 31 9:45 Bloomberg Consumer Comfort 27-Mar - - - -Mar 31 10:00 NAPM-Milwaukee Mar Index - - 63Mar 31 10:00 Factory Orders Feb M/M % Chg. 0.5 3.1Mar 31 10:30 Fed's Lacker to Speak at 2011 Credit Symposium in CharlotteMar 31 12:30 Fed's Tarullo to Speak at 2011 Credit Symposium in CharlotteApr 01 8:15 Fed's Plosser Speaks on Economy in Harrisburg, PAApr 01 8:30 Change in Nonfarm Payrolls Mar Thousands 190 192Apr 01 8:30 Unemployment Rate Mar % 8.9 8.9Apr 01 8:30 Avg Hourly Earning All Emp Mar M/M % Chg. 0.2 0.0Apr 01 8:30 Avg Weekly Hours All Employees Mar Hours 34.3 34.2Apr 01 9:00 Fed's Dudley to Speak in San Juan, Puerto RicoApr 01 10:00 Construction Spending Feb M/M % Chg. 0.5 -0.7Apr 01 10:00 ISM Manufacturing Mar Index 61 61.4Apr 01 17:00 Total Vehicle Sales Mar Millions 13.40 13.38
CanadaMar 26 10:30 BoC Gov. Carney in a Panel Discussion in CalgaryMar 28 12:45 BoC Dep. Gov. Boivin Speaks in MontrealMar 30 8:30 Industrial Product Price Feb M/M % Chg. 0 0.2Mar 30 8:30 Raw Materials Price Index Feb M/M % Chg. -0.5 0.3Mar 30 9:00 Teranet/National Bank HPI Jan M/M % Chg. - - 0.3Mar 31 8:30 Gross Domestic Product Jan M/M % Chg. 0.5 0.5
InternationalMar 28 17:45 NZ Trade Balance Feb NZD, Millions 270 11Mar 28 19:30 JN Jobless Rate Feb % 4.9 4.9Mar 29 19:50 JN Industrial Production Feb P Y/Y % Chg. 4.0 3.5Mar 30 20:30 AU Retail Sales s.a. Feb M/M % Chg. 0.4 0.4Mar 31 5:00 EC Euro-Zone CPI Estimate Mar Y/Y % Chg. 2.3 2.4Mar 31 19:50 JN Tankan Lge Manufacturers Index 1Q Index 6 5Apr 01 5:00 EC Euro-Zone Unemployment Rate Feb % 9.9 9.9Apr 01 4:30 UK PMI Manufacturing Mar Index 60.9 61.5
* Eastern Standard Time; Source: Bloomberg, TD Economics
U.S. & INTERNATIONAL ECONOMIC ANALYSISBeata Caranci, Associate Vice President and Deputy Chief Economist mailto:[email protected] James Marple Senior Economist mailto:[email protected]
Martin Schwerdtfeger Economist, International mailto:[email protected]
