THE WEEKLY BOTTOM LINE TD Economics HIGHLIGHTS OF THE WEEK • It was a great week for U.S. equity markets, Reacting to positive economic data, the Dow-Jones reached a new record high, erasing the losses caused in the aftermath of the recession. • The biggest data release came at the end of the week and it did not disappoint. U.S. payrolls added an additional 236k jobs, well ahead of expectations for 165k. • Sustaining this pace of job growth is likely to be more difficult as sequestration hits the economy in the months ahead. However, by the second half of the year, with ongoing support from housing activity, job gains in excess of 200k should become the norm. March 8, 2013 Current* Week Ago 52-Week High 52-Week Low Stock Market Indexes S&P 500 1,546 1,518 1,546 1,278 S&P/TSX Comp. 12,810 12,773 12,832 11,281 DAX 7,973 7,708 7,973 5,969 FTSE 100 6,472 6,379 6,472 5,260 Nikkei 12,284 11,606 12,284 8,296 Fixed Income Yields U.S. 10-yr Treasury 2.05 1.84 2.38 1.39 Canada 10-yr Bond 1.93 1.80 2.29 1.58 Germany 10-yr Bund 1.52 1.41 2.06 1.17 UK 10-yr Gilt 2.05 1.87 2.45 1.44 Japan 10-yr Bond 0.65 0.66 1.05 0.62 Foreign Exchange Cross Rates C$ (USD per CAD) 0.97 0.97 1.03 0.96 Euro (USD per EUR) 1.30 1.30 1.36 1.21 Pound (USD per GBP) 1.49 1.50 1.63 1.49 Yen (JPY per USD) 96.2 93.6 96.2 77.5 Commodity Spot Prices** Crude Oil ($US/bbl) 91.3 90.7 108.1 77.7 Natural Gas ($US/MMBtu) 3.54 3.55 3.77 1.84 Copper ($US/met. tonne) 7734.0 7673.0 8674.5 7283.0 Gold ($US/troy oz.) 1578.9 1576.2 1790.4 1539.6 THIS WEEK IN THE MARKETS *as of 10:50 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 0.10% 0.50% 0 - 0.25% 1.00% 0.75% NORTH AMERICAN STOCK MARKETS 80 85 90 95 100 105 110 115 120 125 Jan-11 Apr-11 Aug-11 Nov-11 Mar-12 Jun-12 Oct-12 Jan-13 S&P TSX S&P 500 Daily data, re-indexed. January 2011=100 Data to 11:55 AM, March 8, 2013. Source: WSJ / Bloomberg Current Rate 2014 3/8/13 Q1 Q2 Q3 Q4F Q1F Q2F Q3F Q4F Fed Funds Target Rate (%) 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 2-yr Govt. Bond Yield (%) 0.26 0.25 0.28 0.30 0.35 0.40 0.50 0.60 0.80 10-yr Govt. Bond Yield (%) 2.05 1.90 2.05 2.20 2.30 2.50 2.70 2.80 3.00 30-yr Govt. Bond Yield (%) 3.25 3.05 3.15 3.40 3.50 3.75 3.95 4.05 4.10 Real GDP (Q/Q % Chg, Annualized) 0.1 (Q4) 2.1 1.5 2.4 2.8 2.7 3.2 3.3 3.1 CPI (Y/Y % Chg.) 1.6 (Jan-13) 1.9 1.9 2.2 2.3 2.3 2.3 2.2 2.2 Unemployment Rate (%) 7.7 (Feb-13) 7.9 7.9 7.8 7.8 7.7 7.6 7.5 7.4 Forecast by TD Economics. Source: Bloomberg, TD Economics TD ECONOMICS KEY FORECASTS 2013
JOBS, JOBS, JOBS!It’s been a good week for bulls and economic optimists.
Early in the week the Dow-Jones industrial average topped its previous peak reached in 2007. The good news kept on rolling in as the week went on. The Dow closed higher every day this week and as of writing, was up 2.1% from its close last week.
The gains in the stock market reflect increasing optimism about the state of the U.S. economy. This optimism was further supported by Friday’s payroll report. The economy generated an estimated 236k jobs in the month of February, surpassing market expectations for 165k. It was difficult to find any fault with the jobs report. All major sectors (except government) gained jobs in the month, average weekly hours rose, and the unemployment rate fell to 7.7%. Furthermore, the improvement in the construction industry is proving a substantial fillip to job growth. Construction jobs rose by 48k in the month. While accounting for just over 4% of nonfarm employment, construction made up 20% of the jobs created in February.
The performance of the labor market is not only key to the stock market, but also central to the Federal Reserve policy. With inflation looking relatively benign, the Fed has tied its asset purchase program to substantial improvement in the labor market and has made explicit its intention to leave interest rates at current levels until the unemployment rate reaches at least 6.5%.
In the near term, the fundamental question is what kind of labor market improvement the Fed would consider “sub-stantial.” A strong case can be made that 235k is consistent with a substantial improvement. However, one month does not a trend make. This kind of job growth will have to be sustained for a period of time before the Fed is willing to step back from its asset purchase program.
So, what are the prospects for maintaining this pace of job growth? There are a few reasons to be cautious. One reason is that over the last two years, job growth has shown a pattern of strong growth early in the year, only to fizzle in the summer months. Indeed, February of 2012 saw even stronger job growth than this year, with he creation of 271k jobs; but, by June job growth slowed to 87K. Some econo-mists have argued that this is evidence of a seasonal pattern that has been impacted by the recession.
Even if this not the case, a second reason for caution is that February’s outturn came before the impact of seques-
tration. The direct result of sequestration is likely to be furloughs of government workers, which will not show up directly in the jobs numbers. However, sequestration will result in reduced incomes and spending and therefore slow economic growth. Slower economic growth is likely to lead to a deceleration in job growth, particularly in the second quarter when the hit is the hardest.
In all likelihood, we will have to wait until the second half of this year before job seeing job growth tops 200k a month consistently. By then – providing that politicians in Washington can avoid a government shutdown and extend the debt ceiling without issue – support from construction activity should push the numbers through the “substantial” threshold. Consistent with this, we expect that by the end of the year, the Federal Reserve will pullback on its asset purchase program.
From there, the question is how long until unemployment reaches 6.5%. One would think that a clear threshold of 6.5% would be an easy thing to gauge, but alas, it is anything but. The unemployment rate is very sensitive to changes in the participation rate, which has fallen by 2.9 percentage points since January 2007. With underlying growth in the adult population of 200k a month, for every 0.1 percentage point increase in the participation rate, the labor force grows by an additional 240k. If discouraged workers start making their way back into the labor force, the 235k jobs we saw in February could be the bare minimum just to keep the unemployment rate from moving up.
The surge in gasoline prices should push total consumer spending up sharply in February, with the pace of retail sales expected to rise at a relatively brisk 0.8% m/m. Stronger autos should also bolster the top line, and sales ex-autos are expected to rise at a slightly more modest 0.7% m/m pace. However, with gas and autos accounting for almost all of the gains in spending, core retail sales activity should rise at a much more modest 0.2% m/m pace, suggesting a relatively subdued tone in underlying spending momentum. Moreover, the tone in personal expenditures should remain relatively soft in the next few months as the hit from higher taxes and impact of sequestration lower take-home pay, and possibly spending momentum.
Gasoline prices should reverse course in dramatic fash-ion in February, with the expected 7% m/m surge in prices at the pump pushing the headline index up 0.6% m/m. This will be biggest gain in this index in almost four years, and on a year-ago basis the pace of headline inflation should accelerate to its fastest pace since September. Food prices are also expected to rise further. Core prices should rise at a more modest 0.2% m/m, following a similar gain in the month before, though the annual pace of core consumer price inflation is expected to remain unchanged at 1.9% y/y. Despite the sharp rise in gasoline prices, which is beginning to abate in March, the overall tone of the inflation report should reinforce the benign inflationary backdrop as core inflation is expected to remain on or about the 2.0% y/y mark for the remainder of the year.
U.S. Retail Sales - February*Release Date: March 13, 2013January Result: Total 0.1% M/M; Ex-autos 0.2% M/MTD Forecast: Total 0.8% M/M; Ex-autos 0.7% M/M Consensus: Total 0.5% M/M; Ex-autos 0.5% M/M
Industrial sector activity should rebound modestly in February as gains in manufacturing sector activity more than compensate for the expected weakness in mining ac-tivity. The advance in manufacturing sector activity should be driven almost exclusively by rising auto assembling, production of machinery and other capital goods, consis-tent with the improving tone in overall investment activity. Utility production should also rise modestly. And with the gain in production activity factory usage should advance, rising to 79.2% from 79.1% in the month before.
U.S. Industrial Production - February* Release Date: March 15, 2013January Result: Industrial Production -0.1% m/m;Capacity Utilization 79.1%TD Forecast: Industrial Production 0.3% m/m;Capacity Utilization 79.2%Consensus: Industrial Production 0.3% m/m;Capacity Utilization 79.3%
RECENT KEY ECONOMIC INDICATORS: MARCH 4-8, 2013Release
Date Economic Indicator/Event Data for Period Units Current Prior
United StatesMar5 ISMNon-Manf.Composite Feb Index 56.0 55.2Mar5 IBD/TIPPEconomicOptimism Mar Index 42.2 47.3Mar6 ADPEmploymentChange Feb Thousands 198.0 215.0 RMar6 FactoryOrders Jan M/M%Chg. -2.0 1.3 RMar6 U.S. Federal Reserve Releases Beige BookMar7 ChallengerJobCuts Feb Y/Y%Chg. 7.0 -24.4Mar7 TradeBalance Jan USD,Blns -44.4 -38.1 RMar7 HouseholdChangeinNetWorth 4Q USD,Blns 1174 1885 RMar7 ConsumerCredit Jan USD,Blns 16.151 15.100 RMar8 ChangeinNonfarmPayrolls Feb Thousands 236.0 119.0 RMar8 ChangeinPrivatePayrolls Feb Thousands 246.0 140.0 RMar8 ChangeinManufact.Payrolls Feb Thousands 14.0 12.0 RMar8 UnemploymentRate Feb % 7.7 7.9Mar8 AvgHourlyEarningMOMAllEmp Feb M/M%Chg. 0.2 0.1 RMar8 UnderemploymentRate(U6) Feb % 14.3 14.4Mar8 WholesaleInventories Jan M/M%Chg. 1.2 0.1 RMar8 WholesaleSales Jan M/M%Chg. -0.8 0.0
CanadaMar6 BankofCanadaRate 6-Mar % 1.00 1.00Mar6 IveyPurchasingManagersIndexSA Feb Index 51.1 58.9Mar7 InternationalMerchandiseTrade Jan CAD,Blns -0.24 -0.33 RMar7 BuildingPermits Jan M/M%Chg. 1.7 -10.4 RMar8 HousingStarts Feb Thousands 180.7 159.0 RMar8 LaborProductivity 4Q Q/Q%Chg. 0.1 -0.4 RMar8 UnemploymentRate Feb % 7.0 7.0Mar8 NetChangeinEmployment Feb Thousands 50.7 -21.9Mar8 FullTimeEmploymentChange Feb Thousands 33.6 -20.6Mar8 PartTimeEmploymentChange Feb Thousands 17.2 -1.4Mar8 ParticipationRate Feb % 66.7 66.6
InternationalMar3 AU TDSecuritiesInflation Feb Y/Y%Chg. 2.4 2.5Mar4 EC Euro-ZonePPI Jan Y/Y%Chg. 1.9 2.1Mar4 AU RBACashTarget 5-Mar % 3.00 3.00Mar5 EC Euro-ZoneRetailSales Jan Y/Y%Chg. -1.3 -3.0 RMar6 EC Euro-ZoneGDPSA 4QP Y/Y%Chg. -0.9 -0.9Mar6 AU TradeBalance Jan AUD,Mlns -1057 -688 RMar6-7 JN BOJTargetRate 7-Mar % 0.10 0.10Mar7 FR ILOUnemploymentRate 4Q % 10.6 10.2 RMar7 FR TradeBalance(Euros) Jan Euros,Mlns -5862 -5418 RMar7 UK BOEAnnouncesRates 7-Mar % 0.50 0.50Mar7 EC ECBAnnouncesInterestRates 7-Mar % 0.75 0.75Mar8 GE IndustrialProductionNSAWDA Jan Y/Y%Chg. -1.3 -0.5 R
*EasternStandardTime;Source:Bloomberg,TDEconomics
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TD Economics | www.td.com/economics
March 8, 2013
UPCOMING ECONOMIC RELEASES AND EVENTS: MARCH 11-15, 2013Release
Date Time* Economic Indicator/Event Data for Period Units Consensus
Forecast Last Period
United StatesMar12 7:30 NFIBSmallBusinessOptimism Feb Index 89.5 88.9Mar12 10:00 JOLTsJobOpenings Jan Thousands -- 3617.0Mar12 14:00 MonthlyBudgetStatement Feb USD,Blns -- 2.88Mar13 8:30 ImportPriceIndex Feb M/M%Chg. -- -1.3Mar13 8:30 AdvanceRetailSales Feb M/M%Chg. 0.5 0.1Mar13 8:30 RetailSalesLessAutos Feb M/M%Chg. 0.5 0.2Mar13 10:00 BusinessInventories Jan M/M%Chg. 0.3 0.1Mar14 8:30 CurrentAccountBalance 4Q USD,Blns -113.0 -107.5Mar14 8:30 ProducerPriceIndex Feb M/M%Chg. 0.6 0.2Mar14 8:30 ProducerPriceIndexExFood&Energy Feb M/M%Chg. 0.1 0.2Mar15 8:30 EmpireManufacturing MarP Index 8.50 10.04Mar15 8:30 ConsumerPriceIndex Feb M/M%Chg. 0.5 0.0Mar15 8:30 ConsumerPriceIndexExFood&Energy Feb M/M%Chg. 0.2 0.3Mar15 9:00 TotalNetTICFlows Jan USD,Blns -- 25.2Mar15 9:15 IndustrialProduction Feb M/M%Chg. 0.3 -0.1Mar15 9:15 CapacityUtilization Feb % 79.3 79.1Mar15 9:15 Manufacturing(SIC)Production Feb M/M%Chg. 0.3 -0.4Mar15 9:55 U.ofMichiganConfidence MarP Index 77.7 77.6
CanadaMar14 8:30 CapacityUtilizationRate 4Q % -- 80.9Mar14 8:30 NewHousingPriceIndex Jan M/M%Chg. -- 0.2Mar14 8:30 NewHousingPriceIndex Jan Y/Y%Chg. -- 2.3Mar14 10:00 Bloomberg March Canada Economic SurveyMar15 9:00 ExistingHomeSales Feb M/M%Chg. -- 1.3
InternationalMar11 3:00 GE TradeBalance Jan Euros,Blns 14.4 12.0Mar11 3:45 FR IndustrialProduction Jan Y/Y%Chg. -2.7 -2.1Mar11 3:45 FR ManufacturingProduction Jan Y/Y%Chg. -3.4 -2.9Mar12 3:00 GE WholesalePriceIndex Feb Y/Y%Chg. -- 2.3Mar12 3:45 FR CurrentAccount Jan Euros,Blns -- -3.6Mar12 5:30 UK IndustrialProduction Jan Y/Y%Chg. -1.1 -1.7Mar12 5:30 UK ManufacturingProduction Jan Y/Y%Chg. -1.0 -1.5Mar12 5:30 UK TotalTradeBalance Jan GPB,Mlns -3100.0 -3201.0Mar12 11:00 UK NIESRGDPEstimate Feb M/M%Chg. -- 0.0Mar13 3:45 FR ConsumerPriceIndex Feb Y/Y%Chg. 1.3 1.4Mar13 6:00 EC Euro-ZoneInd.Prod.Wda Jan Y/Y%Chg. -2.0 -2.4Mar13 16:00 NZ RBNZOfficialCashRate 14-Mar % 2.50 2.50Mar13 20:30 AU UnemploymentRate Feb % 5.5 5.4Mar14 5:00 EC ECB Publishes Monthly ReportMar15 6:00 EC Euro-ZoneCPI Feb Y/Y%Chg. 1.8 1.8Mar15 6:00 EC Euro-ZoneCPICore Feb Y/Y%Chg. 1.3 1.3Mar15 6:00 EC Euro-ZoneLabourCosts 4Q Y/Y%Chg. -- 2.0
U.S. & INTERNATIONAL ECONOMIC ANALYSISBeata Caranci, Vice President and Deputy Chief Economist [email protected] Marple Senior Economist [email protected]
Martin Schwerdtfeger Senior Economist, International [email protected]
