TD Economics
HIGHLIGHTS OF THE WEEK United States • Some stability has returned to financial markets this week, following post-Brexit selloff. Volatility has sub-sided and equities rallied, with the S&P 500 erasing much of its Brexit-related losses. • Economic data were also encouraging. Personal spending rose by a solid 0.4% m/m in May, coming on the heels of an impressive 1.1% m/m gain in April, while initial jobless claims suggested robust job growth continues. • The U.S. economy should remain relatively well-insulated from Brexit-related spillovers, but some drag may manifest in the second half of year. Still, the impact is expected to be modest, lowering growth by just 0.1 percentage point relative to our earlier forecast.• The stronger dollar, coupled with increased uncertainty and slower global growth will likely dampen whatever appetite the FOMC may have had to raise rates in the near-term. Still, the Fed will not sit on the sidelines indefinitely, and can sneak in a rate hike in early 2017, or even in December. Canada • After sliding further on Monday in response to the UK decision to leave the EU, financial markets got some reprieve throughout the rest of the week, with a relief rally erasing much of the lost ground. • Within the commodity spectrum, energy and industrial metals prices are likely to be most adversely im-pacted by the Leave vote, while precious metals prices will benefit from the referendum outcome. • Canada will not be immune to the fallout from the referendum outcome; however the impact on the economy will be relatively contained, and unlikely to alter the Bank of Canada’s monetary policy stance. June 30, 2016
Current* Week Ago 52-Week High 52-Week Low
Stock Market Indexes
S&P 500 2,060 2,071 2,128 1,829 S&P/TSX Comp. 13,909 13,902 14,898 11,843 DAX 9,651 9,631 11,736 8,753 FTSE 100 6,173 6,021 6,808 5,537 Nikkei 14,952 15,600 20,842 14,952
Fixed Income Yields
U.S. 10-yr Treasury 1.58 1.61 2.47 1.57 Canada 10-yr Bond 1.18 1.12 1.87 1.00 Germany 10-yr Bund -0.06 0.02 0.92 -0.06 UK 10-yr Gilt 1.10 1.14 2.19 1.10 Japan 10-yr Bond -0.17 -0.15 0.53 -0.19
Foreign Exchange Cross Rates
C$ (USD per CAD) 0.77 0.78 0.81 0.69 Euro (USD per EUR) 1.11 1.13 1.16 1.06 Pound (USD per GBP) 1.38 1.44 1.58 1.38 Yen (JPY per USD) 102.4 104.2 125.1 102.4
Commodity Spot Prices**
Crude Oil ($US/bbl) 46.7 48.0 59.6 26.2 Natural Gas ($US/MMBtu) 2.68 2.58 2.95 1.49 Copper ($US/met. tonne) 4776.5 4541.5 5784.0 4327.5 Gold ($US/troy oz.) 1313.0 1299.0 1313.0 1051.1
THIS WEEK IN THE MARKETS
*as of 10:45 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.
GLOBAL OFFICIAL POLICY RATE TARGETS
Current Target -0.10%0.50% 0.25 - 0.5% 0.50% 0.00% -15 -10 -5 0 5 10 S&P 500 Dax FT 100 Nikkei 225 US 10Y T-Note USD:EUR USD:JPY USD:GBP USD:CAD USD:MXN Gold WTI Brent VIX* WEEKLY MOVES Note: Data as of June 30, 12:56 PM. Change from end of business on June 24. Sources: Bloomberg, TD Economics
U.S. – BREXIT WILL HAVE MODEST IMPACT ON GROWTH BUT DELAY THE FED
After a few tense days following the Brexit selloff some stability has returned to financial markets this week. Vola-tility has subsided, with the VIX equity gauge declining from its peak of 27 to 16, and both the dollar and yen have retreated somewhat as “flight to safety” flows abated. Mean-while, equities have rallied, helping the S&P 500 rebound from most of the Brexit-induced losses. Oil prices also got a lift from a recovery rally, with bullish sentiment further supported by an unexpectedly large drawdown in U.S. crude inventories last week. The improved risk appetite was also to be found across the Atlantic. The FTSE 100 has hit a new post referendum high helped by a decline in the value of the pound, and even the broader domestic-focused FTSE 250 recovered half of its losses and is down a more subdued 6% relative to its pre-referendum level.
While market volatility has subsided for now, the outlook remains far from clear. Given its unprecedented nature and significant political uncertainty, policy makers and econo-mists can only at this point draw vague assessments of the impact the U.K.’s decision to leave the E.U. may have on various economies. Our take on the impact is reflected in our recent Economic Forecast Update. We expect Brexit will hit U.K. economy the most, with growth expected to slow to 1.2% this year and 0.7% in 2017 (from 1.9% and 2.2% reported in the previous forecast). Moreover, the bulk of the impact on the global economy is expected to manifest in 2017, with slower growth in the Eurozone but spillovers extending more globally. This is expected to lower the already modest global growth by 0.2pp in 2017 to 3.2%.
The U.S. economy should be relatively well-insulated but it will not be completely immune, with negative spillovers manifesting through trade, financial, and confidence chan-nels. Encouragingly, the U.S. economy continues to fare well with robust economic momentum through the second quarter. This week’s release of income and spending fig-ures indicated that after a timid start of the year, American shoppers were out in full force during the second quarter. Coming on the heels of an impressive 1.1% m/m gain in April, personal spending posted another solid result in May, rising by 0.4% m/m. As such, real consumption is expected to advance by more than 4% (annualized), which should be enough to boost GDP growth above the mid-2% mark this quarter. Better yet, first quarter growth was this week revised up by 0.3 percentage points to 1.1% (annualized).
Still, the Brexit impact may begin to manifest in the
second half of year, weighing on momentum somewhat (see Chart). Relative to our previous forecast, GDP growth over the second half of the year is expected to be 0.4pp (an-nualized) slower. This dynamic reflects reduced business investment due to elevated risk aversion and more drag from trade sector related to the stronger dollar, which is expected to rise by 3% on a trade-weighted basis by the end of the year. These will be partially offset by stronger residential investment and spending on durables due to lower interest rates. As a result, growth is expected to come in at 1.8% this year and 2.0% in 2017 – about 0.1pp slower than reported in our mid-June pre-Brexit forecast.
The stronger dollar, which will weigh on inflation, coupled with increased uncertainty and slower global growth will likely dampen whatever appetite the FOMC may have had to raise rates in the near-term. Still, while a delay is likely, we remain of the view that the Fed will not sit on the sidelines indefinitely. In light of the relatively subdued impact, we expect the Fed to be in the position to raise rates in early 2017, or even squeeze in one rate hike in December should financial markets stay calm and U.S. economic data remains upbeat.
Ksenia Bushmeneva, Economist 416-308-7392 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Q1 Q2F Q3F Q4F Q1F Q2F Q3F Q4F 2016 2017
CHART: MODESTLY WEAKER ECONOMIC GROWTH THROUGH THE REMAINDER OF 2016
Previous forecast* Post-Brexit update Real GDP growth; Q/Q % change (annualized)
Financial markets started the week with a Brexit hang-over, with risk aversion propping up precious metals prices and the U.S. dollar, and pushing equity markets and other commodity prices further into the red. However, there was some reprieve as the week progressed. Equity markets recovered much of the ground lost as investors sought out buying opportunities, with the S&P/TSX recouping about two thirds of its losses by Thursday morning. After hitting a low of US$46 per barrel on Monday, crude oil prices bounced back to around US$49 per barrel (at the time of writing), while the loonie moved back above 77 US cents.
The relief rally that has transpired in recent days does not mean that the impact on financial markets of the UK refer-endum is over. Given its lack of precedent and enormous uncertainty as to how the break up will play out, its progress will dominate headlines for some time, stirring up financial market volatility as each piece of information is digested.
Looking at commodity prices, energy and industrial met-als prices are likely to be most adversely impacted by the Leave vote, with potentially slower global growth weighing on physical demand and a stronger U.S. dollar and lack of risk appetite limiting financial demand. Still, individual market supply-demand fundamentals will also play a role, possibly limiting movements in either direction. On the flipside, precious metals are expected to benefit from this unexpected decision, particularly gold. In addition to its safe haven status, the expected increase in monetary stimulus around the globe – as central banks are likely to add liquid-ity and consider lowering interest rates – should bode well for gold prices as it further reduces the carrying cost of the
yellow metal. Even central banks like the Federal Reserve that are unlikely to cut rates are now likely to remain on hold for longer. As such, the ongoing uncertainty, combined with loosening monetary policy conditions around the globe should propel gold prices to an average of $1350/oz in the third quarter – a level not seen in over two years.
Following the referendum result, we have received a number of inquiries regarding the impact on the Canadian economy which has lost momentum after a strong start to 2016. Despite growth returning to positive territory in April (+0.1%), it is likely to be further hindered in Q2 thanks to the adverse impact of the wildfires in Alberta. Our analysis suggests that, while it will remain resilient, the Canadian economy will not be totally immune to the fall out. With limited direct trade linkages with the UK, the greatest im-pact of the Leave vote on Canada will likely be via indirect channels – largely through weaker business and consumer confidence, and through the U.S. where business invest-ment is likely to be weaker, reducing demand for Canadian exports. These impacts are expected to reduce second half growth by 0.4 ppts this year, pulling 2016 and 2017 annual growth rates down by 0.1 ppt each year on net. The outlook for inflation and the loonie remains unchanged, allowing the Bank of Canada to continue to focus on underlying demand fundamentals. With the impact on the Canadian economy expected to be relatively contained, a rate cut is unlikely to be warranted. Hence, we continue to expect the Bank to leave rates on hold well into 2018. For details, please see our forecast update.
CANADA – UK LEAVE VOTE TO HAVE SLIGHT IMPACT ON CANADA
Dina Ignjatovic, Economist, 416-982-2555
0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 2011 2012 2013 2014 2015 2016F 2017F GOLD PRICES Source: Haver Analytics US$/oz. Forecast -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 2016Q1 2016Q3 2017Q1 2017Q3
IMPACT OF BREXIT ON CANADIAN GROWTH
U.S.: UPCOMING KEY ECONOMIC RELEASES
The US trade deficit is expected to widen in May, mirror-ing the sharp deterioration seen in the advance merchandise trade report as TD expects the deficit to rise to $40.2B from $37.4B. Despite the worsening in the trade balance, the over-all tone of the report should be somewhat encouraging. In particular, import activity (which reflects domestic demand momentum) is expected to rise at a decent 0.7% m/m pace, marking the third monthly rise in this indicator in the past four months - though this was due in part to higher crude oil prices pushing the energy import bill higher. However, export activity should decline, falling 0.1% m/m, point-ing to some deterioration in US competitiveness from the stronger dollar and weak global demand. Despite this, the external sector should remain a modest source of tailwind
U.S. International Trade - May*
Release Date: July 6, 2016 April Result: -$37.4b TD Forecast: -$40.2b Consensus: -$39.5b
for the economy, though this is likely to reverse in the com-ing months.
As the impact from the Verizon workers’ strike unwinds, the monthly pace of payrolls growth should be flattered high-er by the 34K previously displaced workhigh-ers that will return to work. At the same time, we expect the sharp downdrift in employment growth to partially reverse course, with the change in payrolls rebounding to a more respectable 175K pace in June – including the Verizon workers. The risks to this call are to the upside. Despite the rebound in headline employment gains, the overall tone of this report should be relatively weak, reflecting continued slowing in underlying labor market momentum relative to the brisk pace earlier this year. During the month, the unemployment rate should drift modestly higher, climbing to 4.8% from the cycle-low of 4.7% as the rebound in the labor force more than offsets the gains in household employment. Wage growth should be decent, posting a 0.2% m/m gain, though the annual pace of
U.S. Employment - June*
Release Date: July 8, 2016
May Result: 38K; unemployment rate 4.7% TD Forecast: 175K; unemployment rate 4.8% Consensus: 180K; unemployment rate 4.8%
average hourly earnings growth should remain unchanged at 2.5% y/y. In the months ahead, we expect the pace of job growth to slow further, as rising anxiety about the fallout from the Brexit vote and the US election dampens US busi-ness capital investment and hiring activity.
3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 0 50 100 150 200 250 300 350
Jun-14 Nov-14 Apr-15 Sep-15 Feb-16
U.S. LABOR MARKET
Net Job Change* (lhs) Unemployment Rate (rhs) Thousands of jobs % Seasonally-adjusted data; * Change in non-farm payrolls Source: U.S. Deptartment of Labor / Haver Analytics -55 -50 -45 -40 -35 -30 -25
Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16
U.S. INTERNATIONAL TRADE BALANCE
Source: Census Bureau / Haver Analytics
US$, Billions
CANADA: UPCOMING KEY ECONOMIC RELEASES
Canada’s trade deficit is expected to narrow to $2.0 billion in May, though this forecast is subject to a tremen-dous amount of uncertainty. At issue is the impact that the wildfires in Northern Alberta had on the production and subsequent shipment of crude oil. The shutdown reported in the industry is likely to impact both exports and imports, though a spike in prices will bias the nominal headlines higher. We therefore have more confidence that the volumes metrics—which ultimately matters for real GDP—will not be as upbeat as nominal exports. Elsewhere in the report, a normalization in auto production should allow for a mod-estly positive contribution to exports while higher commod-ity price should lift the metals complex.
Canadian International Trade - May*
Release Date: July 6, 2016 April Result: -$2.9b TD Forecast: -$2.0b Consensus: N/A 36 38 40 42 44 46 48
Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16
CANADIAN INTERNATIONAL MERCHANDISE TRADE
Exports Imports
Dollars, Billions
Source: Statistics Canada / Haver Analytics A stark regional and industrial divergence in sentiment
is expected to define the Bank of Canada’s latest Business Outlook Survey (BOS). Note that the survey period encom-passed the last two weeks of May and the first two weeks of June which includes the immediate aftermath of the wildfires in Northern Alberta. Oil prices steady ground higher over this period while the Canadian dollar held steady. On bal-ance, ongoing challenges in the energy industry paired with continued (though cautious) optimism among firms exposed to the United States should allow the balance of opinion on future sales to drift higher to +20. National investment and hiring intentions are expected to remain broadly unchanged and subdued levels. Of note, the observed recovery in oil prices is still well short of the threshold where new invest-ment is profitable which is consistent with recent industry reports that indicate a further pullback in investment this
Canadian Business Outlook Survey - Q2*
Release Date: July 4, 2016 Q1 Result: +16 (Future Sales) TD Forecast: +20
Consensus: N/A
year. Export-orientated firms are likely to report growing capacity pressures though the national average will be weighed down by the resource industry where there contin-ues to be abundant spare capacity. Finally, expectations of future inflation are also expected to coalesce in the bottom half of the Bank’s 1-3% target range.
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Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16
BUSINESS OUTLOOK: FUTURE SALES SURVEY
Several individual industries poised to reverse recent declines are forecast to drive the creation of a respectable 20k jobs in June. Of note, the trade sector lost 41k jobs in May (almost a 3 standard deviation decline) while healthcare shed 25k positions (a 2 standard deviation decline). Based on historical rebounds, these two sectors alone could add around 50k jobs in June. Expectations for a further increase in hiring is also supported by the split in full/part-time hir-ing which points to sustained hirhir-ing in full-time while the May drop in part-time hiring is set to be reversed. Note that the temporary hiring attributed to the 2016 Census is set to run through to the middle of July, which reduces the likeli-hood of a retrenchment in public sector hiring. Even with the forecasted increase in employment, the unemployment rate is likely to nudge higher to 7.0% given an anticipated
Canadian Employment - June*
Release Date: July 8, 2016
May Result: 14k; unemployment rate 6.9% TD Forecast: 20k; unemployment rate 7.0% Consensus: N/A
rebound in the labour force and a low threshold given the May print of 6.940%. If the forecast for 20k in June is real-ized the 6-month pace of employment will remain broadly unchanged at 10k jobs, which is a touch stronger than what is implied by the wider macro backdrop.
6.5 6.8 7.0 7.3 7.5 7.8 8.0 -80 -40 0 40 80
Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16
CANADIAN LABOUR MARKET*
7 June 30, 2016
Release
Date Economic Indicator/Event Data for Period Units Current Prior
Jun 27 Advance Goods Trade Balance May USD, Blns -60.6 -57.5 Jun 28 Core PCE Q1 T Q/Q % Chg. 2.0 2.1 Jun 28 Gross Domestic Product Price Index Q1 T Q/Q % Chg. 0.4 0.6 Jun 28 Personal Consumption Q1 T Q/Q % Chg. 1.5 1.9 Jun 28 Gross Domestic Product Annualized Q1 T Q/Q % Chg. 1.1 0.8
Jun 28 Consumer Confidence Index Jun Index 98.0 92.4 R6
Jun 29 PCE Core May M/M % Chg. 0.2 0.2 Jun 29 PCE Deflator May M/M % Chg. 0.2 0.3
Jun 29 Real Personal Spending May M/M % Chg. 0.3 0.8 R5
Jun 29 Personal Spending May M/M % Chg. 0.4 1.1 R5
Jun 29 Personal Income May M/M % Chg. 0.2 0.5 R5
Jun 29 Pending Home Sales May M/M % Chg. -3.7 3.9 R6
Jun 30 Continuing Claims Jun 18 Thsd 2120 2140 R6
Jun 30 Initial Jobless Claims Jun 25 Thsd 268.0 258.0 R6
Jun 30 CFIB Business Barometer Jun Index 60.0 58.2
Jun 30 Raw Materials Price Index May M/M % Chg. 6.7 0.7
Jun 30 Industrial Product Price May M/M % Chg. 1.1 -0.5
Jun 30 Gross Domestic Product Apr M/M % Chg. 0.1 -0.2 Jun 29 GE Consumer Price Index Jun P Y/Y % Chg. 0.3 0.1
Jun 30 FR Producer Price Index May Y/Y % Chg. -3.5 -4.2 R6
Jun 30 FR Consumer Price Index Jun P Y/Y % Chg. 0.2 0.0
Source: Bloomberg, TD Economics.
RECENT KEY ECONOMIC INDICATORS: JUNE 27-30, 2016
United StatesCanada
8 June 30, 2016
Release
Date Time* Economic Indicator/Event Data for Period Units Consensus Forecast Last Period
Jul 05 10:00 Factory Orders Excluding Transportation May M/M % Chg. - 0.5
Jul 05 10:00 Factory Orders May M/M % Chg. -0.8 1.9
Jul 05 14:30 Fed's Dudley Speaks on Local Economy in Binghamton, NY
Jul 06 8:30 Trade Balance May USD, Blns -39.5 -37.4
Jul 06 10:00 ISM Non-Manufacturing Composite Jun Index 53.5 52.9
Jul 06 14:00 FOMC Meeting Minutes (June 14-15 Meeting) Jun 15
Jul 07 8:15 ADP Employment Change Jun Thsd 150.0 173.0
Jul 07 8:30 Initial Jobless Claims Jul 02 Thsd -
-Jul 08 8:30 Unemployment Rate Jun M/M % Chg. 4.8 4.7
Jul 08 8:30 Change in Nonfarm Payrolls Jun Thsd 180.0 38.0
Jul 08 8:30 Underemployment Rate Jun % - 9.7
Jul 08 8:30 Average Hourly Earnings Jun M/M % Chg. 0.2 0.2
Jul 04 10:30 BoC Senior Loan Officer Survey Q2 Index - 6.6
Jul 04 10:30 BoC Business Outlook Survey Q2 Index - 16.0
Jul 06 8:30 International Merchandise Trade May CAD, Blns - -2.9
Jul 08 8:30 Net Change in Employment Jun Thsd - 13.8
Jul 08 8:30 Unemployment Rate Jun % - 6.9
Jul 05 5:00 EC Retail Sales May Y/Y % Chg. - 1.4
* Eastern Standard Time. Source: Bloomberg, TD Economics.
UPCOMING ECONOMIC RELEASES AND EVENTS: JULY 4-8, 2016
United StatesCanada
