bmo jul 30 weekly focus

8/9/2019 Bmo Jul 30 Weekly Focus

1/15

FEATURE ARTICLE, PAGE 7

Stressing About Credit

Creation, Not Test Results

U.S. Growth Middling as Consumer Confidence Fades Canadian Economic Momentum Slowing Basel Banking Rules Relaxed Solid July for Global Equities India, New Zealand, Israel Hike Rates

JULY 30, 201


2/15

PAGE 2 FOCUS JULY 30, 2010

The Pall of UncertaintyEconomic activity in Canada is clearly ebbing, in line with the slowdow

in the rest of the world. Consequently, business and consum

confidence is shaky, edging downward as great uncertainty continues t

weigh on sentiment. Canadian and U.S. businesses are holding recor

volumes of cash, and while investment in machinery, equipment an

software is very strong in the U.S., and rising in Canada, job growth in the U.S. remain

a sore spot. The U.S. long-term unemployment rate is extremely high, plaguing

recovery in confidence and consumer spending.

Businesses, especially in the U.S., are mired in the negative feedback loop of tep

consumer spending leading to disappointing orders, which discourages job creatio

and rehiring. As long as 14.6 million workers are unemployed in the U.S., everythin

from housing to auto sales to spending on clothing and even necessities is muted.

Inevitably, this weakens Canadian economic activity both directlythroug

weaker exportsand indirectly, through reduced confidence. The news has bee

dominated of late by mounting concerns of a double dip. Canadians cant help but bimpacted by this, even though employment has been very strong here.

Fear of a double dip can be self-fulfilling. First among the causes for concern

the effect of falling business and household confidence, the glue holding the glob

recovery together. The initial sign came in May when the global purchasing manager

index for both manufacturing and services fell from the April peak as activity and ne

orders dropped. The declines continued in June, fuelling fears that the rapid phase o

the recovery could be short-lived. But Julys results for Europethe main cause fo

concern in the springwere much more encouraging.

Households have also shown signs of a slide back into a fear of spending. In mo

recession-hit countries, consumers have been saving much more than before the crisand they are reducing debt. In the U.S., housing activity has slumped after th

homeowners tax credit expired and the overhang of unsold homes, boosted b

continuing foreclosures, remains a longer-term shroud on the market. Even in Canad

housing has slowed since earlier this year.

As the newly released Q2 GDP results show, the U.S. economic recovery remain

patchy and heavily reliant on government support and inventory rebuilding. We a

expecting even softer growth in the second halfat roughly a 2% pace, which mean

that the jobless rate will barely budge. Optimism would improve if companies shifte

spending and retained earnings toward hiring, helping consumers overcome their ru

But, something needs to spur business confidence for that to happen.The murky outlook is also reflective of European bank exposure to sovereign ri

and economic slowdown. The recent stress tests helped to mitigate this concern, bu

the unwinding of temporary boosts to growth and the massive fiscal restraint

Europe are raising the prospects of a further slowdown.

In the U.S., the debate is raging between Democratic (Keynesian) calls for fisc

stimulus and Republican (Supply-Side) calls for government spending cuts. Ironicall

the Dems are also supporting the expiry of the Bush tax cuts for households earnin

Our Thoughts


3/15


$250,000 or more, an act of fiscal restraint, while the Republicans want to see th

continuation of the tax cuts (due to expire January 1, 2011), an act of fiscal stimulus.

Bottom Line: As Bernanke says, these are unusually uncertain times, and th

does not bode well for business or consumer confidence. We will continue to spir

through this negative loop, raising the prospects of a double dip, until somethin

penetrates the gloom and spurs confidence in a brighter outlook. What thsomething might be is once again uncertain. My view is that some additional fisc

stimulus is necessaryhopefully in the form of corporate tax cuts and addition

federal assistance to state and local government, an enormous source of new layoffs

believe a double dip is unlikely, but we are clearly in store for sub-par growth and on

a very slow rise in hiring.

What in the world has happened to the greenback? It has done

reverse Charles Atlas, and is now the 90-pound weakling on the beach. A

8% plunge from Junes peak has erased all of its trade-weighted gains th

year. Meantime, the euro has bulked up 10% since early June, the Britispound is at five-month highs, and the Canadian dollar is taking aim

parity again. Four factors have conspired to deflate the greenback

stature. First, double-dip recession and deflation fears are no longer the purview

Europe. A string of soft U.S. numbers and a glum Beige Book confirm the patchy natur

of this recovery, and even one inflation hawk on the FOMC (St. Louis President Bullard)

warning that the U.S. could be headed for Japanese-like deflation and may nee

another jolt of monetary caffeine. While we dont expect a recession, the U.S. econom

isnt likely to vastly outrun Europe, which has taken on a slightly rosier hue in light o

surprisingly perkier data. The sluggish U.S. recovery should keep the Fedlike othe

members of the benchwarmers club (ECB, BoE and BoJ)on the sidelines well into neyear, if not, 2012. Second, fiscal concerns are also not limited only to Europe. Both th

U.S. and Europe have awful fiscal finances, but at least Europe is addressing its problem

ECB President Trichet is warning advanced nations not to delay fiscal dieting, while th

new U.K. government is wielding an axe at its budget. Meantime, the U.S. Administratio

has yet to draw up a credible plan to stabilize the debt, drawing a rebuke from on

Moodys official, while Californias muscular governor warns it is at risk of a fisc

meltdown if it doesnt pass an overdue budget soon. Third, the U.S. trade defic

continues to expand (slashing almost 3 ppts from Q2 growth), in part because fisc

incentive programs pumped spending and imports. Fourth, Europes financial backsto

plan and bank stress tests, though not perfect, have at least soothed investor concernabout sovereign default, damping safe-haven demand for dollars. Meantime, the IMF

own stress tests reveal that U.S. banks, though stable now, remain vulnerable to wea

housing and commercial real estate markets.

Looking ahead, although the dollar might regain some of its muscle if Europe

credit woes re-emerge, its prospects for the year ahead look dim. The U.S. economy

expected to slow further in the second half of the year, as the boosts from invento

restocking and fiscal stimulus wane. Meantime, the federal government is unlikely t

seriously tackle its deficit until after the November elections, and possibly much later

Our Thoughts

SAL GUATIERI


4/15


the new Congress is gridlocked. The dollars weakness should be most pronounce

against the Asian and commodity-based currencies, as many of these countries w

continue to raise interest rates. On the bright side, a weak dollar should facilitate

necessary rebalancing of the U.S. economy by encouraging savings and productio

over consumption.

Maybe its me but it felt a little like bizzaro world on the economic da

front on Friday. Canadian real GDP rose only 0.1% in May, which, followin

up a flat April reading, points to growth of around 2.5% a.r. in Q2. That

right in line with the U.S. figure of 2.4%. Isnt Canada supposed to outpac

the U.S. through the recovery? While Canadas outperformance on growt

will likely take a hiatus in the second half of the year, thepicture remain

much brighter north of the border. Employment is the key differentiator, with Canad

nearly back to pre-recession levels, while the U.S. is still down 7.5 million jobs. Howeve

there was a bit of a dampener on the employment front in Canada, as the establishmen

survey for May (not to be confused with the Labour Force Survey) showed nonfarmemployment actually dropped 25k. Coupled with a 22k gain in April (the LFS reported

record increase in that month), Canadas establishment survey seems to be mor

consistent with recent GDP figures. It looks as though the record job growth in Q

according to the LFS, was too good to be true.

Despite the current soft patch, financial markets are showing some signs th

conditions might already be perking up. Dr. Copper climbed 11.1% in July, the stronge

gain in nearly a year. Chinas CSI 300 equity index gained 11.9%, its best month in a yea

as policy tightening fears subsided. Chinese equities have been a decent leadin

indicator for global equities and the economy over the past two years. Indeed, despit

all the gloom of the double-dippers, with some upping their odds of such an event, Juwas an excellent month for stocks, while bond yields were little changed. As of th

morning, the Dow, S&P 500, and Europes Stoxx 50 were up over 6% for the month. Th

TSX is on pace for a more modest 3.5% gain, as gold stocks weighed. Solid earning

results, with nearly 80% of S&P 500 companies beating bottom line estimates, provide

a boost to markets. However, with earnings season winding down and the glob

economic data likely to reflect a soft patch in activity, commodities and equities mig

have a tough time repeating those gains in August.

Dividends are in style again, and for good reason. For one, the S&

500 is at about the same level it was more than 12 years ago. Whiinvestors have made nothing through price appreciation since earl

1998 (and actually lost money in real terms), they would have racked u

a 22% gain by re-investing their dividends, highlighting the importanc

of an income stream in a secular bear market. Meantime, the alternative

for investors desiring income are not all that compelling given the low level of bon

yields. In fact, the dividend yield on the TSX sits just below the yield on 10-ye

government bonds, after crossing above last year for the first time since the 1950s. Th

same happened to the S&P 500 and, though now yielding less than 10-year Treasurie

Our Thoughts

ROBERT KAVCIC


5/15


the spread is as narrow as it has been since the 1950s. At the same time, very health

corporate balance sheets are making dividend hikes possible as we pull out

recessionsee the recent increases by GE, Caterpillar, Barrick Gold and others.

Indeed, one benefit of dividends over bond coupons is their ability to grow an

provide inflation protection over time. Among S&P 500 companies with dividend yield

currently above the 10-year government bond yield, and that have not missed a quarterpayment in the past decade, 40 firms have produced 10-year annual growth in per-sha

dividends above the rate of inflation. Impressively, every major sector of the market

represented in that list, giving investors ample opportunity to create a diverse portfolio o

stocks, with a steady track record of real dividend growth, that yield more tha

government bonds. In Canada, there are 17 companies that fit the same bill, most

concentrated in the financial sector, but with representation also in energy, utilitie

industrials and telecom. After being rendered nearly obsolete in 1999, dividends matte

again, and there are plenty of stocks in North America that offer a higher yield tha

government bonds, while providing inflation protection at the same time.

Our Thoughts


6/15


GOOD NEWS BAD NEWS

CANADAEconomic growth still on track

for >2% gain in Q2

but growth has clearlyslowed

Real GDP at Basic Prices +0.1% (May)

Industrial Product Price Index -0.9% (June)

Raw Materials Price Index -0.3% (June)CANADAConference Boards Consumer Confidence

Index -3.7 pts to 80.0 (June)

Establishment Survey of Employment -25,018 (Ma

UNITED STATESEconomy continues to grow,

but unevenly

Beige Book shows no solid pick-up in economic activity

Hawkish St. Louis Fed PresidentBullard sounds deflationwarning bell

$104 bln Treasury auctionsgenerally met with strongdemandbut 7-year sloppy

Real GDP +2.4% a.r. (Q2 A)

Core Durable Goods Orders +0.6% (June)

Chicago PMI +3.2 pts to 62.3 (July)

New Home Sales +23.6% to 330,000 a.r. (June)

S&P Case-Shiller Home Price Index +4.6% y/y (May)

Homeowner Vacancy Rate -0.1 ppts to 2.5% (Q2)

Initial Claims -11,000 to 457,000 (July 24 wk)

Employment Cost Index +0.5% (Q2)

U.S.

Conference Boards Consumer Confidence

Index -3.9 pts to 50.4 (July)

Redbook -0.7% (July 24 wk)

EUROPEECBs Bank Lending Survey

shows credit standardstightened (Q2)

ECB makes lending rules morestringent, raises cost of usingweaker-rated assets as

collateral to borrow from theECB

EurozoneEconomic Confidence +2.3 pts to

101.3 (July)

EurozoneSmoothed M3 flat from a year ago

(July)first non-negative reading since October 2009GermanyGfK Consumer Confidence +0.3 pts to

3.9 (Aug.)

GermanyUnemployment-20,000 (July)

FranceProducer Prices unch (June)

ItalyJobless Rate -0.1 ppts to 8.5% (June)

EUROPEEurozoneJobless Rate unch at 10.0% (June)

EurozoneConsumer Prices +1.7% y/y (July P)

accelerating but due to energy

GermanyRetail Sales -0.9% (June)U.K.Nationwide House Prices -0.5% (July)

U.K.GfK Consumer Confidence -3 pts to -22 (July

JAPANStrong JPY an issue for

exporters

Retail Sales +0.4% (June)

Household Spending +0.5% y/y (June)

Exports +27.7% y/y, Imports +26.1% y/y (June)

Consumer Prices-0.7% y/y (June)deflation easing

JAPA

NManufacturing PMI -1.1 pts to 52.8 (July)

Industrial Production -1.5% (June P)

Jobless Rate +0.1 ppts to 5.3% (June)

Indications of stronger growth and a move toward price stability are good news for the economy.

Jennifer Lee, Senior Economist

Recap


7/15


Stressing About Credit Creation, Not Test ResultMichael Gregory and Benjamin Reitzes

Last weeks stress test results for 91 institutions, representing two-thirds of Europe

banking system, elicited a sigh of relief among global investors. It wasnt that on

seven banks failed with a mere 3.5 bln (US$4.5 bln) in collective capital deficiency, othat the test itself was foolproof (it wasnt). Instead, investors appeared encouraged b

the rays of light shone on previously opaque bank balance sheets. It also helped th

some global banks reported strong earnings this week, along with the news tha

international regulators had watered down their previously draconia

recommendations on new bank capital requirements. Nevertheless, as was the cas

after last years U.S. bank stress test, investors appear to put a high premium o

balance sheet clarity (Chart 1).

The stress test results and methodology prompted

cynical reaction from analysts. The small number of failure

in the European test stood in contrast to the U.S. test o

May 2009, in which 10 of 19 large banks failed and neede

to raise US$75 bln in capital (Chart 2). The more negativ

U.S. results appeared to afford the European test le

credibility, although there were cynics of the U.S. test to

Note that the larger U.S. capital deficiency also reflecte

the fact that the focus was on tier 1 common capital, whi

European regulators looked at a broader measure of tier

capital (most U.S. banks would have fared well using th

broader measure).

Criticisms of the European tests methodology we

broad based. They included the assertion that th

recession scenario was too mild and therefo

unemployment didnt rise enough and home price

didnt fall enough, a sovereign credit default scenario wa

not included, and only trading books were subject t

haircuts on sovereign securities. However, Europea

officials insist their stress scenarios were more seve

than the U.S. ones. Considering the Euro Area contracte

4.1% in 2009, a double-dip recession scenario witfurther moderate declines in real GDP in 2010 and 201

would be a very negative outcome, especial

considering positive growth seen through the first half o

this year. The U.S. test modelled a 3.3% drop in GDP i

2009, with 0.5% growth in 2010 (so only a deep one-ye

recession), and the scenarios were publicized well befo

the test results were released.

Feature

CHART 1

INVESTORS LIKE BANK BALANCE SHEET CLARITY(bps)

Bank Credit Default Swap Spreads

08 09 100

200

400

600

800North

America

Europe

EuropeanStress Test

U.S. StressTest

Source: Markit Group

EUROPEAN TEST NOT SO STRESSFUL

United States

Capital Shortfall: US$75 bln

Europe

Capital Shortfall: US$4.5 bln

Bank Stress Test Results

10Failed

9Passed

7 Failed84

Passed

CHART 2


8/15


We judge that excluding a sovereign credit default was no

a weakness of the testing exercise. The Greek and pa

European support packages put in place in recent month

will guard against this outcome for at least the next coup

of years. However, beyond the bail-out period (and we

beyond the testing horizon), we believe that Greece migstill have to restructure its debt if it cant secure anoth

support package (the penultimate problem with Greece

the sheer size of its debt and the massive primary budg

surplus that must be maintained just to pay the interest

As long as meaningful fiscal consolidation continues in th

other countries in question (such as Portugal, Spain an

the U.K.), this will go a long way in limiting any futu

sovereign contagion. Meantime, European banks will hav

a few more years to build even more capital to absorb an

potential sovereign debt restructuring.

Since 2007, European banks have raised US$570 bln

capital vs. US$565 bln in losses, while U.S. banks raise

US$812 bln in capital vs. US$1192 bln in losses. Tot

potential losses in the European test were about 5% of ris

weighted assets or US$735 bln, less than the 7.7% of ris

weighted assets or US$600 bln in the U.S. test. Howeve

when added to writedowns already booked, potenti

European losses would rise above actual losses in the U.

Recall that the U.S. test was conducted at the height of th

global recession, while European banks have had an ext

year to heal, which is why the larger potential losses didn

translate into more failures. Moreover, considering the hug

losses already taken, future losses arent likely to be a

severe in any adverse scenario (the worst credits hav

already been erased, although there remains concern th

European banks have lagged in writing down the

exposures to U.S. real estate).

There is no doubt that favourable stress test results

quick remedial actions to shore up deficient capital go long way in boosting bank investor confidence, an

contribute to lower bank funding costs than wou

otherwise be the case. But, if banks arent actively tappin

wholesale funding markets owing to a dysfunctional cred

creation process, then the entire testing exercise become

a moot point as far as economic prospects are concerne

This is the case on both sides of the Atlantic.

Feature

CHART 3

WORST BANK CREDIT CONTRACTION SINCE WWIIUnited States (y/y % chng)

Bank Lending

48 53 58 63 68 73 78 83 88 93 98 03 08-10

0

10

20

30

recession

S&L crisis

CHART 4

Other Consumer Loans

96 99 02 05 08-20

0

20

40

60

80

Business Loans

90 95 00 05 10-40

-20

0

20

40

60

80

100

Mortgages

90 95 00 05 10-20

0

20

40

60

80

100

120

Source: Federal Reserve Senior Loan Officer Survey

LENDING STANDARDS STARTING TO STABILIZE...AT LOFTY LEVELSBanks Reporting Tighter Credit Standards United States (net : percent)

All Mortgages

Prime

Subprime

Non-Traditional

SmallFirms

LargeFirms

RealEstate

CreditCards

Other

CHART 5

Business Loans

00 05 10-80

-60

-40

-20

0

20

40

60

Mortgages

00 05 10-120

-80

-40

0

40

80

Source: Federal Reserve Senior Loan Officer Survey

CREDIT DEMAND DECREASING ACROSS THE BOARD

AllMortgages

Prime

Subprime

Non-Traditional

SmallFirms

LargeFirms

RealEstate

Banks Reporting Increasing Demand for Loans United States (net : percent)

Other Consumer Loans

00 05 10-60

-40

-20

0

20

40

TaxCredits


9/15


In the United States, bank credit continues to contract at

record pace, more than a year after the test results we

released (the recent uptick to less negative growth reflec

an accounting change that required banks to consolidat

loans in off-balance sheet vehicles) (Chart 3). Shrinking ban

intermediation reflects factors on both the supply andemand side. Banks are guarding their capital carefully

light of past losses, potential future losses and forthcomin

regulatory changes. Only in loans to large businesses (th

have access to competing capital market funding) and

consumer credit cards (perhaps reflecting small busine

migration into this personal product) have U.S. banks eve

begun to ratchet down their very tight lending standard

(Chart 4). Meantime, U.S. banks face a shrinking demand fo

loans across the board (Chart 5), as balance she

restructuring and economic uncertainty take their tolls.

In Europe (the ECBs survey was released this week) , ban

lending to households and non-financial corporation

inched up just 1.1% y/y in June, still hovering in its slowe

range since the early 1980s (and after contracting for th

first time on record) (Chart 6). Faced with comparab

capital issues to U.S. institutions, European banks are st

tightening lending standards and, lately, at an uppin

pacelikely reflecting concerns not only about sovereig

credit but also the private sector credit ramifications o

fiscal consolidation (Chart 7). However, unlike their U.

counterparts, European banks are seeing signs o

increasing household loan demand (but not amon

businesses), allowing bank credit to inch up (Chart 8).

Bottom line: The funny thing about stress testing is th

you can always construct a more adverse scenari

Individual banks around the world no doubt conduct som

pretty extreme scenarios for internal use only. But whe

looking at an entire banking system, and its inheren

diversification of individual bank risk, its more appropriato focus on an array of more probable adverse scenario

Besides, any debate about stress test modelling diver

attention from the much more serious problem

dysfunctional credit creation. If European regulators we

hoping that their stress test would stoke bank credit growt

the U.S. experience would suggest otherwise.

Feature

CHART 6

BANK CREDIT BARELY EXPANDINGEuro Area (y/y % chng)

Loans to Non-Financial Private Sector

84 86 88 90 92 94 96 98 00 02 04 06 08 10-5

0

5

10

15

CHART 7

TURNING THE TIGHTENING SCREWSBanks Reporting Tighter Credit Standards Euro Area (net : percent)

03 05 07 09-10

0

10

20

30

40

50

03 05 07 09-20

0

20

40

60

80

SMEs

LargeFirms Mortgages

Other ConsumerLoans

Source: ECB Bank Lending Survey

CHART 8

MIXED CREDIT DEMAND: HOUSEHOLDS UP, FIRMS DOWNBanks Reporting Increasing Demand for Loans Euro Area (net : percent)

03 05 07 09-80

-60

-40

-20

0

20

40

60

03 05 07 09-50

-40

-30

-20

-10

0

10

20

30

SMEs

LargeFirms

Mortgages

OtherConsumer

Loans

Source: ECB Bank Lending Survey


10/15


CANADA I II III IV I II III IV 2009 2010 2011

Real GDP (q/q % chng : a.r.) 6.1 2.7 2.0 2.7 3.0 3.4 3.7 3.5 -2.5 3.3 3.0

Consumer Price Index (y/y % chng)1.6 1.5 2.2 1.9 1.8 2.3 1.7 1.6 0.3 1.8 1.9

Unemployment Rate (%) 8.2 8.0 7.9 7.8 7.6 7.5 7.4 7.3 8.3 8.0 7.5

Housing Starts (000s : a.r.) 198 199 170 162 169 179 182 185 149 182 179

Current Account Balance ($blns : a.r.) -31.3 -44.0 -42.4 -42.4 -41.8 -42.9 -43.3 -44.0 -43.5 -40.0 -43.0

Interest Rates

(average for the quarter : %)

Overnight Rate 0.25 0.33 0.83 1.00 1.33 1.50 1.83 2.33 0.40 0.60 1.75

3-month Treasury Bill 0.19 0.41 0.68 0.83 1.19 1. 37 1.71 2.22 0. 33 0.53 1.62

10-year Bond 3.47 3.47 3.15 3.04 3.15 3.38 3.60 3.83 3.23 3.28 3.49

Canada/U.S. Interest Rate Spreads

(average for the quarter : bps)

90-day 8 26 52 67 103 121 122 119 18 38 116

10-year -25 -2 18 19 15 7 0 -8 -3 3 4

UNITED STATES

Real GDP (q/q % chng : a.r.) 3.7 2.4 2.0 2.4 2.8 3.0 3.1 3.3 -2.6 2.9 2.7

Consumer Price Index (y/y % chng) 2.4 1.8 0.9 0.7 0.6 1.1 1.4 1.4 -0.3 1.4 1.2

Unemployment Rate (%) 9.7 9.7 9.5 9.3 9.1 8.9 8.7 8.5 9.3 9.5 8.8

Housing Starts (mlns : a.r.) 0.62 0.60 0.56 0.60 0.65 0.68 0.71 0.74 0.55 0.59 0.70

Current Account Balance ($blns : a.r.) -436 - 483 -488 -494 -495 -493 -495 -497 - 378 - 475 -495

Interest Rates

(average for the quarter : %)

Fed Funds Target Rate 0.13 0.13 0.13 0.13 0.13 0.13 0.46 1.00 0.13 0.13 0.43

3-month Treasury Bill 0.11 0.15 0.16 0.16 0.16 0.16 0.49 1.03 0. 15 0.14 0.46

10-year Note 3.72 3.49 2.97 2.84 3.00 3.30 3.60 3.90 3.26 3.25 3.45

EXCHANGE RATES

(average for the quarter)

US/C$ 96.0 97.3 96.0 94.8 95.9 98.9 100.3 100.8 88.0 96.0 99.0

C$/US$ 1.041 1. 028 1.042 1.055 1.043 1.011 0.997 0.992 1.141 1.041 1.011

/US$ 91 92 89 94 97 99 102 104 94 91 100US$/Euro 1.38 1.27 1.27 1.26 1.27 1.29 1.28 1.26 1. 39 1.30 1.28

US$/ 1.56 1.49 1.54 1.51 1.52 1.54 1.53 1.51 1. 57 1.53 1.53

Note: Blocked areas represent BMO Capital Markets forecasts

Up and down arrows indicate changes to the forecast

2010 2011 ANNUAL

Economic Forecast


11/15


CANADA Sal Guatieri, Senior EconomiFollowing the best quarter in 23 years, Canadas labour market should moderate in th

summer as the economy downshifts. Look for a modest 5,000 increase in Ju

following Junes blow-out 93,200 gain. Ongoing strength in services should b

tempered by weakness in manufacturing (high C$) and construction (cooler housinmarket). The labour market is only 14,400 workers shy of regaining all of the job

(417,400) shed during the recession, one of the fastest recoveries on record. Aft

touching a 17-month low in June, the unemployment rate is expected to climb for th

first time in nine months, by one tenth to 8.0%. Thats still comfortably below la

summers peak (8.7%) and not much higher than the 45-year average (7.8%). Stead

job growth should coax the Bank of Canada to raise rates again in September.

UNITED STATES Sal Guatieri, Senior EconomiRegional surveys suggest the national ISM measure slipped for the third straigh

month in July after hitting a six-year high in April, likely a result of slowing inventoinvestment and exports. The expected level (55.0) would still indicate healthy growt

in the sector. However, further slowing in new orders or jobs would be disconcertin

since manufacturing has been one of the few consistent bright spots in the recovery.

Lower auto sales and a modest gain in core retail sales suggest person

consumption rose only slightly in June. Hampered by high joblessness and debt

consumer spending remains subdued. Census layoffs likely held personal income to

modest gain. The core PCE deflator is expected to edge higher, though that shou

still shave a tenth from the yearly rate to 1.2%, putting it a hair above the 1963 low

The Fed expects core inflation to slip to 0.8%-to-1.0% later this year, further below ipresumed price-stability zone of 1.7%-to-2.0%.

After reaching four-year highs in the spring, the non-manufacturing composite inde

slipped in June and likely eased further in July, owing largely to renewed weakness

housing. The expected level (53.5) would indicate modest GDP growth, consiste

with our 2% estimate for Q3. According to survey respondents, new orders hav

slowed in recent months and employment remains weak.

Private sector employment likely rose a modest 90,000 in July, little changed from th

prior month (83,000) or the H1 average (99,000). Total nonfarm payrolls likely shran60,000 due to the loss of roughly 150,000 census workers. While manufacturing an

temporary services should remain solid, construction and retail trade will continue t

drag. The unemployment rate is expected to inch up to 9.6%, just one-half percentag

point below its cycle peak. Until companies restore average work hours to pre-recessio

levels, hiring could remain weak. Meantime, the economy is caught in a classic catch-2

situation: firms wont commit to hiring until the recovery strengthens, but (given th

deleveraging headwinds) the recovery likely wont strengthen until employment pic

up and supports consumer spending.

Key for Next Week

EmploymentFriday, 7:00 am

July (e) +5,000 (+0.03%)Consensus +15,000 (+0.1%)

June +93,200 (+0.6%)Unemployment Rate

July (e) 8.0%Consensus 7.9%

June 7.9%

Average Hourly Wages July (e) +1.7 % y/yJune +1.7% y/y

ISM Manufacturing

Monday, 10:00 amPrices-Paid

July (e) 55.0 55.0Consensus 54.2 55.0

June 56.2 57.0

Personal Spending andIncome

Tuesday, 8:30 am

Personal PersonalIncome Spending

June (e) +0.2% +0.1%Consensus +0.2% +0.1%

May +0.4% +0.2%

ISM Non-manufacturingWednesday, 10:00 am

July (e) 53.5Consensus 53.0

June 53.8

Nonfarm PayrollsFriday, 8:30 am

July (e) -60,000Consensus -60,000

June -125,000

Unemployment Rate July (e) 9.6%

Consensus 9.6%June 9.5%

Average Hourly Earnings July (e) +0.1%

Consensus +0.1%June -0.1%


12/15


JUL 30 * JUL 23 WEEK AGO 4 WEEKS AGO DEC. 31/09

Call Money 0.75 0.75 0 25 50

Prime Rate 2.75 2.50 25 25 50

Fed Funds (effective) 0.25 0.25 0 0 0Prime Rate 3.25 3.25 0 0 0

Canada 0.65 0.62 3 15 46

United States 0.14 0.15 -1 -2 9

Japan 0.20 0.12 9 9 8

Eurozone 0.90 0.89 1 11 20

United Kingdom 0.75 0.74 1 1 14

Australia 4.81 4.85 -4 0 79

Canada 1.48 1.59 -11 4 0

United States 0.57 0.59 -2 -6 -57

Canada 3.13 3.23 -10 3 -48

United States 2.93 3.00 -7 -5 -91

Japan 1.06 1.08 -1 -4 -23

Germany 2.67 2.71 -3 9 -71

United Kingdom 3.32 3.44 -11 -3 -69

Australia 5.20 5.20 0 10 -44

Risk IndicatorsVIX 24.7 23.5 1.2 pts -5.4 pts 3.0 pts

TED Spread 31 35 -3 -6 11

Inv. Grade CDS Spread ** 104 106 -2 -19 18

High Yield CDS Spread ** 554 569 -15 -97 37

US/C$ 97.01 96.54 0.5 3.1 2.2

C$/US$ 1.031 1.036

/US$ 86.50 87.46 -1.1 -1.4 -7.0

US$/Euro 1.3026 1.2909 0.9 3.7 -9.0

US$/ 1.564 1.543 1.4 2.9 -3.3

US/A$ 90.46 89.57 1.0 7.5 0.8

CommoditiesCRB Futures Index 269.15 266.62 0.9 5.8 -5.0

Oil (generic contract) 77.30 78.98 -2.1 7.2 -2.6

Natural Gas (generic contract) 4.82 4.56 5.5 2.8 -13.6

Gold (spot price) 1172.35 1189.20 -1.4 -3.2 6.9

S&P/TSX Composite 11684 11714 -0.3 4.4 -0.5S&P 500 1098 1103 -0.4 7.4 -1.6

Nasdaq 2240 2269 -1.3 7.1 -1.3

Dow Jones Industrial 10434 10425 0.1 7.7 0.1

Nikkei 9537 9431 1.1 3.6 -9.6

Frankfurt DAX 6138 6166 -0.5 5.2 3.0

London FT100 5301 5313 -0.2 9.6 -2.1

France CAC40 3656 3607 1.4 9.2 -7.1

S&P ASX 200 4494 4458 0.8 6.0 -7.7

* as of 10:30 am ** One day delay

Equities

CHANGE FROM: (BASIS POINTS)

(% CHANGE)

Canadian Money Market

U.S. Money Market

3-Month Rates

Bond Markets

10-year Bond

2-year Bond

Currencies

Financial Markets Update


13/15

* date approximate

MONDAY AUGUST 2 TUESDAY AUGUST 3 WEDNESDAY AUGUST 4 THURSDAY AUGUS

JAPAN

EUROZON

E E U R O Z O N EManufacturing PMI

July F (e) 56.5June 55.6

E U R O Z O N E

Producer Price Index June (e) +0.4% +3.1% y/yMay +0.3% +3.1% y/y

E U R O Z O N E

Services PMI July F (e) 56.0June 55.5

Retail Sales June (e) -0.1% +0.1% y/yMay +0.1% +0.2% y/y

G E R M A N Y

Factory Orders June (e) +1.4% May -0.5% +

ECB Monetary Policy M

Services PMI July (e) 54.5June 54.4

Bank of England Monetary Policy Meeting (August 4-5)

U.K.

Manufacturing PMI July (e) 57.0June 57.5

OTHER C H I N A

Manufacturing PMI * July (e) 51.4June 52.1

C H I N A

Non-manufacturing PMIJulyJune 57.4

A U S T R A L I A

Retail Sales June (e) +0.4%May +0.2%

Building Approvals June (e) +2.0% +16.0% y/yMay -6.6% +26.6% y/y

Reserve Bank of Australia Monetary

Policy Meeting

A U S T R A L I A

Trade Surplus June (e) A$1.8 blnMay A$1.6 bln

House Price IndexQ2 (e) +2.0% +17.2% y/yQ1 +4.8% +20.0% y/y

AUGUST 2 AUGUST 6


14/15


15/15

PAGE 15 FOCUS JULY 30 2010

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