the weekly bottom line - td bank · time’s a tickin’ on fiscal policy resolution tick tock tick...
TRANSCRIPT
THE WEEKLY BOTTOM LINE
TD Economics
HIGHLIGHTS OF THE WEEK
United States• Theriskofrunningoffthefiscalcliffwillbecomearealityinacoupleofweeksifamiddlegroundisnot
foundbyDecember20th.• Financialmarketsmaybeactingtoocomplacent.AsofearlyFriday,theS&P500indexwasup4.5%in
threeweeks,eventhoughthereisalreadyevidencethatexcesscautiousbehaviorfrompolicyuncertaintyistakingatollandcreatingdistortionsintherealeconomy.
• OurQ4realGDPtrackingislessthan1%,showinganeconomyalreadyonthinice.• TheFedhasa2-daymeetingonDecember11thand12th.Monetarypolicycannotsingle-handedlypush
againstthefiscalheadwind,butwedoubttheFedwillstandbyidly.OperationTwistterminatesatyear-endandinitsplacemaycomeanextensionofQE3withopen-endedTreasurypurchases.
December 7, 2012
Current* WeekAgo
52-WeekHigh
52-WeekLow
Stock Market IndexesS&P500 1,412 1,416 1,466 1,205S&P/TSXComp. 12,159 12,239 12,740 11,281DAX 7,489 7,406 7,535 5,671FTSE100 5,902 5,867 5,966 5,260Nikkei 9,527 9,446 10,255 8,296Fixed Income YieldsU.S.10-yrTreasury 1.61 1.62 2.38 1.39Canada10-yrBond 1.71 1.70 2.29 1.58Germany10-yrBund 1.30 1.39 2.15 1.17UK10-yrGilt 1.74 1.78 2.45 1.44Japan10-yrBond 0.71 0.72 1.05 0.70Foreign Exchange Cross RatesC$(USDperCAD) 1.01 1.01 1.03 0.96Euro(USDperEUR) 1.30 1.30 1.35 1.21Pound(USDperGBP) 1.60 1.60 1.63 1.53Yen(JPYperUSD) 82.4 82.5 83.7 76.2Commodity Spot Prices**CrudeOil($US/bbl) 86.1 88.9 109.5 77.7NaturalGas($US/MMBtu) 3.45 3.48 3.77 1.84Copper($US/met.tonne) 7978.8 7978.8 8737.5 7186.5Gold($US/troyoz.) 1701.0 1714.8 1790.4 1539.6
THIS WEEK IN THE MARKETS
*asof11:30amonFriday,**Oil-WTI,Cushing,Nat.Gas-HenryHub,LA(Thursdaycloseprice),Copper-LMEGradeA,Gold-LondonGoldBullion;Source:Bloomberg
FederalReserve(FedFundsRate)BankofCanada(OvernightRate)EuropeanCentralBank(RefiRate)BankofEngland(RepoRate)BankofJapan(OvernightRate)Source:CentralBanks,HaverAnalytics
0.10%0.50%
0-0.25%1.00%0.75%
GLOBAL OFFICIAL POLICY RATE TARGETSCurrentTarget
STOCK MARKET INDEXES
1,340
1,363
1,387
1,410
1,434
24-Oct 31-Oct 7-Nov 14-Nov 21-Nov 28-Nov 5-Dec11400
11600
11800
12000
12200
12400
12600S&P500 S&P/TSXComposite
Source:Bloomberg,HaverAnalytics
Current Rate 201312/7/12 Q1 Q2 Q3 Q4F Q1F Q2F Q3F Q4F
FedFundsTargetRate(%) 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.252-yrGovt.BondYield(%) 0.24 0.33 0.30 0.23 0.25 0.30 0.30 0.30 0.4010-yrGovt.BondYield(%) 1.61 2.21 1.64 1.63 1.70 1.90 2.00 2.25 2.5530-yrGovt.BondYield(%) 2.81 3.34 2.75 2.82 2.90 3.00 3.10 3.35 3.70RealGDP(Q/Q%Chg,Annualized) 2.7(Q3) 2.0 1.3 2.0 1.7 1.9 2.2 2.6 3.1CPI(Y/Y%Chg.) 2.2(Oct-12) 2.8 1.9 1.7 2.2 2.0 2.4 2.4 2.2UnemploymentRate(%) 7.7(Nov-12) 8.3 8.2 8.1 8.1 8.1 8.0 7.9 7.8ForecastbyTDEconomics.Source:Bloomberg,TDEconomics
TD ECONOMICS KEY FORECASTS2012
2
TD Economics | www.td.com/economics
December 7, 2012
TIME’S A TICKIN’ ON FISCAL POLICY RESOLUTIONTick tock tick tock. With the risk of running off the
fiscal cliff soon to become a reality if a deal isn’t brokered in Congress, Republicans and Democrats are stepping up efforts to table plans. Both sides acknowledge it will be necessary to achieve a bipartisan plan with a combination of spending cuts, revenue increases and entitlement reforms. But, they are miles apart on the characteristics of the right policy mix. Last week, a White House proposal laid out a two-stage plan, of which the most contentious part for Republicans was a $1.6 trillion increase in tax revenues over the next decade. House Speaker John Boehner and company fired back this week with a letter that emphasized structural reforms in entitlement programs and about half the increase in revenue, achieved only in the absence of higher tax rates. If a middle ground cannot be found by December 20th (at the latest), hope of getting a bill passed through both chambers of Congress will turn into despair. And, let’s not forget that the debt ceiling limit will once again be hit in late February or early March, adding yet another dimension that needs resolution within Congress.
The S&P500 index is up 4.5% in the past three weeks, making us wonder whether investors have complete confi-dence in politicians or are being too complacent of the risks. There is already evidence that excessive cautious behavior due to policy uncertainty is taking a toll and creating dis-tortions in the real economy. Take business investment as an example. It’s been well documented (including by ourselves) that businesses are under investing relative to the health of their balance sheets. This is true regardless of the metric, be it the financing gap, profits as a share of GDP, or liquidity ratios. Yet, investment in equipment and software contracted in Q3 and has only slightly improved in Q4. By all counts, it should be expanding in a 6-8% an-nualized quarterly range and be a key driver of economic growth. Now consider that Q3 federal defense spending grew at the fastest pace in four years and was to credit for almost one-quarter of real economic growth. With defense spending on the sequester chopping block, no doubt the Pentagon took the precaution to accelerate spending ahead of potential budget cuts. Thus, this economic boost is no guide of underlying economic momentum and presages a decline.
This is just the tip of the iceberg of potential market distortions if a deal in Congress is not struck soon. Capital gains and dividend taxes will reset in 2013, and the latter, in particular, could induce tax avoidance strategies. Be-
fore the year is out, equities could come under intensified downward pressure as investors move to realize capital gains. For instance, the Tax Reform Act of 1986 raised the maximum tax rate on long-term capital gains from 20% to 28%. When compared to prior years, this resulted in ab-normally high trading volumes in the December prior to the policy taking effect, followed by abnormally low volumes in January. With a 5 percentage point tax swing on deck for capital gains, investor jitters can kick up without a moment’s notice. Remember the 25% drop in the S&P500 Index in 2008 when Congress voted down TARP legislation, only to scramble for a second vote two weeks later? Volatility in markets and confidence is the last thing the economy needs. Our Q4 real GDP estimate is tracking less than 1%. The economy is already skating on thin ice in the absence of any additional shocks.
Enter the Federal Reserve. A timely 2-day meeting is set for December 11th and 12th. Fed members have repeatedly articulated that monetary policy can not single-handedly push against the fiscal headwind. Yet, we doubt they will stand by idly. Operation Twist is terminating at year-end, and with more to lose in doing nothing than something to shore up market confidence, we could see an announcement towards further Treasury purchases. It would likely not be a full scale QE4 program. Rather, it may be an extension of QE3 with open-ended purchases for a short period of time (i.e. a few months) to help us through the fiscal policy hump and the persistence in political discord. Tick tock tick tock.
Beata Caranci, VP & Deputy Chief Economist416-982-8067
U.S. REAL GDP GROWTH
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
Q1F2013
Q2F Q3F Q4F Q1F2014
Q2F Q3F Q4F
TDForecast FiscalCliff
Source:BEA,ForecastbyTDEconomics
Q/Q%Chg.,
3
TD Economics | www.td.com/economics
December 7, 2012
UPCOMING KEY ECONOMIC RELEASES
*ForecastbyRatesandFXStrategyGroup.Forfurtherinformation,contactTDRates&[email protected].
The December FOMC will affirm that financial repres-sion is alive and kicking. The two principal issues are whether the Fed will adopt numerical economic targets (unlikely at this meeting) and the size and contours of the next leg of QE3. The Fed will outline a 3-month buying agenda equivalent in size to the current program, one that is set to expire. That means $40B in MBS and approximately $45B in Treasuries. Distribution of Treasury purchases will differ relative to Operation Twist. Buying in the 4-6 year sector to be reintroduced at the expense of purchases in 20-30 year bonds. Buying distribution is a detail, but size and program length are not. Our operating assump-tions are that there is little to gain and everything to lose by underwhelming a market expecting more QE and, in a time of uncertainty the Fed will lean toward the status quo. That suggests a total QE program of approximately $85B.
Since QE is open-ended the Fed does not need to outline QE intentions beyond the next 3 months. We know QE will now be used in a fashion similar to the policy rate, adjusting it accordingly relative to the tone of emerging risks and data. If it errs, it will be on the side of more, not less.
The strong rebound in motor vehicle sales should more than compensate for falling gasoline sales in November. During the month, we expect total retail sales to rise at a modest 0.3% m/m pace, reversing some of the weakness the month before. Excluding autos, however, sales should decline by 0.3% m/m mostly on account of reduced ex-penditures at the pump. Core spending activity (which excludes spending on autos, gas and building material, and is a useful gauge on the tone of real spending) should post a more respectable 0.4% m/m gain adding to a similar gain the month before. In the months ahead, we expect the pace of core consumption spending activity to be relatively tepid, reflecting in part the impact of the Hurricane and the headwinds from weak employment growth.
U.S. FOMC Interest Rate Decision* Release Date: December 12, 2012Current Rate: 0.0 0% to 0.25%TD Forecast: 0.0 0% to 0.25%Consensus: 0.0 0% to 0.25%
U.S. Retail Sales - November*Release Date: December 13, 2012October Result: Total -0.3% M/M; Ex-autos 0.0% M/MTD Forecast: Total 0.1% M/M; Ex-autos 0.3% M/M Consensus: Total 0.4% M/M; Ex-autos 0.0% M/M
FED FUNDS TARGET RATE
0
1
2
3
4
5
6
02 03 04 05 06 07 08 09 10 11 12
%
Source:U.S.FederalReserveBoard/HaverAnalytics
U.S. RETAIL AND FOOD SERVICES SALES
-1.0
-0.5
0.0
0.5
1.0
1.5
Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12
Total Excl.AutomotiveDealers
Source:U.S.DepartmentofCommerce/HaverAnalytics
M/M%Chg.
4
TD Economics | www.td.com/economics
December 7, 2012
*ForecastbyRatesandFXStrategyGroup.Forfurtherinformation,contactTDRates&[email protected].
Falling gasoline prices in November should more than compensate for rising food prices, with the headline CPI index expected to post its first decline since May with a 0.1% m/m drop. With the decline, the annual pace of consumer price inflation should moderate to 2.0% y/y, down from 2.2% y/y the month before. Core inflation, on the other hand, should remain quite firm, advancing at a further 0.2% m/m pace, though the annual rate pace of core consumer price inflation should remain unchanged at 2.0% y/y. Higher vehicle prices should be one key driver for the up-tick, adding to the gains in apparel and lodging costs. In the coming months, we expect inflation momen-tum to remain relatively subdued as the weak labor market performance and subdued economic recovery continue to temper inflation momentum.
US industrial output is expected to decline for the second straight month in November as the impact of Hurricane Sandy continues to show up in the data. In particular, with a large swathe of the Northeast without power for the better part of two weeks and a large number of factories idle for a few days, we expect the pace of industrial production to decline by a further 1.1% m/m. Utility production should fall sharply, declining by 2.5% m/m, adding to the 1.0% m/m drop in manufacturing sector output. However, with the impact of the Hurricane expected to reverse meaning-
U.S. CPI - November* Release Date: December 14, 2012October Result: All-items 0.1% M/M; Core 0.2% M/MTD Forecast: All-items -0.1% M/M; Core 0.2% M/MConsensus: All-items -0.2% M/M; Core 0.2% M/M
fully in December, we expect overall industrial production activity to bounce back next month. Capacity utilisation should also decline on the month, falling to 77.0%.
U.S. Industrial Production - November* Release Date: December 14, 2012October Result: Industrial Production -0.4% m/m;Capacity Utilization 77.8%TD Forecast: Industrial Production -1.1% m/m;Capacity Utilization 77.0%Consensus: Industrial Production 0.2% m/m;Capacity Utilization 78.0%
U.S. CONSUMER PRICE INDEX (CPI)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12
AllItems AllItemsEx.FoodandEnergy
Y/Y%Chg.
Source:BureauofLaborStatistics/HaverAnalytics
U.S. INDUSTRIAL PRODUCTION
-0.8
-0.5
-0.2
0.1
0.4
0.7
1.0
1.3
Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-1276
77
78
79
80
IndustrialProduction(lhs)CapacityUtilization(rhs)
M/M%Chg. %
Source:BureauofEconomicAnalysis
5
TD Economics | www.td.com/economics
December 7, 2012
RECENT KEY ECONOMIC INDICATORS: DECEMBER 3-7, 2012Release
Date Economic Indicator/Event Data for Period Units Current Prior
United StatesDec3 ISMManufacturing Nov Index 49.5 51.7Dec3 ConstructionSpending Oct M/M%Chg. 1.4 0.5 RDec3 TotalVehicleSales Nov Mlns 15.46 14.22Dec5 ADPEmploymentChange Nov Thousands 118.0 157.0 RDec5 FactoryOrders Oct M/M%Chg. 0.8 4.5 RDec5 ISMNon-Manf.Composite Nov Index 54.7 54.2Dec6 ChallengerJobCuts Nov Y/Y%Chg. 34.4 11.6Dec6 InitialJoblessClaims 1-Dec Thousands 370.0 395.0 RDec6 ContinuingClaims 24-Nov Thousands 3205.0 3305.0 RDec6 BloombergConsumerComfort 2-Dec Index -33.8 -33.0Dec6 HouseholdChangeinNetWorth 3Q USD,Blns 1722.0 -157.0 RDec7 ChangeinNonfarmPayrolls Nov Thousands 146.0 138.0 RDec7 ChangeinPrivatePayrolls Nov Thousands 147.0 189.0 RDec7 ChangeinManuf.Payrolls Nov Thousands -7.0 10.0 RDec7 UnemploymentRate Nov % 7.7 7.9Dec7 Avg.HourlyEarning-AllEmployees Nov M/M%Chg. 0.2 0.0Dec7 ChangeinHouseholdEmployment Nov Thousands -122.0 410.0Dec7 Underemploymentrate(U6) Nov % 14.4 14.6Dec7 U.ofMichiganConfidence DecP Index 74.5 82.7
CanadaDec4 BankofCanadaRate 4-Dec % 1.00 1.00Dec6 BuildingPermits Oct M/M%Chg. 15.0 -12.7 RDec6 IveyPurchasingManagersIndexSA Nov Index 47.5 58.3Dec7 LaborProductivity 3Q Q/Q%Chg. -0.5 -0.6 RDec7 UnemploymentRate Nov % 7.2 7.4Dec7 NetChangeinEmployment Nov Thousands 59.3 1.8Dec7 FullTimeEmploymentChange Nov Thousands 55.2 7.3Dec7 PartTimeEmploymentChange Nov Thousands 4.1 -5.5Dec7 ParticipationRate Nov % 66.8 66.8
InternationalDec2 AU TDSecuritiesInflation Nov M/M%Chg. -0.1 0.1Dec3 JN VehicleSales Nov Y/Y%Chg. -3.3 -9.0Dec3 UK PMIManufacturing Nov Index 49.1 47.3 RDec4 EC Euro-ZonePPI Oct M/M%Chg. 0.1 0.2Dec5 UK PMIServices Nov Index 50.2 50.6Dec5 EC Euro-ZoneRetailSales Oct M/M%Chg. -1.2 -0.6 RDec5 AU EmploymentChange Nov Thousands 13.9 10.2 RDec5 AU UnemploymentRate Nov % 5.2 5.4Dec6 FR ILOUnemploymentRate 3Q % 10.3 10.2Dec6 UK TotalTradeBalance Oct GBP,Mlns -3644.0 -2493.0 RDec6 EC Euro-ZoneHouseholdCons. 3QP Q/Q%Chg. 0.0 -0.2Dec6 EC Euro-ZoneGDPSA 3QP Q/Q%Chg. -0.1 -0.1Dec6 UK BOEAnnouncesRates 6-Dec % 0.50 0.50Dec6 EC ECBAnnouncesInterestRates 6-Dec % 0.75 0.75Dec7 FR TradeBalance Oct Euros,Mlns -4685.0 -4997.0 RDec7 UK IndustrialProduction Oct M/M%Chg. -0.8 -2.1 RDec7 UK ManufacturingProduction Oct M/M%Chg. -1.3 0.0 RDec7 GE IndustrialProductionSA Oct M/M%Chg. -2.6 -1.3 R
*EasternStandardTime;Source:Bloomberg,TDEconomics
6
TD Economics | www.td.com/economics
December 7, 2012
UPCOMING ECONOMIC RELEASES AND EVENTS: DECEMBER 10-14, 2012Release
Date Time* Economic Indicator/Event Data for Period Units Consensus
Forecast Last Period
United StatesDec11 7:30 NFIBSmallBusinessOptimism Nov Index 92.5 93.1Dec11 8:30 TradeBalance Oct USD,Blns -42.6 -41.5Dec11 10:00 WholesaleInventories Oct M/M%Chg. 0.4 1.1Dec11 10:00 JOLTsJobOpenings Oct Thousands -- 3561.0Dec12 8:30 ImportPriceIndex Nov M/M%Chg. -0.5 0.5Dec12 12:30 FOMCRateDecision 12-Dec % 0.25 0.25Dec12 14:00 MonthlyBudgetStatement Nov USD,Blns -136.0 -137.3Dec12 14:00 FOMC to Release Projections of Economy and FFRDec12 14:15 Fed's Bernanke Holds Press ConferenceDec13 8:30 AdvanceRetailSales Nov M/M%Chg. 0.4 -0.3Dec13 8:30 RetailSalesLessAutos Nov M/M%Chg. 0.0 0.0Dec13 8:30 ProducerPriceIndex Nov M/M%Chg. -0.5 -0.2Dec13 8:30 PPIExFood&Energy Nov M/M%Chg. 0.2 -0.2Dec13 8:30 InitialJoblessClaims 8-Dec Thousands 370.0 370.0Dec13 8:30 ContinuingClaims 1-Dec Thousands -- 3205.0Dec13 9:45 BloombergConsumerComfort 9-Dec Index -- -33.8Dec13 10:00 BusinessInventories Oct M/M%Chg. 0.3 0.7Dec14 8:30 ConsumerPriceIndex Nov M/M%Chg. -0.2 0.1Dec14 8:30 CPIExFood&Energy Nov M/M%Chg. 0.2 0.2Dec14 9:15 IndustrialProduction Nov % 0.2 -0.4Dec14 9:15 CapacityUtilization Nov % 78.0 77.8
CanadaDec10 8:15 HousingStarts Nov Thousands 202.0 204.1Dec11 8:30 InternationalMerchandiseTrade Oct CAD,Blns -1.20 -0.83Dec13 8:30 NewHousingPriceIndex Oct M/M%Chg. 0.1 0.2Dec13 8:30 CapacityUtilizationRate 3Q % 80.5 81.0Dec14 8:30 ManufacturingSales Oct M/M%Chg. 0.0 0.4
InternationalDec9 18:50 JN AdjustedCurrentAccountTotal Oct Yen,Blns 247.0 -142.0Dec10 2:00 GE TradeBalance Oct Euros,Blns 15.5 16.9Dec10 2:45 FR IndustrialProduction Oct Y/Y%Chg. -2.0 -2.5Dec10 2:45 FR ManufacturingProduction Oct Y/Y%Chg. -2.3 -2.5Dec11 5:00 EC ZEWSurvey(Econ.Sentiment) Dec Index -- -2.6Dec12 2:45 FR ConsumerPriceIndex Nov Y/Y%Chg. 1.6 1.9Dec12 4:30 UK ILOUnemploymentRate Oct % 7.8 7.8Dec12 5:00 EC Euro-ZoneInd.Prod.wda Oct Y/Y%Chg. -2.4 -2.3Dec14 3:00 FR PMIManufacturing DecP Index 44.9 44.5Dec14 3:00 FR PMIServices DecP Index 45.7 45.8Dec14 3:30 GE PMIManufacturing DecA Index 47.3 46.8Dec14 3:30 GE PMIServices DecA Index 50.0 49.7Dec14 4:00 EC PMIManufacturing DecA Index 46.6 46.2Dec14 4:00 EC PMIComposite DecA Index 46.9 46.5Dec14 4:00 EC PMIServices DecA Index 47.0 46.7Dec14 5:00 EC EurozoneEmployment 3Q Y/Y%Chg. -- -0.6Dec14 5:00 EC Euro-ZoneCPI Nov Y/Y%Chg. 2.2 2.5Dec14 5:00 EC Euro-ZoneCPICore Nov Y/Y%Chg. 1.5 1.5
*EasternStandardTime;Source:Bloomberg,TDEconomics
7
TD Economics | www.td.com/economics
December 7, 2012
Thisreport isprovidedbyTDEconomics.Itisforinformationpurposesonlyandmaynotbeappropriateforotherpurposes.Thereportdoesnotprovidematerial informationabout thebusinessandaffairsofTDBankGroupand themembersofTDEconomicsarenotspokespersonsforTDBankGroupwithrespecttoitsbusinessandaffairs.Theinformationcontainedinthisreporthasbeendrawnfromsourcesbelievedtobereliable,but isnotguaranteedtobeaccurateorcomplete.Thereportcontainseconomicanalysisandviews,includingaboutfutureeconomicandfinancialmarketsperformance.Thesearebasedoncertainassumptionsandotherfactors,andaresubjecttoinherentrisksanduncertainties.Theactualoutcomemaybemateriallydifferent.TheToronto-DominionBankanditsaffiliatesandrelatedentitiesthatcompriseTDBankGrouparenotliableforanyerrorsoromissionsintheinformation,analysisorviewscontainedinthisreport,orforanylossordamagesuffered.
CONTACTS AT TD ECONOMICS
Craig AlexanderSenior Vice President and
Chief Economist mailto:[email protected]
TO REACH US Mailing Address 55KingStreetWest 21stFloor,TDTower Toronto,Ontario M5K1A2 Fax:(416)944-5536 [email protected]
CANADIAN ECONOMIC ANALYSISDerek Burleton, Vice President and Deputy Chief Economist [email protected]
Sonya Gulati Senior Economist, Housing and Federal Finances [email protected]
Diana Petramala Economist, Macro [email protected]
Francis Fong Economist, Macro and Special Studies [email protected]
Dina Ignjatovic Economist, Autos, Commodities and Other Industries [email protected]
Leslie Preston Economist, Financial Markets and Industry [email protected]
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]
Michael Dolega Economist [email protected]