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North American Outlook:
Turning The Corner in 2011
February 2011
David Tulk, CFA
Chief Canada Macro Strategist
North American Outlook in a
Nutshell
•
Global economy transitioning from a sugar high to a
sustainable expansion.
•
Fiscal stimulus in the United States will ensure abovetrend growth in 2011 while the underlying economy
continues to heal.
•
Canadian growth will slow, but become more balanced in
2011.
US Economy Has Reached an
Inflection Point
ISM Composite and New Orders Index
(Diffusion Index)
65
80
60
70
55
60
50
50
45
40
40
35
Composite Index (LHS)
30
New Orders Index (RHS)
30
Jan-05 Nov-05 Sep-06
Source: ISM/Haver Analytics
20
Jul-07 May-08 Mar-09 Jan-10 Nov-10
Fiscal Stimulus to Underpin 2011
Impact of Fiscal Stimulus on US Real GDP Growth
(Percent)
1.0
0.6
0.2
-0.2
-0.6
Q4
Q1F
2010
Source: BEA / TD Economics
Q2F
Q3F
2011
Q4F
Q1F
Q2F
2012
Q3F
Q4F
Key Headwind to the Economic
Recovery is the Labour Market
US Job Losses by Recession (Millions of Jobs)
2
0
-2
-4
1960
1981
1990
2001
Current
-6
-8
Census Hiring
-10
0
5
10
15
20
25
30
Months Following Start of Recession
Source: BLS/Haver Analytics
35
40
45
Canada is Not an Island
ISM and Canadian GDP and Overnight Rate
8
Q/Q GDP Growth (green) / 2-qtr change in BoC rate (yellow)
Canadian GDP
Change in BoC Rate*
6
4
2
0
-2
-4
30
35
40
45
50
U.S. ISM (Index)
*Change in following 2 qtrs; Source: Statscan, BEA, Bloomberg
Source: BEA, Federal Reserve, Statistics Canada/Haver Analytics
55
60
65
International Backdrop has Taken a
Bite Out of Canadian Growth
Composition of Canadian Real GDP Growth (Percent)
12
8
4
0
-4
-8
-12
Sep-07
Domestic Demand Including Inventories
Net Exports
Real GDP Growth
Jun-08
Source: Statistics Canada/Haver Analytics
Mar-09
Dec-09
Sep-10
Stronger US Growth Will
Rekindle Demand for Exports
US Activity Index and Canadian Exports (Index)
115
Forecast
110
105
100
95
90
85
US Activity
Canadian Exports
80
2001
2003
2005
Source: Bank of Canada / Haver Analytics
2007
2009
2011
Housing Market Coasting
Towards a Soft Landing…
Canadian Resale Activity and Sales-to-New Listings
(3 Month Average Percent Change, Ratio)
10
0.8
8
Sales (3M MA, LHS)
6
Sales-to-Listings (RHS)
0.7
4
2
0.6
0
-2
0.5
-4
-6
0.4
-8
-10
Feb-08
0.3
Aug-08
Source: CREA
Feb-09
Aug-09
Feb-10
Aug-10
… Due in Large Part to the Fall in
Global Bond Yields
Spread of 5 Year Conventional Mortgage Rate over Target
Overnight Rate (Percent)
6.3
5.8
5.3
4.8
4.3
3.8
Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10
Source: Bank of Canada / Haver Analytics
Consumer Spending Straining
Under the Weight of Leverage
Household Debt to Income Ratio
(Percent of Personal Disposable Income)
180
Canada
United States
160
140
120
100
80
1990
1993
1996
1999
2002
2005
2008
The Labour Market is Reaching
its Cruising Altitude
Canadian Employment
(Thousands of Jobs)
17300
17100
16900
16700
16500
Jan-07
Sep-07
May-08
Source: Statistics Canada / Haver Analytics
Jan-09
Sep-09
May-10
Jan-11
On Balance, the Canadian Economy
Still Has Significant Spare Capacity
3
Measures of Canadian Capacity
(Standardized Distribution)
Output Gap
2
Difficulty Meeting Demand
1
0
-1
-2
-3
Sep-99 Mar-01 Sep-02 Mar-04 Sep-05 Mar-07 Sep-08 Mar-10
Source: Bank of Canada /Haver Analytics
Bank of Canada to Balance Domestic
Momentum with Global Risks
Bank of Canada Overnight Interest Rate (Percent)
5
4
3
2
1
0
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
Forecast as at December 2010; Source: Bank of Canada / TD Securities
Canadian Dollar: Stuck in a Range
With You
Canadian Dollar
1.05
1.00
0.95
0.90
0.85
0.80
0.75
Aug-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10
Source: Bloomberg
Off Consensus Call for CAD
USDCAD Forecast*
Bloomberg
Consensus
TD Securities
2010Q1
2010Q2
2010Q3
2010Q4
2011Q1
2011Q2
2011Q3
2011Q4
1.02
1.06
1.03
1.00
0.99
0.98
0.98
1.00
1.02
1.06
1.03
1.00
1.02
1.09
1.06
1.03
*Forecast as of February 17, 2011; Source: Bloomberg, TD Securities
CAD Less Impacted by Europe, but
Risks Remain…
USDCAD and Spain 5-Year CDS Spread
400
350
Spain CDS Spread (LHS, Basis Points)
1.33
USDCAD (RHS)
300
250
200
1.28
1.23
1.18
150
1.13
100
1.08
50
1.03
0
Jan-08 May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10
Source: Bloomberg, TD Securities
0.98
… and CAD is Vulnerable to Volatility
and Risky Assets
1 Month Rolling CAD Correlations
1.0
0.5
0.0
S&P500
WTI
2Y Rate Spread
Relative Eco Surprise
-0.5
Oct-10
Nov-10
Source: Bloomberg, TD Securities
Dec-10
Jan-11
Feb-11
Longer-Term Fundamentals More
Supportive from International Investors…
Net Financial Flows into Canada
(6 Month Moving Average, Billions CAD)
12
8
Bonds
Equities
Money Market
4
0
-4
-8
1988
1991
1994
1997
Source: Statistics Canada / Haver Analytics
2000
2003
2006
2009
… And Foreign Central Banks
"Other Currecy" Share of Total Allocated Reserves*
(Percent)
5
4
3
2
1
1999
2001
2003
* Other than USD, GBP, EUR, JPY, CHF.
Source: IMF COFER database
2005
2007
2009
Financial Market Implications
• Considerable uncertainty means that volatility is the
watchword of the day.
•
We have seen the cyclical trough in interest rates.
Yields will continue to rise in tandem with the economic
recovery.
• USD will retain its safe-haven status in the event of
financial market turmoil.
Concluding Thoughts…
• Recoveries from financial crises are typically subdued
and take a long time. Except when stimulus has a role
to play.
• The inevitable hand off from public to private drivers of
growth has been delayed but not avoided.
• Canada is expected to become more balanced.
David Tulk, CFA
Chief Canada Macro Strategist
416 – 982 – 0445
[email protected]