Download Driving North American Growth and Trade

Douglas Porter, CFA, Chief Economist, BMO Financial Group
April 28, 2017
Feature Article
Page 8
Great Lakes-St. Lawrence Region:
Driving North American
Growth and Trade
U.S. GDP Slows in Q1;
Canada GDP Stalls in February
U.S. to Impose Tariffs on
Canadian Softwood Lumber
President Trump Flip Flops on Nafta
C$ Hammered
BMO Capital Markets Economics
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Please refer to page 17 for important disclosures
ECB, BoJ on Hold
Our Thoughts
Page 2 of 17
Focus — April 28, 2017
Broad(way) Street Bullies
“T
he continued expansion of the American economy will depend upon
the availability of Canada’s natural resources. Thus, I am frequently
astonished to read constantly in newspaper reports on both sides of the
boundary about the various problems and tensions in CanadianAmerican relations. These have been problems of economics. Canadian
oats, fish, lead, zinc, oil and livestock compete with American producers
who may seek restrictions on Canadian imports.”
— John F Kennedy, Senator (D-Mass.)
Convocation Speech at the University of New Brunswick, 1957
…yes, 60 years ago. Plus ça change?
Apparently, we all misheard President Trump 10 weeks ago when he met with Prime
Minister Trudeau. Most thought that, when it came to trade relations with Canada, he
said “tweaking Nafta”; in fact, he said “wreaking havoc”. Somehow, Canada has
suddenly replaced Mexico as the number one trade villain in some U.S. eyes,
morphing from an “outstanding trading partner” to a “disgrace” in a few short
steps. That’s despite the well-documented fact that Canada is the number one U.S.
export market, and runs as close to balanced bilateral trade as any major economy
with America. And, including services, the U.S. is in a rare overall surplus
position with Canada. But these alternative facts seemingly make little impression.
By all reports, the President was preparing on Wednesday to take the first step to exit
Nafta, before suddenly pledging, after a call with Trudeau and President Enrique
Peña Nieto, to not terminate the deal “at this time”. Gee, thanks. Quite clearly this
was a negotiating tactic, perhaps aimed at bringing the partners to the table and/or an
attempt to show “progress” in his first 100 days in office. Even so, it’s disconcerting
to say the least that the President can treat two of America’s largest trading partners
in such a cavalier manner, nearly reducing them to political pawns.
At a Great Lakes Economic Forum this week in Detroit, which I had the honour of
presenting to, the former U.S. Ambassador to Canada, James Blanchard, advised
Canada to keep calm. He said, “I don’t even think the president knows what he wants
to do here. He just likes to negotiate, and bully a little bit. Canada just needs not to
overreact.” And, one of Canada’s representatives attending, Treasury Board
President Scott Brison, seemed to agree, suggesting that Canadians “keep their sticks
on the ice” and reminded that “fights only last about five minutes” in hockey. (Of
course, technically, it’s the penalty for fighting that lasts five minutes; the fights are
usually only about five seconds—and we can only hope this time—but point taken.)
While reasonable advice, the problem is that: a) it’s not just one voice hammering on
Canada; and, b) the rhetoric/bullying is having a real impact on financial markets.
Commerce Secretary Wilbur Ross, who is charged with overseeing the trade file,
lashed Canada for “dumping lumber” and “subsidizing mills” as he announced a
near-20% tariff on Canadian softwood lumber. Not to quibble, but the common
definition of dumping is selling in export markets below domestic prices and/or
below cost, neither of which seems to be the case in this dispute. And, the triple
threats to softwood lumber, the dairy industry, and Nafta broadly, sent the Canadian
Douglas Porter, CFA
Chief Economist
[email protected]
416-359-4887
Our Thoughts
Page 3 of 17
Focus — April 28, 2017
dollar spinning. The currency has dropped more than 2% in the past two weeks alone
to its weakest level in more than a year—at a time when the loonie is normally at its
seasonally strongest.
Of course, it’s not just trade irritants that are gnawing on the loonie. Oil prices have
been grinding relentlessly lower, with WTI dropping nearly 9% in the past two weeks
to around $49. Rubbing salt, the deepening concerns over a large alternative
mortgage lender (see Ben’s Thought for more) weighed heavily on financial stocks
generally and sparked talk of wider trouble for the housing sector if credit conditions
tighten. This development arrives precisely at the moment the Ontario government
stepped in with their suite of housing market-calming measures; potentially, this
could make it seem that the measures worked a little too well.
For the Bank of Canada, the uncertainty on trade, the prospect of a cooler housing market
(and possibly markedly so), and last week’s surprisingly mild inflation reading are all the
reason they need to stick to their cautious tone. The market still has small odds of a rate
hike priced in by the end of 2017, but those odds look to be fading fast. With Canadian
short-term rates in lock-down mode, oil sagging and the U.S. blustering on trade, the
loonie is set to remain on the defensive for some time yet. While we have the currency
recovering to around the 75 cent level by the end of the year (from 73.5 cents now), that
view depends critically on a rebound in oil prices and a trace of normalcy in trade
relations. Neither seems to be an obvious likelihood at this point, especially the latter.
T
he preceding discussion doesn’t even address the more fundamental challenge to
the loonie of Canada’s competitiveness. Yet another shot was fired across the bow
this week by Trump’s proposed tax reform. While light in detail to an extreme—the
entire “plan” was 250 words—the well-advertised aim is to carve U.S. headline
corporate tax rates from 35% to 15%, and slim personal tax brackets to three, with the
top rate trimmed to 35%. House Speaker Paul Ryan said he agreed with 80% of the
proposal, suggesting the broad strokes of a possible eventual deal are coming together.
No doubt, omnipresent concerns about the already-hefty U.S. budget deficit ($653
billion in the past 12 months) will create hurdles aplenty—we, and many others, are
highly skeptical that tax cuts can come close to “paying for themselves” through
significantly higher GDP growth. And if the tax measures aren’t revenue-neutral,
then they can’t be made permanent, further reducing their effectiveness. Still, broad
reform could drive a serious wedge between U.S. and Canadian taxes, adding yet
more pressure on Canada’s economy absent a response. The effect would not be
immediate, but rather a drip, drip, drip, as capital spending decisions get driven by
tax and trade considerations.
Another Housing Headwind
W
hile Nafta, lumber and dairy hogged the headlines early in the week, there were
some worrying developments for the Canadian alternative mortgage industry
and, potentially, the housing market. At present, the risk appears to be contained to one
firm, but there’s a non-negligible risk of contagion to similar firms. In addition, there’s
no sign as of yet that there are any issues with asset quality of lenders broadly, which
should be particularly encouraging. Still, confidence can be fickle and more negative
Benjamin Reitzes
Senior Economist
[email protected]
416-359-5628
Our Thoughts
Page 4 of 17
Focus — April 28, 2017
headlines would hit the non-major-bank mortgage finance sector hard. One only needs
to look at the major bank stocks (that have strong profitability and no issues at present),
which were broadly lower this week and have nothing to do with the recent negative
headlines, to see that this is a confidence issue.
On the surface, the numbers are reassuring. Canada’s mortgage market is about $1.45
trillion outstanding. The chartered banks account for $1.07 trln of that total (74%).
Using Bank of Canada data and internal calculations, it appears that alternative
lenders account for slightly above $200 billion of the total (or just under 14%). And,
of that, just about $40 bln (or nearly 3%) is so-called unconventional. So, even if
delinquency ratios for the latter hit U.S. crisis highs of 5% or so, that would only be
about $2 bln or 0.1% of the total.
Assuming there are no revelations about mortgage asset quality, this flare-up may be
short-lived. However, the potential removal of a meaningful competitor in the market
could push mortgage rates modestly higher, possibly tighten funding for other
alternative lenders, and possibly limit access to credit for those unable to get a
traditional mortgage. Taken with the latest moves by the Ontario government to cool
the broader housing market, don’t be surprised if there’s a meaningful deceleration in
the GTA and surrounding areas over the next few months.
We’ll be keeping a watchful eye on the situation, with a primary focus on other
actors in the market and whether the funding pressures spread. B.A.A.R.
The Hard Facts on Softwood
W
e have been saying for months that the failure to renew the Softwood Lumber
Agreement (SLA) last October served as a harbinger for more difficult trade
negotiations with the U.S., even prior to President Trump’s election victory.
Monday’s preliminary ruling by the U.S. Department of Commerce to apply an
average countervailing duty of 20% on Canadian softwood lumber came as no
surprise to the Canadian industry; any chances for renegotiation of the SLA were all
but scuttled after the U.S. Lumber Coalition filed countervailing duty and antidumping duty petitions in November of last year.
Here are the key facts as of writing:
 The U.S. will levy a preliminary countervailing duty (CVD) of 19.88% for
lumber imports from Canada. The figure is actually based on the average duties
charged to the five largest Canadian exporters with assigned rates ranging from
24% to 3%. All other producers outside of the five will pay the 19.88% rate.
 Several, but not all, of the producers will face retroactive duties dating back 90days from Monday’s ruling.
 There will likely be additional duties imposed. The Department of Commerce has
pushed back its ruling on anti-dumping duties (AD) to late June given the greater
complexity of the case. Anti-dumping duties could range from 5% to 15% on top
of the countervailing duties.
 The petitioner in the duty cases, the U.S. Lumber Coalition, filed a request with
Commerce to align the final decisions in the CVD and AD cases. If approved,
Alex Koustas
Senior Economist
[email protected]
416-359-4624
Our Thoughts
Page 5 of 17
Focus — April 28, 2017
final AD/CVD determinations would likely be announced in early November.
The last stage in these duty cases is a final determination from the International
Trade Commission, which rules on whether the U.S. lumber industry has been
injured. That comes 45 days after the final AD/CVD ruling, or likely in late
December. Therefore, duties would be collected in earnest in early 2018.
 Cash deposits for duties are required beginning on the date the preliminary CVD
or AD determination is published in the Federal Register.
Over 70% of Canadian softwood exports are destined for the U.S., which amounts to
nearly 60% of total Canadian production. Though the industry’s share of Canadian
GDP has declined, it still directly employs nearly 200,000 people, accounting for 1%
of total employment but a meaty 10% of manufacturing payrolls. Any major
disruption of U.S. shipments would have a serious effect on the industry and highly
sensitive forestry communities. However, early signs are that the industry is better
equipped to cope with the new tariffs this time around.
To wit, prices for Western Mill Spruce-Pine-Fir averaged $US 410 mbf last week,
30% higher than two months ago, as Canadian producers raised prices in anticipation
of the imposition of new duties. This influence on the market reflects the power that
Canadian producers currently possess with a 30% foot-hold on the American market.
As long as the supportive cyclical factors driving market demand (housing starts,
consumer spending) continue to develop as expected, there is every possibility that
most of the tariff cost can be passed along to buyers in the short-term. The fact that
anti-dumping duties are now being considered as prices reach 10-year highs is
puzzling to say the least.
Bottom Line: The Softwood Lumber Agreement appeared to be working for all
parties prior to its expiry, with both Canadian and U.S. firms enjoying the spoils of
positive cyclical factors. These factors will continue to support lumber demand and
firm pricing conditions despite the tariff environment. For the time being, it appears
that Canadian producers are able to pass the costs along to buyers, with the U.S.
consumer ultimately footing the bill.
Patience is a Virtue at the Fed
A
fter lifting rates in March, the FOMC is nearly certain to take a pass at next
week’s policy meeting. First, it can’t be certain that the economy’s Q1 softpatch won’t bleed into Q2 until it sees several April data points, especially on
consumer spending. Second, the median FOMC member predicts just two additional
rate increases this year. Hiking in less than two months after the last move, which
occurred three months after the previous one, would have investors thinking the Fed
is upping the tightening ante, thereby risking a bond tantrum. And third, the Fed, like
everyone else, has no clearer guidance on the scope and timing of U.S. government
policies today than 100 days ago. Will Trump’s massive tax cuts be largely revenue
neutral, and hence have limited economic effect, or will they blow a massive hole in
the budget? Will Nafta be tweaked or torn apart? Without clarity on at least the
overriding issue of whether stimulus will overshadow protectionism, the Fed can
have little confidence in its forecast of an economic pickup.
Sal Guatieri
Senior Economist
[email protected]
416-359-5295
Our Thoughts
Page 6 of 17
Focus — April 28, 2017
The statement itself—that’s all we’ll get in the absence of an updated FOMC “dot
plot” and press conference—should downplay the economy’s recent stumble, while
noting still healthy consumer fundamentals and broad strength in business
investment, labour markets, and residential/commercial real estate markets. The
statement should also affirm that the risks to the outlook “appear roughly balanced”,
code for “we’re keeping the normalization door open”. This puts the spotlight on
June, which would adhere to the three-month gap between the previous two rate
increases. Similarly, September is likely ripe for the Fed’s fifth increase… marking
the slowest tightening cycle on record back to the early 80s.
After September, the spotlight will likely fall on putting a bloated balance sheet
on a diet. May is likely too soon for the FOMC to begin outlining the contours of its
plan to downsize a $4.3 trillion portfolio chock-full of Treasury notes and mortgage
bonds. However, earlier commentary suggests the process could begin later this year.
Key issues include whether to phase out or end the reinvestment program abruptly,
and whether to delay raising rates in the early stage of balance sheet runoff. A delay
would stem the flattening of the yield curve, as long rates drift higher. While the
curve is still nowhere close to signalling a possible recession, a further clockwise
rotation would be unwelcome.
Psst! See Any Exits around Here?
T
hat’s what the ECB is likely asking. True they “did not discuss” an eventual exit
from the current stimulus plan, nor did they discuss what they would do in June.
But with an “increasingly solid” recovery and “diminished” downside risks, the
central bank will keep its eyes trained on inflation. Of course, policymakers won’t
get too excited that April Euro Area inflation hit 1.9%, the 2nd fastest pace in four
years. And, they will try really hard not to get too excited that Euro Area core
inflation jumped 1.2% y/y, the fastest pace in three years. Indeed, for the third
meeting in a row, President Draghi listed the ECB’s four criteria for inflation: 1)
converging to the inflation rate target, 2) the convergence must be durable, 3) the
convergence must be self-sustained, and 4) it must be for the whole of the Eurozone,
not just in one country. So far, we know that inflation is picking up in all of the major
countries so that’s one point we can check off. As for the other three, it is too soon to
say. It will take at least a few months to convince the ECB that their criteria have
been met.
Assuming that those global factors that were discussed during the press conference
do not heat up, the topic of an eventual exit should officially be raised. Our
expectation is that the ECB’s very accommodative policies will run their natural
course, i.e., until year-end. The other possibility of trimming monthly purchases
while extending the life of the program can’t be dismissed either. Some sort of exit
will likely be eyed before September rolls around.
Jennifer Lee
Senior Economist
[email protected]
416-359-4092
Recap
Page 7 of 17
Focus — April 28, 2017
Priscilla Thiagamoorthy
Economic Analyst
[email protected]
416-359-6229
Canada
Good News
The Province of Ontario is projecting a balanced
budget in FY17/18
 U.S. moves to slap tariffs on
The Province of Nova Scotia is projecting a $136
Cdn softwood lumber…
mln surplus in FY17/18
 President Trump does a 180
and assures no Nafta withdrawal
after all (at least not yet)
 C$ hit hard
United States
 President Trump unveils plans
to chop tax rates for individuals
and businesses…
 …but with little details on how
it will be paid for, will it pass
Congress?
 Nasdaq surges past 6,000
 Short-term extension averts
government shutdown
Japan
 BoJ on hold; lowers inflation
outlook but raises economic
outlook
Europe
 ECB on hold and signals no
rush to tighten
 Equity markets rally as Macron
favoured to win round 2 of the
French presidential election
Core Durable Goods Orders +0.2% (Mar.)—upward
revisions point to firm capital spending
Bad News
Real GDP at Basic Prices unch (Feb.)
Real Retail Sales -0.1% (Feb.)
Wholesale Trade Volumes -0.4% (Feb.)
Conference Board Consumer Confidence Index
-2.3 pts to 109.4 (Apr.)
Ottawa posts an $11.5 bln deficit (Apr.-to-Feb.)—
compared to $7.5 bln surplus last year
Real GDP +0.7% a.r. (Q1 A)—weak
New Home Sales +5.8% to 621,000 a.r. (Mar.)
Conference Board Consumer Confidence Index
-4.6 pts to 120.3 (Apr.)
S&P Case-Shiller House Prices +5.9% y/y (Feb.)
Pending Home Sales -0.8% (Mar.)
FHFA House Prices +6.4% y/y (Feb.)
Initial Claims +14k to 257k (Apr. 22 week)
Employment Cost Index +0.8% (Q1)
Goods Trade Deficit widened to $64.8 bln (Mar.)
Chicago Fed National Activity Index 0.11 (Mar.)
Retail Sales +0.2% (Mar.)
Consumer Prices +0.2% y/y (Mar.)
All Industry Activity Index +0.7% (Feb.)
Household Spending -1.3% y/y (Mar.)
Leading Index revised up to +0.1% (Feb.)
Industrial Production -2.1% (Mar. P)
Jobless Rate steady at 2.8% (Mar.)
Euro Area—Consumer Prices +1.9% y/y (Apr. A)
France—Real GDP +0.3% (Q1 A)—below expected
Euro Area—Private Sector Credit +3.2% y/y (Mar.)
France—Consumer Spending -0.4% (Mar.)
Euro Area—Economic Confidence +1.6 pts to 109.6
(Apr.)—decade high
U.K.—Real GDP +0.3% (Q1 A)
U.K.—Nationwide House Prices -0.4% (Apr.)
Germany—Retail Sales +0.1% (Mar.)
Germany—GfK Consumer Confidence +0.4 pts to
10.2 (May)
Germany—Ifo Business Climate +0.5 pts to 112.9
(Apr.)—6-yr high
Germany—Consumer Prices +2.0% y/y (Apr. P)
France—Consumer Confidence unch at 100 (Apr.)
U.K.—Rightmove House Prices +1.1% (Apr.)
Other
 Geopolitical tensions continue
to run high
Australia—Consumer Prices +2.1% y/y (Q1)—but
core measures still subdued
Australia—Producer Prices +0.5% (Q1)
Mexico—Real GDP +0.6% (Q1 P)
Indications of stronger growth and a move toward price stability are good news for the economy.
Feature
Page 8 of 17
Great Lakes-St. Lawrence Region:
Driving North American Growth
and Trade
Focus — April 28, 2017
Chart 1
Facts and Figures
 GDP of US$6 trillion
(2016 est)
 Population: 107
million (2015)
Robert Kavcic, Senior Economist • [email protected] • 416-359-8329
The Great Lakes-St. Lawrence region is a vital driver of North
American economic output, employment and trade, accounting for
nearly a third of combined Canadian and U.S. output, jobs and
exports. Economic growth in the region is expected to accelerate in
2017 as Ontario and Quebec post another year of strong activity,
while states in the region pick up alongside a broader increase in
U.S. momentum. Overall, ongoing expansions in housing and
consumer spending are supportive, with the currency impact adding
a modest boost on the Canadian side of the border. Still, some
longer-term issues remain for the region’s economy. Labour costs
are in focus as the factory sector seeks to remain competitive, while
demographic headwinds will be a persistent challenge. At the same
time, uncertainty on the trade front is an area of concern given the
deeply integrated nature of cross-border activity in the region, and
its impact on the overall North American economy.
Pulling the Weight of a Nation
The Great Lakes-St. Lawrence region boasts a massive geographic
footprint, and is a major driver of the North American economy.
With economic output estimated at US$6 trillion in 2016, the region
accounts for 30% of combined Canadian and U.S. economic activity
and employment. The region’s output ranks ahead of Japan,
Germany, the U.K. and France, and it would rank as the third largest
economy in the world if it were a country, behind only the U.S. and
China—notably, the region overtook Japan a few years ago. Quite
simply, the economic importance of the region can’t be overstated.
Economic Update—Growth Improving
The Great Lakes-St. Lawrence economy is poised to accelerate in
2017, after posting sturdy growth in recent years. Real GDP in the
region expanded at an expected 1.6% pace in 2016, roughly in-line
with each of the prior two years. Growth in Ontario and Quebec has
strengthened above 2%, while the U.S. states in the region have
lagged—but the latter look to do some catching up this year.
The U.S. economy is expected to accelerate this year, growing at a
2.1% clip in 2017, up from a 1.6% pace last year. Canada is
expected to outperform after lagging in recent years, growing at
2.5% as Central Canada remains strong, while the oil-producing
provinces emerge from recession. Ontario is seeing sturdy growth
around the 2.6% mark, topping the national average on a sustained
Quebec
Ontario
 30% of Canadian/U.S.
economic activity
 51 million jobs
Minnesota
Wisconsin
Michigan
 30% of Canadian/U.S.
workforce
New
York
Pennsylvania
Illinois Ohio
Indiana
 More than half of
Canada/U.S.
cross-border trade
Chart 2
Gross Domestic Product
2015 (US$ trlns)
United States
China
Great Lakes Region
Japan
Germany
United Kingdom
France
India
Italy
Brazil
Canada
Russia
0
5
10
15
20
Sources: BMO Economics, Haver Analytics
Chart 3
Growth Outlook Improves
(y/y % chng)
15 16 17 18
Canada
0.9 1.4 2.5 1.9
U.S.
2.6 1.6 2.1 2.5
Great Lakes Region 1.7 1.6 2.2 2.1
Real GDP
8
forecast
6
Canada
4
2
0
U.S.
-2
-4
-6
00
02
04
06
08
10
Sources: BMO Economics, Haver Analytics
12
14
16
18
Feature
Page 9 of 17
Focus — April 28, 2017
basis for the first time in more than a decade, while Quebec is
piercing through the 2% threshold—both well above-potential
economic growth.
Chart 4
North American car and truck production hit a 14-year high in
2016, while sales remain buoyant (especially in Canada), supporting
activity through the supply chain. However, unlike on the Canadian
side of the border, the strong U.S. dollar has been a headwind to
U.S. export activity, and contributed to below-average GDP growth
in the Great Lakes states in the three years through 2016. Some
firms in the factory sector have also been clipped by capital
spending retrenchments in energy and agriculture, but the tide
appears to be turning modestly on both fronts.
Goods Trade Balance
The housing market continues to recover across the U.S. Midwest.
Still-attractive affordability, healthy job growth and some easing in
credit conditions should support continued gains in the sector.
Importantly, U.S. housing affordability remains attractive enough
that home prices will continue to rise even as the Federal Reserve
raises interest rates more aggressively this year and in 2018.
Meantime, Toronto’s market continues to set record price levels and
conditions have strengthened across Southwestern Ontario and in
areas such as Ottawa and Montreal.
For consumers in the region, the steep decline in oil prices has
helped, while jobless rates fell in most jurisdictions in the Great
Lakes region last year. Indeed, hiring continues across the region,
led by sturdy gains in the service sector, while some states are
seeing cyclical rebounds in construction and manufacturing—
sectors that are still below peak levels.
Adding it all up, the Great Lakes region continues to churn out
sturdy economic growth. While some headwinds have kept the pace
of growth in check south of the border, most signs point to a
stronger expansion in 2017.
A Critical Trade Relationship
Trade is a pressing issue given the policy priorities of the new U.S.
Administration. Note that while the U.S. ran a near-$350 billion
trade deficit with China in 2016, the gap was a much smaller $69
billion with Mexico, and a paltry $16.5 billion with Canada. On a
wide scale, this suggests that the U.S. trade imbalance is not an
issue best resolved at the Canadian border. Meantime, trade
within the Great Lakes region is relatively balanced as well, with
Ontario and Quebec running a modest surplus with the U.S. states.
The bulk of that surplus is with Michigan, while the provinces run
small deficits with Illinois, Wisconsin, Indiana and Ohio.
The Great Lakes-St. Lawrence region is also a critically important
North American trading hub. The region’s states were the origin
U.S. Trade Deficit: Not Made in Canada
United States
(US$ blns : 4-qtr m.s.)
Canada
0
Mexico
-100
-200
-300
China
-400
00
02
04
06
08
10
12
14
16
Sources: BMO Economics, Haver Analytics
Chart 5
Key Trading Partners
2016
(C$ blns)
Ontario and Quebec Trade
Michigan
Exports
to state
Balance
32.7
Imports
from state
New York
Ohio
6.4
-7.1
Illinois
-1.0
Indiana
-3.9
Pennsylvania
2.1
Wisconsin
-2.0
Minnesota
-0.3
0
20
40
60
80
Sources: BMO Economics, Industry Canada
Chart 6
Strong Cross-Border Ties
2016 (total trade : C$ blns)
Ontario and Quebec’s Trading Partners
Great Lakes States
Other U.S. States
China
Mexico
United Kingdom
Japan
Germany
South Korea
0
50
100
Sources: BMO Economics, Industry Canada
150
200
250
Feature
Page 10 of 17
of roughly a quarter of total U.S. merchandise exports in 2016, while Ontario and
Quebec accounted for 60% of Canadian shipments (a decade high). Transportation
equipment and machinery are the major drivers, but agricultural and food products,
metals and chemicals contribute to a diverse range of exports. The region’s crossborder trade linkages are also immensely important. For example, the Great Lakes-St.
Lawrence states are Ontario and Quebec’s largest trading partner, accounting for
$242 billion of total trade in 2016. That represents almost a third of total international
trade among the two provinces. Also, it’s notable that fully 33 U.S. states count
Canada as their largest export market, including all in the Great Lakes-St. Lawrence
region. The North American Free Trade Agreement has certainly helped to spur
the trade relationship in the region, and recent policy rhetoric is concerning given
how integrated the supply chain has become.
Meantime, improving border infrastructure is encouraging. For example,
construction of the Gordie Howe International Bridge between Windsor and Detroit
continues to move closer to reality, though completion looks to be beyond 2020. This
should help improve the flow of goods at what is currently the busiest commercial
crossing on the U.S.-Canada border.
Finally, the Great Lakes-St. Lawrence Seaway is a critical avenue for North
American trade. According to the Chamber of Marine Commerce, shipping in the
region supports 227,000 jobs, produces $35 billion of business revenue, and adds
nearly $5 billion per year to federal, state and provincial revenues.
The Bottom Line: The Great Lakes-St. Lawrence region is a key contributor to
North American economic output, employment and trade, and the current outlook
remains positive for the region. Measures by policymakers to maintain the trade
relationship and further facilitate the flow of goods in the region and beyond would
be a clear positive for economies on both sides of the border.
The complete version of this report from April 25th can be viewed online at:
https://economics.bmocapitalmarkets.com/economics/reports/20170425/sr20170425.pdf
Focus — April 28, 2017
Economic Forecast
Page 11 of 17
Focus — April 28, 2017
Economic Forecast Summary for April 28, 2017
BMO Capital Markets Economic Research
2016
2017
Annual
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2016
2017
2018
Real GDP (q/q % chng : a.r.)
2.7
-1.2
3.8
2.6
3.5
1.9
2.1
2.2
1.4
2.5
1.9
Consumer Price Index (y/y % chng)
1.5
1.6
1.2
1.4
1.9
1.7
1.9
2.0
1.4
1.9
2.0
Unemployment Rate (percent)
7.2
7.0
7.0
6.9
6.7
6.7
6.6
6.5
7.0
6.6
6.3
199
198
199
197
226
202
185
181
198
198
180
-71.3
-77.6
-79.0
-42.9
-46.2
-42.1
-37.7
-34.0
-67.7
-40.0
-31.0
CANADA
Housing Starts (000s : a.r.)
Current Account Balance ($blns : a.r.)
(average for the quarter : %)
Interest Rates
Overnight Rate
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.88
3-month Treasury Bill
0.45
0.51
0.50
0.48
0.47
0.55
0.55
0.55
0.49
0.50
0.90
10-year Bond
1.22
1.28
1.06
1.45
1.71
1.60
1.70
1.80
1.25
1.70
2.00
Canada-U.S. Interest
(average for the quarter : bps)
Rate Spreads
90-day
16
25
20
5
-13
-38
-57
-72
17
-45
-61
10-year
-70
-47
-50
-69
-73
-77
-78
-79
-59
-77
-73
Real GDP (q/q % chng : a.r.)
0.8
1.4
3.5
2.1
0.7
2.7
2.7
2.8
1.6
2.1 
2.5
Consumer Price Index (y/y % chng)
1.1
1.1
1.1
1.8
2.6
2.3
2.5
2.3
1.3
2.4
2.3
Unemployment Rate (percent)
5.0
4.9
4.9
4.7
4.7
4.5
4.4
4.3
4.9
4.4
4.2
Housing Starts (mlns : a.r.)
1.15
1.16
1.14
1.25
1.25
1.26
1.28
1.30
1.18
1.27
1.31
Current Account Balance ($blns : a.r.)
-532
-479
-464
-450
-515 
-542 
-566 
-596 
-481
-555 
-660 
UNITED STATES
(average for the quarter : %)
Interest Rates
Fed Funds Target Rate
0.38
0.38
0.38
0.46
0.71
0.96
1.21
1.38
0.40
1.06
1.63
3-month Treasury Bill
0.29
0.26
0.30
0.43
0.60
0.90
1.10
1.25
0.32
0.95
1.50
10-year Note
1.92
1.75
1.56
2.13
2.44
2.35
2.50
2.60
1.84
2.45
2.75
EXCHANGE RATES
(average for the quarter)
US¢/C$
72.8
77.6
76.6
75.0
75.6
73.9
73.8
74.6
75.5
74.5
76.8
C$/US$
1.37
1.29
1.31
1.33
1.32
1.35
1.36
1.34
1.33
1.34
1.30
¥/US$
115
108
102
109
114
111
115
119
109
115
117
US$/Euro
1.10
1.13
1.12
1.08
1.07
1.06
1.03
1.01
1.11
1.04
1.04
US$/£
1.43
1.43
1.31
1.24
1.24
1.25
1.23
1.21
1.35
1.23
1.25
Blocked areas represent BMO Capital Markets forecasts
Up and down arrows indicate changes to the forecast 
Spreads may differ due to rounding
Key for Next Week
Page 12 of 17
Focus — April 28, 2017
Merchandise Trade Deficit
Thursday, 8:30 am
Mar. (e)
Feb.
$800 mln
$972 mln
Employment
Friday, 8:30 am
Apr. (e)
Mar.
+10,000 (+0.1%)
+19,400 (+0.1%)
Unemployment Rate
Apr. (e)
6.7%
Consensus 6.7%
Mar.
6.7%
Personal Spending and Income
Monday, 8:30 am
Personal
Spending
Mar. (e)
+0.2%
Consensus +0.2%
Feb.
+0.1%
Personal
Income
+0.3%
+0.3%
+0.4%
Core PCE Price Index
Mar. (e)
unch
+1.7% y/y
Consensus -0.1%
+1.6% y/y
Feb.
+0.2%
+1.7% y/y
Manufacturing ISM (PMI)
Monday, 10:00 am
Apr. (e)
56.5
Consensus 56.5
Mar.
57.2
Non-manufacturing ISM (NMI)
Wednesday, 10:00 am
Apr. (e)
56.0
Consensus 55.9
Mar.
55.2
Canada
Canada’s trade deficit is expected to narrow modestly to Benjamin Reitzes
$800 mln in March. The Canadian dollar backed off from Senior Economist
18 month highs, which should provide some support to [email protected]
416-359-5628
exporters. Oil prices pulled back somewhat in the month,
and there’s additional downside risk due to the mid-month fire at Syncrude.
However, inventories likely made up for the latter disruption. We look for imports to
be flat to down, after three straight monthly gains. We’ll be watching electronic &
electrical equipment import volumes, which have a strong correlation with machinery
and equipment investment and have slumped for the past two years. We’ll also be
watching non-energy export volumes closely as usual, as they’ve failed to gain
traction over the past two years. After adding significantly to Q4 GDP, we’re
expecting a meaningful negative impact on Q1 growth.
Despite continued scepticism, the Canadian economy has shown clear signs of
improvement from almost all corners. That’s consistent with the solid job gains
recorded over the past eight months or so. While there’s some risk we could see some
payback for the string of chunky increases, we’re going to stick with the trend and
are looking for another 10,000 increase in April. There have been 210k full-time jobs
created over the past four months, the second strongest pace on record, though that
followed a very weak period through much of 2016. The story was the opposite for
part-time, which was exceptionally strong in 2016, before cratering in February.
We’ll see what kind of volatility the April report serves up. Our call would keep the
jobless rate steady at 6.7%, a tick above the post-recession low.
United States
Consumer spending almost stalled in Q1, but looks to have Sal Guatieri
picked up slightly at quarter end. Look for a 0.2% advance Senior Economist
in March, with increases in “core” retail sales and services [email protected]
416-359-5295
demand more than offsetting declines in autos and service
station receipts. Volumes likely rose similarly, providing a launch pad for consumers
to return to the near 3% spending rate of 2016. A solid 0.3% advance in personal
income should underpin demand. Flat core prices in the month are expected to clip
the annual rate slightly to 1.7%, in line with last year’s pace. Despite firmer wages,
inflation remains in check.
The manufacturing index is expected to dip to 56.5 in April after hitting two-year
highs recently. Still, elevated new orders will continue to stoke production, with
businesses buying more machinery and gear in anticipation of a fiscal boost to the
economy. Almost every industry reported growth in the last two ISM surveys,
indicating broad strength, and the commentary was constructive.
After stepping back in March, the non-manufacturing index is expected to retrace
higher to 56.0 in April. A continued healthy construction sector and recovering oil
patch will provide ballast. Of concern, the last survey indicated greater uncertainty
about the Administration’s policies, likely due to its inability to pass health-care
legislation.
Key for Next Week
Page 13 of 17
FOMC Announcement
Focus — April 28, 2017
See Sal’s Thought on page 5.
Wednesday, 2:00 pm
Nonfarm Payrolls
Friday, 8:30 am
Apr. (e)
+190,000
Consensus +193,000
Mar.
+98,000
Unemployment Rate
Apr. (e)
4.6%
Consensus 4.6%
Mar.
4.5%
Average Hourly Earnings
Apr. (e)
+0.3%
+2.7% y/y
Consensus +0.3%
+2.7% y/y
Mar.
+0.2%
+2.7% y/y
Following March’s lacklustre advance (98,000), nonfarm payrolls are expected to
reboot 190,000 higher in April. Last month’s figure was modestly depressed by a
Northeast snowstorm, and a strong household survey indicates underlying strength.
Still, with companies reporting greater difficulty finding workers, labour shortages
will undermine employment. Thankfully, the shortages are also drawing more job
seekers into the workforce. Look for the unemployment rate to retrace slightly to
4.6% after hitting cycle-lows last month. Also note that the more inclusive U6 jobless
rate should stay near a decade-low 8.9%, assuming further declines in the number of
involuntary part-time workers and persons marginally attached to the workforce.
Average hourly earnings growth should hold at 2.7%, affirming a modest upward
trend to near eight-year highs.
Financial Markets Update
Page 14 of 17
Focus — April 28, 2017
Apr 28 ¹
Apr 21
Week Ago
4 Weeks Ago
Dec. 31, 2016
(basis point change)
0
0
Canadian
Money Market
Call Money
Prime Rate
0.50
2.70
0.50
2.70
0
0
U.S. Money
Market
Fed Funds (effective)
Prime Rate
1.00
4.00
1.00
4.00
0
0
0
0
25
25
3-Month
Rates
Canada
United States
Japan
Eurozone
United Kingdom
Australia
0.52
0.79
-0.14
-0.33
0.33
1.75
0.53
0.77
-0.17
-0.33
0.34
1.75
-1
2
2
0
-1
0
0
4
5
0
-1
-4
6
29
25
-1
-4
-5
2-Year Bonds
Canada
United States
Canada
United States
Japan
Germany
United Kingdom
Australia
0.73
1.27
1.54
2.30
0.01
0.32
1.07
2.58
0.72
1.18
1.47
2.25
0.01
0.25
1.03
2.54
1
9
8
5
0
7
4
4
-2
1
-8
-9
-6
-1
-6
-13
-2
8
-18
-14
-3
11
-16
-19
Risk
Indicators
VIX
TED Spread
Inv. Grade CDS Spread ²
High Yield CDS Spread ²
10.6
38
64
328
14.6
38
67
347
Currencies
US¢/C$
C$/US$
¥/US$
US$/€
US$/£
US¢/A$
73.07
1.369
111.44
1.0907
1.292
74.52
74.09
1.350
109.09
1.0728
1.282
75.41
-1.4
—
2.2
1.7
0.8
-1.2
(percent change)
-2.7
—
0.0
2.4
3.0
-2.3
-1.8
—
-4.7
3.7
4.7
3.4
Commodities
CRB Futures Index
Oil (generic contract)
Natural Gas (generic contract)
Gold (spot price)
181.31
49.50
3.28
1,266.78
181.87
49.62
3.19
1,284.10
-0.3
-0.2
2.7
-1.3
-2.5
-2.2
2.8
1.4
-5.8
-7.9
-12.0
9.9
Equities
S&P/TSX Composite
S&P 500
Nasdaq
Dow Jones Industrial
Nikkei
Frankfurt DAX
London FT100
France CAC40
S&P ASX 200
15,626
2,387
6,049
20,947
19,197
12,433
7,222
5,272
5,924
15,614
2,349
5,911
20,548
18,621
12,049
7,115
5,059
5,854
0.1
1.6
2.3
1.9
3.1
3.2
1.5
4.2
1.2
0.5
1.0
2.3
1.4
1.5
1.0
-1.4
2.9
1.0
2.2
6.6
12.4
6.0
0.4
8.3
1.1
8.4
4.6
10-Year Bonds
¹ = as of 10:30 am
² = One day delay
-4.1 pts
0
-4
-19
-1.8 pts
-2
-3
-9
0
0
-3.5 pts
-12
-4
-27
Global Calendar
May 1 – May 5
Manufacturing PMI
Apr. F (e) 52.8
Mar.
52.4
Tuesday May 2
Wednesday May 3
Thursday May 4
Friday May 5
Markets Closed
Markets Closed
Markets Closed
Services PMI
Apr.
Mar.
52.9
Composite PMI
Apr.
Mar.
52.9
BoJ Minutes from
March 15-16 Meeting
EURO AREA
Euro Area
Japan
Monday May 1
Markets Closed
EURO AREA
Real GDP
Q1 A (e)
Q4
Jobless Rate
Mar. (e)
9.4%
Feb.
9.5%
Producer Price Index
Mar. (e)
-0.1%
Feb.
unch
ITALY

Saturday April 29
Jobless Rate
Mar. P (e) 11.5%
Feb.
11.5%
EU Brexit Summit
U.K.
Markets Closed
EURO AREA
Manufacturing PMI
Apr. F (e) 56.8
Mar.
56.2
+0.5%
+0.4%
EURO AREA
+1.7% y/y
+1.7% y/y
Services PMI
Apr. F (e) 56.2
Mar.
56.0
+4.2% y/y
+4.5% y/y
Composite PMI
Apr. F (e) 56.7
Mar.
56.4
GERMANY
Apr. (e)
Mar.
Unemp.
-12,000
-30,000
Retail Sales
Jobless Rate Mar. (e)
unch
5.8%
Feb.
+0.7%
5.8%
+2.0% y/y
+1.8% y/y
EURO AREA
Retail PMI
Apr.
Mar.
49.5
Sunday May 7
FRANCE
Presidential Election Runoff
Manufacturing PMI
Apr. (e)
54.0
Mar.
54.2
Construction PMI
Apr. (e)
52.0
Mar.
54.2
Services PMI
Apr. (e)
54.5
Mar.
55.0
Composite PMI
Apr. (e)
54.5
Mar.
54.9
U.K. Local Elections
Other
CHINA
Markets Closed
CHINA
Caixin Manufacturing PMI
Apr. (e)
51.3
Mar.
51.2
AUSTRALIA
RBA Monetary Policy Meeting

Sunday April 30
Manufacturing PMI
Apr. (e)
51.7
Mar.
51.8
CHINA
Caixin Services PMI
Apr.
Mar.
52.2
Caixin Composite PMI
Apr.
Mar.
52.1
AUSTRALIA
Trade Surplus
Mar. (e)
A$3.3 bln
Feb.
A$3.6 bln
Non-Manufacturing PMI
Apr.
Mar.
55.1
Upcoming Policy Meetings | BoE: May 11, June 15, Aug. 3 | ECB: June 8, July 20, Sep. 7
AUSTRALIA
RBA Statement on Monetary Policy

North American Calendar
May 1 – May 5
Canada
Monday May 1
Tuesday May 2
Wednesday May 3
Markit Manufacturing PMI Auto Sales D
Apr.
55.5
Mar.
+7.1% y/y
9:30 am
Apr.
Mar.
8:30 am
Mar. (e)
Feb.
4:10 pm
United States
10:30 am 3-, 6- & 12-month bill
auction $12.0 bln
(new cash -$2.0 bln)
8:30 am
Mar. (e)
Consensus
Feb.
Personal
Spending
+0.2%
+0.2%
+0.1%
Personal
Income
+0.3%
+0.3%
+0.4%
8:30 am
Mar. (e)
Consensus
Feb.
Core PCE Price Index
unch
+1.7% y/y
-0.1%
+1.6% y/y
+0.2%
+1.7% y/y
9:45 am
Markit Manufacturing PMI
(Apr. F)
10:00 am
Apr. (e)
Consensus
Mar.
Manufacturing ISM (PMI)
56.5
56.5
57.2
10:00 am
Mar. (e)
Consensus
Feb.
Construction Spending
+0.4%
+0.4%
+0.8%
11:00 am 4-week bill auction
announcement
11:30 am 13- & 26-week bill auction
$72 bln
C
= consensus
D
= date approximate
Ward’s Total Vehicle Sales D
Apr. (e)
17.3 mln a.r.
Consensus 17.2 mln a.r.
Mar.
16.5 mln a.r.
FOMC Meeting Begins
Thursday May 4
12:00 pm 3-year bond auction $3.2 bln
2-year bond auction announcement
7:00 am
Apr. 28
Apr. 21
MBA Mortgage Apps
8:15 am
ADP National
Employment Report
+170,000
+175,000
+263,000
Apr. (e)
Consensus
Mar.
+2.7%
7:30 am
Apr.
Mar.
Mar. (e)
Consensus
Feb.
8:30 am
3- & 10-year note, 30-year
bond auction and other
quarterly refinancing
announcements
Challenger Layoff Report
-2.0% y/y
8:30 am
Initial Claims
Apr. 29 (e) 246k (-11k) C
Apr. 22
257k (+14k)
8:30 am
Apr. 22
9:45 am
Markit Services/Composite Apr. 15
PMI (Apr. F)
8:30 am
10:00 am Non-manufacturing ISM
(NMI)
Q1 P (e)
Apr. (e)
56.0
Consensus
Consensus 55.9
Q4
Mar.
55.2
8:30 am
2:00 pm FOMC Announcement
11:30 am 4-week bill auction
Merchandise Trade Deficit
$800 mln
$972 mln
BoC Governor Poloz
speaks to CanCham
Mexico and Club de
industriales in Mexico City
Continuing Claims
1,988k (+10k)
Productivity Unit Labour
Costs
-0.2% a.r. +2.6% a.r.
unch a.r.
+2.5% a.r.
+1.3% a.r. +1.7% a.r.
Goods & Services
Trade Deficit
$44.5 bln
$44.9 bln
$43.6 bln
9:45 am
Bloomberg Consumer
Comfort Index – Apr. 30th
week
10:00 am
Mar. (e)
Consensus
Feb.
Factory Orders
+0.4%
+0.5%
+1.0%
Friday May 5
8:30 am
Apr. (e)
Mar.
Employment
+10,000 (+0.1%)
+19,400 (+0.1%)
8:30 am
Apr. (e)
Consensus
Mar.
Unemployment Rate
6.7%
6.7%
6.7%
8:30 am
Apr. (e)
Mar.
Average Hourly Wages
+1.1% y/y
+1.1% y/y
10:00 am
Ivey Purchasing Managers’
Index (s.a.)
Apr.
Mar.
61.1
8:30 am
Apr. (e)
Consensus
Mar.
Nonfarm Payrolls
+190,000
+193,000
+98,000
8:30 am
Apr. (e)
Consensus
Mar.
Unemployment Rate
4.6%
4.6%
4.5%
8:30 am
Average Hourly Earnings
Apr. (e)
+0.3%
+2.7% y/y
Consensus +0.3%
+2.7% y/y
Mar.
+0.2%
+2.7% y/y
1:30 pm Fed Chair Yellen speaks at
Brown University in
Providence, RI on “125 Years
of Women’s Participation in
the Economy”
3:00 pm
Consumer Credit
Mar. (e)
+$16.0 bln
Consensus +$15.0 bln
Feb.
+$15.2 bln
Fed Speakers: Vice Chair Fischer (11:30
am); San Francisco’s Williams (12:45
pm); Chicago’s Evans (1:30 pm);
Boston’s Rosengren (1:30 pm); St. Louis’
Bullard (1:30 pm)
Saturday May 6
11:00 am 13- & 26-week bill auction
announcements
Fed Speaker:
San Francisco’s Williams (3:00 pm)
Upcoming Policy Meetings | Bank of Canada: May 24, July 12, Sep. 6 | FOMC: June 13-14, July 25-26, Sep. 19-20

Page 17 of 17
Focus — April 28, 2017
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