Download Pumpin` Back-Lash— It`s Not a Gas!

MARCH 30, 2012
FEATURE ARTICLE, PAGE 7
Pumpin’ Back-Lash—
It’s Not a Gas!
• Federal Budget: Balanced Budget Well on Track
• Ontario Budget: Restraint Coming
• Bernanke Downplays Labour Market Improvement
• European Permanent Bailout Fund Expanded
Our Thoughts
A Word of Warning for Canada’s Housing Market
Speaking earlier this week with an old friend having trouble selling his
house in New Jersey, I am reminded just how devastating the U.S.
housing debacle has been for families and the overall economy.
Although there have been mixed signals of a bottoming in most markets,
the Case-Shiller index showed a 3.8% year-over-year decline in house
prices in January. Only three cities reported year-over-year growth—Denver (0.2%),
Detroit (1.7%) and Phoenix (1.3%), with the latter two cities among the hardest hit in
recent years. The largest drop was in Atlanta, down almost 15% year-over-year.
Prices have not stabilized and there is an overhang of foreclosed homes coming
onto the market. According to real estate data firm CoreLogic, there were 65,000
completed foreclosures in the U.S. in February, bringing the total for the previous
twelve months to over 860,000. Florida leads the list with a foreclosure rate of 12% of
outstanding mortgages, well above the national 3.4% rate. (Florida is also home to the
only two core-based statistical areas—Tampa-St. Petersburg-Clearwater and OrlandoKissimmee-Sanford—with double-digit foreclosure rates of 12%.) The five states with the
highest foreclosure rates were (1) Florida (12.0%), (2) New Jersey (6.6%), (3) Illinois
(5.4%), (4) Nevada (5.0%), and (5) New York (4.9%).
The five states with the lowest foreclosure rates were (1) Wyoming (0.7%), (2)
Alaska (0.8%), (3) North Dakota (0.8%), (4) Nebraska (1.0%), and (5) Montana (1.4%).
These are also the states in the top quintile of economic growth, largely as a result of
the boom in natural resources, especially shale gas and oil. These states have the
lowest unemployment rates; and, in some of them, there are outright labour
shortages. Clearly, housing, employment and economic growth go hand-in-hand,
creating a virtuous feedback loop missing in much of the rest of the country.
In February, there were an estimated 1.4 million homes in the foreclosure
inventory, representing 3.4% of all homes with mortgages. (Roughly one-third of
homeowners in the U.S. own their homes outright.) The foreclosure inventory is
comprised of home mortgages that have been delinquent for so long that they are in
the foreclosure process. From the start of the financial crisis in September 2008, there
have been roughly 3.4 million completed foreclosures.
The devastation in the U.S. housing market is without precedent in the post-WWII
period. During prior recessions, delinquency rates on mortgages edged up, but were
very low compared with current levels. The delinquency rate for mortgages 90 days or
more past due peaked at 0.8% after the 1990s recession, according to the Mortgage
Bankers Association, and was low still after the tech-bubble burst in 2001-02. This cycle,
delinquency rates peaked at over 5% in early 2010 and have only come down to 3.1%
recently, even after all of the completed foreclosures.
And foreclosures are slated to rise in 2012 relative to last year. According to
RealtyTrac, February foreclosure activity surged in about half the states, as banks
tackled a backlog of delinquent mortgages that were in limbo due to foreclosureabuse claims. The increase occurred in 26 states where the courts supervise the
foreclosure process. These courts had temporarily put foreclosures on hold in the fall
of 2010 after claims of robo-signing foreclosures surfaced. The pace of foreclosures has
PAGE 2 – FOCUS – MARCH 30, 2012
Our Thoughts
accelerated following last month’s $25 billion settlement between America’s biggest
mortgage lenders and state officials.
Last year, lenders took back 804,000 homes. RealtyTrac estimates that
foreclosures could rise about 25% this year to roughly 1 million homes, putting further
downward pressure on the price of neighbouring houses. Estimates vary but at yearend 2011, more than 6 million American homeowners were either behind on their
mortgage payments or in foreclosure. About 11 million U.S. households are currently
underwater on their homes, owing more than their homes are worth. This represents
about a quarter of all homeowners with mortgages.
It is no wonder that house prices are still falling in many regions and consumer
confidence, though up from the lows, remains far from robust. Without the
participation of the homebuilding and residential real estate industry, job creation
remains below historical norms. There are still nearly 5.5 million Americans who have
been unemployed for more than 27 weeks, although that is down from the record 6.7
million in April 2010. The average duration of unemployment is just off its peak, now
at 40 weeks. And, as Chairman Bernanke pointed out this week, the longer a worker is
without a job, the harder it is to get one.
This is the first time the U.S. economy has ended a recession without a major
revival in housing, which helps to explain why the recovery has been so muted.
Moreover, it is likely to be at least another year before a real housing recovery begins.
In the meantime, fiscal tightening is a drag on economic activity and will be a much
larger drag unless the Congress comes up with a way to stop automatic spending cuts
and the expiration of the Bush tax cuts by December 31.
Bottom Line: There is much to be learned from the U.S. experience. Canada has
weathered the storm quite well, but an over-heated housing market could pose major
problems in the future. As of the end of 2011, Canada’s severe mortgage delinquency
rate was a Lilliputian 0.38% compared to the peak 5.02% rate in the U.S. In Ontario, it
was a mere 0.28%, and it was a bit higher in British Columbia at 0.47%. Basically,
Canadians rarely default on their mortgages.
Nonetheless, Canadians have never been so indebted. Mortgage rates won’t stay
low forever: they have already started to rise, which is why we recommend locking-in
at today’s low rates. A Canadian-style housing crisis could occur because of potential
over-leveraging on the developers side as condo development continues to dominate
the Toronto and Vancouver markets. Delays in construction, caused by supply
problems, strikes, or any other reason could cause cash-strapped developers and
builders to abandon projects or look for alternative deep pockets. The banks will be
reticent to increase their exposure to builders and developers. Shocks to this market
would have ripple effects throughout the economy at a time when federal and
provincial governments are tightening their belts.
I second the government’s caution about household indebtedness and hope
that the condo boom gradually dissipates. The multiple-bidding frenzy in the singlefamily market in some communities in Toronto is also worrying. I am not forecasting a
crash landing, but it would be foolish to ignore the lessons learned south of the
border.
PAGE 3 – FOCUS – MARCH 30, 2012
Our Thoughts
Can two wrongs make a right? Even if neither of this week’s two critical
budgets in Canada was just what the policy doctor ordered, the overall
fiscal dosage looks like the right medicine. Ideally, Ontario’s austerity
effort would have been a bit tougher early on—even with all of the
sound and fury, the Province is still calling for a deficit of $15.2 billion in
DOUGLAS PORTER FY12/13 (which starts Sunday), barely below the prior year’s $15.3 billion
gap, and still 2.3% of GDP. Meantime, despite downplaying their restraint effort,
Ottawa unveiled some meaty cuts in direct spending, even as their underlying deficit
position is improving much more rapidly than expected. Arguably the best news in
the Federal Budget was the fact that this year’s shortfall will come in under $25 billion
(1.5% of GDP), and the coming year’s will fall to $21.1 billion (1.2% of GDP), both about
$6 billion below where things were pegged late last Fall.
Combined, the two deficits are estimated to shave just 0.2 percentage points
from Canadian GDP in 2012 in net new fiscal restraint measures. Given the underlying
slowdown in domestic demand, and given the still-sluggish global backdrop, that
level of restraint seems broadly appropriate for the economy at this stage of the cycle.
All things considered, this is a bit lighter of a combined hit to growth than we were
anticipating ahead of the two budgets. Combined with a slightly better-thanexpected January GDP performance (up 0.1%) and small upward revisions to earlier
months, it looks like the Canadian expansion may have a wee bit more staying power
than expected. While our 2.0% 2012 growth call stands for now, if next week’s
employment reports reveal some underlying strength—the U.S. still churning out
200,000 jobs or better, and Canada rebounding from its recent funk—an upward
revision will follow close behind.
Financial markets took a bit of breather for a second straight week, with
global equities largely unchanged as of Friday morning. Fixed income
markets have calmed as well, retracing a good chunk of the 6-week selloff which started in February. After pricing in better-than-even odds of a
BoC rate hike before year-end as recently as two weeks ago, expectations
have retreated to a mere 16% chance this morning. Have fundamentals
changed so much since mid-month? The short answer is no. Canadian GDP growth is
likely to come in north of 2% in Q1, supported by January’s uptick in monthly GDP. The
U.S. economy remains on track for decent growth in Q1 as well, though employment
growth could downshift modestly in March. Worries about a hard landing in China
persist, but there hasn’t been convincing evidence in that direction. And, Europe
remains a thorn in the markets’ side, though today’s news of an expanded bailout
fund is being cheered.
While fundamentals haven’t changed significantly, rate hike expectations were
likely getting too aggressive. Indeed, with Chairman Bernanke sounding dovish this
week, playing down the improvement in the labour market, the Fed appears to be
very content staying on hold until late-2014. That lessens the potential for early Bank
of Canada tightening and limits the extent of moves once rate hikes begin. As such,
Canadian rate expectations have been trading in-line with U.S. interest rates over the
PAGE 4 – FOCUS – MARCH 30, 2012
Our Thoughts
past two months. That trend will likely continue unless the Canadian data weaken
appreciably. For now, it looks as though U.S. data will play a more prominent role in
driving BoC policy expectations.
It’s been a busy couple of weeks on the lecture circuit for Chairman
Bernanke. The thrust of his comments are two-fold: The economy is
doing well but not great, and the Fed has done much but possibly not
enough to achieve its goal of normalizing labour markets. As if on cue,
the economic data this week remained sufficiently mixed to reinforce
SAL GUATIERI Bernanke’s main theme that, “It’s far too early to declare victory”. Home
sales fell in February, while factory orders rebounded and consumers showed a firmer
pulse at the expense of saving less of their still-modest income gains. Rising gasoline
prices, which pose a “major problem” for many households and a “moderate risk” to the
recovery, are moving up the Chairman’s list of things that go bump in the night. While
discretionary spending is holding up, gasoline consumption has plunged 6% in the
past year, accelerating a trend that began in the mid-2000s (no wonder East Coast
refineries are shutting down). However, it’s the fact that labour markets remain “far
from normal” that keeps the Chairman up at night. Until the current 8.3%
unemployment rate falls meaningfully toward 6%, Bernanke seems keen on keeping
the monetary pedal to the metal. And, should anything slow the rate of decline in
joblessness (higher gas prices, an unraveling of Europe’s debt crisis, a “pretty flat”
housing market), then Bernanke appears open to pushing the pedal through the floor
to drive away this bête noire.
Of course, a Fed keen on keeping the monetary taps wide open is supportive for
equities and bonds, as witnessed by the S&P 500’s 12% YTD gain, the Nasdaq’s 20%
leap, and the ongoing junk-bond rally. If all the liquidity sloshing in the system can’t
find its way into goods and services inflation (take your pick why: high unemployment,
penny-pinching shoppers armed with the Web’s price-searching capabilities, WalMart, cheap goods from Asia), then it will likely find its way into asset prices—as we
learned (or were supposed to have learned) from the housing boom. With housing still
saddled by high foreclosures, that leaves one less contender vying for today’s cheap
money. This equity rally could have legs.
PAGE 5 – FOCUS – MARCH 30, 2012
Recap
• Fed Chairman Bernanke warns
job market is still “far from
normal”
• Rate hike expectations pared
on his dovish comments
• Better consumer spending
results encouraging
EUROPE
• Eurozone bailout package
expanded
• Stubborn Euro Area inflation
dampens already-lowered
expectations for a ECB rate cut
JAPAN
• Unexpected production
decline points to more modest
Q1 growth
CANADA
UNITED STATES
Real GDP at Basic Prices +0.1% (Jan.)
Industrial Product Prices +0.2% (Feb.)—moderate
Raw Material Prices -0.5% (Feb.)
Ottawa back on track to a balanced budget by
FY2014/15
Ontario expects a $15.2 bln budget deficit (FY12/13)
New Brunswick looks for a $182 mln budget
deficit (FY12/13)
Real Personal Spending +0.5% (Feb.)—but personal
income growth modest
U of Michigan Consumer Sentiment revised up to
76.2 (Mar.)
Initial Claims -5,000 to 359,000 (Mar. 24 wk)
ICSC Same-Store Sales +2.4% (Mar. 24 wk)
Durable Goods Orders +2.2% (Feb.)—core +1.2%
U.S.
• Economy grew modestly at the
start of the year
BAD NEWS
Conference Board’s Consumer Confidence
Index -1.4 pts to 70.2 (Mar.)
Pending Home Sales -0.5% (Feb.)
S&P Case-Shiller Home Prices -3.8% y/y (Jan.)—but
an improvement from prior month
Chicago PMI -1.8 pts to 62.2 (Mar.)—still a
decent reading
Eurozone—Consumer Prices eased to
+2.6% y/y (Mar. E)
Eurozone—Smoothed M3 +2.3% y/y (Feb.)
Germany—Ifo Survey +0.1 pts to 109.8 (Mar.)
Germany—Unemployment -18,000 (Mar.)
France—Consumer Spending +3.0% (Feb.)
EUROPE
CANADA
GOOD NEWS
Eurozone—Economic Confidence slipped to
94.4 (Mar.)
Germany—GfK Consumer Confidence dipped to
5.9 (Apr.)
Germany—Retail Sales -1.1% (Feb.)
France—Producer Prices +0.8% (Feb.)
Italy—Producer Prices +0.4% (Feb.)
U.K.—Real GDP revised lower to -0.3% q/q (Q4)
U.K.—Nationwide House Prices -1.0% (Mar.)
U.K.—GfK Consumer Confidence -2 pts to -31 (Mar.)
Retail Sales +2.0% (Feb.)
Jobless Rate -0.1 ppts to 4.5% (Feb.)
Household Spending +2.3% y/y (Feb.)
Consumer Prices +0.3% y/y (Feb.)
Manufacturing PMI +0.6 pts to 51.1 (Mar.)
JAPAN
Jennifer Lee, Senior Economist
Industrial Production -1.2% (Feb. P)
Indications of stronger growth and a move toward price stability are good news for the economy.
PAGE 6 – FOCUS – MARCH 30, 2012
Feature
Pumpin’ Back-Lash—It’s Not a Gas!
Sal Guatieri, Senior Economist
Just when things were looking up for the U.S. economy, along comes costlier fuel to potentially spoil the party.
Housing markets are stabilizing, Europe’s debt concerns are easing, and China’s economy is landing softly,
allaying U.S. growth fears. But gasoline prices are nearing record highs and could reach $5 a gallon this summer
if tensions between the West and Iran escalate (Chart 1). Will plumper pump prices halt the expansion?
Although crude oil prices are expected to hover near $100 a barrel (WTI) in the year ahead, the risk of a nearterm spike is elevated due to potential supply disruptions. The rising cost of imported overseas oil, together with a
shortfall in domestic pipeline capacity, has forced about one-third of U.S. East Coast refineries to halt operations, and
Sunoco threatens to close its large Philadelphia refinery this summer. Meantime, European Union embargoes and U.S.
sanctions on countries that do not reduce their purchases of Iranian oil could remove one million barrels per day from
the market this summer (about half of Iran’s oil exports), according to the International Energy Agency. A further
escalation of tensions could disrupt oil shipments in the Strait
of Hormuz, a key route for one-fifth of globally-traded oil. This
would likely push crude prices back to 2008’s high of $147 a
CHART 1
barrel. While North Dakota’s shale oil boom could help
PUMPED UP
alleviate the shortage, constraining factors (such as a lack of
United States (US$/gallon)
skilled drillers) would prevent output from increasing fast
Gasoline Prices
record
enough to offset the supply disruption. A more reliable source
4.5
high
of supply could emerge from a drawdown of the U.S. Strategic
4.0
Petroleum Reserve or an increase in Saudi Arabia’s output,
3.5
though neither would alleviate the refinery capacity issue. The
3.0
upshot is that the risk of $5 pump prices in the U.S. (and
2.5
over C$1.60 a litre in Canada) is not insignificant.
2.0
1.5
1.0
0.5
92
94
96
98
00
02
04
06
08
10
12
CHART 2
CRUDE AWAKENING
United States
Petroleum Product Prices
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
160
140
120
100
80
60
40
20
0
recession
WTI
Crude
70
75
80
WTI Crude = (US$/barrel : rhs)
85
Gasoline
90
95
Gasoline = (US$/gallon : lhs)
PAGE 7 – FOCUS – MARCH 30, 2012
00
05
10
Americans consume about 130 billion gallons of gasoline
each year, slightly less than 4% of total spending. The more
they pay for fuel, the less they tend to spend on other
things. If gas becomes too dear, spending retrenches—a
factor in past recessions (Chart 2). Prices have risen 60 cents
to $3.90 a gallon this year, retracing a similar-sized decline in
earlier months. Over a more meaningful period, say a year,
prices are up 8%. A sustained increase of this size could
drain about $40 billion from annual household purchasing
power, reducing consumer spending by 0.3% and real GDP
by 0.2%. Our regression model suggests a sustained 8%
increase in fuel prices could reduce annual GDP by 0.2%.
Though not immaterial, the hit is far less than in 2008 and
2011, when a near 38% y/y price spike to July 2008 and then
again to May 2011 likely sliced one pt from annual growth.
The takeaway is that the recent increase in fuel prices
likely doesn’t warrant a material downward revision to
Feature
our U.S. growth call. In fact, there is little evidence of a
meaningful impact on household behaviour to date. Auto
sales are still rising (ironically, higher gas prices have
spurred drivers to replace their old gas guzzlers with more
fuel-efficient vehicles), while discretionary purchases,
notably on restaurant meals and recreational goods, have
stood firm. However, the muted effect could simply reflect
an offset from lower home heating bills due to the mild
weather and low natural gas prices.
CHART 3
A LIGHTER WEIGHT ON CONSUMERS
United States
Personal Spending on
Gas & Fuel Products
Average Fuel
Consumed per Vehicle
(blns chn 2005$ : saar)
(gallons per year)
300
280
260
240
220
200
90
95
00
05
10
900
850
800
750
700
650
600
60
70
80
Average Fuel Consumed per Vehicle = (Source: Federal Highway Administration)
90
00
10
So far, so good―unless fuel costs jump further.
Another 30% increase to $5 a gallon could reduce real GDP
by 0.9% in the next year. This, combined with the
previous 8% y/y run-up in pump prices, could carve
slightly more than 1 pt from annual GDP growth,
reducing it from a projected 2½% in 2012/13 to 1½%.
The unemployment rate could rise toward 9%.
Two factors could magnify the economic impact. One is the still-fragile nature of the recovery, as households
remain burdened by high debts, soft house prices and weak wage growth, while the federal government is
expected to seriously tighten its fiscal belt. As well, with pump prices already high (60% above the two-decade
mean after inflation), a further sharp increase could have an outsized effect on confidence. Alternatively, the
economy could be less affected today than in the past. Fuel consumption has declined steadily since 2005,
partly due to better vehicle efficiency (Chart 3), and the auto industry is less dependent on gas-guzzlers. In
addition, costlier gasoline is less likely to fuel inflation and interest rate increases today than in the past owing to
high unemployment. In fact, rising unemployment would damp wage costs further, thereby keeping the Fed on
hold for longer than currently anticipated (2014H2) and possibly spurring more quantitative easing.
Canadians would also suffer from higher fuel costs, as gasoline accounts for a slightly larger share (4¼%) of
the consumer basket than in the U.S. The adverse effect would be amplified by a weak U.S. economy and high
household debts. Based on our model, a 25% increase in gasoline prices from C$1.30 per litre currently to just
over C$1.60,1 coupled with a 6% increase in the past year and attendant weaker U.S. demand, could reduce
Canadian GDP growth by slightly more than 1 pt from 2¼% projected in 2012/13 to 1¼%. The
unemployment rate could rise toward 8%. However, if the run-up in fuel costs largely reflects higher oil prices (as
opposed to refinery capacity constraints), the economic impact could be partially offset by improved terms of
trade, as net oil exports are the largest contributor to Canada’s goods trade surplus. Alberta, Saskatchewan and
Newfoundland & Labrador would benefit, while manufacturing-heavy Central Canada would suffer.
Bottom Line: A rapid, sustained increase in pump prices to $5 a gallon could slow the U.S. expansion to 1½% in
the year ahead, that is, growth recession territory. It could also undercut the current equity rally and President
Obama’s re-election chances. Alone, it would likely not trigger a recession, but adverse feedback between higher
joblessness and fragile consumer confidence and housing markets could be troublesome, especially if Europe’s
debt crisis flares again. On the bright side (for borrowers), interest rates would stay low for longer.
1
The strong C$ and larger share of taxes in Canadian fuel suggest the % increase in Canada would not fully match that in the States.
PAGE 8 – FOCUS – MARCH 30, 2012
Economic Forecast
2011
2012
ANNUAL
2011 2012
I
II
III
IV
I
II
III
IV
2010
Real GDP (q/q % chng : a.r.)
3.7
-0.6
4.2
1.8
2.1
1.6
2.0
2.3
3.2
2.5
2.0
Consumer Price Index (y/y % chng)
2.6
3.4
3.0
2.7
2.4
2.3
2.4
2.2
1.8
2.9
2.3
Unemployment Rate (%)
7.7
7.5
7.2
7.4
7.5
7.4
7.4
7.3
8.0
7.5
7.4
Housing Starts (000s : a.r.)
177
192
205
199
198
187
184
183
191
193
188
Current Account Balance ($blns : a.r.) -40.3
-62.4
-49.3
-41.3
-40.2
-46.0
-45.8
-43.9
-50.9
-48.3
-44.0
CANADA
Interest Rates
(average for the quarter : %)
Overnight Rate
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
0.60
1.00
1.00
3-month Treasury Bill
0.95
0.95
0.88
0.86
0.88
0.91
0.91
0.91
0.56
0.91
0.90
10-year Bond
3.31
3.16
2.53
2.13
2.04
2.28
2.50
2.76
3.24
2.78
2.40
90-day
82
90
86
84
81
82
82
82
42
86
82
10-year
-15
-5
10
9
0
-8
-10
-14
2
0
-8
Real GDP (q/q % chng : a.r.)
0.4
1.3
1.8
3.0
2.2
2.3
2.8
2.9
3.0
1.7
2.4
Consumer Price Index (y/y % chng)
2.1
3.3
3.8
3.3
2.8
2.4
2.2 u
2.3 u
1.6
3.1
2.4
Unemployment Rate (%)
9.0
9.1
9.1
8.7
8.3
8.2
8.1
8.0
9.6
8.9
8.2
Housing Starts (mlns : a.r.)
0.58
0.57
0.62
0.67
0.69
0.70
0.71
0.71
0.58
0.61
0.70
Current Account Balance ($blns : a.r.)
-473
-494
-431
-496
-517 v -512 v -513 v -517 v
-471
-473
-515 v
Fed Funds Target Rate
0.13
0.13
0.13
0.13
0.13
0.13
0.13
0.13
0.13
0.13
0.13
3-month Treasury Bill
0.13
0.05
0.03
0.01
0.07
0.09
0.09
0.09
0.14
0.05
0.09
10-year Note
3.46
3.21
2.43
2.05
2.04
2.36
2.60
2.90
3.21
2.79
2.47
US¢/C$
101.4
103.4
102.1
97.8
99.9
98.9
99.0
100.5
97.1
101.2
99.6
C$/US$
0.986
0.967
0.979
1.023
1.002
1.012
1.010
0.995
1.030
0.989
1.005
82
82
78
77
79
84
87
89
88
80
85
US$/Euro
1.37
1.44
1.41
1.35
1.31
1.29
1.29
1.31
1.33
1.39
1.30
US$/£
1.60
1.63
1.61
1.57
1.57
1.56
1.57
1.59
1.55
1.60
1.57
Canada/U.S. Interest Rate Spreads
(average for the quarter : bps)
UNITED STATES
Interest Rates
(average for the quarter : %)
EXCHANGE RATES
(average for the quarter)
¥/US$
Note: Blocked areas represent BMO Capital Markets forecasts
Up and down arrows indicate changes to the forecast uv
PAGE 9 – FOCUS – MARCH 30, 2012
Key for Next Week
CANADA
Employment
Thursday, 8:30 am [new time]
Mar. (e)
+7,000 (+0.04%)
Consensus +10,000 (+0.06%)
Feb.
-2,800 (-0.02%)
Unemployment Rate
Mar. (e)
7.5%
Consensus 7.4%
Feb.
7.4%
Average Hourly Wages
Mar. (e)
unch
Feb.
-0.1%
The lacklustre start to 2012 for employment likely continued in March, with an
anticipated 7,000 increase. That would leave the year-to-date gain at 6,500, miles below
last year’s near-75k surge over the same period. Soft job growth is expected to persist
through mid-2012. Service sector employment has been especially weak the past five
months, shedding 62,800 positions, though that followed a period of strength. The slide
is consistent with sluggish domestic growth, which is expected to be a feature of the
economic landscape in 2012 and, to a lesser extent, in 2013. Not surprisingly, mining, oil
& gas has stayed strong, and should remain so as long as resource prices are elevated.
The small headline increase likely won’t be sufficient to keep the jobless rate steady, as
an anticipated rebound in the labour force—February saw the third biggest drop in 12
years—will cause an uptick to 7.5%, retracing half the prior month’s surprising drop.
UNITED STATES
Manufacturing ISM
Monday, 10:00 am
PMI
Mar. (e)
53.5
Consensus 53.1
Feb.
52.4
Prices
63.0
62.3
61.5
Nonmanufacturing ISM
Wednesday, 10:00 am
Mar. (e)
56.0
Consensus 56.6
Feb.
57.3
Nonfarm Payrolls
Friday, 8:30 am
Mar. (e) +190,000
Consensus +210,000
Feb.
+227,000
Unemployment Rate
Mar. (e) 8.3%
Consensus 8.3%
Feb.
8.3%
Average Hourly Earnings
Mar. (e)
+0.2%
Consensus +0.2%
Feb.
+0.1%
PAGE 10 – FOCUS – MARCH 30, 2012
Benjamin Reitzes, Senior Economist
Sal Guatieri, Senior Economist
Following February’s setback, the ISM manufacturing index should return to form in
March, rising for the fourth time in five months to 53.5, suggesting moderate growth
in the sector. Purchasing managers have remained guardedly optimistic, notably
cheered by the recovery in the auto industry. Also revving factory engines are decent
export gains and healthy business spending, though the latter has likely downshifted
following the expiration of the full-expensing allowance on new equipment.
After stalling last fall, the ISM nonmanufacturing index has climbed to one-year highs.
However, some pullback is expected in March (to 56.0), reflecting an economy that,
though still growing, lacks momentum and now faces higher fuel costs. Last month,
the largest number of industries (14) since June reported an increase in output, and
most purchasing mangers remained upbeat. Unusually mild weather should lift
construction activity in March, while damping utilities output.
Employment growth likely slowed in March following recent solid gains, with higher
gasoline prices clouding the demand outlook. Payrolls are expected to increase
190,000 after averaging 245,000 the previous three months. Government job cuts
should persist, though they have dwindled to an average 6,000 the past three months
from 22,000 the previous two years—local governments have stopped swinging an
axe while the federal government is using a scalpel. Construction jobs should get a lift
from balmy temps. The jobless rate should hold at 8.3% for the third month after
dropping over 1 pt since late 2010—a decline unwarranted by modest 1.7% GDP
growth last year. Bernanke thinks the recent jobs spurt reflects a catch-up from earlier
massive layoffs and anaemic hiring, and is unlikely to continue unless the economy
strengthens. Look for some payback in the 2.6 million jobs (374k/month) the volatile
household survey says the economy created the past 7 months. Bernanke will also
have an eye on the duration of joblessness and part-timers working for economic
reasons, two metrics that suggest the job market remains “far from normal”.
Financial Markets Update
CHANGE FROM: (BASIS POINTS)
WEEK AGO
4 WEEKS AGO
DEC. 31/11
MAR 30 *
MAR 23
1.00
3.00
1.00
3.00
0
0
0
0
0
0
0.25
3.25
0.25
3.25
0
0
0
0
0
0
0.92
0.07
0.20
0.78
1.03
4.61
0.90
0.07
0.10
0.81
1.03
4.61
2
-1
10
-3
-1
0
0
1
10
-17
-2
-1
10
6
10
-58
-5
1
1.18
0.34
1.24
0.35
-5
-2
8
6
23
9
2.07
2.16
0.98
1.80
2.19
4.09
2.18
2.23
1.02
1.86
2.27
4.29
-10
-8
-4
-6
-8
-20
11
18
2
0
6
-12
14
28
0
-3
22
29
16.0
40
93
576
14.8
40
91
542
1.1 pts
0
1
34
-1.3 pts
-1
-1
24
-7.5 pts
-17
-27
-104
100.01
1.000
82.29
1.3312
1.597
103.62
100.22
0.998
82.35
1.3270
1.587
104.67
-0.2
—
-0.1
0.3
0.6
-1.0
-1.1
—
0.6
0.9
0.9
-3.5
2.1
—
7.0
2.7
2.8
1.5
307.44
103.36
2.16
1660.26
314.47
106.87
2.37
1661.90
-2.2
-3.3
-9.1
-0.1
-4.3
-3.1
-13.1
-3.1
0.7
4.6
-27.8
6.2
12365
1404
3087
13161
10084
6911
5758
3403
4335
12466
1397
3068
13081
10011
6996
5855
3476
4270
-0.8
0.5
0.6
0.6
0.7
-1.2
-1.7
-2.1
1.5
-2.2
2.5
3.7
1.4
3.1
-0.2
-2.6
-2.8
1.5
3.4
11.7
18.5
7.7
19.3
17.2
3.3
7.7
6.9
Canadian Money Market
Call Money
Prime Rate
U.S. Money Market
Fed Funds (effective)
Prime Rate
3-Month Rates
Canada
United States
Japan
Eurozone
United Kingdom
Australia
Bond Markets
2-year Bond
Canada
United States
10-year Bond
Canada
United States
Japan
Germany
United Kingdom
Australia
Risk Indicators
VIX
TED Spread
Inv. Grade CDS Spread **
High Yield CDS Spread **
Currencies
(% CHANGE)
US¢/C$
C$/US$
¥/US$
US$/Euro
US$/£
US¢/A$
Commodities
CRB Futures Index
Oil (generic contract)
Natural Gas (generic contract)
Gold (spot price)
Equities
S&P/TSX Composite
S&P 500
Nasdaq
Dow Jones Industrial
Nikkei
Frankfurt DAX
London FT100
France CAC40
S&P ASX 200
* as of 10:30 am
** One day delay
PAGE 11 – FOCUS – MARCH 30, 2012
Global Calendar
APRIL 2 – APRIL 6
EUROZONE
JAPAN
MONDAY APRIL 2
Tankan
Q1 (e)
Q4
TUESDAY APRIL 3
WEDNESDAY APRIL 4
THURSDAY APRIL 5
FRIDAY APRIL 6
Leading Index
Feb. P (e) 95.8
Jan.
94.4
-1
-4
EUROZONE
Manufacturing PMI
Mar. F (e) 47.7
Feb.
49.0
Jobless Rate
Feb. (e) 10.8%
Jan.
10.7%
EUROZONE
Producer Price Index
Feb. (e) +0.5%
Jan.
+0.7%
+3.5% y/y
+3.7% y/y
ITALY
EUROZONE
Services PMI
Mar. F (e) 48.7
Feb.
48.8
Retail Sales
Feb. (e) -0.2%
Jan.
+0.3%
GERMANY
Industrial Production
Feb. (e) -0.5%
Jan.
+1.6%
+0.3% y/y
+1.8% y/y
FRANCE
Trade Deficit
Feb. (e) €5.2 bln
Jan.
€5.3 bln
-1.1% y/y
unch y/y
GERMANY
Jobless Rate
Feb. P (e) 9.3%
Jan.
9.2%
Factory Orders
Feb. (e) +1.4%
Jan.
-2.7%
-5.5% y/y
-4.9% y/y
Good Friday (markets closed)
ECB Monetary Policy Meeting
France, Germany & Netherlands
Sell Bills
EFSF & Belgium Sell Bills
Portugal Sells Bills
France Sells Bonds
OTHER
U.K.
Spain & Germany Sell Bonds
Construction PMI
Mar. (e) 53.4
Feb.
54.3
Manufacturing PMI
Mar. (e) 50.7
Feb.
51.2
CHINA
CHINA
Manufacturing PMI *
Mar. (e) 50.8
Feb.
51.0
HSBC Manufacturing PMI *
Mar. F (e) 48.1
Feb.
49.6
AUSTRALIA
Building Approvals
Feb. (e) +0.5%
Jan.
+0.9%
* date approximate
Services PMI
Mar. (e) 53.4
Feb.
53.8
-5.3% y/y
-14.6% y/y
Nonmanufacturing PMI
Mar.
Feb.
48.4
AUSTRALIA
Retail Sales
Feb. (e) +0.2%
Jan.
+0.3%
Reserve Bank of Australia Monetary
Policy Meeting
Industrial Production
Feb. (e) +0.4%
-2.1% y/y
Jan.
-0.4%
-3.8% y/y
Manufacturing Production
Feb. (e) +0.1%
+0.1% y/y
Jan.
+0.1%
+0.3% y/y
Bank of England Monetary Policy Meeting (April 4-5)
AUSTRALIA
Trade Balance
Feb. (e) +A$1.1 bln
Jan.
-A$673 mln
CHINA
HSBC Services PMI
Mar.
Feb.
53.9
Good Friday (markets closed)
North American Calendar
APRIL 2 – APRIL 6
CANADA
MONDAY APRIL 2
9:30 am
Mar.
Feb.
TUESDAY APRIL 3
WEDNESDAY APRIL 4
RBC Manufacturing PMI
Employment
+7,000 (+0.04%)
+10,000 (+0.06%)
-2,800 (-0.02%)
Unemployment Rate
7.5%
7.4%
7.4%
Average Hourly Wages
unch
-0.1%
Building Permits
+1.5%
+2.3%
-12.3%
Ivey Purchasing Managers’
Index (s.a.)
Mar. (e) 63.0
Feb.
66.5
2-year bond auction announcement
51.8
Auto Sales **
UNITED STATES
+11.2% y/y
10:00 am Manufacturing ISM
PMI
Prices
Mar. (e) 53.5
63.0
Consensus 53.1
62.3
Feb.
52.4
61.5
10:00 am Construction Spending
Feb. (e) +1.0%
Consensus +0.7%
Jan.
-0.1%
Total Vehicle Sales **
Mar. (e) 15.2 mln a.r.
Consensus 14.5 mln a.r.
Feb.
15.0 mln a.r.
1:00 pm Nova Scotia Budget
7:45 am ICSC Same-Store Sales
Mar. 31
Mar. 24 (mtd) +2.4%
+2.6% y/y
8:55 am Redbook Same-Store Sales
Mar. 31
Mar. 24 (mtd) +0.5%
+3.4% y/y
9:45 am New York ISM
Mar.
Feb.
63.1
10:00 am Factory Orders
Feb. (e) +1.5%
Consensus +1.5%
Jan.
-1.0%
2:00 pm FOMC Minutes from
March 13 meeting
11:00 am
4-week bill auction
announcement
11:30 am 13- & 26-week bill
auction $60.0 bln
* consensus ** date approximate
11:30 am 4-week bill auction
11:30 am 52-week bill auction
$26.0 bln
FRIDAY APRIL 6
8:30 am
Mar. (e)
Consensus
Feb.
8:30 am
Mar. (e)
Consensus
Feb.
8:30 am
Mar. (e)
Feb.
8:30 am
Feb. (e)
Consensus
Jan.
10:00 am
12:15 pm BoC Governor Carney
speaks at the Greater
Kitchener-Waterloo
Chamber of Commerce
Mar.
Feb.
THURSDAY APRIL 5
7:00 am
Mar. 30
Mar. 23
8:15 am
MBA Mortgage Apps
-2.7%
ADP National
Employment Report
Mar. (e) +210,000
Consensus +205,000
Feb.
+216,000
10:00 am Nonmanufacturing ISM
Mar. (e) 56.0
Consensus 56.6
Feb.
57.3
7:30 am
Mar.
Feb.
8:30 am
Mar. 31 (e)
Mar. 24
8:30 am
Mar. 24
Mar. 17
9:45 am
Apr. 1
Mar. 25
Mar. (e)
Feb.
11:00 am
Challenger Layoff Report
+2.0% y/y
Initial Claims
356k (-3k) *
359k (-5k)
Continuing Claims
3,340k (-41k)
Bloomberg Consumer
Comfort Index
-34.7
ICSC Chain-Store Sales
+4.5% y/y
+4.1% y/y
3-year note auction
announcement , 10-year note,
30-year bond auction
(reopening) announcement
Upcoming Policy Meetings Bank of Canada: April 17, June 5, July 17 FOMC: April 24-25, June 19-20, July 31
Good Friday
(markets closed)
8:30 am
Mar. (e)
Consensus
Feb.
8:30 am
Mar. (e)
Consensus
Feb.
8:30 am
Mar. (e)
Consensus
Feb.
3:00 pm
Feb. (e)
Jan.
Nonfarm Payrolls
+190,000
+210,000
+227,000
Unemployment Rate
8.3%
8.3%
8.3%
Average Hourly Earnings
+0.2%
+0.2%
+0.1%
Consumer Credit
+$12.0 bln *
+$17.8 bln
Good Friday
(stock markets closed;
limited bond market activity)
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PAGE 14 – FOCUS – MARCH 30, 2012