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Economic and Financial Market Outlook: Read My
Lips… Monetary Stimulus is Here to Stay
September 2013
David Tulk, CFA
Chief Canada Macro Strategist
Central Banks Using Forward Guidance
to Support the Recovery
• Federal Reserve
• fed funds rate: 25bps since Dec 2008
• balance sheet: $3.6 trillion
• tapering expected early 2014
• Bank of England
• base rate: 50bps since March 2009
• asset purchases: £375 billion
• European Central Bank
• refinance rate: 50bps since April 2013
“a highly accommodative stance of
monetary policy will remain appropriate for a
considerable time after the asset purchase
program ends”  6.5% unemployment rate,
2.5% inflation
“the MPC intends not to raise Bank Rate …
at least until the … of the unemployment
rate has fallen to a threshold of 7%”
“The Governing Council confirms that it
expects the key ECB interest rates to
remain at present or lower levels for an
extended period of time”
Liquidity Has Been Assured, Relieving
Financial Market Stress
3 Month Funding Over OIS (Basis Points)
400
United States
Europe
Canada
300
200
LTROs
OMT
100
0
2007
2008
Source: Bloomberg, TD Securities
2009
2010
2011
2012
2013
Central Bank Stimulus Has Anchored
Rates, Helped Risk Assets Perform
US Government Yields and S&P500
2 Year Yields (LHS)
5 Year Yields (LHS)
10 Year Yields (LHS)
Percent
S&P500 (RHS)
Index
6
2000
QE2
QE1
QE3
5
1600
4
1200
3
800
2
400
1
0
2008
Source: Bloomberg
0
2009
2010
2011
2012
2013
US Fiscal Uncertainty and Austerity
to Loom Large in 2013 and Beyond
US Fiscal Stimulus & Drag
(Percentage Point Impact on Real GDP)
2
Forecast
1
0
-1
-2
2009
2010
2011
2012
* Including ARRA and payroll tax expiration; Source: TD Economics
2013
2014
2015
Gradual Healing in the Housing Market
is Encouraging…
US Existing Home Sales and Months Supply
(Thousands Units, Months)
7500
Months' Supply (RHS)
Sales (LHS)
6500
Tax Credit
20
18
16
5500
14
4500
12
3500
10
8
2500
6
1500
4
500
2004
2
2006
Source: NAR/Haver Analytics
2008
2010
2012
… As is the Improvement in the Flow
of Credit
Composite Demand for Credit and Bank Lending
Standards (Percent Reporting Greater / Tighter)
120
Demand
Lending Standards
80
40
0
-40
-80
2006
2007
2008
Source: Federal Reserve/Haver Analytics
2009
2010
2011
2012
Labour Market is on a Very Long
Journey to Recovery
US Job Losses by Recession (Millions of Jobs)
2
0
-2
-4
1960
1981
1990
2001
Current
-6
-8
Census Hiring
-10
0
10
20
30
40
Months Following Start of Recession
Source: BLS/Haver Analytics
50
60
Taper ≠Tightening: Cyclical Vulnerability
to Keep Policy Very Accommodative
Mortgage Refinance Index & 30-Year Mortgage
Rate
7
5.5
Mortgage Refinance Index (LHS)
30-Year Fixed Rate Mortgage (RHS)
6
5.0
5
4.5
4
4.0
3
3.5
2
1
Jan-11
3.0
Aug-11
Source: Bloomberg
Mar-12
Sep-12
Apr-13
The US Economy is a Long Way Away
from Full Capacity
US Output Gap and Core PCE (Percent)
4
2
0
-2
-4
-6
-8
1991
United States
Core PCE Inflation Less 2.5%
1994
1997
Source: Federal Reserve/Haver Analytics
2000
2003
2006
2009
2012
US Forecast: Private Fundamentals
Versus Public Austerity
US Economic Forecast Overview
2012Q4
2013Q1
2013Q2
2013Q3
2013Q4
2014Q1
2014Q2
2014Q3
0.1
1.1
1.7
2.4
2.8
2.7
3.2
3.3
Unemployment
Rate (%)
7.8
7.7
7.6
7.5
7.4
7.3
7.2
7.0
Federal Funds
Target* (%)
0-0.25
0-0.25
0-0.25
0-0.25
0-0.25
0-0.25
0-0.25
0-0.25
10 Year Yields*
(%)
1.75
1.85
2.49
2.60
2.80
3.00
3.15
3.30
Real GDP
Growth
(Q/Q ann.)
* End of period; forecast as at September 2013. Source: Bloomberg, TD Securities
Canadian Recovery Is Running Out of
Steam, Waiting for a Rotation in Growth
Composition of Canadian Real GDP Growth (Percent)
9
6
3
0
-3
-6
Domestic Demand Including Inventories
Net Exports
Real GDP Growth
Series3
-9
-12
Sep-08
Jun-09
Mar-10
Source: Statistics Canada/Haver Analytics
Dec-10
Sep-11
Jun-12
Mar-13
Bank of Canada’s Forward-Looking
Guidance Speaks First to Stimulus…
“As long as there is significant slack in the Canadian economy, the inflation outlook remains
muted, and imbalances in the household sector continue to evolve constructively, the considerable
monetary policy stimulus currently in place will remain appropriate. Over time, as the
normalization of these conditions unfolds, a gradual normalization of policy interest rates can also
be expected, consistent with achieving the 2 per cent inflation target”
Measures of Canadian Capacity (Percent)
2
0
-2
-4
2002
Output Gap
Deviation of Core Inflation From 2.0% Target
2004
2005
Source: Bank of Canada /Haver Analytics
2007
2008
2010
2011
2013
… But the Legacy of ‘Lower for
Longer’ Will Need to be Managed
Household Debt to Income Ratio*
(Percent of Personal Disposable Income)
170
150
130
110
90
Canada
United States
70
1990
1993
1996
1999
2002
2006
* Adusted to US Measure; Source: Statistics Canada, Federal Reserve / Haver Analytics
2009
2012
Tighter Mortgage Regulations Only
Have a Limited Impact in Slowing Sales
Sales Activity Following the Announcement of
Tighter Mortgage Regulations*
120
Existing Home Sales:
2008
2010
2011
2012
100
80
Before
After
60
T-3
0
T+3
T+6
T+9
T+12
Months
Source: CREA, TD Securities
*Rebased to announcement of new regulations
Affordability Will Remain in
Check Despite Rising Rates
Canadian National Housing Affordability*
Monthly Mortgage Carrying Cost as a Percentage of Average Family Income**
40
35
30
25
20
15
10
5
0
3.7%
Posted 5.34%
7% Stress Test
2000 to 2007
Average
* Assumes a constant home price and income; ** Assumes 25% down on an average home price, 5yr posted rate, 25
year amortization; Source: Bank of Canada, TD Securities
Degree of Overvaluation in Housing
Depends on the Metric
Housing Affordability Metrics: Threshold
Carrying Cost Model
Housing Affordability Metrics:
Price to Rent
55
200
Percent of Household PDI
Price-to-Rent ratio, indexed Year 2000=100
180
50
160
45
10% Overvalued
62% Overvalued
140
120
40
30yr Average
35
100
30
80
25
60
1980
20
1980
1984
1988
1993
1997
2001
2006
Source: Haver Analytics, CREA, Statistics Canada
2010
30yr Average
1984
1988
1993
1997
2001
2006
Source: Haver Analytics, CREA, Statistics Canada
2010
Canada Forecast: Subdued Growth
Waiting for Foreign Support
Canada Economic Forecast Overview
2012Q4
2013Q1
2013Q2
2013Q3
2013Q4
2014Q1
2014Q2
2014Q3
0.9
2.5
1.6
2.0
2.3
2.4
2.5
2.8
Unemployment Rate
(%)
7.2
7.1
7.1
7.1
7.2
7.1
7.1
7.0
Core CPI Inflation
(Y/Y)
1.2
1.3
1.3
1.6
1.6
1.7
1.7
1.7
Overnight Rate* (%)
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
10 Year Yields* (%)
1.95
1.87
2.44
2.60
2.75
2.90
3.00
3.25
1.00
1.02
1.05
Real GDP Growth
(Q/Q ann.)
USDCAD
(CAD per USD)*
FORECAST UNDER REVIEW
* End of period; Forecast as at September 2013. Source: Bloomberg, TD Securities
The Taper Trade Makes it as Much
About USD Strength as CAD Weakness
Currency Performance vs USD (June 18 - 21)
NOK
SEK
NZD
JPY
AUD
CAD
EUR
DKK
CHF
GBP
-8
-6
-4
-2
0
2
CAD Correlations Breakdown in Favour
of Macro Fundamentals
1 Month Rolling CAD Correlations
1.0
0.5
0.0
-0.5
S&P500
WTI
2Y Rate Spread
-1.0
Sep-11 Dec-11 Apr-12
Source: Bloomberg, TD Securities
Jul-12
Oct-12 Feb-13 May-13 Aug-13
Export Mix to Keep Rebound Subdued
Amid Slower Domestic Demand
Composition of Canadian Exports Versus Forecasted
Growth (Percent)
10
China (4%)
2013-4 Real GDP Growth Forecast for Trade Partner (2012 Shares)
India (1%)
ASEAN-4 (1%)
8
Mexico (1%)
Rest of the
World (6%)
6
US (74%)
Asian
NICs (2%)
Japan (2%)
4
EU (9%)
2
0
0
10
20
30
40
50
Share of Canadian Exports
Source: Haver Analytics, TD
60
70
80
90
100
Market Positioning Far More Cautious on
the Strength in CAD
Canadian Dollar Positioning & CAD Forecast
160
0.9
Forecast
120
1.0
80
40
1.1
0
1.2
-40
-80
-120
2007
1.3
Net Non-Commercial (LHS)
USDCAD (RHS, inverted)
2008
2008
Source: CFTC/Haver Analytics
2009
1.4
2010
2011
2012
2013
A Sign that Longer-Term Investors are
Also Shying Away from Canadian Debt
Net Financial Flows into Canada
(6 Month Moving Average, Billions CAD)
12
Equities
Money Market
Bonds
8
4
0
-4
-8
2005
2006
2007
2008
Source: Statistics Canada / Haver Analytics
2009
2010
2011
2012
2013
Discontinuous Relationship With WTI &
WCS Spread Limit CAD Upside
Spread Between WCS and WTI
(USD/bbl)
WTI and USD/CAD (2000-2013)
160
0
130
-10
You are Here
100
-20
70
-30
40
-40
10
-50
May-08
0.9
1.1
Source: Bloomberg, TD Securities
1.3
1.5
1.7
Apr-09
Source: Bloomberg
Mar-10
Mar-11
Feb-12
Feb-13
The Outlook in a Nutshell
•
Some of the near-term risks in Europe have faded, but very
important structural challenges remain unresolved.
•
Slow abatement of headwinds in the United States is consistent
with a prolonged economic recovery, stimulus withdrawal still far
away.
•
Canadian growth will remain unbalanced but ultimately requires
support from foreign demand. Risk of a US-style housing
correction is low and interest in CAD is fading.
•
The global economy remains vulnerable to economic and other
shocks, ensuring policy stimulus remains in place. Volatility and
uncertainty will remain elevated.
David Tulk, CFA
Chief Canada Macro Strategist
416 – 983 – 0445
[email protected]