Download North American Economic Outlook

Economic and Financial Market Outlook:
Low for Longer…For Even Longer
August 2016
Mazen Issa
Senior FX Strategist
China: Growth Expectations
Marked Lower…
Evolution of Consensus Expectation for China
Real GDP Growth
7.6
7.4
7.2
7.0
6.8
2014
6.6
2015
6.4
2016
2017
6.2
6.0
Jan-14
Apr-14
Jul-14
Source: Bloomberg / TD Securities
Oct-14
Jan-15
Apr-15
Jul-15
Oct-15
…But More than Meets the Eye
When it Comes to China
16
China's Official Growth vs. Growth Indicator
4
3
14
2
12
1
10
0
8
-1
6
-2
-3
4
2
China Actual GDP %Y/Y
PCA-Based Growth Indicator (rhs)
-5
-6
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
0
-4
Source: Haver, Bloomberg, TD Securities
Growth Spectrum Not Off to a Good
Start…
WEAKER 2016
China: Managing
slower growth with
unknown
structural potholes
STRONGER 2016
Growth Spectrum Not Off to a Good
Start…
WEAKER 2016
China: Managing
slower growth with
unknown
structural potholes
STRONGER 2016
Emerging Asia:
Caught in China's
grip
The Sun is Starting to Rise on the
Eurozone…
Eurozone Money Growth and Core Inflation
(Year-over-Year Percent Change)
16
2.5
M3 (LHS)
Core Inflation (RHS)
12
2.0
8
1.5
4
1.0
0
-4
2007
0.5
2008
2009
2010
Source: Bloomberg / TD Securities
2011
2012
2013
2014
2015
2016
…But Political Uncertainty Is Also on
the Rise Since Brexit
The Problem With Brexit
Europe No Longer a Headwind, but
Will Only Provide Minimal Support
UK:
Recession bound
WEAKER 2016
China: Managing
slower growth with
unknown
structural potholes
Eurozone:
Structural issues to
restrain rebound
STRONGER 2016
Emerging Asia:
Caught in China's
grip
Are Some US Economic Headwinds
Turning a Corner?
All the Familiar Fundamental Headwinds
Continue to Heal
Composite Demand for Credit and Bank Lending
Standards (Percent Reporting Greater / Tighter)
US Fiscal Stimulus & Drag
(Percentage Point Impact on Real GDP)
120
1.0
Forecast
Demand
Lending Standards
80
0.5
40
0.0
0
-0.5
-40
-80
-1.0
2007
2009
2011
2013
2015
2006
2017
2008
2010
2012
2014
Source: Federal Reserve/Haver Analytics
Source: TD Economics
Source: ISM/Haver Analytics
US Existing Home Sales and Months Supply
(Thousands Units, Months)
US Job Losses by Recession (Millions of Jobs)
6
+5.5 million jobs
20
7000
18
Months' Supply (RHS)
Sales (LHS)
16
6000
Tax Credit
14
5000
4
2
0
12
-2
10
-4
1960
1981
Census Hiring
4000
8
-6
6
-8
4
-10
1990
2001
3000
2000
2004
2
2006
Source: NAR/Haver Analytics
2008
2010
2012
Current
0
10
2014
20
30
40
50
60
Months Following Start of Recession
Source: BLS/Haver Analytics
70
80
90
US Recovery Expected to Remain on
Track Despite Global Turmoil
Eurozone:
Structural issues to
restrain rebound
WEAKER 2016
China: Managing
slower growth with
unknown
structural potholes
STRONGER 2016
Emerging Asia:
Caught in China's
grip
United States:
Fundamental healing
with a bit more
turbulence
Saudi Arabia Has Reshaped the Supply
Landscape of Oil
Global Break-Even Oil Prices
(Brent USD)
120
110
100
100
100
90
80
80
70
70
90
70
75
60
50
40
20
45
Kashagan Field
Oil Sands Mining & Upgrading
Oil Sands Mining
Arctic
Ultra-deepwater
US Tight Oil
15
Oil Sands SAGD
10
Deepwater
Gulf of Mexico
25
Low-cost
Conventional
-
80
60
40
Russia
40
100
Source: TD Securities, Rystad Energy, CITI Research, Enbridge, Company Reports, Other contributors.
Demand Remains Deficient & Supply is
Abundant
Global Demand Balance vs Price of WTI
(Millions of Barrels per Day)
Demand Balance (4Q MA, RHS)
Price of WTI (LHS)
150
Forecast
1.3
125
0.8
0.3
100
-0.2
75
-0.7
-1.2
50
-1.7
-2.2
25
2004
2006
2008
2010
2012
2014
2016
Source: IEA, Bloomberg, TD Securities
S
Primary Hit to Canada is Through
Business Investment
Real GDP Growth and Business Investment
(Annualized Percent Change)
8
Technical Recession
4
0
-4
-8
Real GDP Growth
-12
Business Investment
-16
-20
-24
Mar-13
Sep-13
Mar-14
Sep-14
Source: Statistics Canada / Haver Analytics
Mar-15
Sep-15
Currency is Serving as an Important
Shock Absorber to the Economy
WTI and Canadian Dollar (2000-2016)
WTI (USD/bbl)
160
130
100
You are here
70
40
10
0.9
1.0
1.1
1.2
1.3
USDCAD
Source: Bloomberg, TD Securities
1.4
1.5
Weaker CAD
1.6
1.7
Non-Energy Exports Helping to Provide
An Offset
Energy and Non-Energy Exports
(Index: 2012 = 100)
140
Energy Exports
120
Non-Energy Exports
100
80
60
40
2010
2011
2012
Source: Bloomberg / TD Securities
2013
2014
2015
2016
However Link to the United States is
Not As Close as Before
Canadian Exporters Are Diverging From
US Demand (Index 2002 = 100)
130
120
US Activity Index
CAD Merchandise Exports
110
100
90
80
2002
2004
2006
Source: Statistics Canada, Bank of Canada, TD Securities
2008
2010
2012
2014
Even More Pressure on Domestic
Demand to Carry the Load
Housing Valuation Metrics (Percent)
100
TD Threshold Carrying Cost Model
Price-Income
Price-Rent
Real Price
80
60
40
Overvalued
20
0
-20
-40
Undervalued
-60
1988
1992
Source: CREA, TD Securities
1996
2000
2004
2008
2012
2016
Incomplete Offset to Energy Weakness
Will Weigh on Canada
Canada:
Competing
growth impulses
WEAKER 2016
China: Managing
slower growth with
unknown
structural potholes
Eurozone:
Structural issues to
restrain rebound
STRONGER 2016
United States:
Emerging Asia:
Caught in China's Fundamental healing
with a bit more
grip
turbulence
Taper Tantrum Experience Reinforced
the Theme of Gradualism
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
2011
3.0
2012
2013
2014
2015
Source: Bloomberg
S
Financial Market Implications for
the Outlook
•
Even with 50bps of hikes expected from Federal Reserve in 2017,
government bond yields are going to remain low by historical
standards. Bank of Canada could cut if growth dynamics do not
improve.
•
Demand and supply mismatch in the oil market implies renewed
downside price pressure with a recovery anticipated in 2016H2.
WTI to reach around $60/bbl by the end of 2016.
The Easy Part of the USD Rally
Has Passed
The USD Looking More Like an Ageing
Rather than a Raging Bull
Nominal Trade-Weighted Dollar Around Major
Fed Hiking Cycles
110
Range of TWI Performance during Fed Cycles*
2015
105
1994
100
95
90
85
-12
-6
0
# of months around hike
Source: Federal Reserve, TD Securities
*Major tightening cycles since 1985. Rebased to December 2015 hike.
6
12
ECB Policy Crowded Out Investors…
EUR Outflow Been Concentrated in Debt
(EUR bn, 12m total)
800
Equities
Bonds
Net Total
600
negative rates begin
400
Net Outflow
200
0
-200
Net Inflow
-400
-600
2009
Source: ECB, Bloomberg
2010
2011
2012
2013
2014
2015
2016
…and Has Encouraged a Reach for
Yield in Regions Like CAD
Net Portfolio Flows in Canada
(C$ bn, 12m moving sum)
200
Bonds
Equities
Net Total
150
Net
Outflow
100
50
0
Net Inflow
-50
-100
2008
2009
Source: Statistics Canada
2010
2011
2012
2013
2014
2015
2016
Oil and Rates Still Important Drivers for
CAD But May Become More Elusive
1 Month Rolling CAD Correlations
1.0
0.5
0.0
-0.5
S&P500
-1.0
Nov-14
Jan-15
5Y Rate Spread
Apr-15
Source: Bloomberg, TD Securities
Jul-15
WTI
Oct-15
Jan-16
Apr-16
Jul-16
A Road Map to 2016
•
The recovery from a balance sheet recession always
moves slower and takes longer than you expect
•
Confidence is key to avoid lurking vulnerabilities in a
slow-growth environment:
• Counterintuitive Federal Reserve response function
• All other central banks biased to do more and deal with the
consequences later
•
Untested economic theory will lead to more uncertainty
and more market volatility
Mazen Issa
Senior FX Strategist
212– 827 – 7182
[email protected]