THE WEEKLY BOTTOM LINE - TD
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THE WEEKLY BOTTOM LINE TD Economics HIGHLIGHTS OF THE WEEK • Central banks go on the offensive following a string of disappointing economic data, with a barrage of stimulative measures heard in Beijing, London, and Frankfurt. • The week’s domestic economic data consisted of a string of weak reports with dual ISM index declines and a very soft payrolls report only briefly interrupted by a mid-week holiday. • All eyes are on the Fed now with this week’s data lowering the bar for additional quantitative easing. However, we believe that while the scales are more balanced now, additional signs of weakness will be needed for the Fed to act. July 6, 2012 Current* Week Ago 52-Week High 52-Week Low Stock Market Indexes S&P 500 1,353 1,362 1,419 1,099 S&P/TSX Comp. 11,685 11,597 13,495 11,178 DAX 6,435 6,416 7,471 5,072 FTSE 100 5,665 5,571 6,055 4,944 Nikkei 9,021 9,007 10,255 8,160 Fixed Income Yields U.S. 10-yr Treasury 1.55 1.64 3.14 1.45 Canada 10-yr Bond 1.68 1.74 3.06 1.63 Germany 10-yr Bund 1.33 1.58 2.97 1.17 UK 10-yr Gilt 1.60 1.73 3.30 1.52 Japan 10-yr Bond 0.80 0.84 1.18 0.80 Foreign Exchange Cross Rates C$ (USD per CAD) 0.98 0.98 1.06 0.95 Euro (USD per EUR) 1.23 1.27 1.45 1.23 Pound (USD per GBP) 1.55 1.57 1.65 1.53 Yen (JPY per USD) 79.6 79.8 83.7 75.8 Commodity Spot Prices** Crude Oil ($US/bbl) 84.9 85.0 109.5 75.7 Natural Gas ($US/MMBtu) 2.91 2.74 4.65 1.84 Copper ($US/met. tonne) 7699.5 7691.8 9818.5 6721.5 Gold ($US/troy oz.) 1587.2 1597.4 1900.2 1532.4 THIS WEEK IN THE MARKETS *as of 10:00 am on Friday, **Oil-WTI, Cushing, Nat. Gas-Henry Hub, LA (Thursday close price), Copper-LME Grade A, Gold-London Gold Bullion; Source: Bloomberg Federal Reserve (Fed Funds Rate) Bank of Canada (Overnight Rate) European Central Bank (Refi Rate) Bank of England (Repo Rate) Bank of Japan (Overnight Rate) Source: Central Banks, Haver Analytics 0.10% 0.50% 0 - 0.25% 1.00% 0.75% GLOBAL OFFICIAL POLICY RATE TARGETS Current Target WEEKLY MOVES vs U.S. DOLLAR -3.06 -3.01 -1.45 -1.18 -1.01 -0.65 -0.5 -0.31 0.24 -4 -3 -2 -1 0 1 Euro Swiss franc British pound Brazilian real Mexican peso N. Zealand dollar Australian dollar Canadian dollar Japanese yen Source: Bloomberg, as at 12:12 pm, July 6th, 2012 % Current Rate 2013 7/6/12 Q1 Q2 Q3F Q4F Q1F Q2F Q3F Q4F Fed Funds Target Rate (%) 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 2-yr Govt. Bond Yield (%) 0.27 0.33 0.31 0.35 0.40 0.65 0.70 0.80 1.00 10-yr Govt. Bond Yield (%) 1.54 2.21 1.63 1.95 2.10 2.25 2.50 2.75 3.00 30-yr Govt. Bond Yield (%) 2.66 3.34 2.70 2.90 3.15 3.40 3.65 3.80 3.95 Real GDP (Q/Q % Chg, Annualized) 1.9 (Q1) 1.9 1.8 2.3 2.1 1.6 2.2 2.6 3.1 CPI (Y/Y % Chg.) 1.7 (May-12) 2.8 1.9 1.4 1.6 1.4 1.8 2.1 2.1 Unemployment Rate (%) 8.2 (Jun-12) 8.3 8.2 8.1 8.1 8.1 8.1 7.9 7.7 Forecast by TD Economics. Source: Bloomberg, TD Economics TD ECONOMICS KEY FORECASTS 2012
Transcript of THE WEEKLY BOTTOM LINE - TD
THE WEEKLY BOTTOM LINE
TD Economics
HIGHLIGHTS OF THE WEEK
• Centralbanksgoontheoffensivefollowingastringofdisappointingeconomicdata,withabarrageofstimulativemeasuresheardinBeijing,London,andFrankfurt.
• Theweek’sdomesticeconomicdataconsistedofastringofweakreportswithdualISMindexdeclinesandaverysoftpayrollsreportonlybrieflyinterruptedbyamid-weekholiday.
• AlleyesareontheFednowwiththisweek’sdata loweringthebarforadditionalquantitativeeasing.However,webelievethatwhilethescalesaremorebalancednow,additionalsignsofweaknesswillbeneededfortheFedtoact.
July 6, 2012
Current* WeekAgo
52-WeekHigh
52-WeekLow
Stock Market IndexesS&P500 1,353 1,362 1,419 1,099S&P/TSXComp. 11,685 11,597 13,495 11,178DAX 6,435 6,416 7,471 5,072FTSE100 5,665 5,571 6,055 4,944Nikkei 9,021 9,007 10,255 8,160Fixed Income YieldsU.S.10-yrTreasury 1.55 1.64 3.14 1.45Canada10-yrBond 1.68 1.74 3.06 1.63Germany10-yrBund 1.33 1.58 2.97 1.17UK10-yrGilt 1.60 1.73 3.30 1.52Japan10-yrBond 0.80 0.84 1.18 0.80Foreign Exchange Cross RatesC$(USDperCAD) 0.98 0.98 1.06 0.95Euro(USDperEUR) 1.23 1.27 1.45 1.23Pound(USDperGBP) 1.55 1.57 1.65 1.53Yen(JPYperUSD) 79.6 79.8 83.7 75.8Commodity Spot Prices**CrudeOil($US/bbl) 84.9 85.0 109.5 75.7NaturalGas($US/MMBtu) 2.91 2.74 4.65 1.84Copper($US/met.tonne) 7699.5 7691.8 9818.5 6721.5Gold($US/troyoz.) 1587.2 1597.4 1900.2 1532.4
THIS WEEK IN THE MARKETS
*asof10:00amonFriday,**Oil-WTI,Cushing,Nat.Gas-HenryHub,LA(Thursdaycloseprice),Copper-LMEGradeA,Gold-LondonGoldBullion;Source:Bloomberg
FederalReserve(FedFundsRate)BankofCanada(OvernightRate)EuropeanCentralBank(RefiRate)BankofEngland(RepoRate)BankofJapan(OvernightRate)Source:CentralBanks,HaverAnalytics
0.10%0.50%
0-0.25%1.00%0.75%
GLOBAL OFFICIAL POLICY RATE TARGETSCurrentTarget
WEEKLY MOVES vs U.S. DOLLAR
-3.06
-3.01
-1.45
-1.18
-1.01
-0.65
-0.5
-0.31
0.24
-4 -3 -2 -1 0 1
Euro
Swissfranc
Britishpound
Brazilianreal
Mexicanpeso
N.Zealanddollar
Australiandollar
Canadiandollar
Japaneseyen
Source:Bloomberg,asat12:12pm,July6th,2012
%
Current Rate 20137/6/12 Q1 Q2 Q3F Q4F Q1F Q2F Q3F Q4F
FedFundsTargetRate(%) 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.252-yrGovt.BondYield(%) 0.27 0.33 0.31 0.35 0.40 0.65 0.70 0.80 1.0010-yrGovt.BondYield(%) 1.54 2.21 1.63 1.95 2.10 2.25 2.50 2.75 3.0030-yrGovt.BondYield(%) 2.66 3.34 2.70 2.90 3.15 3.40 3.65 3.80 3.95RealGDP(Q/Q%Chg,Annualized) 1.9(Q1) 1.9 1.8 2.3 2.1 1.6 2.2 2.6 3.1CPI(Y/Y%Chg.) 1.7(May-12) 2.8 1.9 1.4 1.6 1.4 1.8 2.1 2.1UnemploymentRate(%) 8.2(Jun-12) 8.3 8.2 8.1 8.1 8.1 8.1 7.9 7.7ForecastbyTDEconomics.Source:Bloomberg,TDEconomics
TD ECONOMICS KEY FORECASTS2012
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CENTRAL BANKS TO THE RESCUECentral banks went on an offensive yesterday following
a slew of dismal economic data in Europe and beyond. The barrage of stimulative measures heard in Beijing, London, and Frankfurt all within an hour of each other sent equity markets into heavy buying. However, the incipient rally was cut short as reality set in that the measures were more a sign of resignation in the face of materializing downside risks and a slowing global economy, rather than effective stimulative policy – at least in the case of the ECB and BoE.
The People’s Bank of China lowered its lending rate by 31 basis points to 6 per cent – the second consecutive monthly cut – and was the only one of the central banks to surprise the markets on Thursday. With its trade-dependent economy slowing as global demand retreats, the PBoC pulled the trigger the day of the anticipated ECB and BoE announcements, perhaps in an attempt to get a “bigger bang for its Yuan” given the additional confidence impact that a perception of synchronicity could entail. The other possible reason for the synchronized move was to support the euro and, in particular, keep as much of the market pressure as possible off the euro-Renminbi exchange rate.
The other announcements were largely as expected with the Bank of England leaving its lending rate unchanged but pumping an additional £50bn into the economy already in a double-dip, albeit shallow, recession. This move follows a rather unconventional measure of a funding-for-lending programme – jointly established by the Bank of England and the U.K. Treasury – intended to spur credit growth in an otherwise stagnant environment.
The European Central Bank too has virtually exhausted all of its conventional policy tools by lowering the refinanc-ing and deposit rates by a quarter percentage points each to 75bp and zero, respectively. The refinancing rate drop should save European banks money while the deposit rate decrease is intended to put to work some of the €800bn or so in overnight deposits parked at the ECB facility. More importantly, as governor Draghi has stated, the ECB has no obvious additional measures that could be effective in a highly fragmented market. This means that any sort of quantitative easing – something that the ECB has avoided thus far – would be difficult to implement given multiple sovereigns that are in the eurozone and the continuing debt crisis.
Finally, although this week was a short one in the U.S. – with a mid-week Independence Day holiday – it was
nonetheless full of data releases. Unfortunately, the majority of these added to the overall feeling of pessimism as both ISM readings declined with the manufacturing index falling marginally into contractionary territory. And while both ISM employment sub-indexes stood their ground, this morning’s payroll report once again surprised to the downside. Non-farm payrolls posted the smallest gain since the third quarter of 2011, and private payrolls had their worst quarter in a year-and-a-half. All this served to dim the economic outlook further and consequently, lower inflation expectations.
Following last month’s extension of Operation Twist through year-end, we expected the Fed to stay on the side-lines unless there is a material shift in inflation expectations as outlined in our recent Perspective. With the 5-year for-ward breakevens falling by 10 basis points this week, the Fed found itself ever closer to another round of quantitative easing. However, given the subdued impact of another round and potential risks of additional purchases, this week’s data and its impact on inflation expectations is still not enough to tip the scales. Another twenty basis point decline in inflation expectations or a further intensification of global risks would likely be sufficient to shift the scales in favor of QE3. Accordingly, a closer eye on financial developments and economic data will be called for leading up to the July 31/August 1 FOMC meeting, with mid-month reports on retail sales and CPI of particular importance.
Michael Dolega, Economist 416-944-5729
THE PAYROLLS SEE-SAW
0
50
100
150
200
250
300
Jan-11 May-11 Sep-11 Jan-12 May-12
Source:BureauofLaborStatistics
Thousands (3-monthmovingavg.)
Non-farmemployment
Privateemployment
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UPCOMING KEY ECONOMIC RELEASES
*ForecastbyRatesandFXStrategyGroup.Forfurtherinformation,contactTDRates&[email protected].
The US trade balance is expected to post its second consecutive monthly improvement in May, with the deficit narrowing to $47.5B. Much of the improvement is expected to come from falling energy prices, which should push the petroleum import bill sharply lower in May. Weakening domestic economic growth momentum should also temper import demand, with total imports expected to fall by as much as 1.5% m/m, marking the second monthly decline in this indicator.
Exports should decline during the month, as weakening global demand and the appreciation in the dollar (which should reduce export competitiveness) temper global US exports demand. As a result, we expect exports to fall by 1.0% m/m, also marking the second straight drop. With both
imports and exports declining for the second consecutive month, this report should underscore the weakening tone in global economic activity as continued unease towards the situation in Europe tempers overall activity.
U.S. International Trade - May* Release Date: July 11, 2012April Result: -$50.1B TD Forecast: -$48.5BConsensus: -$48.4B
U.S. INTERNATIONAL TRADE BALANCE
-55
-50
-45
-40
-35
-30
-25
Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12
Source:CensusBureau/HaverAnalytics
US$,Billions
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Jul2 ISMManufacturing Jun Index 49.7 53.5Jul2 ISMPricesPaid Jun Index 37.0 47.5Jul2 ConstructionSpending May M/M%Chg. 0.9 0.6 RJul3 ISMNewYork Jun Index 49.7 49.9Jul3 FactoryOrders May M/M%Chg. 0.7 -0.7 RJul3 TotalVehicleSales Jun Millions 14.05 13.73Jul3 DomesticVehicleSales Jun Millions 11.05 10.75Jul5 MBAMortgageApplications 29-Jun W/W%Chg. -6.7 -7.1Jul5 ChallengerJobCuts Jun Y/Y%Chg. -9.4 66.7Jul5 RBCConsumerOutlookIndex Jul Index 47.0 46.1Jul5 ADPEmploymentChange Jun Thousands 176 136 RJul5 InitialJoblessClaims 30-Jun Thousands 374 388 RJul5 ContinuingClaims 23-Jun Thousands 3306 3302 RJul5 BloombergConsumerComfort 1-Jul Index -37.5 -36.1Jul5 ISMNon-Manf.Composite Jun Index 52.1 53.7Jul6 ChangeinNonfarmPayrolls Jun Thousands 80 77 RJul6 ChangeinPrivatePayrolls Jun Thousands 84 105 RJul6 ChangeinManufact.Payrolls Jun Thousands 11 9 RJul6 UnemploymentRate Jun % 8.2 8.2Jul6 AvgHourlyEarningAllEmp Jun M/M%Chg. 0.3 0.2 R
Jul6 UnemploymentRate Jun % 7.2 7.3Jul6 NetChangeinEmployment Jun Thousands 7.3 7.7Jul6 FullTimeEmploymentChange Jun Thousands 29.3 1.4Jul6 PartTimeEmploymentChange Jun Thousands -22.0 6.3Jul6 ParticipationRate Jun % 66.7 66.8Jul6 BuildingPermits May M/M%Chg. 7.4 -4.4 RJul6 IveyPurchasingManagersIndexSA Jun Index 49.0 60.5
Jul2 JN VehicleSales Jun Y/Y%Chg. 40.9 66.3Jul2 EC Euro-ZoneUnemploymentRate May % 11.1 11.0Jul3 AU RBACashTarget 03-Jul % 3.50 3.50Jul3 EC Euro-ZonePPI May M/M%Chg. -0.5 0.1 RJul4 EC Euro-ZoneRetailSales May M/M%Chg. 0.6 -1.0Jul4 AU TradeBalance May Millions -285 -26 RJul5 GE FactoryOrders(nsa) May M/M%Chg. 0.6 -1.4 RJul5 UK BOEAnnouncesRates 05-Jul % 0.5 0.5Jul5 EC ECBAnnouncesInterestRates 05-Jul % 0.75 1.00Jul6 FR TradeBalance May Euros,Mlns -5325 -5768 R
Source:Bloomberg,TDEconomics
RECENT KEY ECONOMIC INDICATORS: JULY 2 - 6, 2012
International
Prior
United States
ReleaseDate Economic Indicators Data for
Period Units Current
Canada
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UPCOMING ECONOMIC RELEASES AND EVENTS: JULY 9 - 13, 2012Release
Date Time* Economic Indicator/Event Data for Period Units Consensus
Forecast Last Period
United StatesJul9 -- Fed Evans Speaks in ThailandJul9 11:55 Fed's Williams Speaks in Couer d'Alene, IdahoJul9 15:00 ConsumerCredit May $,Blns 8.5 6.5Jul10 6:05 Fed's Bullard Speaks on the Eurozone in LondonJul10 7:30 NFIBSmallBusinessOptimism Jun Index 94.0 94.4Jul10 10:00 IBD/TIPPEconomicOptimism Jul Index 46.5 46.7Jul10 10:00 JOLTsJobOpenings May Thousands -- 3416Jul11 7:00 MBAMortgageApplications 6-Jul W/W%Chg. -- -6.7Jul11 8:30 TradeBalance May $,Blns -48.4 -50.1Jul11 10:00 WholesaleInventories May M/M%Chg. 0.3 0.6Jul11 14:00 Minutes of June 19-20 FOMC MeetingJul12 8:30 ImportPriceIndex Jun M/M%Chg. -1.6 -1.0Jul12 8:30 InitialJoblessClaims 7-Jul Thousands 374 374Jul12 8:30 ContinuingClaims 30-Jun Thousands 374 3306Jul12 14:00 Monthly Budget StatementJul12 15:40 Fed's Williams Speaks in Portland, OregonJul13 8:30 ProducerPriceIndex Jun M/M%Chg. -0.6 -1.0Jul13 9:55 U.ofMichiganConfidence Jul Index 73.6 73.2Jul13 13:20 Fed's Lockhart Speaks on Economy in Jackson, MS
CanadaJul9 10:30 BusinessOutlookFutureSales 2Q % -- 35.0Jul9 10:30 BoCSeniorLoanOfficerSurvey 2Q % -- -16.9Jul10 8:15 HousingStarts Jun Thousands 200.0 211.4Jul11 8:30 Int'lMerchandiseTrade May CAD,Blns -0.60 -0.37Jul12 8:30 NewHousingPriceIndex May M/M%Chg. 0.2 0.2
InternationalJul9 2:00 GE CurrentAccount May Euro,Blns 10.2 11.2Jul9 2:00 GE TradeBalance May Euro,Blns 14.1 14.4Jul9 2:30 FR BankofFranceBusinessSentiment Jun Index 92.0 93.0Jul9 4:30 EC SentixInvestorConfidence Jul Index -25.8 -28.9Jul10 1:00 JP ConsumerConfidence Jun Index 40.7 40.7Jul10 2:45 FR IndustrialProduction May M/M%Chg. -0.8 1.5Jul10 4:30 UK IndustrialProduction May M/M%Chg. -0.2 0.0Jul10 4:30 UK TotalTradeBalance May GBP,Mlns -3500 -4421Jul11 2:45 FR CurrentAccount May Euro,Blns -3.5 -4.2Jul11 21:30 AU EmploymentChange Jun Thousands 0.0 38.9Jul11 21:30 AU UnemploymentRate Jun % 5.2 5.1Jul12 -- JP BankofJapanInterestRateAnnouncement Jul % -- 0.10Jul12 1:30 FR CPI-EUHarmonised Jun M/M%Chg. 0.0 -0.1Jul12 4:00 EC ECB Publishes July Monthly ReportJul12 5:00 EC EurozoneIndustrialProduction May M/M%Chg. 0.0 -0.8
*EasternStandardTime;Source:Bloomberg,TDEconomics
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