Douglas Porter, CFA, Chief Economist, BMO Financial Group · much for the market’s original...

Douglas Porter, CFA, Chief Economist, BMO Financial Group

April 7, 2017

BMO Capital Markets Economics economics.bmocapitalmarkets.com 1-800-613-0205

Please refer to page 14 for important disclosures

10 Reasons the BoC Should Lighten Up

Canada Jobs Beat Expectations... Again

Fed Minutes: Balance Sheet Cut “Appropriate Later this Year”

ECB Pres. Draghi Stresses No Early Exit

U.S. Strikes Syrian Airbase

Forecast change: BMO looks for earlier Fed rate hikes in 2017, June and Sept. (vs June and Dec.) and for BoC to start hikes in Apr. 2018 (vs. July)

Next Issue: Thursday, April 13, 2017

Feature ArticlePage 7

of 14 Focus — April 7, 2017

Our Thoughts

Fed Ups Its Tightening Ante

he Minutes from the March 14-15 FOMC meeting cast a powerful light on monetary policy prospects. It was revealed that the timing of altering reinvestment

policy was seemingly pulled forward with “most participants” judging this “would likely be appropriate later this year.” According to the most recent Survey of Primary Dealers, the market odds had favoured reinvestment starting by 2018Q2.

Still up in the air is when this will actually commence (obviously December or sooner) and when the details will be announced (“well in advance” but still to be discussed “during upcoming meetings”, making June the likely earliest announcement date). A key feature being deliberated is whether to phase out reinvestments or end them all at once… tapering or cold turkey. The former reduces the risk of another “taper tantrum” while tapping the balance sheet shrinkage brakes. The latter is easier to communicate and allows for speedier normalization. Either way, the process of draining liquidity will launch this year, which is, other things equal, unconstructive for financial asset prices. But, other things are rarely equal. Should strengthening economic growth sail alongside (powered by stimulative government policies or animal spirts), this could help buoy equity prices, for example. And, the ultimate impact on bond yields will be partly determined by how Treasury finances the Fed’s redemption waves.

The Minutes contained some other hawkish policy hints. They stated that “about half of the participants did not incorporate explicit assumptions about fiscal policy in their projections.” If the FOMC was prepared for three rate hikes both this year and next (the median projection), while not factoring in some upside risks, imagine how much the dot plot could change if these risks began to be realized? Perhaps we should think about three hikes as a “minimum” placeholder, pending developments on the fiscal and regulatory fronts, and wait to see whether surging business and consumer confidence translate (tentative so far) into tangible economic activity.

Finally, while there was still some debate about when the inflation goal would be achieved, the Minutes revealed that “nearly all participants judged that the U.S. economy was operating at or near maximum employment.” As recently as both the December and January-February meetings, the qualifying adjective used was “most”. Although the March employment report disappointed on the payroll employment front (up only 98k with 38k in downward revisions, but partly impacted by bad weather), it didn’t disappoint on the slack side. The unemployment rate dropped 2/10s to 4.5%, a new cycle low, which matches the lowest level any FOMC participant judges the longer-run rate to be. The participation rate was unchanged at 63.0%, so this drop is all due to household-surveyed job growth (472k) outpacing labour force growth (145k). Indeed, household-survey jobs are up 919k in the past two months—among the strongest performances so far this expansion. The broader U6 rate dropped an even larger 3/10s to 8.9%, also a new cycle low, as both marginally-attached (discouraged) workers and those working part-time for economic reasons decreased. Indeed, our in-house measure of labour market slack (which incorporates 16 indicators) flashed “full employment” for the first time in March. These meaningfully reduced slack metrics and solid household employment performance offset the poor headline payroll result in our mind, and probably the Fed’s.

Michael Gregory, CFA Deputy Chief Economist [email protected] 416-359-4747

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Our Thoughts

On balance, the combination of a hastier start to balance sheet normalization and a near unanimous assessment of having achieved one policy goal emphasizes that there was a slightly heightened sense of tightening urgency at the March meeting… so much for the market’s original “dovish hike” interpretation. In consequence we have tweaked our Fed call. We pulled forward this year’s remaining two rate hikes to June-September from June-December, and would have considered a new fourth action in December if not for the fact that reinvestment tapering should be in full swing by then. Until reinvestment rolls down to nil, we suspect the FOMC will be leery to resume rate hikes, out of fear of triggering another “taper tantrum”. We look for a quarterly pattern of rate hikes to resume in June 2018.

Bank of Canada Preview: Limited Optimism

his week’s Feature lays out our view that the tone of the April 12th Bank of Canada policy statement and Monetary Policy Report will likely be neutral while

accentuating the downside risks. Indeed, Governor Poloz wants to ensure that bond yields and the Canadian dollar stay under wraps. Even so, the data have clearly turned more positive, and the Bank will have no choice but to upgrade their GDP growth forecast materially.

The March policy statement opened up with some inflation talk, but we anticipate that will be moved a bit lower down this month. And, any talk on inflation will outline how the core measures remain subdued driven by economic slack. Expect the likely upward revisions to GDP growth to be noted, but downplayed, while trumpeting the uncertainties. Look for a slight tweak to the divergence theme, as the Canadian economy might actually outperform the U.S. this year. Indeed, the fact that the U.S. is running close to capacity, while Canada still has some slack, will be emphasized. Given the recent and persistent softness in exports, more cautious commentary on that front is probable.

In the MPR, 2017 GDP will likely be upgraded at least two-tenths from January’s 2.1% forecast, while 2018 could be cut a tick or two. The CPI profile for 2017 will also be lifted a few ticks after the stronger start to the year.

The most important question surrounding this meeting is whether the timing of the output gap closing shifts. Given the better-than-expected 2016Q4 growth, upward revisions to 2016Q2 and Q3, and strong start to 2017 (GDP growth tracking above 3% for Q1), the output gap would close at the end of this year using the January MPR’s growth profile for the rest of 2017. However, due to the BoC’s dogged dovishness, we anticipate that they will lift potential growth to keep the output gap closing in 2018. As a small nod to the better data though, the Bank will likely see the gap closing in the first half of 2018, slightly earlier than the mid-2018 in the January MPR. Look for either better labour force growth over the past year, coming government stimulus, or improving productivity as a rationale for higher potential growth.

Key Takeaway: Expect the Bank of Canada to take a more neutral tone, while still emphasizing the downside risks and disappointment regarding export and investment

Benjamin Reitzes Senior Economist [email protected] 416-359-5628

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Our Thoughts

growth. Assuming the data don’t sour, look for a more meaningful shift in tone to come at the July meeting. B.A.A.R.

Let’s Knot Dragh It Out

he ECB has had a rough month. After the March monetary policy meeting, the intent was to signal some optimism, a light at the end of the tunnel if you will.

After all, economic growth and inflation around the world are improving; and, the staff forecasts for Euro Area GDP and CPI were revised higher yet again. But the seemingly growing optimism pushed bond yields higher. Marketwatchers started to price in a 50%+ probability of an ECB rate hike before the end of 2017, much to the dismay of most on the ECB’s Governing Council. A number of officials quickly stepped in to set the record straight: underlying inflation was still very subdued, as was wage growth, which is considered to be a “linchpin” for inflation. The Minutes from the meeting (released this week) made it crystal clear, calling it “premature” to draw conclusions on the medium-term inflation outlook, and that changing the forward guidance at that point would also be “premature”. Only when inflation and the economy proceed further will there be discussion on policy normalization. In other words, not so fast.

The ECB these days, with its many differing views being opined by the various policymakers, reminds one of the Federal Reserve way back when they also suffered from some communication issues. (Remember how one Fed official, when asked what “considerable period” meant, blurted out that “this is the kind of term that’s hard to define but probably means something on the order of around six months, or that kind of thing” and markets pounced on it?) Yes, this is not a pure comparison but the point is, an influential central banker can say one thing but mean something else. Again: communication problems.

Bottom Line: The ECB is getting a little uncomfortable with its accommodative stance. Although it is unlikely that they will change the €60 bln/month pace of asset purchases between now and December, it is becoming increasingly unlikely that they will extend the time frame again. Unless of course, those pesky elections go horribly wrong later this year.

Toronto’s Housing Market: Five-alarm Fire

lenty of ink has been spilt on explaining the craziness in Toronto’s real estate market. I say craziness because this seems to be the most-often used description

of the market, including by some seasoned realtors (which is really saying something). Policymakers from all three levels of government are wringing their hands in unison over the problem (yes, they finally admit it is a problem). But is the fire out of control?

Here’s what we know. Outside of a few regions in China, one is hard pressed to find a city with faster-rising house prices than Toronto, where the average rose by a third in the past 12 months. This is the fastest rate since the late 1980s when speculation ran amok. Curiously, prices are now rising faster in the outskirts of Greater Toronto than in supply-constrained Central Toronto. This reflects the utter

Jennifer Lee Senior Economist [email protected] 416-359-4092

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Sal Guatieri Senior Economist [email protected] 416-359-5295

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Our Thoughts

lack of affordability in the latter (and soon to be in the former if prices don’t pipe down), and utter desperation of buyers pining for a backyard.

There is no single factor pushing prices. Economic and demographic trends remain favourable. Job growth in the GTA has averaged just over 2% in the past two years. Seeking work and a new life, a net 175,000 people from other countries and provinces moved to Ontario last year, a record number and 75% above the past-decade mean. Many newcomers brought wealth and skills to the region. In addition, the large cohort of millennials is now of prime home-buying age. Meantime, the leading edge of retiring baby boomers is cashing in their lottery ticket, and buying outside the GTA, which is likely driving prices higher in places like the Niagara Region, where housing supply is ample. Throw in some foreign investment (about 5% of sales according to TREB and Urbanation) and a sprinkle of speculation, and it’s no wonder that demand remains red hot. Meantime, rising construction and environmental costs, approval delays for permits, and a dwindling supply of zoneable land are squeezing the supply of new units. Across the GTA, there are just 300 new detached homes available in builder inventories today versus 12,000 a decade ago. In the resale market, listings are having a hard time keeping up with sales, suggesting the latter would be even stronger if supply wasn’t an issue.

While all of these fundamental factors likely warrant strong price growth, they almost certainly don’t warrant a 33% gain. To get that kind of increase in prices from already high levels you need two other forces. The first is cheap and abundant credit, which provides oxygen to keep the fire going. Without it, the flames would peter out. The second is a shift in buyer and seller psychology. Fear of missing out of ever buying a home is pulling buyers in (many are even foregoing home inspections), while fear of missing out on capital gains is holding sellers back from listing their properties.

For policymakers playing firefighters, taking a multi-pronged approach and seriously tightening the credit taps would surely douse the flames. But, in the absence of a meaningful policy shift, we can take some comfort in the old adage that trees don’t grow to the sky. At some point, the crushing weight of affordability will rain down on the markets… hopefully before the next recession sprays a firehose.


Recap

Priscilla Thiagamoorthy Economic Analyst [email protected] 416-359-6229

Good News Bad News

Canada BoC Gov. Poloz doesn’t think

low interest rates are fuelling housing market speculation

BoC’s BOS shows firms more upbeat as investment intentions surge

Employment +19,400 (Mar.) Auto Sales +7.1% y/y (Mar.) Ivey PMI +6.1 pts to 61.1 (Mar.) Province of Newfoundland & Labrador projects a $778 mln budget deficit (FY17/18)—down from $1.1 bln expected for FY16/17 Province of PEI projects balanced budget (FY17/18)

Jobless Rate +0.1 ppts to 6.7% (Mar.) Average Hourly Wages +1.1% y/y (Mar.)—soft Building Permits -2.5% (Feb.) Merchandise Trade Deficit $972 mln (Feb.)—swung from surplus

United States FOMC Minutes reveal talks of

shrinking the balance sheet… and March’s hike wasn’t so dovish after all

Richmond Fed’s Lacker resigns

Jobless Rate -0.2 ppts to 4.5% (Mar.) Average Hourly Earnings +0.2% (Mar.) Construction Spending +0.8% (Feb.) Factory Orders +1.0% (Feb.) Goods & Services Trade Deficit narrowed to $43.6 bln (Feb.) Initial Claims -25k to 234k (Apr. 1 week)

Nonfarm Payrolls +98,000 (Mar.)—disappointing Manufacturing ISM -0.5 pts to 57.2 (Mar.) Non-Manufacturing ISM -2.4 pts to 55.2 (Mar.) Auto Sales 16.6 mln units a.r. (Mar.)—2-yr low

Japan BoJ Kuroda thinks it’s too

early to talk exit strategy from ultra-easy stimulus

Tankan Large Mfg Index +2 pts to 12 (Q1) Services PMI +1.6 pts to 52.9 (Mar.) Composite PMI +0.7 pts to 52.9 (Mar.) Consumer Confidence +0.7 pts to 43.9 (Mar.)

Leading Index -0.5% (Feb. P)

Europe ECB Pres. Draghi doesn’t see a

need to deviate from current policy stance

ECB Minutes: ultra-easy monetary stance still needed until inflation gets to target

BoE Gov. Carney warns of risks to financial stability…

…and urges U.K. banks to prepare for all Brexit outcomes

Euro Area—Retail Sales +0.7% (Feb.) Euro Area—Jobless Rate -0.1 ppt to 8-year low 9.5% (Feb.) Euro Area—Producer Prices unch (Feb.) Germany—Industrial Production +2.2% (Feb.) Germany—Factory Orders +3.4% (Feb.) Germany—Trade Surplus widened to €21.1 bln (Feb.) France—Trade Deficit narrowed to €6.6 bln (Feb.) France—Jobless Rate steady at 10% (Feb. P) Italy—Jobless Rate -0.3 ppts to 11.5% (Feb. P) U.K.—Services PMI +1.7 pts to 55.0; Composite PMI +1.1 pts to 54.9 (Mar.)

Euro Area—Retail PMI -0.4 pts to 49.5 (Mar.) France—Industrial Production -1.6% (Feb.) Italy—Retail Sales -0.3% (Feb.) U.K.—Industrial Production -0.7% (Feb.) U.K.—Manufacturing PMI -0.3 pts to 54.2; Construction PMI -0.3 pts to 52.2 (Mar.) U.K.—Unit Labour Costs +2.1% y/y (Q4) U.K.—Trade Deficit widened to £12.5 bln (Feb.)

Other RBA on hold and tilts dovish

on job market slack

China—Foreign Reserves $3.0 trln (Mar.) Australia—Trade Surplus widened to A$3.6 bln (Feb.) Australia—Building Approvals +8.3% (Feb.)

China—Caixin Manufacturing PMI -0.5 pts to 51.2; Caixin Services PMI -0.4 pts to 52.2; Caixin Composite PMI -0.5 pts to 52.1 (Mar.) Australia—Retail Sales -0.1% (Feb.)

Indications of stronger growth and a move toward price stability are good news for the economy.


Feature

10 Reasons the BoC Should Lighten Up Douglas Porter, CFA, Chief Economist • [email protected] • 416-359-4887 Benjamin Reitzes, Senior Economist • [email protected] • 416-359-5628

The Bank of Canada has been conspicuously cautious on the economic outlook so far this year, even in the face of a wave of surprisingly upbeat economic data. We suspect that the song will remain similar in next week’s quarterly Monetary Policy Report, accentuating the downside risks albeit with an ostensibly neutral bias. It is blindingly obvious that the Bank is attempting to keep overall monetary conditions loose—whether through keeping bond yields at bay or the Canadian dollar under wraps. Still, given the run of stronger data, we have pulled forward the timing of the resumption of rate hikes to April 2018 from July, and now have the Bank matching the Fed in subsequent quarterly rate hikes. Here are 10 reasons why we think that an ultra-loose policy is no longer required or appropriate, grouped into three broad categories:

Growth… 1. GDP: The economy has powered ahead at a 4.3% annualized pace since mid-2016 (Chart 1). Growth in that rarified air for a seven-month stretch has happened only a few times since 2000. And, in the two years since the emergency BoC rate cut in January 2015, real GDP has expanded at a 1.6% annualized pace—not stellar, perhaps, but a bit above potential growth and far from dire.

2. Employment: Echoing GDP, job growth has sparkled since last summer. With yet another solid reading in March, employment is up at a crackling 2.3% a.r. in the past eight months—again, one of the fastest rates since early last decade. While the Bank gripes about slow hours worked and soft wage growth, the former popped back in March. And, the jobless rate remains near its cycle low at 6.7%.

3. Business investment: The biggest thorn in the economy over the past two years was the deep drop in capital spending; that weakness seems to be ending. The Bank’s latest Business Outlook Survey showed investment intentions popping to a 7-year high in Q1, while electronic equipment imports have perked up as well (Chart 2). Yes, much of this may be maintenance work; and, yes, there is still much caution, but the deep drag from this component looks to be over.

4. Trade: The return to a merchandise trade deficit in February was a rare sour note for the economy. But net trade is still much-improved from recent years. Moreover, it’s not the Bank’s job to determine the composition of growth, but rather the overall pace of growth, much as it must set policy for the national economy and not regional growth rates. Even as trade struggles, consumer spending is on fire, with auto sales on track for their fifth consecutive annual record high in 2017.

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Sources: BMO Economics, Haver Analytics

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Business Investment Poised to Pick UpCanada

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¹ (y/y % chng) ² (percent)Sources: BMO Economics, Haver Analytics

Real BusinessInvestment¹

Businesses Planning IncreasedInvestment in Machinery & Equipment²

ElectronicImports¹

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Chart 3

¹ MLS HPI Benchmark March 2017: TREB press releaseSources: BMO Economics, Haver Analytics

March 2017


Feature

Markets… 5. Housing: Despite the Bank’s recent comments that they are not the source of the housing inferno in and around Toronto (Chart 3)—and that, apparently, interest rates don’t matter for the property market—we beg to differ. The sustained period of extremely low rates is the root cause of the fiery market. The Bank often states that it is not the first line of defence against excesses in housing; true, but they are a line of defence, and they can’t simply abrogate their responsibility to ensure that bubbles don’t emerge. While no one expects the Bank to tighten monetary policy simply to address a blazing hot housing market in a few regions, it would be helpful if officials stopped musing about the possibility of further rate cuts and hint at the eventuality of higher borrowing costs.

6. Bond Yields: Even with the 60 bp back-up from their record lows of last summer, long-term bond yields remain incredibly low. One would have to extend out to the 30-year area to reach yields above inflation, with even 10-year yields still holding close to 1.6% (Chart 4). And with U.S. yields drifting lower since the start of 2017, there seems to be little risk that Canadian yields will suddenly flare higher anytime soon.

7. TSX: While Toronto has been a bit of an underperformer so far this year, the TSX is still close to an all-time high. The index is less than 2% from its February peak, and the near-20% total return in the past year is hardly indicative of a bleak outlook.

8. Commodity Prices: While no ball of fire, commodity prices have been largely stable over the past six months. Most critically, oil prices seem to have regained their equilibrium after a late-winter lull, with WTI moving back above US$50. The broader BoC commodity price index is up 15% y/y, while our own index is now up 14% y/y (Chart 5). In a similar vein, the Canadian dollar has been remarkably stable over the past year, and is simply not a major driver for the outlook at this point.

Other… 9. Inflation: The go-to argument for policy doves is that core inflation remains subdued, with the BoC’s three new measures averaging just 1.6% y/y. However, note that those levels are just two-tenths below both the 10- and 20-year averages (Chart 6). Also, headline inflation is right on target at 2%, and so too is the very-old-fashioned measure of core—prices excluding food, energy and indirect taxes (akin to what much of the rest of world would regard as core). Moreover, core inflation tends to lag the broader economy (sometimes by years, not months), and calm conditions today are no guarantee of calm conditions tomorrow.

10. Tactics: We would not dare wheel out the word credibility, but if the Bank persistently talks down the economy in the face of overwhelming evidence to the contrary, there is the real risk that market participants will simply tune them out.

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¹ (y/y % chng) ² (percent)Sources: BMO Economics, Haver Analytics

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forecast

BMO Economics Commodity Price Index

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20-year m.a.


Economic Forecast

Economic Forecast Summary for April 7, 2017 BMO Capital Markets Economic Research

2016 2017 AnnualQ1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2017 2018

CANADAReal 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 2.1 1.8 2.0 2.0 1.4 2.0 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

Housing Starts (000s : a.r.) 199 198 199 197 205 191 185 181 198 190 180

Current Account Balance ($blns : a.r.) -71.3 -77.6 -79.0 -42.9 -46.2 -42.1 -37.7 -34.0 -67.7 -40.0 -31.0

Interest Rates (average for the quarter : %)

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 0.55 0.90

10-year Bond 1.22 1.28 1.06 1.45 1.71 1.60 1.75 1.80 1.25 1.70 2.05

Canada-U.S. InterestRate Spreads (average for the quarter : bps)

90-day 16 25 20 5 -13 -36 -56 -71 17 -44 -60

10-year -70 -47 -50 -69 -73 -79 -81 -82 -59 -79 -75

UNITED STATESReal GDP (q/q % chng : a.r.) 0.8 1.4 3.5 2.1 1.8 2.7 2.7 2.8 1.6 2.4 2.5

Consumer Price Index (y/y % chng) 1.1 1.1 1.1 1.8 2.7 2.5 2.7 2.6 1.3 2.6 2.4

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 1.27 1.29 1.31 1.34 1.18 1.30 1.36

Current Account Balance ($blns : a.r.) -532 -479 -464 -450 -538 -566 -592 -625 -481 -580 -685

Interest Rates (average for the quarter : %)

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 2.40 2.55 2.65 1.84 2.50 2.80

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$ 115 108 102 109 114 114 117 119 109 116 117

US$/Euro 1.10 1.13 1.12 1.08 1.07 1.05 1.03 1.01 1.11 1.04 1.04

US$/£ 1.43 1.43 1.31 1.24 1.24 1.22 1.18 1.19 1.35 1.21 1.23

Blocked areas represent BMO Capital Markets forecastsUp and down arrows indicate changes to the forecast Spreads may differ due to rounding


Key for Next Week

Canada Housing starts are expected to rise to a solid 220,000 unit annualized rate in March, building on the strong run of the prior three months. Residential permits have averaged 238k in the five months to February, suggesting there could be further upside to our call. Note that demographic demand is closer to 190k, so those clamouring for more housing supply might want to simmer down. The week’s other housing report, new home prices, is expected to show a 0.2% increase for February, keeping the annual increase at 3.1%, a six-and-a-half year high—though that hardly compares to the double-digit gain in the MLS Home Price Index.

See Benjamin Reitzes’ Thought on page 3.

United States A 6% pullback in gasoline prices (after seasonal adjustment) points to the first annual decline in CPI inflation in eight months. A likely flat monthly print should trim the yearly rate to 2.6% from February’s five-year high of 2.7%. After running hot in recent months, core prices likely throttled back to a 0.1% advance (assuming auto insurance premiums—up 10% annualized the past four months—took a pit-stop). The annual core rate should hold at 2.2%, the average rate of the past 14 months and smack in the middle of a thin 0.2-percentage-point range. With PCE inflation also hovering near the 2% target and the economy at or near full employment, the FOMC no longer fears undershooting its goalposts.

There’s no disputing the downshift in consumer spending this year. The only question is whether it’s the start of a disturbing new trend or merely a temporary breather after a strong 2016. We lean toward the latter given still supportive household fundamentals and vibrant housing sector (pushing furniture sales). However, a downside miss in March would raise a second eyebrow. Lower gasoline prices and a 5% skid in unit auto sales suggest retail sales fell 0.2% in the month. But excluding autos and fuel, “core” sales should increase a decent 0.4%, raising hopes of a consumer rebound heading into Q2. The only thing for certain is that online sellers will continue to gain market share, with sales rising at a fairly steady 15% annual rate in the past five years.

Benjamin Reitzes Senior Economist [email protected] 416-359-5628

Housing Starts Monday, 8:15 am Mar. (e) 220,000 a.r. (+4.7%) Consensus 212,000 a.r. (+0.9%)

Feb. 210,207 a.r. (+0.6%)

New Housing Price Index Thursday, 8:30 am Feb. (e) +0.2% +3.1% y/y Jan. +0.1% +3.1% y/y

BoC Policy Announcement and Monetary Policy Report Wednesday, 10:00 am BoC Press Conference Wednesday, 11:15 am

Sal Guatieri Senior Economist [email protected] 416-359-5295

Consumer Prices Friday, 8:30 am Mar. (e) unch +2.6% y/y Consensus unch +2.6% y/y

Feb. +0.1% +2.7% y/y Ex. Food & Energy Mar. (e) +0.1% +2.2% y/y Consensus +0.2% +2.3% y/y

Feb. +0.2% +2.2% y/y

Retail Sales Friday, 8:30 am Ex. Autos Mar. (e) -0.2% +0.1% Consensus unch +0.2%

Feb. +0.1% +0.2% Ex. Autos/Gas Mar. (e) +0.4% Consensus +0.3%

Feb. +0.2%


Financial Markets Update

Apr 7 ¹ Mar 31 Week Ago 4 Weeks Ago Dec. 31, 2016(basis point change)

Canadian Call Money 0.50 0.50 0 0 0 Money Market Prime Rate 2.70 2.70 0 0 0

U.S. Money Fed Funds (effective) 1.00 1.00 0 25 25 Market Prime Rate 4.00 4.00 0 25 25

3-Month Canada 0.55 0.52 3 7 9 Rates United States 0.80 0.75 5 6 30

Japan -0.14 -0.20 6 24 25 Eurozone -0.33 -0.33 0 0 -1 United Kingdom 0.34 0.34 0 -1 -3 Australia 1.78 1.79 -1 -1 -2

2-Year Bonds Canada 0.73 0.75 -2 -11 -2 United States 1.24 1.26 -1 -11 5

10-Year Bonds Canada 1.53 1.62 -9 -28 -19 United States 2.32 2.39 -7 -26 -13 Japan 0.06 0.07 -1 -3 1 Germany 0.23 0.33 -10 -25 2 United Kingdom 1.07 1.14 -7 -16 -17 Australia 2.55 2.70 -15 -43 -21

Risk VIX 12.9 12.4 0.5 pts 1.3 pts -1.1 pts Indicators TED Spread 36 40 -4 -2 -14

Inv. Grade CDS Spread ² 65 66 -1 1 -2 High Yield CDS Spread ² 335 338 -3 2 -21

(percent change)Currencies US¢/C$ 74.76 75.09 -0.4 0.7 0.5

C$/US$ 1.338 1.332 — — — ¥/US$ 110.73 111.39 -0.6 -3.5 -5.3 US$/€ 1.0630 1.0652 -0.2 -0.4 1.1 US$/£ 1.240 1.255 -1.2 1.9 0.5 US¢/A$ 75.20 76.29 -1.4 -0.3 4.3

Commodities CRB Futures Index 186.62 185.88 0.4 2.2 -3.1 Oil (generic contract) 52.12 50.60 3.0 7.5 -3.0 Natural Gas (generic contract) 3.27 3.19 2.4 8.6 -12.3 Gold (spot price) 1,267.01 1,249.35 1.4 5.2 10.0

Equities S&P/TSX Composite 15,650 15,548 0.7 0.9 2.4 S&P 500 2,356 2,363 -0.3 -0.7 5.2 Nasdaq 5,873 5,912 -0.6 0.2 9.1 Dow Jones Industrial 20,665 20,663 0.0 -1.1 4.6 Nikkei 18,665 18,909 -1.3 -4.8 -2.4 Frankfurt DAX 12,196 12,313 -0.9 1.9 6.2 London FT100 7,338 7,323 0.2 -0.1 2.7 France CAC40 5,121 5,123 0.0 2.5 5.3 S&P ASX 200 5,862 5,865 0.0 1.5 3.5

¹ = as of 10:30 am ² = One day delay

D = date approximate Upcoming Policy Meetings | BoE: May 11, June 15, Aug. 3 | ECB: Apr. 27, June 8, July 20

Global Calendar April 10 – April 14

Monday April 10 Tuesday April 11 Wednesday April 12 Thursday April 13 Friday April 14

Japa

n Current Account Surplus Feb. ’17 (e) ¥2.5 trln Feb. ‘16 ¥2.4 trln

Machine Orders Feb. (e) +3.7% +2.5% y/y Jan. -3.2% -8.2% y/y

Producer Price Index Mar. (e) +0.3% +1.4% y/y Feb. +0.2% +1.0% y/y

Bank Lending Ex-Trusts Mar. Feb. +2.9% y/y

Industrial Production Feb. F (e) +2.0% +4.8% y/y Jan. -0.4% +3.7% y/y

Euro

Are

a I T A L Y Industrial Production Feb. (e) +1.4% +2.6% y/y Jan. -2.3% -0.5% y/y

E U R O A R E A Industrial Production Feb. (e) +0.1% +1.9% y/y Jan. +0.9% +0.6% y/y

G E R M A N Y ZEW Survey—Expectations Apr. (e) 14.0 Mar. 12.8

G E R M A N Y Consumer Price Index Mar. F (e) +0.1% +1.5% y/y Feb. +0.7% +2.2% y/y

F R A N C E Consumer Price Index Mar. F (e) +0.7% +1.4% y/y Feb. +0.2% +1.4% y/y

Markets Closed

G7 Foreign Ministers meet in Italy (Apr. 10-11)

U.K.

Consumer Price Index Mar. (e) +0.3% +2.3% y/y Feb. +0.7% +2.3% y/y

Core CPI Mar. (e) +1.9% y/y Feb. +2.0% y/y

Producer Price Index—Output Mar. (e) +0.1% +3.4% y/y Feb. +0.2% +3.7% y/y

Jobless Claimant Claims Count Rate Mar. Feb. -11,300 2.1%

Avg. Wkly Earnings Ex. Bonus (3mma) Feb. (e) +2.1% y/y Jan. +2.3% y/y

Jobless Rate (3mma) Feb. (e) 4.7% Jan. 4.7%

RICS House Price Balance Mar. (e) 22% Feb. 24%

Markets Closed

Othe

r C H I N A Foreign Direct Investment D Mar. (e) +2.0% y/y Feb. +9.2% y/y

Aggregate Yuan Financing D Mar. (e) 1.5 trln Feb. 1.1 trln

New Yuan Loans D Mar. (e) 1.2 trln Feb. 1.2 trln

M2 Money Supply D Mar. (e) +11.1% y/y Feb. +11.1% y/y

A U S T R A L I A NAB Business Conditions Mar. Feb. 9

C H I N A CPI PPI Mar. (e) +1.0% y/y +7.5% y/y Feb. +0.8% y/y +7.8% y/y

Trade Balance D in USD in CNY Mar. (e) +$12.5 bln +75.8 bln Feb. -$9.2 bln -60.4 bln

A U S T R A L I A Westpac Consumer Confidence Apr. Mar. +0.1%

B R A Z I L Central Bank of Brazil

Monetary Policy Meeting

A U S T R A L I A Employment Mar. (e) +19,000 Feb. -6,400

Jobless Rate Mar. (e) 5.9% Feb. 5.9%

A U S T R A L I A

Markets Closed

C = consensus R = reopening

North American Calendar April 10 – April 14

Monday April 10 Tuesday April 11 Wednesday April 12 Thursday April 13 Friday April 14

Cana

da

8:15 am Housing Starts Mar. (e) 220,000 a.r. (+4.7%) Consensus 212,000 a.r. (+0.9%) Feb. 210,207 a.r. (+0.6%)

Manitoba Budget

10:00 am BoC Policy Announcement and BoC Monetary Policy Report; Press Conference at 11:15 am

8:30 am New Housing Price Index Feb. (e) +0.2% +3.1% y/y Jan. +0.1% +3.1% y/y

8:30 am Mfg. Mfg. New Sales Orders

Feb. (e) -0.7% unch Consensus -0.5% n.a. Jan. +0.6% +4.6%

2-year bond auction announcement

Good Friday (markets closed)

Unite

d St

ates 10:00 am Federal Reserve Labor

Market Conditions Index Mar. (e) +1.0 pts m/m Feb. +1.3 pts m/m

4:00 pm Fed Chair Yellen speaks at the Gerald R. Ford School of Public Policy in Ann Arbor, MI

6:00 am NFIB Small Business Economic Trends Survey

Mar. (e) 104.0 Consensus 104.5 Feb. 105.3

10:00 am Job Openings & Labor Turnover Survey (Feb.)

7:00 am MBA Mortgage Apps Apr. 7 Mar. 31 -1.6%

8:30 am Import Prices Mar. (e) -0.5% +3.7% y/y Consensus -0.3% +4.0% y/y Feb. +0.2% +4.6% y/y

2:00 pm Budget Balance Mar. ’17 (e) -$150.0 bln C Mar. ’16 -$108.0 bln

Fed Speaker: Dallas’ Kaplan (10:00 am)

1:00 pm 30R-year bond auction $12 bln

8:30 am Initial Claims Apr. 8 (e) 245k (+11k) C Apr. 1 234k (-25k)

8:30 am Continuing Claims Apr. 1 Mar. 25 2,028k (-24k)

8:30 am PPI Final Demand Mar. (e) -0.2% +2.2% y/y Consensus unch +2.3% y/y Feb. +0.3% +2.2% y/y

8:30 am PPI Final Demand ex. F&E Mar. (e) +0.2% +1.8% y/y Consensus +0.2% +1.8% y/y Feb. +0.3% +1.5% y/y

9:45 am Bloomberg Consumer Comfort Index – Apr. 9th week

10:00 am University of Michigan Consumer Sentiment

Apr. P (e) 97.0 Consensus 96.5 Mar. 96.9

11:00 am 13- & 26-week bill, 5-year TIPS auction announcements

Good Friday (stock markets closed;

limited bond market activity)

8:30 am Consumer Prices Mar. (e) unch +2.6% y/y Consensus unch +2.6% y/y Feb. +0.1% +2.7% y/y

8:30 am CPI Ex. Food & Energy Mar. (e) +0.1% +2.2% y/y Consensus +0.2% +2.3% y/y Feb. +0.2% +2.2% y/y

8:30 am Retail Sales Ex. Autos Mar. (e) -0.2% +0.1% Consensus unch +0.2% Feb. +0.1% +0.2%

8:30 am Retail Sales ex. Autos/Gas Mar. (e) +0.4% Consensus +0.3% Feb. +0.2%

10:00 am Business Inventories Feb. (e) +0.3% Consensus +0.3% Jan. +0.3%

G7 Foreign Ministers meet in Italy (Apr. 10-11)

11:00 am 4-week bill auction announcement

11:30 am 13- & 26-week bill auction $72 bln

1:00 pm 3-year note auction $24 bln

Sunday April 9

Fed Speaker: St. Louis’ Bullard (11:05 pm)

Fed Speaker: Minneapolis’ Kashkari (1:45 pm)

11:30 am 4-week bill auction

1:00 pm 10R-year note auction $20 bln

Upcoming Policy Meetings | Bank of Canada: May 24, July 12, Sep. 6 | FOMC: May 2-3, June 13-14, July 25-26


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