Focus - BMO Nesbitt Burns

Douglas Porter, CFA, Chief Economist, BMO Financial Group
February 6, 2015
Feature Article
Page 7
Canadian Dollar Drop:
Who Wins, Who Loses?
U.S. Payrolls:
Best 3-Month Gain in 18 Years
Global Central Banks Easing:
Denmark, PBoC, RBA
ECB Cuts One Avenue Off for Greece
Oil Prices Rebound Despite
Big Inventory Build
BMO Capital Markets Economics
www.bmocm.com/economics  1-800-613-0205
Please refer to page 15 for important disclosures
BoE on Hold
Our Thoughts
Page 2 of 15
Focus — February 6, 2015
Hey, Hey, My, My, Oil & Yields Can Never Rise?
T
he answer to that question appeared to be a resounding “no, they can never rise”,
at least until this week. While it is still early days, and the rebound is fledgling, it
does appear that both are at last trying to form a bottom. Even with an ugly mid-week
spill on record U.S. inventories, oil prices did something remarkable—they managed
to rise on a weekly average basis for the first time in 20 long weeks. WTI is currently
up 16% from last week’s lows of under $44, but Brent has powered up an even more
impressive 25% in under two weeks and is now at a 2015 high of $58.
(Unsurprisingly, retail gasoline prices have been quick to respond, but I digress.) We
continue to believe that oil will remain on the defensive for some time yet, given the
ongoing build-up of inventories, but the market is clearly impressed by the rapid
decline in active drilling rigs in the U.S. and the run of spending cuts announced by
the major oil producers in recent days.
Similar to oil, it tentatively appears that long-term bond yields have also found a bottom,
although given the many false dawns previously, we would stress the word “tentatively”.
After approaching a post-recession low of under 1.7% last week, the 10-year Treasury
yield bounced roughly 25 bps this week to above 1.9%. Rising oil prices and solid equity
gains started the move, but the finishing touch was delivered by the robust January
employment report on Friday, which alone triggered about half the yield rise.
After a few weeks of so-so U.S. economic data, the jobs report washed away any doubts
on the underlying strength of the recovery. Above and beyond the solid 257,000 payroll
gain for January, the two prior months were revised up sharply (November saw the
biggest rise in private sector jobs in 17 years at 414,000). While the unemployment rate
edged up a tick to 5.7%, that reflected a 1 million rise in the labour force, and both jobs
surveys have averaged gains of more than 300,000 over the past three months. Piling on,
wages reversed the prior month’s decline and remain nicely above inflation at 2.2% y/y.
The Fed can certainly afford to remain patient before hiking rates, given the soggy
global backdrop, the strong U.S. dollar and the downward pull on inflation from low oil
prices. However, if this type of job growth persists, few would seriously doubt the
wisdom of some mild policy snugging later this year.
Canadian bond yields also bounced off the bottom, finally. After touching an all-time
record low of 1.23% at the start of the week, 10-year GoCs rose 20 bps to 1.43%, and 30years pushed back above 2%. Still, both are down roughly 35 bps just since the start of
the year, and remain remarkably low by any metric. The main reason Canadian yields
had plunged so far was the dramatic dovish turn by the Bank of Canada, including the
January rate cut, and the widespread prospect of more. However, this week’s action at the
very least cast a shadow of doubt on a further cut. First, there is the long-awaited firming
in oil prices. Second, the long-standing concern about household debt raised its ugly mug
again, with McKinsey centring out Canada as one of seven trouble spots. (While we
would sharply dispute some of their comparisons, the broader concern about an overly
loose monetary policy threatening to aggravate this vulnerability is valid.) Finally, much
of the economic data from Canada was surprisingly decent, especially in light of the
wave of ugly headline news so far this year. To wit, employment was up 35,400 and the
jobless rate fell a tick to 6.6%, auto sales rose 3.4% y/y, home sales were still solid in
non-oil regions, and consumer confidence rose to a five-year high in January (take that
Douglas Porter, CFA
Chief Economist
douglas.porter@bmo.com
416-359-4887
Our Thoughts
Page 3 of 15
Focus — February 6, 2015
Target, oil patch, BoC etc etc etc). Staggeringly, Alberta continues to lead the country in
job growth (it’s now up 3% y/y in that province), despite some losses in the natural
resource sector. Even so, we suspect that the Bank is still likely to trim again in one of the
next two meetings, given their broader list of concerns.
The natural follow-through from firmer oil prices and a slightly better economic
backdrop was a less negative Canadian dollar. Following the near-record 9%
drubbing in January, the currency managed to strengthen 2% to finish close to 80
cents, its first weekly gain in almost three months. The reprieve may prove temporary
if we are right on a) oil prices remaining on the defensive, and b) the Bank remaining
bound and determined to trim again. Nevertheless, the main message from this
week’s market action and from the underlying economic data is that there actually
will now be a bit more of a two-way trade in oil prices, bond yields and the Canadian
dollar, and we haven’t been able to say that in quite some time.
Pressure’s on Consumers to Carry the U.S. Expansion
T
here’s a lot riding on the American consumer this year. With energy producers
slashing capex, the mighty dollar drilling a hole in the trade balance, and
government spending likely to provide only limited support, the pressure is on
households to step to the plate and spend about 1% faster than last year—if not, we won’t
see 3% GDP growth this year. We believe households are up for the challenge.
Recent trends in consumer spending are encouraging. Personal spending accelerated in
each quarter of 2014, and closed with the fastest pace (4.3%) in nearly nine years.
Moreover, the strength cut across a wide range of goods and services. Auto sales
accelerated to eight-year highs in the fourth quarter, as did spending on services. For the
year as a whole, the 2.5% increase in personal consumption, though no ball of fire, was the
best since 2006, and a notable step up from the average 2.1% rate in the prior four years.
While spending retraced slightly in December, continued strong auto sales in January
(16.7 million annualized) suggest consumers are starting the year on the right track.
Our confidence in a stronger consumer is buoyed by several factors. First, American
businesses are now hiring at the fastest rate in 15 years (with over 3.1 million jobs created
last year), and the pace has only increased in recent months. Wage growth is also starting
to turn up, albeit slowly and to only around 2% or so. That’s not enough to fuel inflation,
but it will support spending. Moreover, wages will rise faster as the unemployment rate
drifts toward 5% this year. Second, cheaper gasoline should boost purchasing power by
about 1½% this year compared with last summer. Third, American households have
never been wealthier, and rising home and equity markets suggest the trend will continue.
However, a key reason we expect consumers to spend at a 3.5% clip this year is that they
are less weighed down by debt. The end of deleveraging should allow for at least
moderate (and more sustainable) borrowing to support demand. According to data from
the New York Fed, households had almost $1 trillion less debt in 2014Q3 than in mid2008, a 7.6% decline. At 90% of disposable income, the debt ratio is the lowest since
2003—before the credit party really got going. While households have taken on $166
billion more personal debt since 2008 (largely student and auto loans), they have chopped
home equity lines of credit by about $200 billion and credit card balances by nearly as
much. Moreover, mortgage balances are down $1.2 trillion (largely via foreclosures).
Sal Guatieri
Senior Economist
sal.guatieri@bmo.com
416-359-5295
Our Thoughts
Page 4 of 15
Focus — February 6, 2015
Combined with record low borrowing costs, a smaller debt load means the cost of
servicing it has never been lower in the last three decades, at less than 10% of
income. Granted, a lower homeownership rate (back to 1994 levels) means more
people are paying rent than in 2008. However, even including rental payments, the
financial obligations ratio is sitting at lows not mined since the early 1980s.
As a result, households are under much less financial strain. Personal loan
delinquency rates have never been lower in the past four decades, and the same
applies to bank-issued auto loans. Credit card delinquency rates are also very low.
Mortgage delinquencies have fallen sharply, and the new foreclosure rate has
returned to normal levels at 0.41%, bang on the historical mean.
The improvement in finances paves the way for increased borrowing that will support
both consumer spending and home sales (which also tends to drive consumption). In fact,
total consumer credit has already picked up to 7.1% y/y in November from 6.2% in 2013,
and not just because of soaring auto loans. Revolving credit is up 3.5%, a six-year high.
While student loan growth is starting to moderate (not a bad thing), revolving credit
should quicken as wage growth increases. The Fed’s survey of loan officers reports
consistently stronger demand for consumer loans in the past three years.
This is not to say there aren’t potential problems on the debt front. Student and auto
loans have ballooned in recent years, and now account for 18% of total household
debt versus 11% in 2008. Student debt has doubled in the past seven years to $1.13
trillion in 2014Q3. Consequently, student loan delinquency rates (30-days or longer)
have risen to around 9%. Outstanding auto loans are rising at a hefty 11% clip and
now stand just shy of $1 trillion. Subprime auto financing is on the rise, and accounts
for one in four new auto loans versus one in five in 2009, according to Equifax.
While auto loan defaults remain low, this won’t last if the economy turns down.
Growth in student and auto loans is bound to slow, especially when interest rates
normalize in coming years. However, overall credit should continue to grow at a
decent rate this year. Long-term interest rates are expected to remain low even if the
Fed tightens policy modestly. And, so long as household credit rises alongside
expected faster income growth, the accumulation of debt in this cycle should be more
sustainable than it was a decade ago. Still smarting from the financial crisis, most
households will likely live within their means this time.
Bank of Canada Rethink?
A
ll of a sudden, things aren’t looking quite as bleak for Canada. Oil prices have
bounced back and are sitting near the BoC’s January MPR assumption ($60
Brent, $55 WTI, $40 WCS), employment rebounded in January (even if the details
were soft), and the U.S. economy looks like it might kick into high gear at any moment
following the best three-month job gain since 1997. These factors suggest the Bank of
Canada may not be as quick to pull the trigger on another rate cut in March. Indeed, the
question of whether they could reverse January’s cut was even posed by some.
Despite the above positives, we’re not ready to abandon our call for a March cut,
though the decision is a bit less one-sided now. In the post-meeting press conference,
Governor Poloz revealed that the Bank’s initial forecast had the output gap closing in
Benjamin Reitzes
Senior Economist
benjamin.reitzes@bmo.com
416-359-5628
Our Thoughts
Page 5 of 15
Focus — February 6, 2015
late 2017. That forecast shifted to the end of 2016 after the BoC lowered the path for
the policy rate. It’s tough to believe that one 25 bp rate cut would be enough to pull
forward the closing of the output gap by about three quarters, suggesting there’s at
least one more rate cut built into the BoC’s projection. Moreover, if Poloz signals
that the BoC has taken out sufficient “insurance”, the Canadian dollar will likely
appreciate sharply and that doesn’t seem to be policymakers’ preference.
The odds still favour another cut by the Bank of Canada.
You Go First. No, You Go First. No, You Go First…
A
nother week, another round of central banks providing more stimulus. This has
been the case over the past month, starting with the RBI, SNB, Turkey, BoC,
Denmark (4x now!), ECB, Singapore, Russia, RBA, and the PBoC, to name a few.
Overall, while it is good news that we have so much stimulus, it is not good news that
we need so much stimulus.
In particular, China’s easing of reserve requirements was notable, given that we have
yet to see hard January data. Sure the January PMI surveys were disappointing, and
could be blamed on the crackdown on government officials to spend less on lavish gifts
ahead of the Chinese New Year. But, these are surveys, not actual data. The early move
to lower reserve ratios suggests that China’s government is becoming increasingly
concerned about slower growth and is, again, stepping in to soften the blow. Unless
there is something going on that the world is not privy to, the easing move sends a
message that the PBoC will be there, again, to bail everyone out if needed. This
suggests we could see more risk-taking, more borrowing and, potentially, a higher
mountain of bad debt. This is something to keep an eye on in coming months.
Also, has everyone kept up with all of the developments in Greece? Depending on who
you are listening to, the talks between Greece’s newly-elected government led by
Syriza and the rest of Europe are either going swimmingly, or not well at all. I’m going
to lean toward the latter. The ECB’s decision this week to lift the waiver on allowing
Greek bonds to be used as collateral was very much a “talk to the hand” signal. In a
nutshell, when Greek banks needed to borrow from the ECB, they were allowed to use
Greek government debt as collateral. But that was on the assumption that Greece would
comply with the bailout terms. That waiver was set to expire on February 28th. Now,
the ECB cannot assume that there will be a successful conclusion of the review of that
program. So, the message is: “Sorry, we can’t take those bonds as collateral.” If the
banks need funding now, they will have to turn to the ELA (Emergency Liquidity
Assistance), which is a program where the Bank of Greece can lend to Greek banks,
but at a higher rate of interest. And, the ECB has the power to restrict these loans if
two-thirds of the governing council feel it is warranted.
So now what? Someone has to blink. It doesn’t appear that Germany will ease its
demands on Greece, nor will the ECB. The market is nervous that a Grexit is a
growing possibility, which has sent 10-year Greek yields up to 10%. Granted this is
far from the sky-high 40% they hit in 2012 but still near two-year highs. There has to
be some compromise… the question is who will blink first?
Jennifer Lee
Senior Economist
jennifer.lee@bmo.com
416-359-4092
Recap
Page 6 of 15
Focus — February 6, 2015
Jennifer Lee
Senior Economist
jennifer.lee@bmo.com
416-359-4092
Canada
 Welcoming some better
economic news
United States
 Employers start the year off
on a hiring binge
 Q4 GDP growth to be
revised lower on wider trade
gap and drop in
manufacturing inventories
Japan
 PM Abe’s nominee for the
BoJ a supporter of
aggressive monetary
stimulus
Europe
 Rough week for Greece…
proposal to swap current
debt with GDP-linked bonds
receives a cool reception
from Germany… ECB to
stop accepting Greek debt as
collateral from banks
 BoE on hold
 Denmark cuts… again
Other
 China’s RRR -50 bps
 RBA -25 bps
 RBI on hold
Good News
Bad News
Employment +35,400 (Jan.)
Jobless Rate -0.1 ppts to 6.6% (Jan.)
Average Hourly Wages +2.0% y/y (Jan.)
Auto Sales +3.4% y/y (Jan.)
Conference Board’s Consumer Confidence Index +2.7
pts to 107.0 (Jan.)—highest since 2010
Building Permits +7.7% (Dec.)
Merchandise Trade Deficit grew to $649 mln (Dec.)—but
non-energy shortfall narrowed to a 5-mth low $5.7 bln
Industrial Product Prices -1.6%; Raw Material
Prices -7.6% (Dec.)
Ivey Manufacturing PMI -10 pts to 45.4; RBC
Manufacturing PMI -2.9 pts to 51.0 (Jan.)
Nonfarm Payrolls +257,000 (Jan.)
Labour Force +1,051k (Jan.)—but lifted the
jobless rate 0.1 ppts to 5.7%
Average Hourly Earnings +0.5% (Jan.)
Nonmanufacturing ISM +0.2 pts to 56.7 (Jan.)
Auto Sales +8.9% y/y to 16.7 mln units a.r. (Jan.)
Construction Spending +0.4% (Dec.)
Real Personal Spending -0.1% (Dec.)
Manufacturing ISM -1.6 pts to 53.5 (Jan.)
Factory Orders -3.4% (Dec.)
Goods & Services Trade Deficit grew to $46.6 bln (Dec.)
Initial Claims +11k to 278k (Jan. 31 wk)—but still low
Nonfarm Productivity -1.8% a.r. (Q4 P)
Unit Labour Costs +2.7% a.r. (Q4 P)
Manufacturing PMI +0.2 pts to 52.2 (Jan. F)
Leading Index +1.3% (Dec. P)
Services PMI -0.4 pts to 51.3; Composite PMI -0.2 pts to
51.7 (Jan.)
Eurozone—Services PMI +1.1 pts to 52.7; Composite
PMI +1.2 pts to 52.6 (Jan. F)
Eurozone—Retail Sales +0.3% (Dec.)
Germany—Factory Orders +4.2% (Dec.)
U.K.—Manufacturing PMI +0.3 pts to 53.0;
Construction PMI +1.5 pts to 59.1; Services PMI +1.4
pts to 57.2; Composite PMI +1.4 pts to 56.7 (Jan.)
Eurozone—Retail PMI -1 pt to 46.6 (Jan.)
Eurozone— Producer Prices -1.0% (Dec.)
Germany—Industrial Production +0.1% (Dec.)
—below expected
France—Trade Deficit grew to €3.4 bln (Dec.)
Italy—Consumer Prices -0.4% y/y (Jan. P)
U.K.—Trade Deficit widened to £10.1 bln (Dec.)
Australia—Retail Sales +0.2% (Dec.)
New Zealand—Employment +3.5% y/y (Q4)
China—Manufacturing PMI -0.3 pts to 49.8;
Nonmanufacturing PMI -0.4 pts to 53.7 (Jan.)
China—HSBC Manufacturing PMI revised down to 49.7;
Services PMI -1.6 pts to 51.8; Composite PMI -0.4 pts to
51.0 (Jan.)
Australia—Trade Deficit narrowed to A$436 mln (Dec.)
Australia—Building Approvals -3.3% (Dec.)
Indications of stronger growth and a move toward price stability are good news for the economy.
Feature
Page 7 of 15
Focus — February 6, 2015
Canadian Dollar Drop:
Who Wins, Who Loses?
Chart 1
Douglas Porter, CFA, Chief Economist • douglas.porter@bmo.com • 416-359-4887
Benjamin Reitzes, Senior Economist • benjamin.reitzes@bmo.com • 416-359-5628
Canadian Dollar
The Canadian dollar was battered in January, falling a near-historic
9%, the second biggest monthly decline on record (behind only the
dark days of October 2008). The currency was hit with three major
negative shocks in rapid-fire succession—a broad-based advance in
the U.S. dollar, a near-record plunge in oil prices, and a surprise
Bank of Canada interest rate cut. And, it is down by more than 20%
since early 2013, the steepest two-year decline on record (Chart 1).
While the outlook is highly contingent on the path of oil prices, as
well as Bank of Canada policy, we believe the bulk of the
currency’s decline is now behind us and it should bottom around
mid-2015 at close to 77 U.S. cents (or C$1.30). The Canadian dollar
is presently close to what we believe is fair value, based on today’s
oil prices, and it is below both its 40-year average (82.5 cents) and
the OECD’s Purchasing Power Parity measure (roughly 80 cents)
(Chart 2). However, just as the currency traded above these metrics
for much of the past decade, it can now trade below these measures
for an extended period of time.
Record Drop
(US¢/C$ : 2-yr % chng : as of February 5, 2015)
40
30
20
10
0
-10
50
Exporting firms are the greatest beneficiaries of a weaker loonie,
as it makes their goods less expensive abroad. And, since the U.S. is
Canada’s largest export market, exporters should be well positioned
to take advantage. The manufacturing industry, which has a sizeable
share of exports, is commonly cited as the prime beneficiary. Strong
U.S. demand growth, a weaker C$, lower energy costs; what more
could one ask? Unfortunately, it likely won’t be as simple as
revving up factories. The Great Recession took a heavy toll on
Canada’s manufacturing base and a lot of capacity was destroyed.
Indeed, manufacturing capacity utilization rates have returned close
to pre-recession levels (Chart 3). That suggests that we’ll need to
see new investment in manufacturing capacity before the sector can
materially increase sales. The irony here is that the Bank of Canada
(led by Mark Carney at the time) harped on business about “dead
60
70
80
90
00
10
90
00
10
Chart 2
Close to Fair Value
(US¢/C$ : as of February 5, 2015)
Canadian Dollar
110
100
The new currency landscape will have a profound impact on
Canada’s economy. However, it is important to stress that this big
move is not a uniquely Canadian story—almost all currencies are
down heavily against the U.S. dollar, and the loonie is broadly
unchanged from a year ago against a basket of other currencies.
Also, a weaker currency does not equate to economic gloom; there
are both winners and losers.
Winners
Record
-20
90
40-year Average
80
OECD Purchasing
Power Parity
70
60
50
60
70
80
Chart 3
Cap-U Normalizing, Sales not So Much
Canada
Manufacturing
52.5
Capacity
Utilization 2
50.0
(rhs)
47.5
88
84
80
45.0
76
42.5
Sales
Volumes 1
40.0
(lhs)
37.5
00
1
72
02
04
(2007 C$ blns : s.a.)
06
2
08
10
(percent : s.a.)
12
68
14
Feature
Page 8 of 15
money” and the need to invest, especially with the strong loonie
lowering the cost of new equipment. Now, with the loonie around
80 U.S. cents (C$1.25), we’re more likely to see investment ramp
up a bit faster. Even so, it could be some time before the benefit to
manufacturing shows up in the data. It’s also important to note that
natural resource exporters (and anyone else that ships to the U.S.)
will benefit as well. The drop in the loonie has, modestly, cushioned
oil producers from the plunge in prices. In C$-terms, oil is off about
45% from its recent highs, 10 ppts less than in US$ terms.
Retailers should also benefit from the weaker loonie. When parity
prevailed, cross-border shopping exploded, with a record number of
Canadian tourists going South to shop (Chart 4). Broader selection
and lower prices were irresistible. Trips to the U.S. levelled out as
of November, but look for a sizeable drop early in 2015. That
should be a boon to domestic retailers as consumers shop closer to
home. The drag that was cross-border shopping from 2010 to 2013
will now work in reverse to boost domestic retail activity.
Canadian investments (real estate, fixed income, equities, etc.) could
see some increased inflows from the weaker loonie. Domestically,
investors have a bit less incentive to send their money abroad, unless
they believe the currency is going to weaken further or foreign
markets offer higher risk-adjusted returns. Real estate, in particular,
could get some modest support, as that investment/vacation property
in Florida or Arizona is significantly less attractive after the
currency’s ~25% premium and rebound in prices over the past few
years. And, foreign investors could see the loonie’s swoon as a
chance to buy Canadian dollar assets on the cheap.
Losers
Focus — February 6, 2015
Chart 4
Cross-Border Shopping Set to Slow
(as of February 5, 2015)
110
2.25
100
Cdn. Tourists
Returning
from the
U.S. 2
90
Canadian
Dollar 1
2.00
(lhs)
1.75
1.50
(rhs)
80
1.25
70
1.00
60
0.75
90
1
95
(US¢/C$)
2
00
05
10
15
(mlns of tourists : s.a.)
Chart 5
Lower Loonie Lifting Prices
Consumer Price Index
12.5
(y/y % chng)
Recreational
Reading
5.0
10.0
7.5
Household
Appliances
2.5
Canada
0.0
5.0
-2.5
2.5
Canada
-5.0
0.0
U.S.
-2.5
Households are likely the biggest losers, on aggregate, from a
09
11
weaker currency, though it is death by a thousand cuts. The
numerous negative impacts are small and difficult to measure.
Higher import prices have the largest detrimental impact for households, as the
weaker loonie makes foreign goods more expensive. Reading materials and
appliances are prime examples as they have high import content (Chart 5). Food
prices could also see a little extra upward pressure. The impact will be clearer in core
CPI, rather than total CPI, as the latter is being pulled sharply lower by the plunge in
energy prices. Furniture, sporting goods, clothing, and autos also have high import
content and some are already showing signs of pass-through from the weaker dollar.
The other major hit to consumers comes from the increased cost of U.S. travel. That
vacation down south looked very attractive when the loonie was near parity;
suddenly, it looks prohibitive. Other regions of the world look a bit more attractive
now, but farther or more costly travel is a deterrent.
Canadian business also faces higher costs for imported production inputs. The highly
integrated nature of the North American supply chain means that a number of inputs
come from the U.S. And, that’s not only the case for manufactured goods, as the
13
U.S.
-7.5
15
09
11
13
15
Feature
Page 9 of 15
services sector also sources some of its inputs (other services contracts) from U.S.
providers. In a similar vein, the cost of productivity-enhancing machinery and
equipment, of which about three-quarters are imported, will climb as well. However,
the latter won’t be the dominiant issue for Canadian firms looking to invest/expand, as
the loonie at parity didn’t appear to have a meaningful positive impact on investment.
The weaker loonie will also hit Canadian sports teams hard. Revenues are in
Canadian dollars and many costs (player salaries in particular) are in US$, denting
profitability. The Toronto Maple Leafs have bigger problems, but smaller-market
teams could face some financial pressure.
The tectonic shift in the loonie’s landscape will also reinforce shifting regional
growth dynamics. Central Canada, B.C., and most of Eastern Canada will see a
greater benefit from improved competitiveness than Alberta and Saskatchewan.
Overall, the weaker loonie should moderately support GDP growth, although the
overall impact on Canadians is not as cut and dry.
Focus — February 6, 2015
Economic Forecast
Page 10 of 15
Focus — February 6, 2015
Economic Forecast Summary for February 6, 2015
BMO Capital Markets Economic Research
2014
2015
Annual
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2013
2014
2015
Real GDP (q/q % chng : a.r.)
1.0
3.6
2.8
2.0
1.1
1.8
2.0
2.2
2.0
2.4
2.0
Consumer Price Index (y/y % chng)
1.4
2.2
2.1
1.9
0.9 
0.5 
0.8 
1.3 
0.9
1.9
0.9 
Unemployment Rate (percent)
7.0
7.0
7.0
6.7
6.7
6.8 
6.8 
6.7 
7.1
6.9
6.7
176
196
199
185
184
188
189
180
Current Account Balance ($blns : a.r.) -45.0
-39.6
-33.6
-49.5 
CANADA
Housing Starts (000s : a.r.)
177
178
183
-71.8  -74.2  -65.6  -60.3 
-56.3
-42.0  -68.0 
(average for the quarter : %)
Interest Rates
Overnight Rate
1.00
1.00
1.00
1.00
0.67
0.50
0.50
0.50
1.00
1.00
0.54
3-month Treasury Bill
0.87
0.93
0.94
0.90
0.60
0.41
0.41
0.41
0.97
0.91
0.46
10-year Bond
2.47
2.35
2.14
1.95
1.41
1.42
1.58
1.82
2.26
2.23
1.56
Canada-U.S. Interest
(average for the quarter : bps)
Rate Spreads
90-day
82
90
91
87
58
39
31
8
91
88
34
10-year
-30
-27
-36
-33
-37
-39
-39
-40
-9
-31
-39
-2.1
4.6
5.0
2.6
2.3
3.0
2.8
2.7
2.2
2.4
3.1
Consumer Price Index (y/y % chng)
1.4
2.1
1.8
1.2
0.0
-0.3
0.1
1.0
1.5
1.6
0.2
Unemployment Rate (percent)
6.6
6.2
6.1
5.7
5.6
5.2 
5.0 
7.4
6.2
5.3 
0.93
0.99
1.03
1.07
1.10
1.19
1.27
1.31
0.93
1.00
1.22
Current Account Balance ($blns : a.r.) -408
-394
-401
-438
-411
-408
-421
-438
-400
-410
-420
UNITED STATES
Real GDP (q/q % chng : a.r.)
Housing Starts (mlns : a.r.)
5.4 
(average for the quarter : %)
Interest Rates
Fed Funds Target Rate
0.13
0.13
0.13
0.13
0.13
0.13
0.21
0.46
0.13
0.13
0.23
3-month Treasury Bill
0.05
0.03
0.03
0.02
0.02
0.02
0.10
0.33
0.06
0.03
0.12
10-year Note
2.76
2.62
2.50
2.28
1.78 
1.80
1.97
2.22
2.35
2.54
1.94 
79.7 
97.1
90.6
79.4 
1.240  1.273  1.270  1.255 
1.030
1.105
1.259 
98
106
122
EXCHANGE RATES
(average for the quarter)
US¢/C$
90.6
91.7
91.8
88.1
C$/US$
1.103
1.090
1.089
1.136
¥/US$
103
102
104
115
119 
121 
123
124 
US$/Euro
1.37
1.37
1.32
1.25
1.13
1.14
1.14
1.13
1.33
1.33
1.14
US$/£
1.66
1.68
1.67
1.58
1.51
1.52
1.52
1.51
1.56
1.65
1.51
Blocked areas represent BMO Capital Markets forecasts
Up and down arrows indicate changes to the forecast 
80.7 
78.6 
78.7
Key for Next Week
Page 11 of 15
Focus — February 6, 2015
Canada
Housing Starts
Monday, 8:15 am
Jan. (e)
177,500 a.r. (-1.6%)
Consensus 184,000 a.r. (+2.1%)
Dec.
180,300 a.r. (-6.5%)
BoC Senior Deputy Governor
Wilkins speaks at the Ottawa
Economics Association
Tuesday, 12:35 pm
Existing Home Sales,
MLS Home Price Index
Friday, 9:00 am (expected)
Existing Home Average
Sales
Prices
Jan. (e)
+1.5% y/y
+3.0% y/y
Dec.
+7.9% y/y
+3.8% y/y
MLS Home Price Index
Jan. (e)
+4.8% y/y
Dec.
+5.4% y/y
Softness in building permits suggests housing starts fell Benjamin Reitzes
modestly to 177,500 units annualized in January. The Senior Economist
benjamin.reitzes@bmo.com
regional breakdown might be of greatest interest in this 416-359-5628
report, as activity in Alberta and Saskatchewan will likely
slow sharply in the early part of the year, while the rest of the country is expected to
remain relatively healthy. Our call would put the 12-month average at 189,000,
consistent with underlying demographic demand.
Bank of Canada Senior Deputy Governor Wilkins will make the first public appearance
by a Bank official since January’s surprise rate cut. The title of her speech is “Minding
the Labour Gap” suggesting there won’t be any significant policy fodder, but will likely
reinforce that labour market slack is among the core reasons the BoC lowered policy
rates. Expect a dovish tone from Wilkins. Governor Poloz is scheduled to speak on
February 24th, and will probably be watched much more closely.
It’s a tale of two regions for Canada’s housing market: Alberta and most everywhere
else. The plunge in oil prices has already put Alberta home sales under serious
pressure, with activity in Calgary and Edmonton tumbling at the start of 2015.
Listings have surged as well, which will likely lower prices in the coming months.
On the other side of the spectrum, Toronto and Vancouver saw activity and prices
continue to advance at a solid clip. And, interest rates falling anew will provide
further support for housing broadly. Look for the divergence between Alberta (and to
a lesser extent Saskatchewan) and the non-oil producing regions to increase through
at least the first half of 2015, as oil prices are only expected to recover slowly over
the course of the year. Average price gains are expected to clock in at around 3% y/y,
close to a 3-year low. The quality-adjusted MLS house price index, a better
representation of market conditions, looks to slow to +4.8% y/y, a one-year low.
United States
Retail Sales
Thursday, 8:30 am
Jan. (e)
-0.3%
Ex. Autos
-0.2%
Dec.
-0.9%
-1.0%
Consensus -0.4%
-0.4%
Plunging gas station receipts and further slippage in auto Sal Guatieri
sales from eight-year highs should drag down retail sales Senior Economist
again in January. However, with consumer confidence sal.guatieri@bmo.com
416-359-5295
scaling decade peaks, most retailers likely saw a broad
upswing in demand. Look for retail sales, excluding autos and gasoline, to rise 0.4%.
That should keep consumer spending on track for 3% or better growth in Q1 after the
largest shopping spree in nine years in Q4. While equities got off to a rocky start this
year, fuel savings have increased and job growth remains solid. There is a lot riding
on the January report, as consumers are widely expected to propel the expansion
forward in 2015 in response to increased wealth and spending power.
Financial Markets Update
Page 12 of 15
Focus — February 6, 2015
Feb 6 ¹
Jan 30
Week Ago
4 Weeks Ago
Dec. 31, 2014
(basis point change)
-25
-25
-15
-15
Canadian
Money Market
Call Money
Prime Rate
0.75
2.85
0.75
2.85
0
0
U.S. Money
Market
Fed Funds (effective)
Prime Rate
0.25
3.25
0.25
3.25
0
0
0
0
0
0
3-Month
Rates
Canada
United States
Japan
Eurozone
United Kingdom
Australia
0.56
0.02
0.00
0.05
0.56
2.42
0.58
0.00
-0.01
0.05
0.56
2.53
-2
2
1
0
0
-12
-35
1
6
-2
0
-33
-35
-2
0
-3
0
-36
2-Year Bonds
Canada
United States
Canada
United States
Japan
Germany
United Kingdom
Australia
0.48
0.62
1.43
1.92
0.33
0.36
1.63
2.45
0.39
0.45
1.25
1.64
0.27
0.30
1.33
2.44
8
16
18
28
6
6
30
1
-47
5
-23
-3
6
-13
3
-27
-54
-5
-36
-25
1
-18
-13
-29
16.2
24
66
351
21.0
25
70
369
10-Year Bonds
Risk
Indicators
VIX
TED Spread
Inv. Grade CDS Spread ²
High Yield CDS Spread ²
Currencies
US¢/C$
C$/US$
¥/US$
US$/€
US$/£
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
¹ = as of 10:30 am
² = One day delay
80.21
1.247
118.98
1.1344
1.527
78.13
78.54
1.273
117.49
1.1291
1.506
77.62
-4.8 pts
-2
-4
-18
-1.4 pts
0
-4
-19
-3.0 pts
2
0
-6
2.1
—
1.3
0.5
1.4
0.7
(percent change)
-4.8
—
0.4
-4.2
0.7
-4.8
-6.8
—
-0.7
-6.2
-2.0
-4.4
224.71
51.81
2.62
1,236.01
218.84
48.24
2.69
1,283.77
2.7
7.4
-2.7
-3.7
-0.4
7.1
-11.1
1.1
-2.3
-2.7
-9.3
4.3
15,190
2,068
4,780
17,928
17,649
10,853
6,865
4,700
5,820
14,673
1,995
4,635
17,165
17,674
10,694
6,749
4,604
5,588
3.5
3.7
3.1
4.4
-0.1
1.5
1.7
2.1
4.1
5.6
1.2
1.6
1.1
2.6
12.5
5.6
12.5
6.5
3.8
0.5
0.9
0.6
1.1
10.7
4.5
10.0
7.6
Global Calendar: February 9 – February 13
Japan
Monday February 9
Current Account Surplus
Dec. ’14 (e) ¥356 bln
Dec. ’13
¥31 bln
GERMANY
Trade Surplus
Dec. (e)
€16.0 bln
Nov.
€17.9 bln
Wednesday February 11
Tertiary Industry Index
Dec. (e)
unch
Nov.
+0.2%
Thursday February 12
Machine Orders
Dec. (e)
+2.3%
Nov.
+1.3%
Markets Closed (Holiday)
Consumer Confidence
Jan. (e)
39.3
Dec.
38.8
Bank Lending ex. Trusts
Jan. (e)
+2.8% y/y
Dec.
+2.7% y/y
Euro Area
Tuesday February 10
FRANCE
Industrial Production
Dec. (e)
+0.4%
-1.1% y/y
Nov.
-0.3%
-2.6% y/y
Manufacturing Production
Dec. (e)
+0.4%
-0.8% y/y
Nov.
-0.6%
-1.3% y/y
ITALY
Industrial Production
Dec. (e)
unch
-0.7% y/y
Nov.
-1.8%
-1.8% y/y
+5.8% y/y
-14.6% y/y
Producer Price Index
Jan. (e)
-0.6%
+1.1% y/y
-0.4%
+1.9% y/y
Dec.
EURO AREA
Industrial Production
Dec. (e)
+0.2%
+0.3% y/y
Nov.
+0.2%
-0.4% y/y
GERMANY
Consumer Price Index
Jan. F (e) -1.3%
-0.5% y/y
Dec.
+0.1%
+0.1% y/y
EU Leaders Summit
U.K.
Industrial Production
Dec. (e)
-0.1%
Nov.
-0.1%
RICS House Price Balance
Jan. (e)
12%
Dec.
11%
+0.5% y/y
+1.1% y/y
Other
Manufacturing Production
Dec. (e)
-0.1%
+2.0% y/y
Nov.
+0.7%
+2.7% y/y
CHINA
Trade Surplus D
Jan. (e)
$48.9 bln
Dec.
$49.6 bln
INDIA
Real GDP
Q4
Q3
+5.3% y/y
CHINA
CPI
Jan. (e)
+1.0% y/y
Dec.
+1.5% y/y
AUSTRAL
House Price Index
Q4 (e)
+1.8%
Q3
+1.5%
PPI
-3.7% y/y
-3.3% y/y
IA
+7.1% y/y
+9.1% y/y
NAB Business Confidence
Jan.
Dec.
2
G20 Finance Ministers and Central Bankers Meet in Turkey (Feb. 9-10)
D
= date approximate
Friday February 13
Bank of England Quarterly Inflation
Report
CHINA
Aggregate Yuan Financing D
Jan. (e)
2.05 trln
Dec.
1.69 trln
AUSTRALIA
Employment
Jan. (e)
-5,000
Dec.
+37,400
New Yuan Loans D
Jan. (e)
1.35 trln
Dec.
0.70 trln
Jobless Rate
Jan. (e)
6.2%
Dec.
6.1%
M2 Money Supply D
Jan. (e)
+12.1% y/y
Dec.
+12.2% y/y
AUSTRALIA
Westpac Consumer Confidence
Feb.
Jan.
+2.4%
Upcoming Policy Meetings | ECB: Mar. 5, Apr. 15, June 3, July 16, Sep. 3, Oct. 22, Dec. 3
Real GDP
Q4 A (e)
Q3
EURO AREA
+0.2%
+0.2%
+0.8% y/y
+0.8% y/y
Trade Surplus
Dec. (e)
€19.0 bln
Nov.
€20.0 bln
GERMANY
Real GDP
Q4 P (e)
+0.3%
+1.0% y/y
Q3
+0.1%
+1.2% y/y
FRANCE
Real GDP
Q4 P (e)
+0.1%
+0.3% y/y
Q3
+0.3%
+0.4% y/y
ITALY
Real GDP
Q4 P (e)
-0.1%
-0.5% y/y
Q3
-0.1%
-0.5% y/y
North American Calendar: February 9 – February 13
Canada
Monday February 9
8:15 am
Jan. (e)
Housing Starts
177,500 a.r. (-1.6%)
Dec.
180,300 a.r. (-6.5%)
Consensus 184,000 a.r. (+2.1%)
Tuesday February 10
12:35 pm BoC Senior Deputy Governor
Wilkins speaks at the Ottawa
Economics Association on
“Minding the Labour Gap”
United States
10:35 am 3-, 6- & 12-month T-bill
auction $11.5 bln
(new cash $-0.6 bln)
10:00 am
Jan. (e)
Dec.
Federal Reserve Labor
Market Conditions Index
+5.0 m/m
+6.1 m/m
Wednesday February 11
7:45 am
8:30 am
Dec. (e)
Nov.
12:05 pm 2-year bond auction
$3.4 bln (new cash $3.4 bln)
Jan. (e)
Retail Economist-GS Same- 7:00 am
Store Sales – Feb 7th week Feb. 6
Jan. 30
Johnson Redbook Sameth
Store Sales – Feb 7 week 2:00 pm
Jan. ’15 (e)
NFIB Small Business
Jan. ’14
Economic Trends Survey
101.0
Dec.
100.4
10:00 am
Dec. (e)
Wholesale Inventories
+0.1%
Nov.
+0.8%
10:00 am
Job Openings & Labor
Turnover Survey (Dec.)
10:00 am
IBD/TIPP Economic
Optimism Index
51.8 C
51.5
8:55 am
9:00 am
MBA Mortgage Apps
C
= consensus
D
= date approximate
Fed Speaker:
Richmond’s Lacker (8:20 am)
11:30 am 4-week bill auction
1:00 pm 3-year note auction
$24.0 bln
8:30 am
Dec. (e)
Mfg.
Sales
+0.5%
Mfg. New
Orders
+1.0%
Nov.
-1.4%
-1.7%
8:30 am
Dec. (e)
Nov.
New Motor Vehicle Sales D
+16.5% y/y
+4.4% y/y
9:00 am
Jan. (e)
Dec.
Existing
Home Sales D
+1.5% y/y
+7.9% y/y
9:00 am
Jan. (e)
Dec.
MLS Home Price Index D
+4.8% y/y
+5.4% y/y
8:30 am
Jan. (e)
Import Prices
-3.0%
Dec.
-2.5%
8:30 am
Producer Price Index
revisions
Feb. P (e)
University of Michigan
Consumer Sentiment
98.5
Jan.
98.1
Consensus -1.0%
+1.3%
Budget Deficit
$18.0 bln
$10.3 bln
8:30 am
Jan. 31
Jan. 24
Continuing Claims
8:30 am
Jan. (e)
Retail Sales Ex. Autos
-0.3%
-0.2%
10:00 am
Dec.
-0.9%
Consensus 98.2
9:45 am
Bloomberg Consumer
Comfort Index – Feb 8th
week
10:00 am
Dec. (e)
Nov.
Business Inventories
+0.2%
+0.2%
2,400k (+6k)
Consensus -0.4%
Fed Speaker: Dallas’ Fisher (8:00 am)
1:00 pm 10-year note auction
$24.0 bln
n.a.
Average
Prices
+3.0% y/y
+3.8% y/y
5-year bond auction announcement
Initial Claims
288k (+10k) C
278k (+11k)
Consensus +0.1%
Fed Speaker: Governor Powell (4:00 pm)
11:00 am 4-week bill auction
announcement
11:30 am 13- & 26-week bill auction
$52.0 bln
New Housing Price Index
unch
+1.6% y/y
+0.1%
+1.7% y/y
Friday February 13
8:30 am
Feb. 7 (e)
Jan. 31
Consensus 101.1
Feb. (e)
Jan.
Thursday February 12
-0.4%
-1.0%
11:00 am 13- & 26-week bill, 30-year
TIPS auction
announcements
1:00 pm 30-year bond auction
$16.0 bln
Consensus -3.3%
Fed Speaker: Dallas’ Fisher (1:30 pm)
Upcoming Policy Meetings | Bank of Canada: Mar. 4, Apr. 15, May 27 | FOMC: Mar. 17-18, Apr. 28-29, June 16-17
Page 15 of 15
Focus — February 6, 2015
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“BMO Capital Markets” is a trade name used by the BMO Investment Banking Group, which includes the wholesale arm of Bank of Montreal and its subsidiaries BMO Nesbitt Burns Inc., BMO Capital
Markets Ltd. in the U.K. and BMO Capital Markets Corp. in the U.S. BMO Nesbitt Burns Inc., BMO Capital Markets Ltd. and BMO Capital Markets Corp are affiliates. Bank of Montreal or its subsidiaries
(“BMO Financial Group”) has lending arrangements with, or provide other remunerated services to, many issuers covered by BMO Capital Markets. The opinions, estimates and projections contained
in this report are those of BMO Capital Markets as of the date of this report and are subject to change without notice. BMO Capital Markets endeavours to ensure that the contents have been
compiled or derived from sources that we believe are reliable and contain information and opinions that are accurate and complete. However, BMO Capital Markets makes no representation or
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