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September 3, 2010
• This week provided fairly positive economic data, as U.S. Personal income and consumption rose in July, the ISM
manufacturing index surprised on the upside, and non-farm private payrolls were also stronger than expected.
• These data support our view that the U.S. recovery will remain on track, and that growth will continue at a relatively
slow pace.
• In order to experience a relapse in economic growth, U.S. aggregate demand components would have to register
contractions of a magnitude difficult to justify outside of a scenario characterized by a renewed severe shock.
• Drama has been growing ahead of next week’s BOC meeting. Investors are split on the likelihood of a follow-up 25
basis point rate hike.
• Regardless of whether the Bank hikes rates, this is likely to be the last for a while, as economic growth is falling short
of the central bank’s expectations.
• Real GDP for Q2 came in at 2%, below the 2.5% consensus estimate and falling short of the Bank’s 3% forecast.
• Q2 data reinforced some of the growing vulnerabilities to the Canadian expansion, including slowing consumer
spending, housing activity and export growth.
• We expect real GDP growth to come in closer to the 2% mark than the Bank’s 3% forecast in the second half of 2010
and first half of 2011.
into deflation. 2
ing Canadian GDP report for the second quarter, a barrage of Inventories
stronger-than-anticipated U.S. figures – notably the ISM and
Exports
jobs numbers for August – helped to propel the likelihood of
a hike from 30% to just above 50% by week’s end. On the Imports
day, it is likely to be the last rate hike for a while. For one,
the recent string of positive U.S. data is more telling of an to the absence of pent-up demand of households, particularly
economy not slipping back into recession than one gain- for big-ticket items, personal consumption expenditure and
ing significant traction. But more importantly, Canada’s homebuilding activity softened in Q2.
weaker-than-expected 2.00% (annualized) reading on real Surprisingly strength in job creation has helped to keep
GDP in Q2 – while certainly containing some bright spots – consumer spending well supported in recent months. How-
provided some strong signals of the growing vulnerabilities ever, this Friday’s employment report for August should
to growth at home. provide some evidence that hiring is beginning to slow down
On the plus side, a major contributor to Canadian second- in tandem with the broad economy. The headline number is
quarter growth was business capital spending, which had expected to receive a boost from a rebound in educational
been lagging behind so far in the recovery. On the flip side, services employment, which fell sharply in the prior month,
a full 2 percentage points of growth alone was attributable to partly due to a statistical quirk. However, excluding educa-
a sharp accumulation in inventories, which tend to provide tion, there was probably little net addition to jobs in August
only a temporary kick. Elsewhere, exports gains slowed, on the heels of a solid run in the spring and early summer.
reflecting the ongoing U.S. challenges. And as a testament The data indicate that Canada’s economy is gearing
down more quickly than the BOC had envisaged in its July
BANK OF CANADA OVERNIGHT TARGET RATE Monetary Policy Report (MPR). In that document, the Bank
%
AND CANADIAN 10-YEAR BOND YIELD
% had not only projected real GDP growth of 3% in Q2, but it
7 7
had expected that pace to be continued in the second half of
Forecast
6 6 2010 and in 2011. Based on our estimates, it now appears
that the profile is likely to be closer to 2%, increasing the
5 5
downside risk to their core inflation forecast.
4 4 Accordingly, rather than continuing to embark on a
3 3
string of rate hikes, the path ahead is likely to be drawn out.
TD Economics is forecasting only four quarter-point hikes
2 2 throughout 2011 beginning in Q1, taking the rate up to 2%,
1 BoC Overnight Rate (now called Target) 1
which is still effectively zero in real terms. Look for the
10-Year Canadian Bond Yield communiqué accompanying Wednesday’s rate decision to
0 0
signal a pause going forward.
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10
Source: Bank of Canada / Haver Analytics; Forecast as at August 2010. Derek Burleton, Deputy Chief Economist
416-982-2514
The Weekly Bottom Line TD Economics
September 3, 2010 4
www.td.com/economics
Consensus: -47.3B 15
-5
After three consecutive months of widening, the U.S.
trade balance is set for a modest improvement in July. -15
0.7% M/M drop in the pace of imports along with a 1.1% -35
While Q2 real GDP growth did fall short of the Bank’s fore-
2 2
cast, the underlying details suggest that there is sufficient
momentum in the domestic economy to warrant a further 1 BoC Overnight Rate (now called Target) 1
annualized units. Despite the recent fall in resale activity, Total Starts 60
(left scale)
building permits have held up reasonably well and the 125
50
weather across the country was generally supportive of
building activity in August. In terms of the composition of 100 40
Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10
starts, single unit dwellings are forecast to stabilize follow-
ing several months of sharp declines. Meanwhile, the ever- Source: CMHC / Haver Analytics
volatile multiples component is forecast to remain flat fol-
lowing a sharp 13% increase in July. Taking a longer-term
perspective, the housing market is expected to remain on the
weak side over the second half of the year. The emergence
of a better balance between buyers and sellers is anticipated
to reduce the incentive of builders, which will allow starts
to return to their demographically supported level.
*Forecast by Rates and FX Strategy Group. For further information, contact TDRates&FXResearch@tdsecurities.com.
The Weekly Bottom Line TD Economics
September 3, 2010 6
www.td.com/economics
TD Forecast: $-1.3B 40
Consensus: -0.8B 38
Exports
Imports
Canada’s merchandise trade deficit is expected to widen 36
further to $1.3B in July. While both exports and imports
34
are likely to rebound from the decline observed in June,
the forecasted 1.6% M/M increase in exports will lag the 32
8.0
60
After posting an unexpected decline in July, the Canadian 7.5
20
labour market is forecast to rebound strongly in July, adding 7.0
40K new jobs. When paired with the modest expansion in -20
6.5
the labour force, the jump in hiring is expected to pull the -60
unemployment rate down by a tenth of a percent to 7.9%. Net Job Change
6.0
*Forecast by Rates and FX Strategy Group. For further information, contact TDRates&FXResearch@tdsecurities.com.
The Weekly Bottom Line TD Economics
September 3, 2010 7
www.td.com/economics
Contacts at TD Economics
Craig Alexander
Senior Vice President and
Chief Economist
mailto:craig.alexander@td.com
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