Economic and Financial Market Outlook: Read My Lips… Monetary Stimulus is Here to Stay September 2013 David Tulk, CFA Chief Canada Macro Strategist
Central Banks Using Forward Guidance to Support the Recovery Federal Reserve fed funds rate: 25bps since Dec 2008 balance sheet: $3.6 trillion tapering expected early 2014 Bank of England base rate: 50bps since March 2009 asset purchases: £375 billion European Central Bank refinance rate: 50bps since April 2013 a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends 6.5% unemployment rate, 2.5% inflation the MPC intends not to raise Bank Rate … at least until the … of the unemployment rate has fallen to a threshold of 7% The Governing Council confirms that it expects the key ECB interest rates to remain at present or lower levels for an extended period of time
Liquidity Has Been Assured, Relieving Financial Market Stress
Central Bank Stimulus Has Anchored Rates, Helped Risk Assets Perform
US Fiscal Uncertainty and Austerity to Loom Large in 2013 and Beyond
Gradual Healing in the Housing Market is Encouraging…
… As is the Improvement in the Flow of Credit
Labour Market is on a Very Long Journey to Recovery
Taper Tightening: Cyclical Vulnerability to Keep Policy Very Accommodative
The US Economy is a Long Way Away from Full Capacity
US Forecast: Private Fundamentals Versus Public Austerity US Economic Forecast Overview 2012Q42013Q12013Q22013Q32013Q42014Q12014Q22014Q3 Real GDP Growth (Q/Q ann.) Unemployment Rate (%) Federal Funds Target* (%) Year Yields* (%) * End of period; forecast as at September Source: Bloomberg, TD Securities
Canadian Recovery Is Running Out of Steam, Waiting for a Rotation in Growth
Bank of Canadas Forward-Looking Guidance Speaks First to Stimulus… As long as there is significant slack in the Canadian economy, the inflation outlook remains muted, and imbalances in the household sector continue to evolve constructively, the considerable monetary policy stimulus currently in place will remain appropriate. Over time, as the normalization of these conditions unfolds, a gradual normalization of policy interest rates can also be expected, consistent with achieving the 2 per cent inflation target
… But the Legacy of Lower for Longer Will Need to be Managed
Tighter Mortgage Regulations Only Have a Limited Impact in Slowing Sales
Affordability Will Remain in Check Despite Rising Rates
Degree of Overvaluation in Housing Depends on the Metric
Canada Forecast: Subdued Growth Waiting for Foreign Support * End of period; Forecast as at September Source: Bloomberg, TD Securities Canada Economic Forecast Overview 2012Q42013Q12013Q22013Q32013Q42014Q12014Q22014Q3 Real GDP Growth (Q/Q ann.) Unemployment Rate (%) Core CPI Inflation (Y/Y) Overnight Rate* (%) Year Yields* (%) USDCAD (CAD per USD)* FORECAST UNDER REVIEW
The Taper Trade Makes it as Much About USD Strength as CAD Weakness
CAD Correlations Breakdown in Favour of Macro Fundamentals
Export Mix to Keep Rebound Subdued Amid Slower Domestic Demand
Market Positioning Far More Cautious on the Strength in CAD
A Sign that Longer-Term Investors are Also Shying Away from Canadian Debt
Discontinuous Relationship With WTI & WCS Spread Limit CAD Upside
Some of the near-term risks in Europe have faded, but very important structural challenges remain unresolved. Slow abatement of headwinds in the United States is consistent with a prolonged economic recovery, stimulus withdrawal still far away. Canadian growth will remain unbalanced but ultimately requires support from foreign demand. Risk of a US-style housing correction is low and interest in CAD is fading. The global economy remains vulnerable to economic and other shocks, ensuring policy stimulus remains in place. Volatility and uncertainty will remain elevated. The Outlook in a Nutshell
David Tulk, CFA Chief Canada Macro Strategist 416 – 983 – 0445