BMO Capital Markets Economics | A Weekly Financial Digest

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Focus

Will Remote Work Change the Economy Remotely? Dog Days of Summer?

U.S. Jobless Benefits: When The Dough Doesn’t Flow

Canada's Active Recovery

August 14, 2020

Feature Article

Our Thoughts

     Our Thoughts

Dog Days of Summer?

.

Benjamin Reitzes,

Canadian Rates & Macro

Strategistbenjamin.reitzes@bmo.com

In a normal year, these would be the dog days of summer, with vacations in full swing,the sports calendar shifting attention to who might make the playoffs in baseball, andNFL pre-season coming shortly. But this year has been anything but normal, withCOVID wreaking havoc on all aspects of life. Work-from-home continues, for thosefortunate enough to be able to do so, a slow reopening of the broader economy isongoing following the lockdowns, and we have basketball, hockey and baseball all onat the same time…in August!

The markets had plenty of intrigue for what had the potential to be a sleepy summerweek. There was a slew of issuance in North America, as the deluge of debt dealscontinues. The U.S. Treasury issued $112 bln in bonds this week which, combined withcorporate and other issuance, had a big impact. Treasury yields have backed up in ahurry and the curve has steepened violently. U.S. 10-year yields are up over 20 bpssince a record-low close last Tuesday, while 30-year yields have seen a similar-sizedmove. The story in Canada was no different amid heavy bond supply as well. Whilethe Canada auctions were pretty well-received, GoC 10- and 30-year yields moved inline with Treasuries. The back-up in yields came despite the inability of Democrats andRepublicans to agree on a new stimulus deal, sitting exactly $1 trillion apart. What’sa trillion between frenemies? The lack of another stimulus deal would mean lessissuance, and potentially a weaker macroeconomic backdrop.

There were other notable factors, with Russia announcing it has a vaccine for COVIDthat’s undergoing testing. (Call President Putin if you’re interested, but I’ll passfor now, thanks.) Perhaps the most impactful event of the week was the surpriseresurgence in the U.S. CPI. Core CPI blew away expectations with the biggest monthlyincrease since January 1991. That still left core inflation running at just 1.6% y/y, but itwas five ticks above the consensus call and left some re-thinking the sanguine view oninflation. Fun fact: 5-year forward 5-year inflation expectations are back at levels seenthrough the second half of 2019. Ironically, gold took a steep tumble on a day wheninflation surged, but bounced back by the end of the week and is still up sharply thisyear.

Equities were mixed on the week, with the S&P coming just shy of the record highshit in February. I doubt many can say they expected such a quick rebound in equitiesjust a few short months ago. There was also a somewhat muted market reaction topresidential candidate Biden picking Kamala Harris to be the VP on his ticket. Thoughperhaps there was some relief that it wasn’t someone on the far left.

Meantime, back in the economy, we saw the Canadian housing sector put on yetanother display of amazement, with starts surging to the third-highest level in over adecade. While not sustainable, it reinforces the fact that the housing bears have gottenthis DEAD WRONG for now. It’s possible the end of CERB and mortgage deferrals mightput some pressure on the market, but we’ve seen exactly none of that so far. Instead,tumbling mortgage rates have only whetted the appetite of those still employed. And,today’s June manufacturing sales report was very strong, up 20.7%, 4 ppts better thanthe flash estimate. That bodes well for June GDP and increases the likelihood thatthere’s upside potential to our already above-consensus call for Q3 GDP growth (we’reat +42% annualized at the moment). In the U.S., the consumer rebound continues

August 14, 2020 | Page 2 of 16

     Our Thoughts

with retail sales surpassing January’s high-water mark. However, the production sidehas been slower to rebound, with industrial production still 8% away from pre-COVIDlevels even after the 3% gain in July. Meantime, the global picture was a bit of a wetblanket, with China’s July retail sales and industrial production both disappointing, andwe got the final read on how deep the contractions in Q2 GDP were in Europe.

Given the market and sports action this week, it hardly seems like these are the dogdays of summer. Next week brings a busy data calendar, particularly in Canada, whileissuance continues aplenty. Why not, when yields remain a stone’s throw from recordlows?

U.S. Jobless Benefits: When The Dough Doesn’t Flow

.

Michael Gregory, CFA,

Deputy Chief Economistmichael.gregory@bmo.com

On August 8, President Trump signed a memorandum authorizing the extension of afederal top-up on state-administered jobless benefits. The weekly $600 established bythe CARES Act expired for the period ending July 25, and Congress has been unable toagree on legislation that would extend it. The House-passed HEROES Act would keepthe $600 through January 2021. The GOP-sponsored HEALS Act in the Senate wouldreduce it to $200 until October, and then set it at a state-specific level that would, incombination with existing state unemployment insurance (UI), replace up to 70% oflost wages with the federal portion capped at $500. Interestingly, these competingproposals are not the main impediment to getting a deal done. The stumbling blockis how much further financial support to provide state and local governments. TheHEROES Acts puts it at $1 trillion while the HEALS Act proposes zero.

President Trump established a $300 weekly top-up as long as a claimant iscurrently receiving at least $100 in benefits. It’s retroactive to the period ending August1 and funded by $44 billion of the $70 billion Disaster Relief Fund (DRF). (On April 18,the President declared that a major disaster exists in all states and territories becauseof the virus). The President also called on state governments to supplement thiswith $100 to be paid for by money not yet spent in the federally-funded $150 billionCoronavirus Relief Fund (also established by the CARES Act). Last look, there was morethan $80 billion remaining in the fund, although it’s unclear how much of this amounthas not yet been earmarked for other purposes by the states. As it stands, the $300would continue until December 6, or until the DRF’s remaining balance reaches $25billion (so a DRF-sapping natural disaster could shorten this program), or until Congresspasses something.

Our working assumption is that few states will sign on for the $100. Collectively,according to Moody’s (reported on August 12), they face a $500 billion budget shortfallover this fiscal year (which started July 1 for most states) and next year. With budgetsrequired to be balanced each year, few states have the financial resources to funda UI top-up. They are going to have a tough time just maintaining their existing UIprograms. Note that the restraint is already unfolding; of the 206,000 state employeeslaid off during March-April, only 6,000 have since been re-hired. (Partly state-fundedlocal governments laid off 789,000, and have since laid off a further 181,000.)

As at July 25, there were 28.3 million Americans receiving jobless benefits. Thisincludes the 10.7 million receiving the federally-funded Pandemic UnemploymentAssistance (PUA) benefit, which is paid to workers not normally eligible for regularstate benefits such as the self-employed (e.g., gig workers). This also includes the

August 14, 2020 | Page 3 of 16

     Our Thoughts

1.2 million receiving the federally-funded Pandemic Emergency UnemploymentCompensation (PEUC) benefit, which is paid to workers normally eligible but whosestate benefits ran out. The PUA and PEUC programs are scheduled to expire at year-end. Beginning this month, up to 28.3 million Americans will likely (retroactively)receive $300 less in weekly income support, which is worth $8.5 billion. This is anincome loss of around $67.8 billion for the remainder of Q3. Assuming all the moneywould have been spent, this amounts to a 6.2% annualized hit to GDP growth. Thiscould end up wiping out a chunk of expected growth in Q3.

However, as the third quarter unfolds, more individuals will go back to work. For theseindividuals, their employment income could partly, fully, or more than completelyreplace their previous jobless benefits. It’s fair to say (and studies show) that themajority of the re-employed would fall into the ‘partly’ camp compared to $600,which, we suspect, slips to a minority compared to $300. The key is that increased jobsand wages are going to soften the blow of decreased jobless benefits.

Also cushioning the blow will probably be a continued reduction in personalsaving. Reflecting the tax rebate and the fact that some workers received more injobless benefits than they did in wages while working, along with a hindered abilityto shop during the lockdowns, personal saving soared from a monthly $116 billion inFebruary to $529 billion in April. Saving has since slipped to $281 billion. While weexpect the personal saving rate will settle above its pre-pandemic range of around 7½% of disposable income owing to increased precautionary saving, there are still morefunds here to help support spending amid ebbing jobless benefits.

At this stage, by year-end, the federal top-up and the PUA and PEUC programs willhave ended. It’s uncertain how many individuals will be receiving regular stateUI benefits by then and thus face another $300 weekly hit to incomes, as well ashow many will see their total benefits drop to zero. Again, interim and subsequentincreases in employment and decreases in saving are going to provide some offset,but to what degree is also uncertain. This is just one more thing we’ll add toautumn’s worry list, along with the pandemic’s path, election uncertainty and stateand local government cutbacks.

Canada's Active Recovery

.

Sal Guatieri,

Senior Economist

sal.guatieri@bmo.com

It’s most systems go for Canada’s economy. Led by big rebounds in work hours,manufacturing shipments and home sales, BMO’s Business Activity Index (BMO BAI)jumped 9.5% in June, accelerating after a 6.0% rebound in May. Preliminary data—including a hefty 5.3% jump in average hourly earnings, a 1.4-ppts slide in the joblessrate, an 11-point spike in small business confidence, surging housing sales and starts,and further gains in credit-card spending and the equity market—point to a 5.0%advance in July. This would erase more than two-thirds (70%) of the epic 24%plunge in the March/April lockdown. While not all Canadian businesses are makingrapid headway and some haven't survived the crisis, the majority are benefiting fromthe easing of restrictions on non-essential businesses, release of pent-up consumerdemand and substantial policy support.

August 14, 2020 | Page 4 of 16

     Our Thoughts

A supplementary measureof the BMO BAI thataccounts for the publicsector suggests that realGDP rose 4.1% in July,following advances of7.7% in June and 4.9% inMay (versus 4.5% actualfor May). This wouldleave the index, a proxyfor the whole economy,down just over 5%from pre-virus levels inFebruary after tumbling20% in March-April (versus-18.4% for actual GDP).

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75

80

85

90

95

100

09 11 13 15 17 19

BMO Business Activity Index

Canada (February 2020 = 100)

Sources: BMO Economics, Haver Analytics

The June estimate for GDP suggests some upside potential to Statistics Canada’s flashestimate of a 5% increase. As well, the strong start to the current quarter implies someupside to our call of a 42% annualized rebound in Q3 GDP after an estimated 40%plunge in Q2.

Canada’s economy has made quick work of unwinding most of its historictwo-month collapse, and could be sitting around 95% of pre-pandemic levels.Unfortunately, a further climb out of this deep hole will likely prove more grinding dueto the tenuous recovery in the global and U.S. economies and ongoing anxiety aboutthe virus. Still, the recovery is going about as well as anyone could have realisticallyhoped for a few short months ago.

August 14, 2020 | Page 5 of 16

     Recap

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

Good News Bad News

Canada CMHC issues stark warning on

high-risk mortgage lending…

…as BoC cuts mortgage stress test rate

BMO’s Business Activity Index +5.0% (July P) Manufacturing Volumes +18.4% (June) Manufacturing New Orders +23.6% (June) Housing Starts +15.8% to 245,604 a.r. (July) Industrial Product Prices +0.5% (July P)

Province of Ontario projects a $38.5 bln deficit (FY20/21)

United States Hopes for a stimulus deal

fading

Fed officials sound more cautious on recovery

Core Retail Sales +3.0% (July) Industrial Production +3.0% (July)—and Capacity Utilization +2.1 ppts to 70.6% Consumer Prices +0.6%; Producer Prices +0.6%; Import Prices +0.7% (July) Initial Claims -228k to 963k (Aug. 8 wk); Continuing Claims -604k to 15,486k (Aug.1 wk) Job Openings jump to 5,889k (June) Productivity +7.3% a.r. (Q2 P) Budget Deficit narrowed to $63.0 bln (July) U of M Consumer Sentiment +0.3 pts to 72.8 (Aug. P)

NFIB Small Business Optimism Index -1.8 pts to 2-month low 98.8 (July)

Japan Risk of a second wave as virus

cases surge

Current Account Surplus ¥167.5 bln (June) Bank Lending Ex-Trusts +6.4% y/y (July) Tertiary Index +7.9% (June)

Machine Tool Orders -31.1% y/y (July P)

Europe U.K. economic slump worst on

record and likely deepest among G7

Euro Area—Industrial Production +9.1% (June) Euro Area—Trade Surplus grew to €17.1 bln (June) Germany—ZEW Survey +12.2 pts to 71.5 (Aug.) U.K.—Monthly GDP +8.7% (June)—and Index of Services +7.7% U.K.—Industrial Production +9.3% (June) U.K.—Jobless Rate flat at 3.9% (3 mths to June) U.K.—RICS House Price Balance +12% (July)

U.K.—Real GDP -20.4% q/q (Q2 P) U.K.—Employment -220,000 (3 mths to June) U.K.—Average Weekly Earnings (Ex. Bonus) -0.2% y/y (3 mths to June) U.K.—Jobless Claims +94,400 (July) U.K.—Trade Deficit widened to £5.1 bln (June)

Other RBNZ raises QE; Mexico cuts

rates 50 bps

Russia approves COVID vaccine

China—Industrial Production +4.8% y/y; Foreign Direct Investment +15.8% y/y (July) China—Fixed Asset Investment -1.6% y/y (Jan.-to-July)—improving China—Consumer Prices +2.7% y/y; Producer Prices -2.4% (July) Australia—Employment +114,700 (July)

China—Retail Sales -1.1% y/y (July) China—Aggregate Yuan Financing eased to 1.7 trln (July)—and New Yuan Loans 1.0 trln; M2 Money Supply slowed to +10.7% y/y (July) Australia—Jobless Rate +0.1 ppts to 7.5% (July) Australia—NAB Business Confidence -14 pts to -14 (July); Westpac Consumer Confidence -9.5% (Aug.)

August 14, 2020 | Page 6 of 16

     Feature

Will Remote Work Change the Economy Remotely?

.

Sal Guatieri,

Senior Economist

sal.guatieri@bmo.com

It’s still early days, but a drastic shift in where many people work is underway.Remote work, either at home or just about anywhere except the office, hasaccelerated due to the pandemic. If sustained, this could impact real estate and labourmarkets to the benefit of suburban homeowners and workforce participation rates, butto the detriment of office landlords, urban condo dwellers and big-city governmentfinances.

The coronavirus has uncorked the telework genie. To the surprise of manyemployees and businesses, remote work appears to be working. The IT infrastructureis holding up, meetings and conferences are being held virtually, and tasks are gettingdone with little apparent loss of productivity. For some, working from home offersincreased flexibility and convenience, a better work-life balance and no commutingcosts. For businesses, it reduces the second-largest expense after payrolls: office space.Companies are investing heavily in networking capacity and collaboration tools toenhance productivity, and the technology that makes remote work possible will onlyget better and cheaper.

More than a third of employees are able to work from home. A Statistics Canadastudy found that 39% of Canadian workers (and 37% of U.S. workers) can effectively dotheir jobs remotely, including more than four-in-five employees in education, financial,and professional, scientific and technical services. In July, 26% of Canadian employees(4.6 million) worked from home, compared with about 9% before the pandemic (1.6million), though the number has fallen recently as businesses reopened.

Some companies are eager to ride the telework train. An April survey by researchfirm Gartner found that three-quarters of CFOs plan to permanently reduce the numberof employees going into the office, and a June 5 survey found that 82% of corporateleaders intend to allow telework at least part-time. A survey by Standard & Poor’sfound that 47% of chief technology officers plan to reduce their office footprint.Claiming "office centricity is over," Shopify’s CEO expects to keep most staff at homepermanently, while Google plans to keep its employees home at least until nextsummer. Facebook expects half of its workforce to stay home in the next decade,though it also just signed a large office lease in Manhattan (IBM and Blackstone arealso seeking more office space in the city). Investment sage Warren Buffett sees apermanent shift towards telework.

Companies will still need office space, just less of it. Not everyone can easily workfrom home, notably those in small condos. Face-to-face collaboration can facilitatetraining and creativity. Corporate culture could suffer without direct personal contact.Some companies might need more space to keep workers distant until a vaccine isfound. Telework has also raised IT costs for companies, notably on cloud services. So,offices aren’t about to disappear. Many firms are likely to adopt a hybrid approachthat surveys suggest staff prefer. This combines working from home with time in theoffice for meetings, team-building exercises, and training.

August 14, 2020 | Page 7 of 16

     Feature

A sustained shift toward remote work could result in:

Lower rents and values for office buildings: Green Street Advisors estimates thatdemand for office space could fall by up to 15% after the pandemic is over. Lessdemand for offices will pressure rents and building prices lower. Some space could beconverted to living space, providing larger suites for families to work in. Other officescould be converted to warehouses for faster distribution and pickup of online goodsin the area. Suburban office buildings could benefit if firms take a “hoteling” approachthat offers more flexible, cheaper work space closer to employees’ homes.

Challenges for firms catering to the office eco-system: Long after the pandemicpasses, food courts and businesses that cater to office workers could struggle to findcustomers. Even beyond office towers, companies selling products and services tooffice workers—such as business attire and dry cleaning—will see much less demand.

Demand for larger living spaces: Such a shift is already underway, and stands tobenefit the single-family residential market. A sharp rebound in June and July GreaterToronto existing home sales was led by detached homes and townhouses, apparentlyat the expense of condos.

Increased home renovations: Telework has alreadyspurred spending on home comfort. In fact, demand forin-home office renovations looks to have risen sharply.U.S. consumer spending on household furnishings,equipment and maintenance surpassed pre-virus levelsin June (Chart 1). While a recent Altus Group surveyfound that Canadians plan to spend less on renovationsthis year, likely due to the uncertainty caused bythe pandemic, this could change when job prospectsimprove.

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500

550

600

650

700

16 17 18 19 20

Consumer Spending¹

Reno√ation

United States ($ blns)

Chart 1

¹ Furnishings, household equipment and household maintenance

Sources: BMO Economics, Haver Analytics

Shift away from urban living: People are buying larger, less expensive homes in thesuburbs and exurbs to more comfortably work from home. In Greater Toronto, resalesjumped 10% y/y in June in the 905 region, but fell 11% in the 416 core. Detachedsales in the 905 region have eclipsed pre-virus levels. In Manhattan, rental apartmentvacancies are the highest in at least 14 years and rents are falling, though this alsoreflects job losses among lower-paid workers who tend to lease. Of course, noteveryone wants to leave a city that offers amenities unavailable in smaller regions.Still, the shift to suburban and rural living could gain momentum, with added fuel froman aging population. Cottage properties (with good wireless service) stand to benefit.Families that can move to less expensive areas will see an increase in affordability,with less income required for mortgage payments and property taxes, though somecompanies could reduce wages of workers living in cheaper regions.

Decline in business travel: The technology that lets people work from home alsoallows them to have client meetings online. While business travel won’t stop, it will

August 14, 2020 | Page 8 of 16

     Feature

likely stay below pre-pandemic levels, posing longer-term challenges for airlines,hotels and conference centres.

Greater labour force participation: Parents, seniors and anyone living in rural areaswho cannot commute or relocate to a large city should benefit from the ability towork remotely, which will increase their attachment to the workforce. Businesseswill benefit from a larger talent pool, which is why more job postings are listing“anywhere” as an option for location. Some tropical destinations (think Barbados) aretrying to entice workers to relocate. An increase in labour force participation wouldprovide a temporary lift to potential economic growth. On the flip side, as more officeworkers compete with employees worldwide and relocate to where living costs arecheaper, wages could also be pressured downward.

Possible increase in worker productivity: In a recent survey, 32% of U.S. hiringmanagers said productivity rose after shifting to remote work, compared with23% who found a decline.[1] This is partly due to less commuting time and fewerunnecessary meetings. Many more hiring managers had a positive rather thannegative experience with remote working, and 62% plan to increase the amount ofwork done from home. However, telework isn’t for everyone, notably those lackinghome privacy. As well, collaboration and idea generation could get stifled over time.The jury is undecided on whether telework will lead to a sustained boost in workerefficiency, and any increase will likely cause just a temporary lift to potential growth.

A large hole in big-city government finances: A shrinking office/commercial taxbase and diminished use of public transit for commuting to downtown offices couldstrain urban fiscal finances long after the pandemic passes. This could lead to servicecuts and municipal layoffs.

Increased income inequality: Many lower-income workers, particularly in thehospitality sector, can't work from home. They will continue to face job insecurities andremain at financial risk in the event of a second wave or new pandemic. Meantime,higher-paid people who can work from home and relocate to less-expensive suburbswill see an increase in discretionary income due to reduced living and commutingexpenses.

The Bottom Line: It’s too early to tell whether remote work will continue to flourishafter the pandemic, though some increase appears likely due to worker preferencesand business savings. If so, we could see a sustained shift from living in smaller condosto detached homes and from large cities to smaller regions. Vacant office and retailspace could be converted to living and warehouse space. Productivity could changelittle, but some increase in workforce participation appears likely. Telework may helpsome people who have lost their jobs or businesses find new opportunities.

[1] Adam Ozimek. Upwork. “The Future of Remote Work”. https://content-static.upwork.com/blog/uploads/sites/6/2020/05/26131624/Upwork_EconomistReport_FWR_052020.pdf

August 14, 2020 | Page 9 of 16

     Economic Forecast

.

Economic Forecast Summary for August 14, 2020

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

CANADA

Real GDP (q/q % chng : a.r.) -8.2 -40.0 42.0 10.0 6.5 4.2 3.5 3.2 1.7 -6.0 6.0

Consumer Price Index (y/y % chng) 1.8 0.0 0.8 0.6 0.9 2.1 1.5 1.6 1.9 0.8 1.5

Unemployment Rate (percent) 6.3 13.0 10.0 8.8 8.3 8.1 7.9 7.6 5.7 9.5 8.0

Housing Starts (000s : a.r.) 209 191 217 205 210 206 202 202 209 205 205

Current Account Balance ($blns : a.r.) -44.4 -73.7 -63.4 -58.6 -55.1 -54.0 -51.8 -51.0 -47.0 -60.0 -53.0

Interest Rates

Overnight Rate 1.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 1.75 0.50 0.25

3-month Treasury Bill 1.29 0.22 0.15 0.15 0.15 0.15 0.15 0.15 1.65 0.45 0.15

10-year Bond 1.20 0.59 0.50 0.60 0.75 0.90 1.00 1.15 1.59 0.70 0.95

Canada-U.S. Interest Rate Spreads

90-day 16 8 7 8 8 8 8 8 -45 10 8

10-year -18 -10 -10 -8 -8 -7 -6 -6 -56 -11 -7

UNITED STATES

Real GDP (q/q % chng : a.r.) -5.0 -32.9 22.0 4.0 6.4 5.7 4.1 3.2 2.2 -5.0 4.0

Consumer Price Index (y/y % chng) 2.1 0.4 1.1 1.0 1.1 2.4 1.8 1.8 1.8 1.1 1.8

Unemployment Rate (percent) 3.8 13.0 9.8 8.9 8.0 7.2 6.5 6.1 3.7 8.9 7.0

Housing Starts (mlns : a.r.) 1.48 1.04 1.25 1.31 1.28 1.29 1.29 1.30 1.30 1.27 1.29

Current Account Balance ($blns : a.r.) -417 -421 -475 -488 -518 -527 -535 -542 -480 -450 -530

Interest Rates

Fed Funds Target Rate 1.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 2.13 0.38 0.13

3-month Treasury Bill 1.13 0.14 0.10 0.10 0.10 0.10 0.10 0.10 2.10 0.35 0.10

10-year Note 1.38 0.69 0.55 0.70 0.85 0.95 1.10 1.20 2.14 0.85 1.00

EXCHANGE RATES

US¢/C$ 74.4 72.2 74.4 75.4 75.9 76.2 76.5 76.8 75.4 74.1 76.4

C$/US$ 1.34 1.39 1.34 1.33 1.32 1.31 1.31 1.30 1.33 1.35 1.31

¥/US$ 109 108 106 105 105 106 106 107 109 107 106

US$/Euro 1.10 1.10 1.17 1.20 1.20 1.21 1.21 1.22 1.12 1.14 1.21

US$/£ 1.28 1.24 1.29 1.30 1.30 1.31 1.32 1.33 1.28 1.28 1.31

Blocked areas mark BMO Capital Markets forecasts; up and down arrows ( ) indicate forecast changes; spreads may differ due to rounding

(average for the quarter : %)

(average for the quarter : bps)

(average for the quarter : %)

(average for the quarter)

2020 2021 Annual

2019 2020 2021

August 14, 2020 | Page 10 of 16

     Key for Next Week

Canada

.

Benjamin Reitzes,

Canadian Rates & Macro

Strategistbenjamin.reitzes@bmo.com

.

Existing Home SalesMonday, 9:00 am (expected)

Existing Average

Home Sales Prices

July (e) +20.0% y/y +10.0% y/y

June +15.2% y/y +6.5% y/y

MLS Home Price Index

July (e) +5.7% y/y

June +5.4% y/y

Home sales surged in July as the reopening continued to push forward. Pent-updemand from buyers forced to sit on the sidelines for a couple of months is providing alift, and will probably support activity for at least a couple more months. Nearly everymajor city had sales up double-digits in July from a year ago, led by Montreal, Victoria,and Fraser Valley. Toronto sales saw the best July on record. Our call for a 20% y/y gainwould put national sales up 20% m/m on a seasonally adjusted basis to a record high.Average prices are expected to climb 10% y/y, while the quality-adjusted MLS HPIlooks to pick up modestly to +5.7% y/y.

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Consumer Price IndexWednesday, 8:30 am

July (e) +0.3% +0.5% y/y

(+0.2% sa)

Consensus +0.4% +0.5% y/y

June +0.8% +0.7% y/y

Core CPI Measures (June)

CPI Core - Trim +1.8% y/y

CPI Core - Median +1.9% y/y

CPI Core - Common +1.5% y/y

Canadian consumer prices likely rose for a third straight month in July as energyprices continued to push higher. We’re looking for the CPI to rise 0.3% m/m, which isabout 0.2% on a seasonally-adjusted basis. The increase is more modest than the priormonth, with gasoline up about 4% versus double-digit gains in May and June. Housinghas rebounded big time, so related sectors should see better pricing power. And, anumber of services are back in business which can swing price pressures either way—lower, as they cut prices to attract customers; higher, as they have to pay for PPE.While COVID continues to impact consumption patterns, more sectors have reopened,which should help normalize spending somewhat. Our call would cut the yearly pace to+0.5%, reversing a small part of the prior month’s 1 ppt surge. The surprisingly strongU.S. headline and core CPI prints suggest there’s some upside risk to our forecast.

The average of the Bank of Canada’s three core CPI measures has been more resilientthan expected with inflation only slowing a couple of ticks from the start of theyear. We’re looking for the core measures to hold steady in July, with risks balancedbetween the disinflationary impact of businesses attempting to bring back customersas they reopen and the inflationary impact of PPE costs and some reversal of priordeclines.

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Retail SalesFriday, 8:30 am

Ex. Autos

June (e) +24.5% +20.0%

Consensus +24.5% +14.8%

May +18.7% +10.6%

As the reopenings continued, retail activity likely returned close to pre-COVID levels.While online shopping has grown tremendously through the pandemic, the returnof physical stores provided a big lift to sales despite the various restrictions in place.StatsCan’s initial estimate for June sales is +24.5% and we see no reason to quibblewith that figure given the huge moves in the month. Indeed, auto sales jumped nearly50%, and more drivers hit the road, lifting gasoline sales (prices were higher, too). Thatwould leave sales at 99.6% of February levels, so nearly fully recovered. StatsCan’sestimate for July will be watched closely; but, with auto sales coming close to normallevels (they were still short in June), there’s little reason to believe overall salesretraced any of the rebound.

August 14, 2020 | Page 11 of 16

     Key for Next Week

United States

.

Michael Gregory, CFA,

Deputy Chief Economistmichael.gregory@bmo.com

.

Housing StartsTuesday, 8:30 am

July (e) 1.26 mln a.r. (+6.1%)

Consensus 1.23 mln a.r. (+3.7%)

June 1.19 mln a.r. (+17.3%)

Building Permits

July (e) 1.34 mln a.r. (+6.1%)

Consensus 1.33 mln a.r. (+5.9%)

June 1.26 mln a.r. (+3.5%)

Housing starts were already averaging around 14-year highs before the pandemichit (1.57 million in February alone). After plummeting to 0.93 million in April, theyrebounded to 1.19 million by June and this should continue in July (up 6.1% to 1.26million). Housing has been able to ramp up more quickly than other sectors in theeconomy. Being outdoors helps, but it’s also because of a very constructive housingmarket balance (see below).

.

FOMC Minutes fromJuly 28-29 meetingWednesday, 2:00 pm

The July 29 FOMC policy statement asserted that “the path of the economy will dependsignificantly on the course of the virus.” The Fed made no policy changes, apart fromextending some of its liquidity and lending facilities (which, arguably, was a tinymore accommodative step). However, we suspect the Minutes will reveal heightenedcorona-concern and some discussion around what more to do if more needs to bedone, such as tweaking the lending facilities (which was subsequently done for theMunicipal Lending Facility), expanding the current QE cadence or modifying forwardguidance. What the FOMC might have settled on for the time being was to prod formore fiscal support. In the presser, Chair Powell said that more “direct fiscal support”,which Congress was deliberating at the time, would be “a good thing”. Powell alsosaid that the results of the review of the Fed’s monetary policy framework (strategy,tools and communication practices) would be released in the “near future”. We’ll bescouring the Minutes for clues on both timing and content.

.

Existing Home SalesFriday, 10:00 am

July (e) 5.42 mln a.r. (+14.9%)

Consensus 5.40 mln a.r. (+14.4%)

June 4.72 mln a.r. (+20.7%)

Would-be home buyers are hearing the calls of the suburban and the rural and, at thevery least, of bigger abodes. The past lockdowns and the continuation of working fromhome are stoking the demand for homes. The lowest mortgage borrowing costs onrecord are adding fuel. While still-recuperating consumer confidence (and its small Julysetback) along with double-digit jobless rates are muffling the sound a bit, would-behome buyers are heeding the calls. The average volume of mortgage applications forpurchases moved above an 11½ year high in mid-June and has remained around thislofty level through early August.

Existing home sales are expected to increase 14.9% to 5.42 million in July, withpending sales from the prior month already reported up 16.6%. Existing home salesare measured at the time of closing, not contract signing, with the latest gain movingthem much closer to February’s 13-year high of 5.54 million. Meanwhile, homesavailable for sale hit a record low in April and have since crept up a bit but onlyon the condo and co-op front. Single-family units on the market hit a new recordlow in June. Relatively lean inventories have more purchasers opting for the newhome segment, with new home sales already hitting a fresh 13-year high in June.Homebuilders reported even higher sales activity in July. This, in turn, is boosting newhome construction.

August 14, 2020 | Page 12 of 16

     Financials Markets Update

.

Financial Markets Update for August 14, 2020

Aug 14 ¹ Aug 7 Week Ago 4 Weeks Ago Dec 31, 2019

Canadian Call Money 0.25 0.25 0 0 -150

Money Market Prime Rate 2.45 2.45 0 0 -150

U.S. Money Fed Funds (effective) 0.25 0.25 0 0 -150

Market Prime Rate 3.25 3.25 0 0 -150

3-Month Rates Canada 0.16 0.16 0 -1 -150

United States 0.09 0.09 0 -1 -145

Japan -0.08 -0.06 -2 1 3

Eurozone -0.48 -0.48 0 -4 -10

United Kingdom 0.07 0.07 0 -1 -72

Australia 0.10 0.11 0 0 -81

2-Year Bonds Canada 0.30 0.27 3 3 -140

United States 0.15 0.13 2 0 -142

10-Year Bonds Canada 0.61 0.48 14 9 -109

United States 0.70 0.57 13 7 -122

Japan 0.05 0.01 5 4 7

Germany -0.42 -0.51 9 3 -23

United Kingdom 0.25 0.14 11 8 -57

Australia 0.93 0.83 11 7 -44

Risk Indicators VIX 22.4 22.2 0.1 pts -3.3 pts 8.6 pts

TED Spread 18 16 1 1 -19

Inv. Grade CDS Spread ² 66 64 2 -6 21

High Yield CDS Spread ² 391 385 6 -84 111

Currencies US¢/C$ 75.43 74.72 1.0 2.4 -2.0

C$/US$ 1.326 1.338 — — —

¥/US$ 106.48 105.92 0.5 -0.5 -2.0

US$/€ 1.1828 1.1787 0.3 3.5 5.5

US$/£ 1.310 1.305 0.3 4.2 -1.2

US¢/A$ 71.67 71.57 0.1 2.4 2.1

Commodities CRB Futures Index 149.37 146.85 1.7 6.1 -19.6

Oil (generic contract) 42.10 41.22 2.1 3.7 -31.1

Natural Gas (generic contract) 2.34 2.24 4.4 36.0 6.8

Gold (spot price) 1,945.70 2,035.55 -4.4 7.5 28.2

Equities S&P/TSX Composite 16,521 16,544 -0.1 2.5 -3.2

S&P 500 3,369 3,351 0.5 4.5 4.3

Nasdaq 11,002 11,011 -0.1 4.8 22.6

Dow Jones Industrial 27,894 27,433 1.7 4.6 -2.3

Nikkei 23,289 22,330 4.3 2.6 -1.6

Frankfurt DAX 12,879 12,675 1.6 -0.3 -2.8

London FT100 6,084 6,032 0.9 -3.3 -19.3

France CAC40 4,961 4,890 1.5 -2.1 -17.0

S&P ASX 200 6,126 6,005 2.0 1.5 -8.3

¹ = as of 11:20 am ² = One day delay

(percent change)

(basis point change)

August 14, 2020 | Page 13 of 16

     Global Calendar — August 17–August 21

Monday August 17 Tuesday August 18 Wednesday August 19 Thursday August 20 Friday August 21

Japa

n Real GDP Q2 P (e) -7.6% -9.2% y/y Q1 -0.6% -1.9% y/y Industrial Production June F (e) +2.7% -17.7% y/y May -8.9% -26.3% y/y

Trade Deficit July ’20 (e) ¥88.0 bln July ’19 ¥253.9 bln Core Machine Orders June (e) +2.0% -17.5% y/y May +1.7% -16.3% y/y

CPI Core July (e) +0.3% y/y +0.1% y/y June +0.1% y/y unch y/y CPI Ex. Food & Energy July (e) +0.5% y/y June +0.4% y/y Manufacturing PMI Services Aug. P July 45.2 45.4 Composite PMI Aug. P July 44.9 Department Store Sales July June -19.1% y/y

Euro

Are

a

E U R O A R E A Consumer Price Index July F (e) -0.3% +0.4% y/y June +0.3% +0.3% y/y Core CPI July F (e) +1.2% y/y June +0.8% y/y

E U R O A R E A ECB Minutes from July 16 meeting

E U R O A R E A Manufacturing PMI Services Aug. P (e) 52.7 54.6 July 51.8 54.7 Composite PMI Aug. P (e) 55.1 July 54.9 Consumer Confidence Aug. A (e) -15.0 July -15.0

U.K.

Consumer Price Index July (e) -0.1% +0.6% y/y June +0.1% +0.6% y/y Core CPI July (e) +1.3% y/y June +1.4% y/y

GfK Consumer Confidence Aug. P (e) -25 July -27 Retail Sales (Incl. Fuel) July (e) +2.0% +0.1% y/y June +13.9% -1.6% y/y Manufacturing PMI Services Aug. P (e) 54.0 57.0 July 53.3 56.5 Composite PMI Aug. P (e) 56.7 July 57.0

Othe

r

A U S T R A L I A RBA Minutes from Aug. 4 meeting

D = date approximate Upcoming Policy Meetings | Bank of England: | European Central Bank: Sep. 10, Oct. 29, Dec. 10 Sep. 17, Nov. 5, Dec. 17

August 14, 2020 | Page 14 of 16

     North American Calendar — August 17–August 21

Monday August 17 Tuesday August 18 Wednesday August 19 Thursday August 20 Friday August 21

Cana

da

8:30 am Int’l Securities Transactions Inflows Outflows

June May $22.4 bln $13.4 bln 8:30 am New Motor Vehicle Sales June (e) -17.0% y/y May -47.2% y/y 9:00 am Existing Average

Home Sales D Prices July (e) +20.0% y/y +10.0% y/y June +15.2% y/y +6.5% y/y 9:00 am MLS Home Price Index D July (e) +5.7% y/y June +5.4% y/y 10:30 am BoC Senior Loan Officer

Survey (Q2)

BoC Buyback: 30-year sector 

10:30 am 3-, 6- & 12-month bill auction $10.0 bln (new cash -$16.0 bln)

BoC Buyback: Under 2-year sector 

8:30 am Consumer Price Index July (e) +0.3% +0.5% y/y (+0.2% sa) Consensus +0.4% +0.5% y/y June +0.8% +0.7% y/y 8:30 am CPI Core (% y/y)

Trim Median Common July June +1.8% +1.9% +1.5% 8:30 am Wholesale Trade June (e) +15.0% Consensus +10.1% May +5.7% Noon 5-year bond auction

$5.0 bln

BoC Buyback: 5-year sector 

8:30 am ADP National Employment Report

July June +1,043k Noon 2-year bond auction

$6.0 bln

2- & 10-year bond auction announcements

BoC Buyback: 2-year sector

12:00 pm BoC Deputy Governor Beaudry speaks in Victoria

8:30 am Retail Sales Ex. Autos June (e) +24.5% +20.0% Consensus +24.5% +14.8% May +18.7% +10.6% 8:30 am New Housing Price Index July (e) +0.1% +1.5% y/y June +0.1% +1.3% y/y

BoC Buyback: 10-year sector 

Unite

d St

ates

8:30 am Empire State Manufacturing Survey

Aug. (e) +14.5 C July +17.2 10:00 am NAHB Housing Market

Index Aug. (e) 74 C July 72 4:00 pm Net TIC Flows

Total Long Term June May -$4.5 bln $127.0 bln

Fed speaker: Atlanta’s Bostic (noon)

8:30 am Housing Starts July (e) 1.26 mln a.r. (+6.1%) Consensus 1.23 mln a.r. (+3.7%) June 1.19 mln a.r. (+17.3%) 8:30 am Building Permits July (e) 1.34 mln a.r. (+6.1%) Consensus 1.33 mln a.r. (+5.9%) June 1.26 mln a.r. (+3.5%)

7:00 am MBA Mortgage Apps Aug. 14 Aug. 7 +6.8% 10:00 am Quarterly Services

Survey (Q2 A)

2:00 pm FOMC Minutes from July 28-29 meeting

8:30 am Initial Claims Aug. 15 (e) 900k (-63k)

Consensus 990k (+27k) Aug. 8 963k (-228k) 8:30 am Continuing Claims Aug. 8 Aug. 1 15,486k (-604k) 8:30 am Philadelphia Fed Index Aug. (e) 21.0 C July 24.1 10:00 am Leading Indicators July (e) +1.0% C June +2.0%

Fed speaker: San Francisco’s Daly (1:00 pm)

9:45 am Markit PMIs (Aug. P)

10:00 am Existing Home Sales July (e) 5.42 mln a.r. (+14.9%) Consensus 5.40 mln a.r. (+14.4%) June 4.72 mln a.r. (+20.7%)

Democratic National Convention (Aug. 17-20) 11:30 am 13- & 26-week bill

auctions $105 bln 11:00 am 4- & 8-week bill auction

announcements

11:30 am 119-day cash management bill auction $30 bln

42-day cash management bill auction $30 bln

1:00 pm 20-year bond auction $25 bln

11:00 am 13- & 26-week bill, 2-, 5- & 7-year note, 2R-year FRN auction announcements

11:30 am 4- & 8-week bill auctions

1:00 pm 30R-year TIPS auction $7 bln

C = consensus D = date approximate R = reopening Upcoming Policy Meetings | Bank of Canada: | FOMC: Sep. 15-16, Nov. 4-5, Dec. 15-16Sep. 9, Oct. 28, Dec. 9

August 14, 2020 | Page 15 of 16

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