north american outlook: turning the corner in 2011 february 2011 david tulk, cfa chief canada macro...
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North American Outlook: Turning The Corner in 2011
February 2011
David Tulk, CFA
Chief Canada Macro Strategist
• Global economy transitioning from a sugar high to a sustainable expansion.
• Fiscal stimulus in the United States will ensure above-trend growth in 2011 while the underlying economy continues to heal.
• Canadian growth will slow, but become more balanced in 2011.
North American Outlook in a Nutshell
US Economy Has Reached an Inflection Point
30
35
40
45
50
55
60
65
Jan-05 Nov-05 Sep-06 Jul-07 May-08 Mar-09 Jan-10 Nov-10
20
30
40
50
60
70
80
Composite Index (LHS)
New Orders Index (RHS)
ISM Composite and New Orders Index (Diffusion Index)
Source: ISM/Haver Analytics
Fiscal Stimulus to Underpin 2011
-0.6
-0.2
0.2
0.6
1.0
Q4 Q1F Q2F Q3F Q4F Q1F Q2F Q3F Q4F2010 2011 2012
Impact of Fiscal Stimulus on US Real GDP Growth (Percent)
Source: BEA / TD Economics
Key Headwind to the Economic Recovery is the Labour Market
-10
-8
-6
-4
-2
0
2
0 5 10 15 20 25 30 35 40 45
1960
1981
1990
2001
Current
US Job Losses by Recession (Millions of Jobs)
Source: BLS/Haver Analytics
Months Following Start of Recession
Census Hiring
Canada is Not an Island
-4
-2
0
2
4
6
8
30 35 40 45 50 55 60 65
*Change in following 2 qtrs; Source: Statscan, BEA, Bloomberg
U.S. ISM (Index)
Canadian GDP
Change in BoC Rate*
ISM and Canadian GDP and Overnight Rate
Source: BEA, Federal Reserve, Statistics Canada/Haver Analytics
Q/Q GDP Growth (green) / 2-qtr change in BoC rate (yellow)
International Backdrop has Taken a Bite Out of Canadian Growth
-12
-8
-4
0
4
8
12
Sep-07 Jun-08 Mar-09 Dec-09 Sep-10
Domestic Demand Including InventoriesNet ExportsReal GDP Growth
Composition of Canadian Real GDP Growth (Percent)
Source: Statistics Canada/Haver Analytics
Stronger US Growth Will Rekindle Demand for Exports
80
85
90
95
100
105
110
115
2001 2003 2005 2007 2009 2011
US Activity
Canadian Exports
US Activity Index and Canadian Exports (Index)
Source: Bank of Canada / Haver Analytics
Forecast
Housing Market Coasting Towards a Soft Landing…
-10
-8
-6
-4
-2
0
2
4
6
8
10
Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10
0.3
0.4
0.5
0.6
0.7
0.8Sales (3M MA, LHS)
Sales-to-Listings (RHS)
Canadian Resale Activity and Sales-to-New Listings (3 Month Average Percent Change, Ratio)
Source: CREA
… Due in Large Part to the Fall in Global Bond Yields
3.8
4.3
4.8
5.3
5.8
6.3
Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10
Spread of 5 Year Conventional Mortgage Rate over Target Overnight Rate (Percent)
Source: Bank of Canada / Haver Analytics
Consumer Spending Straining Under the Weight of Leverage
80
100
120
140
160
180
1990 1993 1996 1999 2002 2005 2008
Canada
United States
Household Debt to Income Ratio (Percent of Personal Disposable Income)
The Labour Market is Reaching its Cruising Altitude
16500
16700
16900
17100
17300
Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11
Canadian Employment (Thousands of Jobs)
Source: Statistics Canada / Haver Analytics
On Balance, the Canadian Economy Still Has Significant Spare Capacity
-3
-2
-1
0
1
2
3
Sep-99 Mar-01 Sep-02 Mar-04 Sep-05 Mar-07 Sep-08 Mar-10
Output Gap
Difficulty Meeting Demand
Measures of Canadian Capacity (Standardized Distribution)
Source: Bank of Canada /Haver Analytics
Bank of Canada to Balance Domestic Momentum with Global Risks
0
1
2
3
4
5
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
Bank of Canada Overnight Interest Rate (Percent)
Forecast as at December 2010; Source: Bank of Canada / TD Securities
Canadian Dollar: Stuck in a Range With You
0.75
0.80
0.85
0.90
0.95
1.00
1.05
Aug-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10
Canadian Dollar
Source: Bloomberg
Off Consensus Call for CAD
USDCAD Forecast*
2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4
Bloomberg
Consensus 1.02 1.06 1.03 1.00 0.99 0.98 0.98 1.00
TD Securities 1.02 1.06 1.03 1.00 1.02 1.09 1.06 1.03
*Forecast as of February 17, 2011; Source: Bloomberg, TD Securities
CAD Less Impacted by Europe, but Risks Remain…
0
50
100
150
200
250
300
350
400
Jan-08 May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10
0.98
1.03
1.08
1.13
1.18
1.23
1.28
1.33Spain CDS Spread (LHS, Basis Points)
USDCAD (RHS)
USDCAD and Spain 5-Year CDS Spread
Source: Bloomberg, TD Securities
… and CAD is Vulnerable to Volatility and Risky Assets
-0.5
0.0
0.5
1.0
Oct-10 Nov-10 Dec-10 Jan-11 Feb-11
S&P500WTI2Y Rate SpreadRelative Eco Surprise
1 Month Rolling CAD Correlations
Source: Bloomberg, TD Securities
Longer-Term Fundamentals More Supportive from International Investors…
-8
-4
0
4
8
12
1988 1991 1994 1997 2000 2003 2006 2009
Bonds
Equities
Money Market
Net Financial Flows into Canada (6 Month Moving Average, Billions CAD)
Source: Statistics Canada / Haver Analytics
… And Foreign Central Banks
1
2
3
4
5
1999 2001 2003 2005 2007 2009
"Other Currecy" Share of Total Allocated Reserves* (Percent)
* Other than USD, GBP, EUR, JPY, CHF.Source: IMF COFER database
• Considerable uncertainty means that volatility is the watchword of the day.
• We have seen the cyclical trough in interest rates. Yields will continue to rise in tandem with the economic recovery.
• USD will retain its safe-haven status in the event of financial market turmoil.
Financial Market Implications
• Recoveries from financial crises are typically subdued and take a long time. Except when stimulus has a role to play.
• The inevitable hand off from public to private drivers of growth has been delayed but not avoided.
• Canada is expected to become more balanced.
Concluding Thoughts…
