the weekly bottom line - april 15, 2011

The Weekly Bottom Line TD Economicswww.td.com/economics

April 15, 2011

HIGHLIGHTS OF THE WEEK

United States• SofterthanexpectedFebruarytradedatawasoutshinedbystrongMarchindustrialproductiondataattheendofthe

week.• RealGDPislikelytocomeinunder2%inthefirstquarterof2011,afterthestrong3.1%readinginthefourthquarter

of2010.• However,thesofteningineconomicgrowthwillprovetobetemporaryanddoesnotrepresentstructuralweakness

intheU.S.economy.Economicgrowthispoisedtoaccelerateinthecomingquarters.• RisinginflationexpectationswilllikelyprovoketheFederalReservetostartraisinginterestratesinearly2012.Canada• BankofCanadamaintainsovernightrateat1.00%thisweek,accompanyingcommuniquéwasmoredovishthan

manyhadanticipated.TheBankupgradeditsoutlookforbotheconomicgrowthandinflation,butcitedtheelevatedLoonieasariskduetoitsdampeningeffectonimportpricesandthecompetitivenessofCanada’sexportsector

• ManyCanadiansarewonderingwhytheBankofCanadaisnotraisinginterestratesdespiterisingfoodandenergycosts.ThoughtheBankdidindeedstatethatheadlineinflationwouldlikelyspiketocloseto3%thisyear,ultimatelytherewouldbelittlepass-throughtounderlyinginflationarypressuresgiventhetemporarynatureoffoodandgaspriceshocks.

• TheBank’sforecastforcoreinflationremainsmoderate,implyingthatratehikesareatleastafewmonthsaway.

Current* WeekAgo

52-WeekHigh

52-WeekLow

Stock Market IndexesS&P500 1,319 1,328 1,343 1,023 S&P/TSXComp. 13,876 14,208 14,271 11,093 DAX 7,178 7,217 7,427 5,670 FTSE100 5,996 6,056 6,091 4,806 Nikkei 9,592 9,768 11,274 8,605 Fixed Income YieldsU.S.10-yrTreasury 3.42 3.58 3.83 2.38Canada10-yrBond 3.31 3.44 3.72 2.69Germany10-yrBund 3.38 3.48 3.49 2.12UK10-yrGilt 3.61 3.81 4.04 2.83Japan10-yrBond 1.29 1.33 1.37 0.85Foreign Exchange Cross RatesC$(USDperCAD) 1.04 1.05 1.05 0.93Euro(USDperEUR) 1.44 1.45 1.45 1.19Pound(USDperGBP) 1.63 1.64 1.64 1.43Yen(JPYperUSD) 83.1 84.8 94.5 78.9Commodity Spot Prices**CrudeOil($US/bbl) 107.7 112.8 112.8 66.0NaturalGas($US/MMBtu) 4.12 4.06 5.17 3.18Copper($US/met.tonne) 9389.3 9855.5 10179.5 6067.8Gold($US/troyoz.) 1484.6 1474.9 1484.6 1135.8

THIS WEEK IN THE MARKETS

*asof11:30amonFriday,**Oil-WTI,Cushing,Nat.Gas-HenryHub,LA(Thursdaycloseprice),Copper-LMEGradeA,Gold-LondonGoldBullion;Source:Bloomberg

FederalReserve(FedFundsRate)BankofCanada(OvernightRate)EuropeanCentralBank(RefiRate)BankofEngland(RepoRate)BankofJapan(OvernightRate)Source:CentralBanks,HaverAnalytics

GLOBAL OFFICIAL POLICY RATE TARGETSCurrentTarget

0.00%0.50%

0-0.25%1.00%1.25%

U.S. CONSUMER PRICE INFLATION

-3

-2

-1

0

1

2

3

4

5

6

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

*Excludingfoodandenergy.SourceBureauofLaborStatistics.

Year-over-year%change

Core CPI*Total CPI

The Weekly Bottom LineApril 15, 2011

TDEconomicswww.td.com/economics

2

UNITED STATES - STILL STRONG DESPITE THE HICCUP IN THE FIRST QUARTER

It was a very busy week for U.S. data releases, but as the week progressed the news seemed to have gone better. Tuesday opened with weaker-than-expected net exports data, while on Wednesday U.S. March retail sales data was solid, but did not knock our socks off. As the week drew to a close, however, strong industrial production data helped lift the S&P 500 index. Nonetheless, as of writing it remained 0.7% below last week’s level.

We are two weeks away from the first estimate of real GDP growth for the first quarter of 2011, but this week’s data suggests that real GDP is likely to come in under 2%, after the strong 3.1% print in the fourth quarter of 2010. In the fourth quarter, an acceleration in GDP was supported by solid gains in consumer spending and net exports – par-ticularly the latter offered the largest boost since 1980. This week’s trade data, however, sets the stage for export growth to decelerate dramatically in the first quarter of 2011. This was in part due to a softening in external demand for durable goods. Consequently, net exports will likely drag on GDP growth in the first quarter.

Similar to trade, consumer spending also took a breather in the first quarter. Spending is poised to come in below 2% in the first quarter of 2011, down from the strong 4.4% print in the fourth quarter of 2010. The slowdown in spending is likely driven by higher gas prices, which skyrocketed in February and took a bite out of spending power. And, as the quarter closed, uncertainty injected by geo-political tensions and the disaster in Japan may have caused consumers to postpone purchasing some big-ticket items in March. So, after the strong growth in February, March was a month of payback as auto sales pulled back. However, these factors should prove to be a transient impact and not represent structural weakness in the U.S. economy, as renewed job strength and low interests continue to support spending.

Therefore, the softening in real GDP in the first quarter of 2011 does not undermine our outlook. Economic growth is expected to accelerate in the coming quarters and real GDP is set to grow at an average annual rate of about 2.8% in 2011. In particular, the rise in core retail sales in March provides a good hand off for the second quarter. What is more, the Federal Reserve’s Beige Book released this week reaffirmed that the economic expansion remains intact and continues to gain traction. Finally, industrial production data for March revealed that manufacturing remains one of the

strongest sectors in the economy and the stars are aligned for continued strength underpinned by consumer spending on durable goods and business investment in machinery and capital.

In a week already heavy with data releases, all eyes were on Friday’s Consumer Price Index report. Led by strong gains in energy, CPI inflation rose to 2.7% in March from 2.1% in February. However, core inflation inched up to only 1.2% in March from 1.1% in February. With economic growth gaining traction, concerns about inflation have come to the forefront. Market based measures of inflation expec-tations have risen steadily over the last few weeks. Expect the Federal Reserve to show increased attention to the price component of its mandate and begin telegraphing to markets how it will begin unwinding monetary accommodation in the months ahead.

All told, despite the temporary hiccup in economic growth in the first quarter, the economy is well position to accelerate in the coming quarters, which will keep inflation in the spotlight. While we continue to expect inflation to remain under control, rising inflation expectations is likely to prompt the Fed to begin tightening monetary policy in early 2012.

Christos Shiamptanis, Economist 416-982-2556

INFLATION EXPECTATIONS

1.5

1.7

1.9

2.1

2.3

2.5

2.7

2.9

3.1

Apr May Jul Aug Oct Dec Jan Mar

Implied5yearforwardinflationrate

Source:FederalReserveBoard.

%

2010 2011



3

CANADA – TO RAISE, OR NOT TO RAISE? THAT IS THE QUESTION

A surprise to no one, the Bank of Canada left its bench-mark overnight rate unchanged at 1.00% on Tuesday. If there was a surprise, the tone of the accompanying communiqué was somewhat more dovish than many anticipated. The Bank upgraded both its profile for economic growth and inflation, but played up the downside risk to both from a stronger Loonie. In fact, this was the first time in this recov-ery that the Loonie was cited as a risk to inflation due to its dampening effect on import prices. The key takeaway from all of this is that the Bank remains at least a few months away from raising rates.

In the meantime, many Canadians are left wondering why monetary policy is not being used to address these rapidly rising food and energy costs, despite the fact that they are real costs to Canadian households. Indeed, gasoline has been a major driver of headline inflation recently and retail food prices are expected to rise significantly in the coming months. While the Bank of Canada’s mandate is to maintain headline inflation at 2%, it uses core inflation as an operational guide which strips out a number of these components – none of gasoline, fuel oil, natural gas, fresh fruits, or vegetables is included. The reason for using core inflation is twofold. First, these components are notoriously volatile and dramatic rises tend to be temporary, as was the case back in 2007-09. Notably, crude oil hit almost US$150 per barrel in July 2008, but fell to around US$30 by the end of the year. Global food prices, as measured by the UN food price index, rose by almost 70% over a 16-month period, but gave back all of those gains in 8 months. For Canada, it would be impossible to address such rapid fluctuations in prices by changing the overnight rate as the impact of

that change does not emerge until 18 to 24 months after. In other words, if the Bank were to have raised interest rates in response to rising prices back in 2007, the impact would not have emerged until after prices had already fallen back. In fact, oil prices fell back this week on fears that the recent run-up would result in global demand destruction, while global food prices are indeed beginning to moderate. Thus, using monetary policy to combat very rapid and potentially temporary inflationary pressures is not good policy.

Second, because the prices of many of these commodi-ties are determined by international financial markets, ris-ing prices are not an indication of underlying inflationary pressures in Canada. The prices of food and gasoline are not rising because domestic wage growth and job gains are al-lowing Canadians to push up prices, which is what domestic monetary policy is meant to address. Indeed, according to the Bank of Canada’s April Monetary Policy Report, the Bank is expecting headline inflation to spike temporarily to 2.7% by the second quarter of this year and fall back to 2% by mid-2012, while core inflation only gradually rises to 2.0%. Ultimately, the Bank judges that temporary nature of headline inflation will result in little pass-through to core inflation, and that the offsetting impact of the high Loonie will lead to only moderate underlying price pressures.

Francis Fong, Economist 416-982-8066

FOOD AND GAS PRICE SPIKES ONLY TEMPORARY

-40

-30

-20

-10

0

10

20

30

40

2007 2008 2009 2010 20110

1

2

3

4

5

6

7

8Y/Y%Change Y/Y%Change

Food (right)

Gasoline (left)

Source:StatisticsCanada

CANADIAN HEADLINE AND CORE INFLATION

-1

0

1

2

3

2009 2010 2011 2012

Forecast

Source:StatisticsCanada;forecastbyBankofCanadaasatApril 2011

Y/Y%Change

TotalCPI

CoreCPI



4

U.S.: UPCOMING KEY ECONOMIC RELEASES

After the sharp unexpected drop in February, we expect the pace of existing home sales to rise modestly in March, advancing to 4.95 million units. This will be consistent with the modest gains in pending home sales in the prior month, but is unlikely to mark the beginning of a mean-ingful upswing in housing activity. Both single-family and condo sales are expected to rise, with sales of distressed properties continuing to account for one-third of total sales.

Cash purchases should also make-up a significant por-tion of the total sale as investment buyers remain active in the market, taking advantage of the bargains to be had. Notwithstanding the upswing in March and the supportive tailwind likely to be provided by the improving labour mar-ket condition, we expect the pace of existing home sales to remain at very depressed levels in the coming months as fear of further price declines tempers demand.

*ForecastbyRatesandFXStrategyGroup.Forfurtherinformation,contactTDRates&[email protected].

U.S. Existing Home Sales - March* Release Date: April 20, 2011February Result: 4.88 millionTD Forecast: 4.95 millionConsensus: 5.00 million

U.S. EXISTING HOME SALES*

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11

Thousandsofunits

*SeasonallyadjustedatannualratesSource:CensusBureau/HaverAnalytics

mailto:TDRates&[email protected]



5

CANADA: UPCOMING KEY ECONOMIC RELEASES


The Canadian inflation dynamic is in the process of turning a corner in March. The boost to commodity prices caused by the geopolitical turmoil in the MENA region is expected to push headline prices higher by 0.6% on a non-seasonally adjusted basis. When seasonal factors are taken into account, the forecasted increase of 0.3% is somewhat more subdued. Meanwhile, boosted by an unfavourable base year comparison, headline inflation is likely to have accelerated sharply to 2.8% in the month.

By contrast, core inflation is expected to have remained relatively benign in March before moving higher into the second quarter. Core prices are forecast to have risen by 0.2% on both a seasonally and non-seasonally adjusted ba-sis. Underpinning this expectation is the continued rollout of the electricity tax credit in Ontario and flat auto prices. On a year-ago basis, core inflation is forecast to have bounced off of the artificially weak cyclical low of 0.9% set in February to a rate of 1.2%.

Expanding our forecast out to the quarter as a whole, we are in line with what the Bank of Canada outlined in their

recently released Monetary Policy Report (MPR). As such, we do not anticipate that this release will have too much of an impact on the market other than to solidify the view that core inflation is recovering from the cyclical trough set in February. Moreover, as the temporary forces that had restrained core in Q1 fade, we expect the market to share our view that additional stimulus withdrawal by the Bank in the second half of the year is warranted.

Canadian CPI - March*Release Date: April 19, 2011February Result: core 0.2% M/M; all-items 0.3% M/MTD Forecast: core 0.2% M/M; all-items 0.6% M/MConsensus: core 0.2% M/M; all-items 0.5% M/M

CANADIAN CONSUMER PRICE INDEX (CPI)

0.5

1.0

1.5

2.0

2.5

3.0

Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11

Source:StatisticsCanada/HaverAnalytics

CPI:AllItemsBankofCanadacoreCPIexcepteightmostvolatileitemsandindirecttaxes

Y/Y%Chg.




6


Retail sales are expected to have rebounded by 0.6% in February following two months of declines. While preliminary data for autos suggests sales fell modestly in the month, we recall the head fake this series provided in January. While a catch-up in the following month does not typically occur, we are inclined to leave auto sales in neutral and expect the ex-autos measure to be broadly consistent with the headline. As a result, retail sales are forecast to be driven by a combination of higher gasoline prices (though the real spike occurred in March) and continued momentum in housing activity. Rising consumer prices are also forecast to have restrained real retail sales, through volumes are still expected to have increased in February.

When combining the forecasted increase in retail sales volumes with the declines observed in manufacturing and expected in wholesale volumes, monthly industry-level real GDP is anticipated to be broadly unchanged in February.

When combined with the robust 0.5% growth rate observed in January, we continue to expect the expenditure-based measure of real GDP growth in Q1 to rise by a very healthy 3.8%. Although this is somewhat less than the rate forecast by the Bank of Canada, the theme of continued strength in consumer spending is shared.

Canadian Retail Sales - February*Release Date: April 21, 2011January Result: total -0.3% M/M; ex-autos 0.0% M/MTD Forecast: total 0.6% M/M ; ex-autos 0.7% M/M Consensus: total 0.5% M/M ; ex-autos 0.5% M/M

CANADIAN RETAIL SALES*

-2.5

-1.5

-0.5

0.5

1.5

2.5

Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11

TotalExMotorVehicles

*SeasonallyAdjustedSource:StatisticsCanada/HaverAnalytics

M/M%Chg.




7

RECENT KEY ECONOMIC INDICATORS: APRIL 11-15, 2011

Apr 12 NFIBSmallBusinessOptimism Mar Index 91.9 94.5Apr 12 ImportPriceIndex Mar M/M%Chg. 2.7 1.4Apr 12 TradeBalance Feb USD,Blns -45.8 -47.0 RApr 12 IBD/TIPPEconomicOptimism Apr Index 40.8 43.0Apr 12 MonthlyBudgetStatement Mar USD,Blns -188.2 -65.4Apr13 MBAMortgageApplications 8-Apr W/W%Chg. -6.7 2.0Apr13 AdvanceRetailSales Mar M/M%Chg. 0.4 1.1 RApr13 RetailSalesExAuto&Gas Mar M/M%Chg. 0.6 0.9 RApr13 RetailSalesLessAutos Mar M/M%Chg. 0.8 1.1 RApr13 JOLTsJobOpenings Feb Thousands 3093 2741 RApr13 BusinessInventories Feb M/M%Chg. 0.5 1.0 RApr14 InitialJoblessClaims 9-Apr Thousands 412 385 RApr14 ContinuingClaims 2-Apr Thousands 3680 3738 RApr14 ProducerPriceIndex Mar M/M%Chg. 0.7 1.6Apr14 PPIExFood&Energy Mar M/M%Chg. 0.3 0.2Apr 15 ConsumerPriceIndex Mar M/M%Chg. 0.5 0.5Apr 15 CPIExFood&Energy Mar M/M%Chg. 0.1 0.2Apr 15 CPICoreIndexSA Mar Index 223.33 223.03Apr 15 EmpireManufacturing Apr Index 21.70 17.50Apr 15 TotalNetTICFlows Feb USD,Blns 97.7 30.6 RApr 15 NetLong-termTICFlows Feb USD,Blns 26.9 51.5 RApr 15 IndustrialProduction Mar M/M%Chg. 0.8 0.1 RApr 15 CapacityUtilization Mar % 77.4 76.9 RApr 15 U.ofMichiganConfidence Apr Index 69.6 67.5

Apr 12 NewHousingPriceIndex Feb M/M%Chg. 0.4 0.2Apr 12 Int'lMerchandiseTrade Feb CAD,Blns 0.0 0.4 RApr 12 BankofCanadaRate 12-Apr % 1.00 1.00Apr14 ManufacturingSales Feb M/M%Chg. -1.5 4.4 R

Apr12 FR CurrentAccount Feb EUR,Blns -5.2 -4.1 RApr12 UK TotalTradeBalance Feb GBP,Mlns -2443 -3858 RApr12 UK CPI Mar Y/Y%Chg. 4.0 4.4Apr12 UK CoreCPI Mar Y/Y%Chg. 3.2 3.4Apr12 UK RetailPriceIndex Mar Y/Y%Chg. 5.3 5.5Apr12 GE ZEWSurvey(Econ.Sentiment) Apr Index 7.6 14.1Apr13 FR CPI-EUHarmonised Mar Y/Y%Chg. 2.2 1.8Apr13 UK ILOUnemploymentRate(3mths) Feb % 7.8 8.0Apr13 EC Euro-ZoneInd.Prod.WDA Feb Y/Y%Chg. 7.3 6.3 RApr15 EC Euro-ZoneCPI-Core Mar Y/Y%Chg. 1.3 1.0Apr15 EC Euro-ZoneTradeBalanceSA Feb EUR,Blns -2.4 -3.1 R

Source:Bloomberg,TDEconomics

International

Prior

Canada

United States

ReleaseDate Economic Indicators Data for

Period Units Current



8

UPCOMING ECONOMIC RELEASES AND EVENTS: APRIL 18-22, 2011Release

Date Time* Economic Indicator/Event Data for Period Units Consensus

Forecast Last Period

United StatesApr18 10:30 Fed's Fisher, Lockhart to Discuss Globalization in AtlantaApr18 12:00 Fed's Bullard to Speak on Banking Rules in KentuckyApr18 12:30 Fed's Fisher to Speak on U.S. Economic Outlook in AtlantaApr19 8:30 BuildingPermits Mar Thousands 540 517Apr19 8:30 HousingStarts Mar M/M%Chg. 525 479Apr20 7:00 MBAMortgageApplications 15-Apr W/W%Chg. -- -6.7Apr20 10:00 ExistingHomeSales Mar Millions 5.00 4.88Apr21 8:30 InitialJoblessClaims 16-Apr Thousands 390 412Apr21 8:30 ContinuingClaims 9-Apr Thousands 3682 3680Apr21 10:00 HousePriceIndex Feb M/M%Chg. -0.2 -0.3Apr21 10:00 LeadingIndicators Mar M/M%Chg. 0.3 0.8Apr21 10:00 PhiladelphiaFed. Apr Index 36.8 43.4Apr21 16:00 RPXComposite28dy Feb Y/Y%Chg. -- -3.39

CanadaApr18 8:30 Int'lSecuritiesTransactions Feb CAD,Blns 10.00 13.29Apr19 7:00 ConsumerPriceIndex Mar M/M%Chg. 0.6 0.3Apr19 7:00 BankofCanadaCPICore Mar M/M%Chg. 0.2 0.2Apr19 8:30 LeadingIndicators Mar M/M%Chg. 0.3 0.8Apr19 8:30 WholesaleSales Feb M/M%Chg. -0.2 1.5Apr21 8:30 RetailSales Feb M/M%Chg. 0.5 -0.3Apr21 8:30 RetailSalesLessAutos Feb M/M%Chg. 0.5 0.0

InternationalApr18 10:00 EC Euro-ZoneConsumerConfidence Apr Index -11.0 -10.6Apr18 21:30 AU Reserve Bank's Board April MinutesApr19 3:30 GE PMIManufacturing Apr Index 60.0 60.9Apr19 4:00 GE PMIServices Apr Index 59.8 60.1Apr19 4:00 EC Euro-ZoneCurrentAccountSA Feb Euro,Blns -- -0.7Apr19 4:00 EC PMIManufacturing Apr Index 57.0 57.5Apr19 4:00 EC PMIServices Apr Index 56.9 57.2Apr19 19:50 JN AdjustedMerchndsTradeBal. Mar Yen,Blns 327.5 556.0Apr20 2:00 GE ProducerPrices Mar Y/Y%Chg. 6.6 6.4Apr20 4:30 UK Bank of England MinutesApr21 4:00 GE IFO-BusinessClimate Apr Index 110.5 111.1Apr21 4:00 GE IFO-Expectations Apr Index 105.5 106.5Apr21 4:30 UK RetailSalesExAutoFuel Mar Y/Y%Chg. 0.8 1.2

*EasternStandardTime;Source:Bloomberg,TDEconomics



9

Thisreport isprovidedbyTDEconomics forcustomersofTDBankGroup.Itisforinformationpurposesonlyandmaynotbeappropriateforotherpurposes.ThereportdoesnotprovidematerialinformationaboutthebusinessandaffairsofTDBankGroupandthemembersofTDEconomicsarenotspokespersonsforTDBankGroupwithrespecttoitsbusinessandaffairs.Theinformationcontainedinthisreporthasbeendrawnfromsourcesbelievedtobereliable,butisnotguaranteedtobeaccurateorcomplete.Thereportcontainseconomicanalysisandviews,includingaboutfutureeconomicandfinancialmarketsperformance.Thesearebasedoncertainassumptionsandotherfactors,andaresubjecttoinherentrisksanduncertainties.Theactualoutcomemaybemateriallydifferent.TheToronto-DominionBankanditsaffiliatesandrelatedentitiesthatcompriseTDBankGrouparenotliableforanyerrorsoromissionsintheinformation,analysisorviewscontainedinthisreport,orforanylossordamagesuffered.

CONTACTS AT TD ECONOMICS

Craig AlexanderSenior Vice President and

Chief Economist mailto:[email protected]

TO REACH US Mailing Address 55KingStreetWest 21stFloor,TDTower Toronto,Ontario M5K1A2 Fax:(416)944-5536 mailto:[email protected]

CANADIAN ECONOMIC ANALYSISDerek Burleton, Vice President and Deputy Chief Economist mailto:[email protected] Pascal Gauthier Senior Economist mailto:[email protected]

Diana Petramala Economist, Macro mailto:[email protected]

Francis Fong Economist, Special Studies mailto:[email protected]

Dina Cover Economist, Industry mailto:[email protected]

Shahrzad Mobasher Fard Economist, Industry mailto:[email protected]

Sonya Gulati Economist, Regional and Government Finances mailto:[email protected]

Leslie Preston Economic Analyst mailto:[email protected]

U.S. & INTERNATIONAL ECONOMIC ANALYSISBeata Caranci, Associate Vice President and Deputy Chief Economist mailto:[email protected] James Marple Senior Economist mailto:[email protected]

Martin Schwerdtfeger Economist, International mailto:[email protected]

Christos Shiamptanis Economist mailto:[email protected]

Alistair Bentley Economist mailto:[email protected]

Chris Jones Economic Analyst mailto:[email protected]

the weekly bottom line - april 15, 2011

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