the weekly bottom line - td bank · european central bank and a strong u.s. payrolls report....

THE WEEKLY BOTTOM LINE

TD Economics

HIGHLIGHTS OF THE WEEK

• Adismalpayrollsreport,incombinationwithotherpoordatareckoningssuchasAugustmanufacturingPMI,increasethelikelihoodoffurtherquantitativeeasingbytheFednextweek.

• Thisweekthough,itwastheturnoftheEuropeanCentralBank(ECB),whichannouncedaplantobuyEuropeansovereignbondsinthesecondarymarkets.Despitethepositivemarketreaction,weshouldbemindfulofthelimitationsofaliquiditytooltoaddresssolvencyconcernsrootedoneconomicstructuraldeficiencies.

• NowitisuptoEuropeangovernmentsundermarketpressuretoabidebytherulesofthegamesetupbytheECB.Thegruelingnatureoffiscalausteritywillnotmakeforagameofhappyplayers.

September 7, 2012

Current* WeekAgo

52-WeekHigh

52-WeekLow

Stock Market IndexesS&P500 1,436 1,407 1,436 1,099S&P/TSXComp. 12,217 11,949 12,740 11,178DAX 7,223 6,971 7,223 5,072FTSE100 5,784 5,711 5,966 4,944Nikkei 8,872 8,840 10,255 8,160Fixed Income YieldsU.S.10-yrTreasury 1.62 1.55 2.40 1.39Canada10-yrBond 1.81 1.77 2.49 1.58Germany10-yrBund 1.52 1.33 2.33 1.17UK10-yrGilt 1.69 1.46 2.64 1.44Japan10-yrBond 0.82 0.80 1.07 0.73Foreign Exchange Cross RatesC$(USDperCAD) 1.02 1.01 1.02 0.95Euro(USDperEUR) 1.28 1.26 1.42 1.21Pound(USDperGBP) 1.60 1.59 1.63 1.53Yen(JPYperUSD) 78.1 78.4 83.7 75.8Commodity Spot Prices**CrudeOil($US/bbl) 95.8 96.5 109.5 75.7NaturalGas($US/MMBtu) 2.85 2.74 4.04 1.84Copper($US/met.tonne) 7693.3 7606.3 9096.3 6721.5Gold($US/troyoz.) 1734.8 1692.0 1870.2 1539.6

THIS WEEK IN THE MARKETS

*asof11:45amonFriday,**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

0.10%0.50%

0-0.25%1.00%0.75%

GLOBAL OFFICIAL POLICY RATE TARGETSCurrentTarget

STOCK MARKETS

40

60

80

100

Oct-07 Jul-08 May-09 Feb-10 Dec-10 Sep-11 Jul-1240

60

80

100

S&P500GermanDAXMSCIWorldindexU.K.FTSE

Index,Oct07=100

Source:Bloomberg,TDEconomics

Current Rate 20139/7/12 Q1 Q2 Q3F Q4F Q1F Q2F Q3F Q4F

FedFundsTargetRate(%) 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.252-yrGovt.BondYield(%) 0.24 0.33 0.30 0.25 0.30 0.30 0.30 0.30 0.4510-yrGovt.BondYield(%) 1.62 2.21 1.64 1.45 1.75 1.90 2.00 2.25 2.5030-yrGovt.BondYield(%) 2.77 3.34 2.75 2.50 2.90 3.00 3.00 3.30 3.60RealGDP(Q/Q%Chg,Annualized) 1.7 (Q2) 2.0 1.5 2.3 2.1 1.6 2.2 2.6 3.1CPI(Y/Y%Chg.) 1.4 (Jul-12) 2.8 1.9 1.4 1.6 1.4 1.8 2.1 2.1UnemploymentRate(%) 8.1 (Aug-12) 8.3 8.2 8.1 8.1 8.1 8.1 7.9 7.7ForecastbyTDEconomics.Source:Bloomberg,TDEconomics

TD ECONOMICS KEY FORECASTS2012

2

TD Economics | www.td.com/economics

September 7, 2012

WEAK PAYROLLS PUT FED ONE STEP CLOSER TO QEThere couldn’t have been a better way to end the week

than with a market rally fueled by the saving grace of the European Central Bank and a strong U.S. payrolls report. Although things didn’t play out exactly that way – the ECB gift came with strings attached and the payroll report was dismal – stock markets remained upbeat. At the time of writing, European stocks were up by more than 4% on the week, and the S&P 500 was trading 2.7% higher than last Friday. It seems that the unlimited size of the ECB’s bond buying plan announced yesterday was enough to eclipse the fact that countries will have to face tough conditions to qualify for it, and that the poor payrolls figure has cemented the expectation of a new round of quantitative easing by the Fed next week.

Yesterday, ECB President Mario Draghi provided details of a plan that would see the central bank buy European sovereign bonds in the secondary market whenever market conditions threaten to disrupt monetary policy transmission. The ECB will decide the timing and size of its bond pur-chases based on a variety of indicators such as the level of sovereign bond yields, yield spreads, volatility, and liquidity conditions in those markets. However, those interventions will only happen after a country has signed into an adjust-ment program with the European Financial Stability Facility (EFSF) or the European Stability Mechanism (ESM), which would make it subject to tough conditionality.

Market reaction was very positive; Spanish 2-year bond yields dropped to 2.9%, the lowest level since April, as investors focused on the potentially unlimited size of the ECB interventions. Another welcomed departure from previous ECB sovereign bond purchases is that the ECB has stated it will rank pari passu with private and other creditors. This means the central bank will have to accept the same conditions as private bondholders in a hypothetical debt restructuring. ECB reluctance to accept losses on its Greek bond holdings led to larger private creditor losses in the Greek debt swap carried out in March, raising concerns that private investors would shy away from the debt of any country that saw future ECB interventions. The pari passu statement addressed those fears.

We see the ECB plan as a positive development because it removes the threat of a market panic attack ending badly. However, the fact that it is contingent on conditionality under an adjustment program means that it will do little to break the negative feedback loop between economic under-performance and fiscal austerity. This is the key reason why

Spain has been thus far reluctant to request a full bail-out. And, we believe this will also be the main element that will lead the markets to reassess on a dimmer light the potential impact of this program in the coming weeks.

In the U.S., the central bank will likely also leap back into action in short order on a string of weak data. The most prominent of these is payrolls, which continues to disappoint. The economy generated only 96K net new jobs during August, well below market expectations. Revisions to the two previous months were also negative. In turn, the unemployment rate declined to 8.1%, but this was caused by a shocking 368K decline in the labor force. As a result, the labor force participation rate fell to 63.5% of the work-ing age population, the lowest level since September 1981.

Both August payrolls and the weak ISM manufacturing report – i.e., it landed in contraction territory for a third consecutive month on Tuesday – increase the odds of the Federal Reserve announcing a further round of asset pur-chase at their meeting next week. Moreover, if it needed more justification, the global backdrop should also make the Fed lean on that direction. The manufacturing PMI indexes for the leading advanced and developing economies were all in contraction territory last month, something that has not occurred since the depths of the recession in mid-2009.

So, while investors continue to call for central banks to fill the void, most of the root causes for the ails that hurt the economy both in Europe and the U.S. fall outside of the remit of monetary authorities. Even then, they might not want to disappoint.

Martin Schwerdtfeger, Senior Economist 416-982-2559

U.S. NON-FARM PAYROLLS CONTINUE THEIR SLOW CLIMB

-1,000

-800

-600

-400

-200

0

200

400

600

2004 2005 2006 2007 2008 2009 2010 2011 2012

PublicPayroll

PrivatePayroll

Source: U.S. Labor Department, TD Economics

Monthlychange,thousandpeople

http://www.td.com/document/PDF/economics/special/ms090612_ECB_bond_buying.pdf

http://www.td.com/document/PDF/economics/special/ms090612_ECB_bond_buying.pdf

3


September 7, 2012

UPCOMING KEY ECONOMIC RELEASES

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

Rising energy prices should be a key catalyst for the widening in the trade deficit in July. During the month we expect the trade deficit to rise to $43.5B from $42.9B the month before. We expect exports to rise for the third straight month, reflecting the lagged impact of the weaker dollar in recent months. Imports should also rise, more than offsetting the gains in exports. In real terms, the external sector should remain a drag on economic activity during the quarter. With global activity appearing to have weakened dramatically and oil prices continuing to inch towards the $100/barrel mark, the improvement in the deficit is unlikely to be sustained in the coming months, though the falling dollar should blunt some of the drag from higher energy prices.

Our expectation for QE3 in September has never been high, just better than even, but we now admit those odds have risen significantly. Arguing that the guts of the US economy are better than they have been in 5 years is not at all incompatible with our call for QE3 in September. In broad terms, however, look for open ended asset purchases starting off with a larger emphasis on MBS related buy-ing. The ECB and the Fed are now poised to provide an “unlimited” “open ended” effort to facilitate the transition toward greater fiscal health. How politicians utilize this remains to be see seen.

U.S. International Trade - July* Release Date: September 11, 2012June Result: -$42.9B TD Forecast: -$43.5BConsensus: -$44.2B

U.S. FOMC Interest Rate Decision* Release Date: September 13, 2012Current Rate: 0.0 0% to 0.25%TD Forecast: 0.0 0% to 0.25%Consensus: 0.0 0% to 0.25%

U.S. INTERNATIONAL TRADE BALANCE

-55

-50

-45

-40

-35

-30

-25

Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12

Source:CensusBureau/HaverAnalytics

US$,Billions

FED FUNDS TARGET RATE

0

1

2

3

4

5

6

02 03 04 05 06 07 08 09 10 11

%

Source:U.S.FederalReserveBoard/HaverAnalytics

4


September 7, 2012


Even though the economic recovery continues to struggle to gain traction, with the employment backdrop remaining soft and the persistent anxiety about the eco-nomic situation continuing to temper household confidence, consumer spending activity should improve modestly in August. During the month, the pace of headline retail sales should advance at a relatively decent 0.8% m/m pace, matching the gains the month before. Much of the upside momentum is expected to be due to higher gasoline, though rising auto sales should also contribute to the pick-up in total sales. Excluding autos, however, the level of sales activity is expected to rise at a slightly more modest 0.6% m/m pace. Core spending, which also excludes spending on building materials, along with autos and gas, and is a fairly good gauge on the overall underlying tone in spend-

ing activity should rise at a far slower 0.3% m/m pace. In the months ahead, we expect the pace of core consumption spending activity to remain tepid, reflecting the headwinds from slowing domestic growth momentum and increasing uncertainty from Europe.

Rising gasoline and food prices should more than compensate for weakness in other CPI components in Au-gust, with the headline index boasting a strong 0.3% m/m advance. This will mark the biggest gain in this indicator since March. Despite the strong monthly print, the annual pace of inflation should remain unchanged at 1.4% y/y. Core consumer prices should also accelerate, rising by 0.2% m/m from the modest 0.1% m/m increase in July, with the annual pace of core CPI inflation easing to 2.0% y/y, marking the lowest print on this indicator in over a year. Looking ahead, with the down-drift in energy prices beginning to reverse course, we expect headline consumer price inflation to be-gin firming, though on an annual basis CPI inflation could continue to edge lower based on favorable base effects. Annual core consumer price inflation, however, should continue to hold around the 2.0% y/y mark.

U.S. Retail Sales - August*Release Date: September 14, 2012July Result: Retail Sales 0.8% M/M; ex-autos 0.8% M/MTD Forecast: Retail Sales 0.8% M/M; ex-autos 0.6% M/M Consensus: Retail Sales 0.7% M/M; ex-autos 0.5% M/M

U.S. CPI - August* Release Date: September 14, 2012July Result: CPI 0.0% M/M; Core CPI 0.1% M/MTD Forecast: CPI 0.3% M/M; Core CPI 0.2% M/MConsensus: CPI 0.5% M/M; Core CPI 0.2% M/M

U.S. RETAIL AND FOOD SERVICES SALES

-1.0

-0.5

0.0

0.5

1.0

1.5

Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12

Total

Excl.AutomotiveDealers

Source:U.S.DepartmentofCommerce/HaverAnalytics

M/M%Chg.

U.S. CONSUMER PRICE INDEX (CPI)

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0


AllItems AllItemsEx.FoodandEnergy

Y/Y%Chg.

Source:BureauofLaborStatistics/HaverAnalytics

5


September 7, 2012


Industrial sector activity continues to progress reason-ably well and in August we expect output to advance at a reasonable 0.4% m/m pace, adding to the 0.6% m/m gain the month before. Stronger manufacturing sector activity should continue to be the key catalyst for the advance, with motor vehicle production expected to boast a relatively de-cent 0.5% m/m rise, on account of improved sales activity in recent months. Utility production should also rise, on account of the record hot August weather which is likely to bolster electricity production. Mining production should also rise. With overall production rising, we expect he rate of factory usage to edge higher with capacity utilization rising to 79.4% from 79.3% the month before.

U.S. Industrial Production - August* Release Date: September 14, 2012July Result: Industrial Production 0.6% m/m;Capacity Utilization 79.3%TD Forecast: Industrial Production 0.4% m/m;Capacity Utilization 79.4%Consensus: Industrial Production 0.1% m/m;Capacity Utilization 79.3%

U.S. INDUSTRIAL PRODUCTION

-0.8

-0.5

-0.2

0.1

0.4

0.7

1.0

1.3


76

77

78

79

80

IndustrialProduction(lhs)CapacityUtilization(rhs)

M/M%Chg. %

Source:BureauofEconomicAnalysis

6


September 7, 2012

RECENT KEY ECONOMIC INDICATORS: SEPTEMBER 3-7, 2012Release

Date Economic Indicator/Event Data for Period Units Current Prior

United StatesSep4 ISMManufacturing Aug Index 49.6 49.8Sep4 ConstructionSpending Jul M/M%Chg. -0.9 0.4Sep4 TotalVehicleSales Aug Millions 14.46 14.05Sep4 DomesticVehicleSales Aug Millions 11.54 11.00Sep6 ADPEmploymentChange Aug Thousands 201 173 RSep6 InitialJoblessClaims 1-Sep Thousands 365 377 RSep6 ISMNon-Mfgcomposite Aug Index 53.7 52.6Sep7 ChangeinNonfarmPayrolls Aug Thousands 96 141 RSep7 ChangeinPrivatePayrolls Aug Thousands 103 162 RSep7 UnemploymentRate Aug Percent 8.1 8.3

CanadaSep5 BankofCanadaRateAnnouncement -- Percent 1.0 1.0Sep7 LabourProductivity 2Q Q/Q%Chg. -0.4 0.0 RSep7 UnemploymentRate Aug Percent 7.3 7.3Sep7 NetChangeinEmployment Aug Thousands 34.3 -30.4Sep7 BuildingPermits Jul M/M%Chg. -2.3 0.0 RSep7 IveyPurchasingManagersIndex Aug Index 62.5 62.8

InternationalSep3 JN VehicleSales Aug Y/Y%Chg. 7.3 36.1Sep3 JN LabourCashEarnings Jul Y/Y%Chg. -1.2 -0.4 RSep4 UK PMIConstruction Aug Index 49 50.9Sep4 EC Euro-zonePPI Jul M/M%Chg. 0.4 -0.5Sep5 EC Euro-zoneRetailSales Jul Y/Y%Chg. -1.7 -0.9 RSep5 AU EmploymentChange Aug Thousands -8.8 11.7 RSep6 FR MainlandUnemploymentRate 2Q Percent 9.7 9.6Sep6 EC Euro-zoneGDP 2Q Y/Y%Chg. -0.5 -0.4Sep6 GE FactoryOrders Jul M/M%Chg. 0.5 -1.6 RSep6 UK BOERateAnnouncement -- Percent 0.5 0.5Sep6 EC ECBRateAnnouncement -- Percent 0.75 0.75Sep7 GE TradeBalance Jul BillionEuros 16.9 18.0 RSep7 FR TradeBalance Jul MillionEuros -4271 -6065 RSep7 UK IndustrialProduction Jul M/M%Chg. 2.9 -2.4 RSep7 UK ManufacturingProduction Jul M/M%Chg. 3.2 -2.9

*EasternStandardTime;Source:Bloomberg,TDEconomics

7


September 7, 2012

UPCOMING ECONOMIC RELEASES AND EVENTS: SEPTEMBER 10-14, 2012Release

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

Forecast Last Period

United StatesSep10 15:00 ConsumerCredit Jul $,Blns 9.1 6.5Sep11 7:30 NFIBSmallBusinessOptimism Aug Index 91.3 91.2Sep11 8:30 TradeBalance Jul $,Blns -44.2 -42.9Sep11 10:00 JOLTsJobOpenings Jul Thousands -- 3762Sep12 7:00 MBAMortgageApplications 7-Sep W/W%Chg. -- -2.5Sep12 8:30 ImportPriceIndex Aug M/M%Chg. 1.3 -0.6Sep12 10:00 WholesaleInventories Jul M/M%Chg. 0.3 -0.2Sep13 8:00 RBCConsumerOutlook Sep Index -- 46.4Sep13 8:30 ProducerPriceIndex Aug M/M%Chg. 1.0 0.3Sep13 8:30 PPIExFood&Energy Aug M/M%Chg. 0.2 0.4Sep13 8:30 InitialJoblessClaims 8-Sep Thousands 370 365Sep13 8:30 ContinuingClaims 1-Sep Thousands 3309 3322Sep13 12:30 FOMC Rate DecisionSep13 14:15 Fed's Bernanke Holds Press ConferenceSep13 14:00 MonthlyBudgetStatement Aug $,Blns -155.0 -134.1Sep14 8:30 ConsumerPriceIndex Aug M/M%Chg. 0.5 0.0Sep14 8:30 CPIExFood&Energy Aug M/M%Chg. 0.2 0.1Sep14 8:30 AdvanceRetailSales Aug M/M%Chg. 0.7 0.8Sep14 8:30 RetailSalesExAutos&Gas Aug M/M%Chg. 0.4 0.9Sep14 9:15 IndustrialProduction Aug M/M%Chg. 0.1 0.6Sep14 9:15 CapacityUtilization Aug % 79.3 79.3Sep14 9:15 ManufacturingProduction Aug M/M%Chg. -- 0.5Sep14 9:55 UniversityofMichiganConfidence Sep Index 74.0 74.3Sep14 10:00 BusinessInventories Jul M/M%Chg. 0.3 0.1

CanadaSep11 8:15 HousingStarts Aug Thousands 201.0 208.5Sep11 8:30 InternationalMerchandiseTrade Jul CAD,Blns -1.45 -1.81Sep13 8:30 CapacityUtilization 2Q % 81.0 80.7Sep13 8:30 NewHousingPriceIndex Jul M/M%Chg. 0.1 0.2Sep14 8:30 ManufacturingSales Jul M/M%Chg. 0.6 -0.4

InternationalSep10 2:45 FR IndustrialProduction Jul Y/Y%Chg. -3.7 -2.3Sep11 4:30 UK TotalTradeBalance Jul GBP,Mlns -3200 -4308Sep12 1:30 FR CPI-EUHarmonised Aug Y/Y%Chg. 2.3 2.2Sep12 2:45 FR CurrentAccount Jul $,Blns -- -4.9Sep12 4:30 UK ILOUnemploymentRate Jul % 8.0 8.0Sep12 4:30 UK EmploymentChange Jul 3M/3M 169 201Sep12 5:00 EC EurozoneIndustrialProduction Jul Y/Y%Chg. -3.3 -2.1Sep12 17:00 NZ RBNZOfficialCashRate 13-Sep % 2.5 2.5Sep13 5:00 EC EurozoneLaborCosts 2Q Q/Q%Chg. 1.6 2.0Sep14 5:00 EC EurozoneCPI-Core Aug Y/Y%Chg. 1.7 1.7Sep14 5:00 EC EurozoneEmployment 2Q Q/Q%Chg. -- -0.2

*EasternStandardTime;Source:Bloomberg,TDEconomics

8


September 7, 2012

Thisreport isprovidedbyTDEconomics.Itisforinformationpurposesonlyandmaynotbeappropriateforotherpurposes.Thereportdoesnotprovidematerial informationabout thebusinessandaffairsofTDBankGroupand themembersofTDEconomicsarenotspokespersonsforTDBankGroupwithrespecttoitsbusinessandaffairs.Theinformationcontainedinthisreporthasbeendrawnfromsourcesbelievedtobereliable,but isnotguaranteedtobeaccurateorcomplete.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 [email protected]

CANADIAN ECONOMIC ANALYSISDerek Burleton, Vice President and Deputy Chief Economist [email protected]

Jacques Marcil Senior Economist, Regional Economies and Provincial Finances [email protected]

Sonya Gulati Senior Economist, Housing and Federal Finances [email protected]

Diana Petramala Economist, Macro [email protected]

Francis Fong Economist, Macro and Special Studies [email protected]

Dina Ignjatovic Economist, Autos, Commodities and Other Industries [email protected]

Leslie Preston Economist, Financial Markets and Industry [email protected]

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

Martin Schwerdtfeger Senior Economist, International [email protected]

Chris Jones Economist [email protected]

Michael Dolega Economist [email protected]

the weekly bottom line - td bank · european central bank and a strong u.s. payrolls report....

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