HIGHLIGHTS
- U.S. inks stimulus bill and financial rescue plan
- Canadian housing starts dip in January
- Canada records (December) first trade deficit since 1976
With U.S. House and Senate versions reconciled at breakneck speed, the ink dried this week on the U.S. stimulus bill, tallied at $789 billion. Passage of the bill, referred to as the 'American Recovery and Reinvestment Act of 2009', is expected later today. The total amount allocated is roughly evenly split into thirds between tax provisions, direct spending measures, and discretionary spending (e.g. State governments). Meanwhile, the U.S. Treasury unveiled its 'Financial Stability Plan'. With the latter announcement by Treasury Secretary Geithner long on principle but short on specifics, markets were underwhelmed, giving a cruel and swift thumbs down, reflected in a 5% drop in the S&P 500 on Tuesday.
Anyone expecting an equity honeymoon period following these announcements has been sorely disappointed, as markets still seem to be fishing for a bottom since November. Most private-sector forecasters, including ourselves, have long emphasized necessary pre-conditions for a sustainable economic recovery to take hold, chief among them being a cleanup of the U.S. financial sector and renormalization of credit markets. With the bulk of the stimulus provided by direct spending measures expected to hit in 2010 and a clean bill of health for the financial sector not yet within reach, expectations of a meaningful recovery as early as the second half of this year are withering.
Lowered expectations
It is currently difficult to judge the chances of success or failure of the Treasury's plans, with joint efforts from the Federal Reserve and the FDIC, precisely because they lack details. The extent to which expectations were poorly managed has unnerved markets. To this observer, this also comes as a surprise from an administration packed with brilliant strategists who managed a Democratic nomination and Presidential election campaigns with unrivaled efficiency. Led by outspoken National Economic Council head Larry Summers who'd been talking about how governments need to overshoot or overreact in times of crisis, we are left wanting. This is most surely not for lack of will on their part, however. Rather, the absence of political appetite for further expansion in taxpayer exposure to toxic assets underpins the greatly limited the size of the Treasury plan. In essence, it is being asked to soak up floodwaters (over $2 trillion worth in assets) with a sponge ($350 billion left of TARP funding). With the little it has, it intends to do a lot: stress-testing institutions, leading to selective capital injections, giving the FDIC the ability to dismantle troubled institutions, provide additional consumer loan support, foreclosure avoidance, bank debt guarantees, and trying to lure in private capital (with juicy preferred share dividend yields?) to soak up devalued assets. Much of this is an extension of currently existing measures rather than new measures, however. To monitor announcements, visit: http://www.financialstability.gov . The devil will be in the details, but on the face of it this is no silver bullet, although arguably no such projectile exists. The elephant in the room is that additional public funding will most likely be required at a later date. Meanwhile, managing the remaining $350 billion transparently and effectively is the best selling pitch Treasury can hope for in an effort to soften up understandable resistance when it comes begging to Congress for more.
Joining the twin deficits club
A few weeks ago we got confirmation in the Federal Budget that Canada would be facing deficits for at least 5 years. Long touted as the land of 'twin surpluses' (fiscal and trade), in sharp contrast to the U.S. 'twin deficits', Canada officially relinquished this title in December as the merchandise trade balance tilted into negative territory (at -$0.5 billion) for the first time since 1976. Import values are retreating (-5.7% M/M) as a reflection of weaker domestic and foreign demand, but just not as quickly as exports (-9.7% M/M). While the trade deficit is unlikely to be as pervasive as the federal and provincial deficits we expect over the next 5-7 years, it could last well into 2010. An eventual recovery in Canada's merchandise trade balance out from deficit towards the zero mark is contingent on some stability in its currency, alongside an assumption that U.S. growth and commodity prices gradually recover in late 2009 and 2010. Canada should by then recover one of its lost twins, while the other one is sure to appear on milk cartons for a while longer.
To build or not to build
If one needed further confirmation of a broadly based turnaround in economic fortunes, the January housing starts data fit the bill. Overall national housing starts totaled only 153,000 units, down 10.9% from December. All provinces west of Québec joined in the double-digit percentage drop. Homebuilders are, encouragingly, taking cues from price trends, which do not support the lofty levels of housing starts above 200,000 units recorded over the last 7 years. While this retreat bodes poorly for the near-term, as it relates to the private residential investment component of real GDP, it should help prevent unmanageable increases in new home inventories. The pre-2002/08 boom level of around 150,000 units is on par with where we think total housing starts could end up on average for 2009-10, with a trough around 140,000 units.
This context is highlighted by an already weak existing home market and a rapidly weakening new home market. Existing home sales were down a whopping 40.9% in January from a year ago while prices were 11.3% lower. Controlling for shifts in sales volumes, existing home prices are down a lesser 6.2%. The market balance has firmly shifted towards potential buyers, but those awaiting U.S-style corrections will likely be disappointed. Supply, as measured by listings, remains high, but has been trending down (-13% from a peak in May) along with sales, an indication that sellers are not desperate but simply testing the waters. Potential buyers are favoured by a rapidly improving affordability picture in most major metro markets, including low borrowing costs and recently beefed up first-time homebuyer incentives. The Canadian new and existing home markets are, so far, no more no less than unwinding in an orderly manner in the midst of a recession.
UPCOMING KEY ECONOMIC RELEASES
Canadian Manufacturing Shipments - December
Release Date: February 16/09 November Result: -6.4% M/M TD Forecast: -5.5% M/M Consensus: -4.5% M/M
The Canadian manufacturing sector has been hit particularly hard by the dramatic slowdown in Canadian and U.S. economic activity in the past few months - and the automobile industry has been the main casualty. Moreover, with the outlook for both economies remaining very grim, there is little chance of a meaningful turnaround in manufacturing sector activity in the near term. For December, we expect Canadian manufacturing sector shipments to post its fifth consecutive monthly drop, with a big 5.5% M/M decline. This comes on the heels of the sharp 6.4% M/M plunge in November. As has been the case in the past, much of the weakness should come from auto-related shipments, though the plunge in energy prices is likely to further depress petroleum and coal sales, and the dismal export performance of the Canadian economy in December provides a grim foreshadowing of the likely outcome for manufacturing. Real sales are also expected to be quite weak during the month, and as such manufacturing sector activity should remain a drag on Canadian economic activity in Q4. In the coming months, we should see further moderation in Canadian manufacturing sector activity as the worsening global economic recession tempers demand for Canadian manufacturing products.
Canadian Wholesale Sales - December
Release Date: February 18/09 November Result: -1.6% M/M TD Forecast: -2.0% M/M Consensus: -1.5% M/M
With consumers retrenching their spending in fairly dramatic fashion, the impact is clearly being felt at the wholesale level, as retailers reduce purchases in the face of declining demand. And since posting sizeable gains in the first half of the year, sales at the wholesale level have declined in 3 of the last 4 months, and there is every indication that this dismal performance will continue for some time. In December, we expect wholesale sales to decline a further 2.0% M/M, on account of the weakening economic conditions and poor performance in the export and manufacturing sectors. The weakness should be broadly based, with most industries expected to post losses on the month, and the risks to this call are to the downside. In real terms, sales are expected to be soft as well.
U.S. Consumer Price Index - January
Release Date: February 20/09 December Result: core 0.0% M/M, 1.8% Y/Y; all-items -0.7% M/M, 0.1% Y/Y TD Forecast: core 0.1% M/M, 1.6% Y/Y; all-items 0.4% M/M, -0.1% Y/Y Consensus: core 0.1% M/M, 1.5% Y/Y; all-items 0.3% M/M, -0.1% Y/Y
Consumer price disinflation has become the norm in the U.S. as soft commodity prices and a weakening domestic economy put out the inflationary flames that once raged in the U.S. economy. For January, we expect these dampening forces to ease slightly on account of the first monthly increase in gasoline prices since the slump in energy prices began, and to a lesser extent rising food prices. In fact, our call is for headline inflation to post a modest 0.4% M/M increase in January, which is the first monthly increase since July. Despite the monthly rise, headline inflation should post its first negative print since the mid- 1950s, falling by -0.1% Y/Y. This is likely to attract considerable market attention as it constitutes the technical existence of deflation. Core inflation is also expected to be soft, with the index posting a small 0.1% gain on the month, and the annual core inflation rate falling to 1.6% Y/Y. And with the disinflationary forces likely to remain well entrenched, we expect U.S. consumer prices to moderate even further in the coming months, before prices start rising again later this year.
U.S. Housing Starts - January
Release Date: February 18/09 December Result: 550K TD Forecast: 550K Consensus: 530K
The back-to-back 15% M/M plunges in U.S. residential construction activity in November and December last year represented a marked acceleration in the pace of the U.S. housing correction, and brought the level of building activity well within the range we believe is consistent with this stage of the U.S. housing cycle. In January, we expect activity to flatten out, with housing starts remaining at 550K. This should not be construed as the beginning of a turnaround in activity, but instead as the result of base effects. In the months ahead, we expect new residential construction to remain soft as the drag from a worsening domestic economy, tighter lending conditions and the massive overhang in the inventory of unsold home, which currently stands at over 12 months, continue to temper new building activity.
Canadian CPI - January
Release Date: February 20/09 December Result: core -0.4% M/M, 2.4% Y/Y; all-items -0.7% M/M, 1.2% Y/Y TD Forecast: core -0.1% M/M, 2.2% Y/Y; all-items -0.5% M/M, 0.8% Y/Y Consensus: core -0.1% M/M, 2.2% Y/Y; all-items -0.3% M/M, 1.1% Y/Y
Growing economic slack and soft commodity prices will continue to play their part in pushing Canadian consumer price inflation lower, and in January we expect this trend to continue. Indeed, despite the modest rebound in crude oil prices in January, we expect Canadian headline CPI to post its fourth consecutive monthly drop in January, falling by a further 0.5% M/M, with the seasonally adjusted index declining by a similar magnitude. The drop in prices should bring the annual consumer price inflation rate to 0.8% Y/Y. The Bank of Canada's core consumer price index is also expected to be soft on the month, falling by 0.1% M/M on a seasonally and non-seasonally basis, and bringing the annual rate of core consumer price inflation to 2.2% Y/Y. In the months ahead, with the Canadian economy likely to weaken further, and commodity prices expected to remain soft, Canadian consumer inflation should moderate even more.
The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.
