Monday, November 30, 2009

The Weekly Bottom Line

  • U.S. housing statistics reinforce notion that market is on the mend, by early next year, the Case-Shiller price index will be back in the black. However, any the gains are unlikely to materially dent the 30% drop from the peak
  • Initial jobless claims and other employment indicators look increasingly promising that job gains could be in store in a matter of a few months
  • U.S. third quarter GDP revised down to 2.8% (annualized) from 3.5%
  • In the Fed minutes, the FOMC revised up the economic growth forecasts for 2009 and 2010 to the range of -0.4% to -0.1% (from -1.5% to -1.0%) and the range of 2.5% to 3.5% (from 2.1% to 3.3%), respectively
  • Canadian retail sales rose 1.0% in September, indicating that the Canadian consumer has helped propel the economy into recovery in the third quarter.
  • The Teranet Home Price Index was down 1.8% from year ago levels in September, however, the decline in this measure has improved significantly over the past few months.
  • The Canadian current account deficit widened to a record $13.1 billion, as imports exceeded exports.


As economists, we often craft elaborate and lengthy presentations detailing every wiggle and hiccup within the economy. But at the end of the day, all anyone really wants to know is whether their investments, job and home are safe. At least in terms of the latter two, the data this week should help investors sleep a little easier.
When you hear the words ‘bidding wars’ and ‘home price gains’, do you think “oh, that was sooo 2006”? Well, not anymore. The September Case-Shiller home price index posted its fourth consecutive monthly gain. The annual rate of decline in home prices has now eased to 9.4% from 19% at the start of the year. If prices continue to improve at a very moderate monthly pace (0.1-0.3%) over the coming months, this price measure will finally break into the black by January, ending a three year journey that left a trail of red ink.

The recent revival in prices is reflecting a substantial tightening in inventories. October new home sales popped up by 6%, pushing inventories to a three year low. Now, the naysayers will note that the rise in sales was only in the South. But isn’t that the area with one of the largest problem in oversupply and foreclosures? And, this news followed a blockbuster report last week on the resale market, which showed a 10% jump in sales for October that was undeniably broadly represented across all regions. In fact, the press release of that report noted “in parts of the country, especially in Southwestern states but also in Florida and suburban Washington, D.C., we’ve been getting many reports of multiple bids in the lower price ranges with foreclosed properties getting absorbed quickly.”

We’re under no illusions that part of the strength in housing demand is directly related to fiscal stimulus from the first-time homebuyer’s credit. And, by the same token, the housing market is likely to experience some measure of pay-back in the second half of next year as stimulus measures disappear from the landscape and pent-up demand is tapped out. In fact, there is a good argument that the entire recent run up in prices is directly attributed to stimulus effects, like the first-time buyers plan in combination with downward pressure on mortgage rates through MBS purchases by the Fed. But we cannot dispute that stimulus measures are having the intended effect…hastening the draw down of the supply glut, which puts a floor under prices, and eventually helps stabilize the housing market, consumer confidence and the broader economy. So, any payback next year would at least be occurring against a healthier backdrop than would otherwise be the case.
In other news this week, dare we hope that the job market could post a gain in a matter of months? For the first time in two years, the 4-week moving average in initial jobless claims stands lower than the year-ago level. In addition, the 3-month trend in temporary business services is up sharply in positive territory (+2.5%), which is a good sign of building pent-up demand for labor. In 2002, it took a mere 2 months for private-sector service jobs to flip positive once temporary services showed a gain of this magnitude. In addition, hours worked in the private sector have come up from its trough, especially in some highly pro-cyclical sectors like transportation – which tends to be one of the first out of the gates following a recession. Couple this with hyper speed productivity growth of nearly 10% in the third quarter, and it begs the question, how much more can companies squeeze out of a razor thin work force? The data are certainly building the perception that the fourth quarter will not only mark the end of 2009, but also possibly the end of the string of job losses. However, be prepared for a slow descent in the unemployment rate, which tends to be sticky as discouraged workers re-enter the labor market in response to improved job prospects. So as the tryptophan from your turkey dinner washes over you, sleep well.


The Canadian dollar was yet again at the center of attention, as it appreciated by a further 1% through the first half of the week, closing at its highest level (95.65U.S. cents) in over a month on Wednesday. The sharp jump on Wednesday largely reflected an announcement by Russia’s central bank that they want to diversify their foreign reserves and start holding Canadian dollars. The loonie has since retraced much of gains from the first half of the week and then some, trading at 94.23 U.S. cents by mid- Friday. However the decline was unrelated to economic conditions in Canada. The depreciation came as global markets were spooked by news that the government of Dubai’s primary holding company asked creditors for a debt standstill and to reschedule some of their payments. This sparked a flight to safety and the U.S. dollar appreciated against most major currencies.

Despite the sharp pull-back in the currency through the latter part of this week, a growing global appetite for holding Canadian dollar denominated assets is a trend we expect to continue. In particular, the trend of waning investor appetite for U.S. dollars will continue to generate some interest for the Canadian currency. And, although the U.S. economy has likely outperformed Canada in the third quarter, with growth of 2.8% and 1% annualized in the respective economies, Canada maintains stronger economic fundamentals.

In particular, the performance of the Canadian housing market relative to the housing market bubble in the U.S., and its subsequent pop, is a good indication of Canada’s comparative strength. In Canada, the housing market correction was short-lived, and CREA’s measure of existing home prices has returned to pre-recession levels, while the depreciation in the Teranet Home Price Index has eased significantly over the last few months. This contrasts to the U.S., where the housing market turmoil has lasted over two years, and while the housing market has improved over 2009, home prices are still 30% below their peak back in 2006.
Furthermore, the backdrop for consumer spending is also more favourable in Canada than in the United States. A pri¬mary strength of the Canadian economy has been the relative health of the banking system that allowed credit to flow to consumers even through the depths of the global credit crunch. Wealth, employment and income losses in Canada were also much less significant than in the U.S., and will be less of a drag on consumer spending in Canada moving forward.

The recovery in consumer spending over the second and third quarter of 2009 has been more robust in Canada than in the United States. Canadian retail sales data out this week indicate that consumer spending likely grew between 2.3-2.6% in the third quarter, following a 1.8% jump in the previous quarter. More importantly, the recovery in demand has occurred without the need for the extra monetary and fiscal stimulus that was required in the United States. Fiscal restraint in Canada has meant that the government’s debt- to -GDP ratio has remained below 30%, a low for G7 nations. Canada’s superior fiscal position will act as a further reason investors will look fondly to the Canadian dollar beyond the knee-jerking gyrations in day-to-day trading.

Unfortunately, the implications of a high-valued Canadian dollar is that Canada’s current account deficit hit a record $13.1 billion in the third quarter. This is yet another sign that Canadian export sector will continue to be one area of weakness for the Canadian economy. The inventory restocking in the U.S., and other parts of the world, has helped support a 20% annualized gain in Canadian exports in the third quarter. However, this affect will be short-lived, and a mild U.S. recovery coupled with strength in the Canadian dollar will mean that export growth will wane in the coming quarters. Nonetheless, optimism around demand for Canadian commodity exports is a positive for the Canadian dollar. Moreover, most recent export data suggests that Canadian exporters have begun to strengthen trade with other OECD countries, and this diversification away from U.S. markets will help exporters mitigate some of the above pressures.

Putting it all together, despite Canada’s anticipated underperformance in the third quarter relative to the U.S., Canada’s strong fundamentals and near-term economic prospects argue that the loonie will likely be propelled to parity in the near-term..


U.S. ISM Manufacturing Report - November

  • Release Date: December 1/09
  • October Result: 55.7
  • TD Forecast: 54.0; Consensus: 54.8
The combination of a weak U.S. dollar and the recovery in domestic and foreign demand for U.S. manufactured products has provided a much needed boost to the U.S. manufacturing sector in recent months. Indeed, after languishing below the 50.0 threshold for 18 straight months, the U.S. ISM manufacturing index has received a burst of new life and is now sitting at its highest level in over 3 years. This growth in U.S. manufacturing sector activity is expected to continue in November, though the headline ISM manufacturing index should ease marginally to 54.0 (consistent with the modest dip in some regional manufacturing indices), suggesting some moderation in the increase in activity. The new orders, production, employment and new export orders sub-indices are all expected to remain well above 50.0 in November, though they are likely to also ease modestly. Moreover, with the new orders to inventory spread, a useful proxy for the future direction of manufacturing sector activity, remaining sharply in positive territory, there appears to be further upside momentum for U.S. manufacturing sector activity. In the coming months, we expect the ISM headline index to remain further above the 50-threshold and begin to push higher as the U.S. and global economic recovery gathers steam..

U.S. Nonfarm Payrolls - November

  • Release Date: December 4/09
  • November Result: -190K; unemployment rate 10.2%
  • TD Forecast: -100K; unemployment rate 10.2%
  • Consensus: -120K; unemployment rate 10.2%
With the U.S. economy slowly emerging from the deep economic and financial crises, it is becoming quite clear that after shedding a record 7.3 million jobs over 22 consecutive months, the U.S. labour market may itself also be on the verge of a rebound. An outright increase in employment, however, is likely to be a few months away, and we expect a further 100K jobs to be lost in November, which will be the slowest pace of job losses since the beginning of the employment decline in January last year. The improved tone in U.S. labour market conditions has been evident in a number of associated labour market indicators, among them are the precipitous drop in initial jobless claims over the past few weeks (though it remains above the 400K mark, which is generally the threshold for job losses) and the upward push in the ISM manufacturing employment sub-index above the 50-threshold. The job losses are likely to be concentrated in the goods-producing sector, while the losses in the service-producing sector are likely to be modest. In terms of the unemployment rate, we expect the rate of joblessness to remain unchanged at 10.2% after spiking 0.4ppt higher in the prior month, though this figure may not yet have peaked. In the coming months, we expect the pace of job losses to ebb further, with the U.S. economy likely to start creating net new jobs by the beginning of next year


Canadian Real GDP - Q3/09

  • Release Date: November 30/09
  • Q2 Result: -3.4% Q/Q ann.
  • TD Forecast: 1.0% Q/Q
  • Consensus: 1.0% Q/Q
It is likely that the Canadian economy grew 1% annualized in the third quarter, marking the end of the 2008/2009 recession. While a 1% growth rate seems meager for the Canadian economy, the details of the report are expected to be more pleasing than the headline number may suggest. In particular, the Canadian consumer has helped propel the economy into recovery, and retail sales data suggest that consumer spending grew over 2% in the quarter. A red hot real estate market has also helped support the economy by stimulating residential investment, related to a significant bounce back in housing starts. Moreover, the recent strength in imports of machinery and equipment puts business investment on track for a possible 35-45% annualized gain. Canadian exporters have also benefited from the global inventory restocking, and exports are expected to rise 20%, marking the first increase in over two years. The major risk to the forecast in the quarter comes from the degree of inventory liquidation that occurred in Canada. Despite the rebound in sales in the third quarter, it appears that businesses continued to service demand out of current stock, rather than ramping up production.

Canadian Employment - November

  • Release Date: December 4/09
  • October Result: -43.2K; unemployment rate 8.6%
  • TD Forecast: 5.0K; unemployment rate 8.7%
The see-sawing performance of the Canadian labour market appears set to continue, with the economy expected to add some 5.0K jobs in November. This will come on the heels of the 43.2K jobs that were lost in October, and will be the third monthly gain in jobs in the past four months. However, even though the Canadian economic recession is likely over, we do not believe that this will mark the beginning of a significant upturn in the Canadian labour market, as we expect to see further ebbs and flows in employment in the coming months. With the combination of the strong Canadian dollar and weak U.S. demand continuing to stifle the already beleaguered manufacturing sector, we expect the manufacturing sector to post further job losses in November, while employment in the construction industry should increase further, on account of the strength in construction activity. Employment in the service-producing sector should be modestly higher, bolstered in part by increased retail trade activity. Despite the gains in employment, the unemployment rate is expected to rise to 8.7%, as previously discouraged workers return to the labour market in search of new jobs.

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TD Bank Financial Group
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.

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