Sunday, December 6, 2009

The Weekly Bottom Line

  • Much fewer U.S. jobs (11K) than expected were shed in November. Revisions to September and October data also reduced the job loss tally by a cumulative 160K during those months. Meanwhile, the unemployment rate edged down to 10.0%, from 10.2% in October.
  • Both U.S. ISM indexes slid in November. However, the manufacturing index still stood at an expansionary 53.6 while the non-manufacturing index dipped below 50.0 to 48.7.
  • U.S. pending home sales inked in October were much better than expected, and still show significant momentum in the existing home market with a ninth consecutive gain (+3.7% M/M).
  • The European Central Bank (ECB) staff upgraded their forecast for real GDP growth in 2010 while leaving the inflation forecast largely unchanged. The ECB's Governing Council (GC) left its key interest rate unchanged at 1.00% and announced it will begin to unwind extraordinary credit measures over the course of next year.
  • Canadian GDP posted a 0.4% annualized gain in the third quarter after three quarters of decline.
  • Canada's third quarter rebound was underpinned by strong growth in domestic demand and a positive contribution from slowing inventory adjustments, but an increasing trade deficit was an increasing drag on growth.
  • Employment surges by 73,000 jobs in November, on service-sector hiring, and unemployment rate eases to 8.5%.
  • Private- and public-sector employment both improve robustly as earlier flood to self-employment eases.


The nonfarm payroll employment survey ended the week on a positive note from an economic data perspective. While the consensus expectation was that the U.S. economy had shed fewer (125K) jobs in November than in recent months, the actual figure showed what was nearly an unchanged level of employment (-11K). Hours worked climbed by 0.6% M/M, while average hourly earnings notched up 0.1% M/M. Meanwhile, the household survey reported a drop in the unemployment rate from 10.2% in October to 10.0% in November, which was also welcome by the markets – with the S&P500 opening Friday morning 1.5% higher than Thursday's close, and likely to end the week 1.5-2.0% higher than last Friday.

The data received earlier in the week had been a mixed bag and stock markets had also matched this tone. With the release of the manufacturing ISM index on Tuesday and an easing in fears related to Dubai's debt, the S&P500 recorded a 1.2% gain from Monday's close. While the ISM manufacturing index had dropped in November (to 53.7) from October (55.7), this was largely anticipated and still showed that sector of the economy was in expansion mode (index above 50.0) in the middle of the fourth quarter. Later in the week, Thursday saw the release of the non-manufacturing ISM index, also for November, which disappointed. Most analysts anticipated a slight improvement in the index from its level of 50.6 in October. Unfortunately, the actual figure dropped below 50.0 to 48.7, which suggests contraction for most sectors of economic activity. This exposed the weakness of the recovery and left markets justifiably uneasy, as seen by a 0.8% retreat in the S&P500 from Wednesday's close.

As most indicators show that the U.S. and world economy are still at a crucial turning point and seemingly in the early stages of recovery, markets are bound to follow each data point with heightened focus to feel out the strength of this recovery, or lack thereof. Volatility, as measured by the VIX or other indexes, while lower than in the midst of the financial crisis last year, remains significantly higher than in pre-crisis years. Expect more of the same heading into a choppy 2010 as large amounts of liquidity still slosh around financial markets.
As for the real economy, while employment data do not lead the way in terms of signaling turning points, they remain judge and jury of the overall recovery. Initial jobless claims, reported weekly, have recently held between 400K and 500K, which is statistically at the intersection between net job creation and destruction – on the fence, so to speak. Prior to the November nonfarm payroll data, the trend extracted from previous months suggested that net job growth could resume in the first quarter of 2010, and this has been our expectation for quite some time. While the initial stages of output growth coming out of recession typically originate more from longer hours worked and gains in productivity, indications are that even a modest continuation of consumer spending growth (2.0-2.5%) should translate into persistent job creation in the first quarter (~100K/ month), with a pickup in the second quarter (~300K/month). While not strong across all sectors of activity (manufacturing, construction, and retail remain still faced with job losses), the November employment report reinforces our view. While real GDP growth resumed in the third quarter, marking an end to the technical recession, it is this labor market improvement that should finally resonate on Main Street in the first half of next year.


Data last week revealed that the Canadian economy turned the corner during the third quarter, and conditions continue to improve. The details of the rebound demonstrate two related shifts within the Canadian economy: first, domestic demand is underpinning recovery, while the trade balance is an increasing drag; and, second, service-sector employment has been the source of relative job market resilience, while employment in Canada's export-oriented goods-producing sector remains stagnant.

The third quarter output entered the black at an albeit-sluggish 0.4% annualized quarterly clip. We expect the pace of the rebound to have built in the present fourth quarter and to accelerate further into 2010. Strongly rebounding domestic demand was the main push for output growth, and net trade has – and will continue to be – a drag, as growth of imports outpaces that of exports. As well, despite ongoing inventory adjustments, the size of inventory draw-downs is declining. While stock is not yet being rebuilt, slowing inventory draw-downs mean that the change in inventories is contributing positively to GDP, as a greater share of sales are devoted to new production.
Government fixed-capital formation was also relatively strong in the quarter. However, making conservative assumptions about just how “shovel-ready” are infrastructure projects, we do not assign a high weight to the contribution of fiscal stimulus during 2009 (estimating a 0.4% addition to annual growth) and project that the main push will come in 2010 (with a 0.8% annual addition).

The most striking aspect of third quarter GDP was nonetheless the robust backbone of domestic demand. Strong personal consumption expenditures and surging investment in machinery and equipment both buoyed domestic demand. With low interest rates, household net worth recovering and credit available from Canadian banks, Canadian consumers are regaining confidence to spend. Consumption of services comprised half of the quarterly boost to overall consumption, and durables, concentrated in motor vehicle purchases, were the other major push. For M&E investment, firms are certainly responding to a soaring loonie and stagnant M&E prices stateside in order to make needed capital investments. As we highlighted in a recent report, conditions are ripe for such productivity-boosting investments, which are needed to heighten export competitiveness.
Notably, the boost to domestic demand from M&E investment and motor vehicles purchases is somewhat offset by the high import content of these categories. Indeed, the import surge indeed owed mainly to gains in M&E and auto imports. With export growth undershooting imports, a deteriorating trade balance will drag on recovery during 2010.

Nonetheless, the domestic economy is growing and with this turnaround, job growth has emerged. Job growth is now firmly positive, as reflected by November's 79,000 job gain, and the 3-month moving average for employment is now anchored in the black. Compositionally, goods-sector employment sufferred a precipitous year-over-year plummet, and services-sector employment has remained relatively flat year-over-year, thereby increasing the service sector share. Within the services sector, financial sector employment has notably gained in its share of jobs. For last month's report, November's job growth relied strongly on somewhat inexplicably rapid gains in educational employment. Nonetheless, the month did witness a more broad-based private-sector advance. It is definitely a strong monthly report and we expect the positive trend to continue – even if we do not anticipate a repeat of November's outsized job gain in coming months.

Looking ahead, the trend rate of new jobs will improve gradually as firms gain confidence about the pace and sustainability of the rebound. With conditions improving, discouraged workers will return to the job hunt. This will spur the somewhat depressed participation rate, leading the pace of labour force growth to exceed that of job creation and the unemployment rate to rise into early 2010. Even so, with robustness of the Canadian domestic economy and rehiring strong, unemployment looks to peak at only 8.7% in early 2010 – still well below the present 10% joblessness witnessed stateside.


U.S. International Trade - October

  • Release Date: December 10/09
  • September Result: -$36.5B
  • TD Forecast: -$37.0B
  • Consensus: -$37.0B
Even though the U.S. dollar has weakened significantly in recent months, the trade deficit has widened dramatically from the cyclical lows reached during the middle of the year. Much of the widening in the deficit has been on account of higher crude oil prices. In October, we expect the pattern to remain largely intact, with the 10% M/M surge in crude oil prices likely to offset the benefits garnered by the improved competitiveness of U.S. products on the global markets due to the weaker dollar. During the month, we expect both exports and imports to rise and the deficit to widen marginally to $37.0B. In the months ahead, the performance of the U.S. trade deficit is likely to be somewhat mixed, as the weak U.S. dollar and increased global demand for U.S. products is partially offset by higher crude oil prices.

U.S. Retail Sales - November

  • Release Date: December 11/09
  • October Result: total 1.4% M/M; ex-autos 0.2% M/M
  • TD Forecast: total 0.5% M/M; ex-autos 0.3% M/M
  • Consensus: total 0.6% M/M; ex-autos 0.4% M/M
With the U.S. economic recovery appearing to be slowly gathering further traction, U.S. households have been gradually making their way back to the shopping malls, taking advantage of the many bargains that retailers continue to offer. Indeed, despite the weak economic backdrop and sluggish labour market conditions, core retail sales (which exclude spending on autos and gas) have risen in 3 of the last 5 months, underscoring the positive tone in personal expenditures. This momentum should continue in November, with retail sales expected to rise by a further 0.5% M/M, following the 1.4% M/M gain. Higher gasoline and car sales are expected to be the key factors pushing sales higher, and excluding autos, sales are expected to rise by a more modest 0.3% M/M. Core retail sales, however, should be flat. In the months ahead, with U.S. households continuing to navigate against the stiff headwinds coming from a distressed (though Analyticsimproving) labour market and weak economic conditions, we expect retail sales activity to remain relatively subdued, though the recovery in consumer spending should remain on track.


Canadian Housing Starts - November

  • Release Date: December 8/09
  • October Result: 157.4K
  • TD Forecast: 165.0K
  • Consensus: 156.0K
The recovery in Canadian residential construction activity has been more moderate than other housing indicators, with new residential starts rising by 32% from their cyclical trough of 118.5K in April. The slow rebound in construction belies the dramatic turnaround seen in the overall Canadian housing market, and reflects, in part, the cautious response of homebuilders to the pick-up in demand. Yet, with building permit approvals continuing to tick up (rising in 4 of the last 5 months) and existing home sales continuing to break new records, there appears to be significant upside momentum for building activity. As such, we expect the level of starts to rise modestly to 165K units in November. This will mark the highest level of new residential building activity since December last year. Most of the gains are likely to be in single-family unit construction, while the more volatile multi-family segment is also expected to advance. And with the Canadian economic recovery Canadaexpected to slowly gain traction in the coming months, and low mortgage rates remaining supportive to housing demand, the recovery in Canadian residential construction should gather further steam.

Bank of Canada Interest Rate Decision

  • Release Date: December 8/09
  • Current Rate: 0.25%
  • TD Forecast: 0.25%
  • Consensus: 0.25%
The coming Bank of Canada interest rate decision announcement will not change substantially in tone to the prior version, and the overnight rate should remain unchanged at 0.25%. The conditional commitment to keep rates unchanged until mid-2010 should be retained, as will the comment that the Bank retains considerable flexibility. The economic assessment is likely to continue referencing improving conditions and expectations for more. While it is most likely that the Bank of Canada will reiterate its view that the risks to the inflation outlook are roughly balanced, we highlight the possibility that the risks themselves could be discussed more explicitly with reference both to the Canadian dollar's drag and the possibility of additional strength from domestic demand and housing. In the context of a Canadian dollar that hasn't moved substantially since the last decision, versus housing, employment, and consumption indicators that show robust growth, it is possible that the risks could appear to be tilting slightly upwards, whether explicitly acknowledged or not.

Canadian International Trade - October

  • Release Date: December 10/09
  • September Result: -$0.9B
  • TD Forecast: -$1.2B
  • Consensus: -$0.7B
Given the backdrop of a strong domestic currency and weak U.S. demand, the dramatic improvement in the Canadian trade balance (boosted mostly by the surge in auto products exports) last month is likely to be a one-month wonder. In October, we expect the Canadian trade deficit to widen to $1.2B. During the month, exports are expected to edge lower, as the impact of the 16% M/M surge in auto-related exports in September washes out of the data. Moreover, with the 2.4% surge in the average price of the Canadian dollar in October further eroding the competitiveness of Canadian products on the global market, exports of other commodities should also weaken. However, given the surge in energy prices in October, energy exports should increase, partially offering the weakness in the exports of the other products. Imports are expected to be relatively unchanged on the months. In the months ahead, with the strong Canadian dollar continuing to wreak havoc on the export-based Canadian economy, we expect net trade to remain relatively unsupportive to overall economic activity.

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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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