Sunday, January 10, 2010


  • U.S. economy loses 85k jobs in December, but November figures are revised up to show the economy added 4k jobs, the first monthly gain since December 2007.
  • Positive signs in hours worked, earnings, and temporary employment in the U.S. all bode well for job growth early in 2010.
  • FOMC minutes include more talk of extending quantitative easing rather than ending it, supporting our expectation that the Fed will be on hold longer than markets currently anticipate.
  • TSX opens the first week of year with robust gains on commodity rally.
  • CAD appreciates against USD on higher commodity prices and better relative Canadian fundamentals.
  • After large November boost, Canadian employment stagnant in December. However, 3-month moving average points to solidly upward trend.
  • From December 2008 to December 2009, the Canadian economy shed 240,000 jobs. With rehiring occurring gradually and key sectors under pressure, these job losses will just be replaced by the end of 2010.
  • For Canada, gains in household net worth from appreciating equities and rising home prices will continue to support higher consumption growth during early 2010, but the pace of new spending should ease as stock and housing markets begin to moderate.

With the New Year upon us, we see the circle of life that is likely to define the U.S. economy and markets through 2010. The U.S. labor market was much weaker than expected in December. While we did get a positive print for November after revisions, this paled in comparison to the -85k jobs lost in December. But equities were mixed to positive on the news. Why? Because weaker jobs mean less chance the Fed will raise rates soon. The Fed, in turn, is on hold until inflation pressures build. This won’t happen for some time given that all the people looking for work will keep spending power and wage pressures weak. From jobs to the Fed to inflation and back to jobs. The circle of life.

In spite of the top-line disappointment, we are inclined to focus on a number of signs of improvement within the details. The unemployment rate stayed at 10%. Hours worked stayed constant, so the first tool employers have of managing one area of their costs was stable since November and up slightly over the last three months. Earnings were stronger, yet another sign employers are feeling better. And lastly, temporary help has grown by more than 8% in the last three months, a good leading indicator that employers will soon look to add to full-time employment. There is still going to be volatility on the way to recovery, and we still believe that the most likely scenario is a slower than average recovery, but we are at least at the stage where that volatility will mean a seesaw of positive and negative reads in the first half of 2010.

For investors, it remains all about the Fed and the implications for interest rates. December’s jobs figures continue to underpin our expectation that the Fed can remain on hold throughout 2010. Indeed, in the minutes of the last FOMC meeting, there was more discussion of extending stimulus than removing it. We will not have a clear track record of recovery until the middle of 2010, at which point the Fed can start to shift gears for an eventual rate hike in the beginning of 2011. For now, that means a bit more support for equities and profits as borrowing costs remain low. It also means steeper yield curves for the first half of the year as the short-end of the curve remains low and perhaps inflation expectations grow into the longer end. And it means a weaker dollar until short-term interest rate expectations rise and support the currency.

Headline inflation rates in the U.S., and the world for that matter, are currently returning to average as the collapse in oil prices last year falls out of the data. This, in turn, is also supporting a weaker dollar as oil-driven inflation rates help to support commodity currencies. But this is a shortterm dynamic driving volatility. The dynamic driving the trend in core inflation rates is not job growth but the level of unemployment. As long as anything close to 10% of American workers are looking for work, inflation will not be a problem, the Fed will have no reason to raise interest rates, and economic growth will be supported. Life will return to the economy, however circuitous that path may be.


A new year dawns and 2010 brings brighter prospects for the Canadian economy after a dismal 2009. Optimism has returned to Canadian consumers and investors are returning to financial markets. On the strength of a commodity rally, the TSX saw strong gains in the first week of the year. Despite a stall on the job front in December, Canadian employment is on a soundly positive trend even while employment stateside is still contracting. As risk-appetite increasingly returns and the greenback correspondingly weakens, the loonie is again on an appreciating trend, which we expect to bring the CAD to parity in the coming weeks.
While 2010 is opening hopefully for Canada, the challenges for the Canadian economy should not be understated, nor the prospects overstated. The downturn registered a major shock to the composition of aggregate demand, accelerating restructuring pressures on Canadian industry. While cyclical industries like manufacturing and construction will improve with the improving economy, previous sources of demand will not simply reemerge and these industries will not rebound easily. With debt pressures and the credit crunch hangover, the U.S. is in for a sluggish recovery and, with the additional headwind of a soaring loonie, Canada’s exports will recover very gradually.

Domestic demand, and particularly consumption, is propping up Canadian economic growth and, with a stagnant outlook for the current account balance across 2010, trade will drag on growth. The resurgence in housing markets has helped to reverse the slump in household assets felt in 2009 and the equity rally has strongly boosted overall household net worth. With interest rates highly stimulative, wealth effects support a near-term boost to consumer spending. However, housing strength partially reflects temporary factors that will soon fade. For equity assets, while corporate profits will improve at a double digit pace during 2010, much of this recovery already appears to be priced-in, and stocks will be hard-pressed to sustain recent upward momentum. Given the present level of household debt relative to personal disposable income and the upward pressure on saving rates, consumption growth should begin to moderate in late 2010. As well, the pace of home-buying and overall housing markets is spurring increased homebuilding but, as housing markets begin to moderate in late 2010, residential construction should ebb correspondingly.

These factors point to a gradual recovery in Canadian output and, consequently, a sluggish uptake of excess capacity. With economic output having shrank by -2.5% in 2009, growth of only around 2.7% in 2010 and 3% in 2011 will not close Canada’s output gap rapidly. Although labour markets have rebounded into positive territory and should sustain on that positive trend, re-hiring will not be rapid. The 3-month moving average for employment in December points to a sound but nonetheless gradual pace of job growth, averaging in the range of 10,000 to 20,000 monthly. With 240,000 jobs lost during 2009, Canadian employers will likely just replace the lost jobs by the end of 2010. In particular, the manufacturing sector was the locus of 275,000 job losses in 2009. The manufacturing industry is facing intensive restructuring pressures, and these jobs will not easily be replaced. Although manufacturing employment felt glimmers in September and November, demand for Canadian manufactured goods still weak and inventory pressures remain.


U.S. International Trade - November

  • Release Date: January 12/10
  • October Result: -$32.9B
  • TD Forecast: -$33.0B
  • Consensus: -$34.8B
The weakening dollar and lower crude oil prices in November should combine to keep the U.S. trade deficit unchanged in November at $33.0B. During the month, we expect exports to post another month of respectable gains, as the improved competitiveness of U.S. products on global markets (on account of the weaker dollar) and the recovery in the global economy bolster foreign demand for U.S. goods. Imports are also expected to grow at a fairly robust rate, though weaker crude oil prices should temper the energy import bill. 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 - December

  • Release Date: January 14/10
  • November Result: total 1.3% M/M; ex-autos 1.2% M/M
  • TD Forecast: total 0.5% M/M; ex-autos 0.2% M/M
  • Consensus: total 0.4% M/M; ex-autos 0.3% M/M
The tone of U.S. consumer spending activity has improved dramatically in recent months as the turnaround in the U.S. economy and improving labour market conditions have combined to bolster consumer confidence and consequently personal expenditures. In December, we expect this positive momentum in spending to continue, though the strong holiday spending and robust car sales should be partially offset by weaker gasoline prices. In the end, we expect total retail sales to rise by 0.5% M/M, while sales ex-autos should rise by a more modest 0.2% M/M. In the months ahead, with U.S. households continuing to navigate against the stiff headwinds coming from a weak (though improving) labour market and soft economic conditions, we expect retail sales activity to remain relatively subdued, though the recovery in consumer spending should remain on track.

U.S. Consumer Price Index - December

  • Release Date: January 15/10
  • November Result: core 0.0% M/M, 1.7% Y/Y; all-items 0.4% M/M, 1.8% Y/Y
  • TD Forecast: core 0.1% M/M, 1.8% Y/Y; all-items 0.1% M/M, 2.8% Y/Y
  • Consensus: core 0.1% M/M, 1.8% Y/Y; all-items 0.2% M/M, 2.8% Y/Y
The combination of a nascent economic recovery and the end of the base-effect impact from last year’s plunge in energy prices should push headline consumer price inflation sharply higher in December. During the month, we expect headline consumer prices to rise by a very modest 0.1% M/M, though the annual pace of price inflation should accelerate to 2.8% Y/Y from 1.8% Y/Y. Despite the surge in headline inflation, core consumer price pressures should remain fairly contained, with core prices rising by 0.1% M/M after an uncharacteristically flat print the month before. The annual pace of core consumer price inflation should remain unchanged at 1.8% Y/Y. Looking ahead, with the considerable economic slack likely to remain a key factor placing downward pressure on core consumer prices, we expect annual core inflation to ease in the coming months.


Canadian Housing Starts - December

  • Release Date: January 11/10
  • November Result: 158.5K
  • TD Forecast: 160.0K
  • Consensus: 161.8K
The recovery in Canadian residential construction activity has been far more subdued that the strong resurgence seen in the existing homes market. This cautious response by Canadian homebuilders is in stark contrast to the positive tone in overall Canadian economic and housing market conditions. Cold weather conditions in December should also play a key role in tempering building activity, keeping the level of new construction relatively unchanged on the month at 160K. 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 expected 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.

Canadian International Trade - November

  • Release Date: January 12/10
  • October Result: $0.4B
  • TD Forecast: $0.3B
  • Consensus: $0.7B
We expect the Canadian trade balance to remain in positive territory in November, though the relatively minor appreciation in the Canadian dollar and weaker energy prices should result in a small narrowing in the merchandise trade surplus to $0.3B. During the month, we expect exports to rise modestly, as the recovery in U.S. and global economic activity bolster export demand. Imports are also expected to be higher, on account of the stronger Canadian dollar and improving domestic conditions boosting export demand. In the months ahead, with the strong Canadian dollar continuing to wreak havoc on the export-based Canadian economy, we expect net trade to be 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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