Global Views August 22, 2014 Weekly commentary on economic and financial market developments Economics Corporate Bond Research Emerging Markets Strategy Fixed Income Research Fixed Income Strategy Foreign Exchange Strategy Portfolio Strategy Contact Us Economics Another Step On The Path To The September FOMC 2-4 Forecasts & Data Key Data Preview A1-A2 Derek Holt Key Indicators A3-A5 ‘New Normal’, Or Simply The Same Old Mistake? 5-6 Global Auctions Calendar A6-A7 Derek Holt Events Calendar A8 Asia/Pacific Regional Outlook 7-8 Global Central Bank Watch A9 Pablo Bréard and Tuuli McCully Forecasts A10 Emerging Markets Strategy Latest Economic Statistics A11-A12 Cautious Chileans Support Fixed Income Rally 9-11 Latest Financial Statistics A13 Joe Kogan Fixed Income Strategy The Eurozone To Move Away From Fiscal Consolidation To Save Growth 12-14 This Week’s Featured Chart Frédéric Prêtet Spain - Risk Aversion Decreases As Economy Rebounds Foreign Exchange Strategy 4 % Latin America Week Ahead: For The Week Of August 25 - 29 15-18 3 Eduardo Suárez 10-Year Bond Spread vs. Germany 2 1 Real GDP, y/y change 0 -1 -2 13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 14Q3f Source: Bloomberg, Scotiabank Economics. Global Views is available on scotiabank.com, Bloomberg at SCOT and Reuters at SM1C August 22, 2014 Economics Global Views THE WEEK AHEAD Derek Holt (416) 863-7707 [email protected] Another Step On The Path To The September FOMC Please see our full indicator, central bank, auction and event calendars on pp. A3-A9. US — Data Dependency In The Aftermath Of Jackson Hole More hawkish FOMC minutes than markets had anticipated rather nicely set up a less dovish and arguably fully neutral speech by Fed Chair Janet Yellen to open the Jackson Hole symposium (go here for comments following her speech). The agenda for the rest of the symposium into the weekend is available here and risks may spill over into the Monday market open. Recall that it is not always the Chair’s speech that gets the most attention. Michael Woodford’s open-ended QE proposal, William White’s criticisms of QE, or current RBI Governor Raghuram Rajan’s warnings on financial stability in front of Chairman Greenspan and company prior to the crisis all captured substantial attention at prior Jackson Hole symposiums and went on to be influential in the dialogue on evolving Fed risks. In her opening remarks, Yellen argued there is ’no simple recipe’ for determining changes to monetary policy and rate rises could come earlier or later, it is ’more difficult to judge the remaining degree of slack’, while ’unusual aspects of recovery may have altered labor markets in ways that point inflation pressures in either direction.” That signals much greater ambiguity than the once very dovish Yellen and is another sign that the dialogue at the Fed is shifting. A gradual evolution of more hawkish sentiments toward our call for the first hike to occur next April is likely and the September FOMC meeting, statement and press conference may be a bigger event than Jackson Hole. Also note that the view that stocks always rally out of Jackson Hole is only true of the crisis era. As the accompanying chart demonstrates, Jackson Hole has motivated stock sell-offs at points when the Fed has Chart 1 Jackson Hole Effect transitioned toward a hawkish bias. My personal view is 6.0 % change from before to after conference each year that the Fed dialogue needs to shift more rapidly toward rate hikes. The strongest six-month outlook in the 4.0 S&P500 Difference Philadelphia Fed’s business outlook metric since way back in 1992 and coming out of the recession, and the 2.0 strongest level for the Conference Board’s leading index since 2007 are among the latest bits of macro evidence 0.0 that the time for emergency levels of stimulus has passed and experimentation toward policy exits can begin. -2.0 Beyond Jackson Hole and any headline risk into the -4.0 Monday open, data risk will play a large role in -6.0 determining the domestic and perhaps global market 78 83 88 93 98 03 08 13 tone next week. The balance of the evidence could wind Source: Kansas City Federal Reserve, Bloomberg, Scotiabank Economics. up being positive for the economic outlook. Housing data will figure into the picture. New home sales are expected to climb after a record single-month revision for May that turned an 18.6% m/m rise into a milder 8.3% gain, and then followed up with an 8.1% m/m drop in June. Massive revisions that are the norm in US data and rarer in many other countries make it more difficult to read housing markets. Pending home sales are expected to rise later in the week following the softness in June that also followed a strong gain in May. Encouragingly, distressed sales now make up the lowest fraction of home resales since just before the crisis blew open in 2008. Whether or not S&P Case Shiller home prices post a second consecutive monthly decline will also figure into the housing releases. Thursday’s revision to Q2 GDP is expected to be mild and still hang in close to the 4% initial estimate, but it’s anything goes with US GDP revisions by way of difficulty in evaluating factors like inventory swings and Obamacare-related service spending revisions. This latter effect will be a factor in next month’s round of GDP revisions when we know Q2 services spending. Recall that Q1 GDP started off at 0.1% q/q, was then revised to -1.0%, then revised to -2.9% and then they revised it again to -2.1%. Following little gain in retail sales during June, consensus is looking for a tepid rise in total consumer spending next Friday and driven by services. The Fed’s preferred inflation metric (the price index for total consumer 2 August 22, 2014 Economics Global Views THE WEEK AHEAD Derek Holt (416) 863-7707 [email protected] … continued from previous page spending) is expected to remain just shy of the Fed’s goals and lower than Chart 2 Record Aircraft Backlog 12 CPI. Durable goods orders should be poised for a massive gain and largely backlog of aircraft orders, driven by a large rise in aircraft orders. 324 planes were put on order at industry total 10 Boeing in July and that was up from 109 the prior month. Large orders from Thousands of Emirates and Qatar Airways played a significant role, as did ‘unidentified Units customer(s).’ As the accompanying chart depicts, the aircraft order book is 8 massive and not a single further plane needs to be sold in order to give about 8 years’ worth of production. A much milder gain in durable goods 6 Years orders ex-planes is likely, and in fact, there might be some take-back on the prior month’s large gain in core (ex-defence and ex-air) capital goods orders. 4 The Conference Board’s consumer confidence gauge may be at risk of softening from the highest print since October 2007. 2 The US Treasury auctions 2s, 5s and 7s next week. Earnings will be light with 0 just seven S&P500 firms on tap including Best Buy. 05 06 07 08 09 10 11 12 13 14 Source: Company Reports, Scotiabank Economics. Canada — Poloz, Q2, And Bank Earnings First up will be a speech by Bank of Canada Governor Stephen Poloz. On Monday, he addresses the annual conference of the Canadian Association of Business Economists and his speech topic will be “Integrating Uncertainty and Monetary Policymaking: A Practitioner’s Perspective.” Over a month has passed since we last heard from Governor Poloz at the press conference for the release of the MPR on July 16th. Since then, inflation ticked a little higher to 2.4% y/y (core 1.8% y/y), and most activity measures have been fairly strong, particularly in terms of export growth and the big revision to job growth. Thus, the reasons for the BoC to remove reference to ‘downside risks to the inflation outlook [are] as important as before’ from its statement have only become stronger. The challenge facing the central bank is how to convey long pause arguments and talk through near-term upsides to inflation and export growth as long as the Federal Reserve is going nowhere fast. Look for the possibility of a stronger emphasis upon estimating the neutral rate as one such way of achieving this. The market effects of doing so, however, would be muted at present yields although the currency may be more vulnerable over time. Next up will be Friday’s GDP prints for June and the full second quarter. The range of consensus estimates runs from 2-3% for Q2 growth at an annualized and seasonally adjusted pace. Scotia sits at about 2.5% with upside risk. With the exception of the temporary weather and inventory adjustments that hit the US in the first quarter of this year, the US has Chart 3 US Outpacing Canadian Growth generally been outpacing Canada on quarterly GDP growth for the past year. The gap last quarter was probably about 1.5 percentage points in our 5 q/q % change in real GDP, SAAR view and reflected the reversal of the temporary underperformance of the 4 US economy in Q1. Our view on Canada’s relative underperformance 3 on GDP growth, outperformance on the curve, and underperformance on the currency is working well on balance but is a full cycle perspective 2 that will be marked by ups and downs in the story.