Nov 12, 2015 - October, as oil sands production comes back online. ... index (PMI) reading remaining within the narrow r
Inside...
FINANCIAL MARKETS MONTHLY November 12, 2015
Getting ready for lift-off Overview ………………………………...page 1 Interest rate outlook ………………………………...page 5 Economic outlook ………………………………...page 6 Currency outlook ………………………………...page 7
Market expectations that the US Federal Reserve will raise the fed funds target at its December meeting increased following the stronger than expected gain in employment in October. The large gain in hiring pushed the unemployment rate to 5.0%, closer to full employment and supportive of continued firm domestic spending activity in the final quarter of 2015. While the Fed edges ever closer to reducing policy stimulus, both the Bank of Canada (BoC) and Bank of England (BoE) are likely to hold the policy rate steady for the remainder of 2015. The European Central Bank (ECB), conversely, is primed to extend policy support, and we expect it will announce a cut to the deposit rate and an increase in the quantitative easing (QE) program at its December meeting. World stock markets, according to the MSCI, took the rising odds of a fed funds hike in stride with the index losing just 0.8% so far this month, merely denting the 7.8% surge recorded in October. The US dollar continued to move higher, and we anticipate that it will appreciate further as the Fed enacts the first rate hike and continues to wean the economy off the extraordinary stimulus albeit at a very gradual pace.
Central bank watch
Diverging trends persist
………………………………...page 8
The divergence in activity between the advanced and emerging market economies continued in the fourth quarter. The purchasing managers’ index for the emerging market economies (EME) held below 50% in October, marking the fourth monthly contraction in business-sector activity in the past five months. The index for advanced economies conversely remained relatively
More of the same for the world economy as 2015 comes to a close ……………….………………..page 9
Central bank near-term bias Three-months out, policy rate The Bank of Canada struck a neutral tone in October, cutting its growth forecast but noting that “momentum is building” in the Canadian economy. We expect the overnight rate will be held steady until late 2016. The Fed delivered a more hawkish policy statement in October, with updated forward guidance putting the focus on December’s meeting. We continue to expect a 25 bp fed funds hike at that meeting. A lower inflation forecast from the BoE gave the recent Inflation Report a dovish tone, highlighting that a rate hike “around the turn of the year” is no longer likely. We expect the Bank Rate will be held steady until mid-2016.
Dawn Desjardins Assistant Chief Economist 416-974-6919
[email protected]
Josh Nye Economist 416-974-3979
[email protected]
In addition to extending the asset purchase program by at least six months, we now expect the ECB will cut the deposit rate further into negative territory (to -0.40%) in December. The RBA appears reluctant to act on its easing bias, although we expect disappointing growth in 2016 will result in further easing with cuts in Q1/16 and mid-2016. The RBNZ held off from further easing in October, but we expect it will act on its easing bias before the end of 2015. While a December cut is the last in our forecast, there is a risk of additional easing in 2016.
Highlights
Financial market volatility
spikes worry The as Fedinvestors is moving closer about the global recovery. to raising the fed funds target band...
Data reports have erred
on the weak side.of the la ...on the back bour market’s strong performance. However there were many
stable consistent with solid growth. Both the International Monetary Fund (IMF) and Organisation for Economic Co-operation and Development (OECD) revised their global growth forecasts lower this autumn, thereby reflecting downgraded forecasts for the EME with activity in the advanced nations forecasted to accelerate relative to 2014. The forecasts anticipate stronger global growth in 2016 with the advanced economies forecasted to expand at a quicker pace accompanied by a modest recovery by the EME.
Strong US domestic demand The headline gross domestic product (GDP) gain in the third quarter was an uninspiring 1.5%; however, this reflected a 1.4 percentage point drag from a slowdown in the pace of inventory building and belied a strong 2.9% annualized jump in domestic demand. The rise in final domestic demand built on a 3.7% gain in the second quarter. Consumer spending rose by 3.2% in the third quarter, which while down from 3.6% in the second quarter, marked the fifth out of the last six quarters that the component has risen by more than 3%. Residential investment rose by 6.1%, thereby marking a sixth consecutive quarter of growth. Business investment rose by 2.1%, and net exports remained essentially unchanged, thereby having no net effect on GDP in the quarter.
one-off factors that cur-
More strength ahead
tailed Theactivity. US economy expand-
The stronger than expected rise in employment in October was accompanied by an increase in wage growth that sent the year-over-year rate up to 2.5% from 2.3% in September. This increase provided tentative indications that as the labour market approaches full employment, wage pressures are starting to emerge, which is a positive for the outlook for consumer spending and housing. Other positives for the consumer spending outlook include the low level of gasoline prices and expectations that even as the Fed raises the policy rate, the pace will be gradual, and by historical standards, interest rates will remain very supportive of economic growth. Data for October showed that consumers were active, with auto sales running at levels that were close to all-time highs. Our forecast assumes consumption will provide another solid lift to the economy in the fourth quarter and that the weight from inventories will be partially reversed, thereby resulting in real GDP growing at a 2.9% annualized pace.
ed at a 1.5% annualized pace in Q3/15, with a slower pace As these factors ease, of inventory accumulation growth accelerate. cutting will 1.4 ppt off the quarterly growth rate while domestic demand grew rapidly. The US recession was deeper than was previously reported and GDP output Headline inflation is being stands 0.4 pp below preweighed down by lowitsenergy recession peak. prices while the core measure is stealthily rising to 2%.
Much ado about headline inflation The headline inflation rate inched downward to 0% in September as energy prices plunged by 4.7% in the month. Core prices, which exclude both food and energy prices, rose by 0.2% in September, thereby reflecting solid gains in shelter costs due to ongoing strengthening housing demand. Some prices fell in September as a stronger US dollar dampened import prices and tempered the rise in the core measure. Core prices were up by 1.9% relative to a year earlier and marked the fastest pace of increase since August 2014. The rise in core prices left the annual pace of increase close to the Fed’s 2% target and importantly occurred despite weight being exerted on import prices due to the sharp appreciation in the US dollar. The rise suggests that the strengthening in the economy’s growth momentum and labour market are resulting in the absorption of excess slack that will keep upward pressure on prices.
Policymakers are talking the talk At the late October Federal Open Market Committee (FOMC) meeting, no change was made to the fed funds target band; however, policymakers upgraded the assessment of consumer spending activity and downplayed the slowing in employment in September. Given the sharp rebound in hiring in October, the Fed’s reaction to the smaller than anticipated rise in August and September non-farm payrolls was well founded. The Fed’s labour market conditions index showed the amount of slack diminished further in the month. Since the October communique, policymakers have done little to dampen expectations that the lift-off from the zero lower bound for the fed funds rate will occur at the December meeting. Both Chair Yellen and Vice-Chair Dudley suggested that as long as the data held, a rate hike at the December meeting should be considered a “live” possibility. To our minds, the recent data fulfill this requirement, and we expect the fed funds rate target range to rise to 25 to 50 basis points in December. We expect a gradual 2
pace of tightening will follow with the range of the Fed funds rate ending 2016 at 1.251.50%.
Highlights
Canada’s economy pulling out of H1’s nosedive Real GDP posted a third consecutive monthly increase in August, almost entirely wiping out the declines recorded in the first five months of 2015. While the string of back-to-back GDP increases is at risk of being interrupted in September by a sharp pullback in nonconventional oil extraction (a fire temporarily shut down a major oil sands project for most of the month), the data to date still leave third-quarter 2015 GDP on track to post a 2.5% annualized gain. Furthermore, even if investment in the oil and gas sector continued to decline, the temporary hit to actual oil extraction in September would be reversed in October, as oil sands production comes back online. Outside of the oil and gas sector, growth in household spending and stronger external demand will keep the economy on a positive growth trajectory. We forecast real GDP growth of 2.1% in the final quarter of 2015, which combined with the third quarter’s gain, would be sufficient to skate the annual growth rate into the positive column at 1.2% for 2015.
bounded in Q3/15 and is
Labour market plodding along
the economy and inflation as
Employment jumped by 44,000 in October, with much of the gain in public administration due to hiring for the federal election that we expect will be at least be partially retraced in November. Excluding public administration, employment rose by 12,000 in October. Year to date, Canada’s economy generated an average of 17,000 jobs per month, thereby exceeding the 10,000 monthly increases in 2013 and 2014. The labour force expanded at a quicker 24,000 average monthly clip, thereby resulting in the unemployment rate rising to 7.0% from 6.7% at the end of 2014. Wage gains remained solid in October at 2.8%. Strength in the labour market’s performance has been a key support for consumer spending, which increased by 2.3% in the second quarter and is forecasted to rise at a firmer 2.8% in the third quarter. Auto sales were robust, with October marking the first time on record that there have been two consecutive months of sales running at a 2 million unit annualized pace.
evolving in line with its ex-
Canada’s economy re-
forecasted to post a 2.5% annualized gain.
The Bank of Canada views
pectations.
The upturn in the econo-
my and steady improvement in labour market conditions argue against any more rate cuts, and we anticipate the next move will be a hike albeit in late 2016.
Waiting for policy details from new government Canada elected a new government on October 19, replacing the Conservative party with a majority Liberal government. The Liberal party’s election platform contained a plethora of initiatives including a proposed $150 billion in “new investment” during the 2016–17 to 2019–20 period, broadly distributed across each fiscal year. The bulk of this is projected to come from tax cuts and benefits, totalling $105.7 billion, followed by infrastructure at a four-year cost of $17 billion. The Liberal party’s economic platform proposed fiscal deficits of “less than $10 billion” in the first three fiscal years of its mandate, in part, to fund these new investments. The party platform projects a return to balanced budget in 2019–20 with a surplus of $1.0 billion. The government’s near- and medium-term policies will be articulated in the Throne Speech on December 4, 2015.
Bank of Canada sees current policy stance as “appropriate” The Bank of Canada maintained the overnight rate at 0.5% at its October meeting and characterized the economy and inflation as evolving in line with its forecasts. In the accompanying Monetary Policy Report, there were limited changes in the Bank’s assessment of the economic outlook relative to July, with the anticipated rebound in activity materializing and the underlying trend inflation rate holding in the range of 1.5% to 1.7%. The Bank downgraded its growth outlook slightly for 2016 and 2017 although still anticipated that the economy will grow by 1.1% in 2015, 2.0% in 2016, and 2.5% in 2017. Despite mild tweaks to the forecast, the Bank appeared somewhat more confident that the economy is navigating through the “complex adjustments” associated with lower commodity prices, and we expect that it will remain patient and hold the policy rate steady as the “reallocation of labour and capital across sectors” continues. 3
Highlights
Downside risks to an
already weak inflation outlook are expected to prompt additional stimulus from the ECB.
Lower commodity
prices and sterling strength are expected to continue to weigh on UK inflation in 2016.
The RBA has room to
ease, because of the benign inflation outlook, but appears reluctant to do so.
The RBNZ has cut the
cash rate by 75 bp since June; we expect another 25 bp in December.
4
Expecting more stimulus from the ECB The “flash” estimate of third-quarter euro area GDP growth is expected to show a 0.4% nonannualized increase, which would match the average quarterly gain seen in the last year. While expenditure details will not be released, private consumption is expected to have been the main driver of growth while net trade likely provided a modest drag. Early indicators for the fourth quarter point to momentum being sustained, with the October composite purchasing managers’ index (PMI) reading remaining within the narrow range that has prevailed for much of 2015. There is further evidence of a rotation in growth, with the traded sector (particularly manufacturing) slowing while domestic demand remains solid. Sustained domestic growth has failed to generate inflationary pressure, and lower commodity prices are providing further downside risk to the inflation profile. In response to a benign inflation outlook, and tighter financial conditions and potential spillover from external weakness, the ECB appears poised to increase monetary policy stimulus. In addition to extending the asset purchase program by six months (to at least March 2017), we now expect the ECB will cut the deposit rate further into negative territory in December (to -40 basis points from -20 basis points currently) while leaving the refi rate unchanged at 5 basis points.
BoE strikes a more dovish tone The initial estimate of third-quarter UK GDP growth fell slightly short of expectations, with the pace of growth moderating to 0.5% (non-annualized) from 0.7% in the second quarter. The gain was again largely driven by the services sector, while production growth was modest and construction activity unexpectedly fell (although the strong signal from construction PMI data indicated scope for upward revision). Growth is expected to continue at a 0.5% pace in the fourth quarter, with recent survey indicators pointing to momentum beginning to wane following more than two years of generally above-trend gains. Notwithstanding sustained GDP growth, a tightening labour market, and a steady pickup in wages, inflationary pressure remains limited, due in part to currency appreciation and weaker commodity prices. With those factors expected to continue to put downward pressure on inflation in 2016, the BoE lowered its inflation forecast despite conditioning projections on more accommodative market interest rate expectations. Along with a weaker external growth forecast, this lent a dovish tone to the Inflation Report, underscoring that a Bank Rate hike “around the turn of the year” is no longer likely. We see mid-2016 as a more likely timeline for tightening to begin.
RBA not ready to act on its easing bias The Reserve Bank of Australia (RBA) held the cash rate steady at 2.0% in November, maintaining an easing bias and issuing a fairly balanced policy statement. A downward revision to the RBA’s inflation forecast indicated scope to cut rates further if desired, although the central bank appears reluctant to act on its easing bias. The growth outlook was noted to have “firmed a little,” and the RBA continues to cite a number of positive themes such as steady employment growth and better business conditions; however, downside risks are also prevalent including a limited pickup in nonmining investment, weaker Chinese growth and commodity prices, and slow income growth. Our forecast assumes those factors will prove persistent, thereby leaving growth at a more subdued pace than the RBA is projecting. We expect this continued disappointment will prompt the RBA to cut rates in the first quarter of 2016 and mid-2016, although we acknowledge that the bar to ease further remains high and that the onus is on activity data to disappoint.
RBNZ holds rates steady (for now) The Reserve Bank of New Zealand (RBNZ) held the cash rate steady at 2.75% following 25 basis point cuts at each of the prior three meetings. The policy statement again indicated that further easing “seems likely,” although at present, it is appropriate to “watch and wait.” The case for holding off on further easing was based in part on stronger dairy prices and a modest pickup in consumer and business sentiment; however, we see the broader economic backdrop as supporting another rate cut before the end of 2015. Limited domestic inflationary pressure and recent currency appreciation call into question the RBNZ’s view that overall consumer price index (CPI) will return to “well within the target range by early 2016.” Third-quarter labour market data showed the unemployment rate rising to a 1.5-year high while wage growth moderated further. Weak terms of trade and slower growth among key trading partners also argue for easier monetary policy, and we expect the RBNZ will follow through with a 25 basis point cut in December. While that cut is the last in our forecast profile, recent data highlight the risk of further easing in 2016.
Interest rate outlook %, end of period Actuals
Forecast
14Q1
14Q2
14Q3
14Q4
15Q1
15Q2
15Q3
15Q4
16Q1
16Q2
16Q3
16Q4
1.00 0.90 1.07 1.71 2.46 2.96
1.00 0.94 1.10 1.53 2.24 2.78
1.00 0.92 1.13 1.63 2.15 2.67
1.00 0.91 1.01 1.34 1.79 2.34
0.75 0.55 0.51 0.77 1.35 1.98
0.75 0.58 0.49 0.81 1.68 2.31
0.50 0.44 0.53 0.81 1.45 2.20
0.50 0.40 0.65 1.00 1.75 2.45
0.50 0.50 0.70 1.15 1.85 2.55
0.50 0.55 0.80 1.25 1.90 2.60
0.50 0.60 1.00 1.50 2.20 2.75
1.00 1.10 1.60 2.10 2.60 3.05
0.25 0.05 0.45 1.74 2.73 3.55
0.25 0.04 0.47 1.62 2.53 3.34
0.25 0.02 0.58 1.78 2.52 3.21
0.25 0.04 0.67 1.65 2.17 2.75
0.25 0.03 0.56 1.37 1.94 2.54
0.25 0.03 0.64 1.64 2.35 3.12
0.25 0.00 0.64 1.37 2.04 2.86
0.50 0.20 1.05 1.85 2.45 3.20
0.75 0.45 1.30 2.05 2.60 3.30
1.00 0.65 1.50 2.15 2.70 3.35
1.25 0.70 1.70 2.30 2.85 3.45
1.50 0.95 2.00 2.55 3.05 3.55
0.50 0.71 2.73
0.50 0.87 2.68
0.50 0.84 2.43
0.50 0.45 1.76
0.50 0.43 1.58
0.50 0.55 2.01
0.50 0.56 1.76
0.50 0.80 2.00
0.50 0.95 2.10
0.75 1.25 2.30
0.75 1.50 2.45
1.00 1.80 2.60
0.00 0.17 1.57
-0.10 0.03 1.25
-0.20 -0.07 0.95
-0.20 -0.11 0.54
-0.20 -0.25 0.18
-0.20 -0.23 0.77
-0.20 -0.26 0.59
-0.40 -0.40 0.60
-0.40 -0.40 0.65
-0.40 -0.40 0.75
-0.40 -0.35 0.90
-0.40 -0.35 1.00
2.50 2.78 4.08
2.50 2.80 4.00
2.50 2.61 3.48
2.50 2.19 2.81
2.25 1.72 2.32
2.00 2.01 3.01
2.00 1.81 2.61
2.00 1.80 3.00
1.75 1.70 3.10
1.50 1.60 3.10
1.50 1.75 3.25
1.50 2.00 3.50
2.75 4.01 4.62
3.25 3.90 5.00
3.50 4.04 4.53
3.50 3.54 3.67
3.50 3.11 3.12
3.25 3.09 3.89
2.75 2.69 3.48
2.50 2.80 3.80
2.50 2.80 4.00
2.50 3.00 4.10
2.50 3.00 4.25
2.50 3.10 4.50
139 228 202 140 130 61
114 206 181 122 120 110
102 194 159 102 87 49
78 150 131 65 62 13
84 138 115 43 60 1
119 171 146 100 100 80
92 140 120 85 80 79
110 140 120 100 120 100
115 130 115 105 140 120
110 120 105 115 150 110
120 115 95 125 150 125
100 105 80 135 150 140
Canada Overnight Three-month Two-year Five-year 10-year 30-year
United States Fed funds Three-month Two-year Five-year 10-year 30-year
United Kingdom Bank rate Two-year 10-year
Eurozone Deposit Rate Two-year 10-year
Australia Cash target rate Two-year 10-year
New Zealand Cash target rate Two-year swap 10-year swap
Yield curve Canada United States United Kingdom Eurozone Australia New Zealand
* Two-year/10-year spread in basis points Source: Reuters, RBC Economics Research
Central bank policy rate %, end of period
Current
Current
Last
Last
United States
Fed funds
0.0-0.25
1.00
December 16, 2008
Eurozone
Deposit rate
-0.20
-0.10 September 10, 2014
Canada
Overnight rate
0.50
0.75
July 15, 2015
Australia
Cash rate
2.00
2.25 May 5, 2015
0.50
1.00
March 5, 2009
New Zealand
Cash rate
2.75
3.00 September 10, 2015
United Kingdom Bank rate
Source: Bloomberg, Reuters, RBC Economics Research
5
Economic outlook
Growth outlook % change, quarter-over-quarter in real GDP 14Q1
14Q2
14Q3
14Q4
15Q1
15Q2
15Q3
15Q4
16Q1
16Q2
16Q3
16Q4
2014
2015F
2016F
Canada*
1.0
3.4
3.2
2.2
-0.8
-0.5
2.5
2.1
2.2
2.4
2.6
2.7
2.4
1.2
2.2
United States*
-0.9
4.6
4.3
2.1
0.6
3.9
1.5**
2.9
2.5
3.2
3.1
2.7
2.4
2.5
2.8
United Kingdom
0.6
0.9
0.6
0.8
0.4
0.7
0.5**
0.5
0.6
0.5
0.6
0.5
2.9
2.4
2.3
Euro Area
0.2
0.1
0.3
0.4
0.5
0.4
0.4
0.4
0.5
0.5
0.5
0.5
0.9
1.5
1.8
Australia
0.9
0.6
0.4
0.5
0.9
0.2
0.6
0.3
0.6
0.7
0.7
0.8
2.7
2.1
2.3
New Zealand
1.1
0.8
0.9
0.8
0.2
0.4
0.4
0.4
0.5
0.5
0.5
0.5
3.3
2.1
1.9
*annualized, **preliminary actual
Inflation outlook % change, year-over-year 14Q1
14Q2
14Q3
14Q4
15Q1
15Q2
15Q3
15Q4
16Q1
16Q2
16Q3
16Q4
2014
2015F
Canada
1.4
2.2
2.1
1.9
1.1
0.9
1.2
1.4
2.2
2.0
2.1
2.2
2.0
1.1
2016F
2.1
United States
1.4
2.1
1.8
1.2
-0.1
0.0
0.1
0.6
2.0
1.8
2.0
2.4
1.6
0.2
2.0
United Kingdom
1.7
1.7
1.4
0.9
0.1
0.0
0.0
0.5
1.3
1.4
1.7
1.9
1.5
0.2
1.6 1.0
Eurozone
0.7
0.6
0.4
0.2
-0.3
0.2
0.1
0.4
1.0
0.8
0.9
1.0
0.4
0.1
Australia
2.9
3.0
2.3
1.7
1.3
1.5
1.5
2.1
2.6
2.7
2.8
2.6
2.5
1.6
2.7
New Zealand
1.5
1.6
1.0
0.8
0.3
0.4
0.4
0.6
1.1
1.0
1.2
1.5
1.2
0.4
1.2
Source: Statistics Canada, Bureau of Labor Statistics, Bank of England, European Central Bank, Reserve Bank of Australia, Reserve Bank of New Zealand, RBC Economics Research
Inflation tracking Inflation Watch Measure Canada United States
Current period Period ago
Bank of Canada core CPI Core PCE
1,2
United Kingdom All-items CPI Eurozone
All-items CPI
1
Australia
Trimmed mean CPI
New Zealand
All-items CPI
1
1
Year ago
Three-month trend Six-month trend
Sep
0.1
2.1
2.2
2.3
Sep
0.1
1.3
1.3
1.5
Sep
-0.2
-0.1
0.2
0.5
Oct
0.1
0.0
-0.6
0.9
Q3
0.3
2.1
N/A
N/A
Q3
0.3
0.4
N/A
N/A
1 Seasonally adjusted measurement. 2 Personal consumption expenditures less food and energy price indices.
Source: Statistics Canada, US Bureau of Labor Statistics, Bank of England, European Central Bank, Reserve Bank of Australia, Reserve Bank of New Zealand, RBC Economics Research
6
Currency outlook Level, end of period
Actuals Canadian dollar Euro U.K. pound sterling New Zealand dollar Japanese yen Australian dollar
Forecast
14Q1
14Q2
14Q3
14Q4
15Q1
15Q2
15Q3
15Q4
16Q1
16Q2
16Q3
16Q4
1.11 1.38 1.67 0.87 103.2 0.93
1.07 1.37 1.71 0.88 101.3 0.94
1.12 1.26 1.62 0.78 109.7 0.87
1.16 1.21 1.56 0.78 119.7 0.82
1.27 1.07 1.48 0.75 120.1 0.76
1.25 1.11 1.57 0.68 122.5 0.77
1.33 1.12 1.51 0.64 119.9 0.70
1.33 1.07 1.51 0.65 123.0 0.69
1.36 1.03 1.51 0.64 128.0 0.67
1.38 1.00 1.47 0.63 132.0 0.65
1.36 1.00 1.45 0.63 130.0 0.65
1.33 1.02 1.48 0.63 128.0 0.65
Canadian dollar cross-rates EUR/CAD GBP/CAD NZD/CAD CAD/JPY AUD/CAD
14Q1
14Q2
14Q3
14Q4
15Q1
15Q2
15Q3
15Q4
16Q1
16Q2
16Q3
16Q4
1.52 1.84 0.96 93.4 1.02
1.46 1.83 0.93 95.0 1.01
1.41 1.82 0.87 97.9 0.98
1.41 1.81 0.91 103.0 0.95
1.36 1.88 0.95 94.7 0.97
1.39 1.96 0.85 98.0 0.96
1.49 2.01 0.85 90.0 0.93
1.42 2.00 0.86 92.5 0.92
1.40 2.06 0.87 94.1 0.91
1.38 2.03 0.87 95.7 0.90
1.36 1.97 0.86 95.6 0.88
1.36 1.97 0.84 96.2 0.86
Rates are expressed in currency units per US dollar and currency units per Canadian dollar, except the euro, UK pound, Australian dollar, and New Zealand dollar, which are expressed in US dollars per currency unit and Canadian dollars per currency unit.
Source: Bloomberg, RBC Economics Research
RBC Economics outlook compared to the market The following charts track historical exchange rates plus the forward rate (dashed line) compared to the RBC Economics forecast (dotted line) out one year. The cone for the forecast period frames the forward rate with confidence bounds using implied option volatilities as of the date of publication.
Euro
Canadian dollar 1.50
1.50
1.40
1.40
1.30 1.30
1.20 1.20
1.10 1.10
1.00
1.00
0.90 0.80 Oct-14
Apr-15
Oct-15
Apr-16
0.90 Oct-14
Apr-15
Oct-15
Apr-16
U.K. pound
Japanese yen 2.00
136
126
1.80
116 1.60
106
1.40
96
86 Oct-14
Apr-15
Oct-15
Apr-16
1.20 Oct-14
Apr-15
Oct-15
Apr-16
7
Central bank watch Bank of Canada The Canadian economy grew for a third consecutive month in August although with the pace of increase moderating to 0.1% from 0.3% and 0.4% in July and June, respectively. The BoC’s Monetary Policy Report struck a balanced tone despite small downward tweaks to the growth forecast as both growth and inflation were evolving as expected, and the policy rate was deemed appropriate.
Canadian overnight rate
Canadian real GDP growth
%
Quarter-over-quarter annualized % change
7
8
Forecas
6
6
4 5
2 4
-2
3
-4 2
-6 -8
1
-10 2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2015
2016
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
U.S. target rate % 7
Forecast 6
6 4
5
2 4
-2
3
-4 2
-6 1
-8 -10 2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
0 2002
Forecasted values:
Source: Bureau of Economics Analysis, RBC Economics Research
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: Bank of Canada, Federal Reserve Board, RBC Economics Research
ECB Deposit rate
Eurozone GDP %
% change, quarter-over-quarter
7
1.5
Forecas
1.0
6
0.5
5
0.0 4
-0.5 -1.0
3
-1.5
2
-2.0 1
-2.5
0
-3.0 -3.5
-1 2002
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Forecasted values:
Source: Eurostat, RBC Economics Research
Bank of England
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: ECB, RBC Economics Research
U.K. policy rate
U.K. real GDP growth
%
% change, quarter-over-quarter
Recent PMI surveys have indicated some moderation in growth momentum, with Q4/15 expected to match the trend-like 0.5% increase in Q3/15 GDP. Downward revisions to the BoE’s inflation forecast indicate no rush to raise rates, although the forecast profile still implies that tighter policy will be needed next year. We expect a Bank Rate hike in mid-2016.
2004
8
European Central Bank The ‘flash’ estimate of euro area growth is forecasted to show a 0.4% increase, which we expect was driven to a large extent by stronger private demand. A weak inflation outlook (with downside risks) and tighter financial conditions are expected to be the major factors prompting a deposit rate cut and asset purchase program extension from the ECB in December.
2003
Source: Bank of Canada, Federal Reserve Board, RBC Economics Research
U.S. real GDP growth Quarter-over-quarter annualized % change
The advance estimate of Q3/15 US GDP showed growth moderating to 1.5% from 3.9% in Q2/15, although much of the slowdown reflected lower inventory investment while domestic demand growth remained strong. Some hawkish changes to the Fed’s latest policy statement put the focus squarely on December’s meeting. A rebound in payroll growth in October further added to our confidence for a December hike.
0 2002
Forecasted values:
Source: Statistics Canada, RBC Economics Research
Federal Reserve
2014
1.5
7
1.0
6
0.5
5
Forecast
0.0
4 -0.5
3 -1.0
2
-1.5
1
-2.0 -2.5 2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: Central Statistical Office, RBC Economics Research
2013
2014
2015
2016
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Forecasted values: Source: Bank of England, RBC Economics Research
Australia and New Zealand Australia and New Zealand GDP growth
The RBA continues to hold a somewhat optimistic view on the Australian economy, but we expect disappointment next year will result in further rate cuts. The RBNZ held off on a fourth consecutive rate cut in October, but we expect another 25 bp cut in December, because of weaker labour market data along with numerous headwinds to growth.
8
2.5
Australia and New Zealand inflation
% change, quarter-over-quarter
7
% change, year-over-year
Forecast 2.0
Forecast 6
1.5
Australia New Zealand
5
1.0 4
0.5 3
0.0 2
-0.5
Australia New Zealand
-1.0 -1.5
1 0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Australian Bureau of Statistics, Statistics New Zealand, RBC Economics Research
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Australian Bureau of Statistics, Statistics New Zealand, RBC Economics Research
More of the same for the world economy as 2015 comes to a close
Global growth forecasts were revised downward by both the IMF and OECD during their autumn economic review. 2016 is still forecasted to show acceleration after 2015’s pullback.
The weakening in 2015 was related to softening in the emerging market economies while advanced economies maintain upward momentum.
Global GDP growth
World GDP growth % change
8
6
Annual % change Forecast
Forecast
7
5
Emerging 6
4 3.3
3.6
3.4
5
3.1
3
World
4 3
2
Advanced
2
1
1 00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
2010 Source: International Monetary Fund, RBC Economics Research
2011
2012
2013
2014
2015
2016
Source: International Monetary Fund, RBC Economics Research
The October PMIs showed that business activity in the EME continued to be weak in Q4/15.
The slowing in US GDP growth in Q3/15 belied very solid domestic demand. Inventories cut a large 1.4 ppt from the quarterly growth rate.
U.S. real GDP growth
Weighted Composite PMI
Quarter-over-quarter annualized % change
50=expansion 60
10
58
8
56
6
Real GDP Real Final Sales to Purchasers
4
54
2 52
0
50 48
-2 Global
-4
Advanced
46
Emerging
-6 -8
44 Jan/2010 Jul/2010 Jan/2011 Jul/2011 Jan/2012 Jul/2012 Jan/2013 Jul/2013 Jan/2014 Jul/2014 Jan/2015 Jul/2015
-10
Source: RBC Economics Research
Source: Bureau of Economics Analysis, RBC Economics Research
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
The material contained in this report is the property of Royal Bank of Canada and may not be reproduced in any way, in whole or in part, without express authorization of the copyright holder in writing. The statements and statistics contained herein have been prepared by RBC Economics Research based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This publication is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities. ®Registered trademark of Royal Bank of Canada. ©Royal Bank of Canada.
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