Economic & Financial Outlook

Transcription

1 Economic & Financial Outlook Conference call / Appel conférence Stéfane Marion / Paul-André Pinsonnault NBF Economics & Strategy Group January 15, 2018

2 World

3 World: Economy continues to surprise on the upside Citi Economic Surprise Index World composite 50 Index NBF Economics and Strategy (data via Bloomberg) 3

4 World: Trade volumes at a record Global trade flows (quarterly volumes) 124 index NBF Economics and Strategy (CPB data via Datastream) 4

5 World: Industrial production is at a record high Volume industrial output Index Emerging World Advanced NBF Economics and Strategy (data via Bloomberg) 5

6 World: Earnings revisions remain positive 3-month change in 12-month forward earnings for the MSCI AC 2 % NBF Economics and Strategy (data via Bloomberg) 6

7 MSCI : change in 12-month forward earnings 1-month change 3-month change 10 year historical average 3 month diffusion 10 year historical average MSCI AC World % 43% MSCI World % 44% MSCI USA % 46% MSCI Canada % 43% MSCI Europe % 39% MSCI Pacific ex Jp % 42% MSCI Japan % 49% MSCI EM % 41% MSCI EM EMEA % 42% MSCI EM Latin America % 40% MSCI EM Asia % 42% 1/12/2018 NBF Economics and Strategy (data via Datastream) 7

8 World: Earnings expectations are not unreasonable 12-month forward earnings for the MSCI AC 32 EPS NBF Economics and Strategy (data via Datastream) 8

9 Global equities: Record high with stable P/E MSCI AC and its 12-month-forward P/E 650 Index Ratio MSCI AC (left) Forward P/E (right) NBF Economics and Strategy (data via Datastream) 6 9

10 MSCI composite index: EPS Performance months forward MSCI AC World MSCI World MSCI USA MSCI Canada MSCI Europe MSCI Pacific ex Jp MSCI Japan NA MSCI EM MSCI EM EMEA MSCI EM Latin America MSCI EM Asia /12/2018 NBF Economics and Strategy (data via Datastream) 10

11 OECD: Pro-cyclical fiscal stimulus? Advanced economies real GDP growth and change in structural budget balance % Change in structural budget balance NBF Economics and Strategy (data via IMF) Real GDP growth? Trump tax cuts Trudeau infrastructure Countering populism & low inflation in Eurozone and Japan UK offsetting Brexitrelated headwinds 11

12 World: Perspective on commodity prices CRB metals vs. WTI 1,400 index USD/barrel 150 1, , , , CRB metals (left) WTI (right) NBF Economics and Strategy (data via Datastream) 12

13 World: USD is not a threat at the moment USD broad index (vs. 26 currencies) 132 index NBF Economics and Strategy (Federal Reserve data via Datastream) 13

14 U.S.

15 S&P 500: The longest rally since 1960 Rallies since 1960 without a 5%+ correction 450 Number of trading days / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /2016 NBF Economics and Strategy (data via Bloomberg as of Dec 13th, 2017) 15

16 U.S.: The second longest business cycle on record Duration of economic cycles since 1945 (peak to peak) Jul 90 - Mar Dec 07 - Oct Apr 60 - Dec Jul 81 - Jul Mar 01 - Dec Nov 73 - Jan Nov 48 - Jul Jul 53 - Aug Dec 69 - Nov 73 Feb 45 - Nov 48 Aug 57 - Apr Average of 11 cycles since 1945: 68.5 months Jan 80 - Jul Months NBF Economics and Strategy ( 16

17 U.S.: GDP exceeds potential for the first time in a decade Actual vs. potential* real GDP 17,600 17,200 $ billions For the first time in a decade, excess capacity F Matured phase 16,800 has been eliminated! 16,400 16,000 Potential GDP 15,600 15,200 A Peak Actual GDP E Expansion 14,800 14,400 14,000 B Recession Trough C * As calculated by the Congressional Budget Office (CBO) - NBF Economics and Strategy (data via Datastream) D Recovery 17

18 U.S.: Yield curve not that flat at this point in the cycle Output gap* vs. yield curve (10-year Treasury yield less 3-month T Bill) 6 5 % 4 Yield Curve Output Gap * Using potential GDP calculated by the Congressional Budget Office (CBO) - NBF Economics and Strategy (data via Datastream) 18

19 U.S.: Core inflation tends to move higher at this point in the cycle Core PCE deflator vs. output gap* 12 % Core PCE (y/y change) Q Output Gap * Using potential GDP calculated by the Congressional Budget Office (CBO) - NBF Economics and Strategy (data via Datastream) 19

20 Canada

21 Canada: Economy has done very well in recent quarters Nominal GDP growth 8 7 % (y/y) NBF Economics and Strategy (data via Statcan and Datastream) 21

22 Poloz on the run: Where is he going? 22

23 Canada: Perspective on CPI-common Core inflation based on common component measure 2.1 % (y/y) NBF Official NBF Economics and Strategy (data via Statistics Canada) 23

24 Perspective on key driver of labour income Full-time employment: Canada vs. the U.S Index, 2000 = NBF Economics and Strategy (data via Datastream) 24

25 Perspective on the prime-aged workforce Employment for people aged 25-54: Canada vs. the U.S. 112 Index, 2000 = NBF Economics and Strategy (data via Statistics Canada and BLS via Datastream) 25

26 Prime-age population growing in Canada, stalling in the U.S. Population aged 25-54: Canada vs. the U.S. 108 Index, 2000 = NBF Economics and Strategy (data via Statistics Canada and BLS via Datastream) 26

27 Wages and salaries growth Q vs. Q %y/y BC QC MB CA ON PE NS AB NB U.S. SK NL NBF Economics and Strategy (data via Statistics Canada) 27

28 Canada: Job creation in the main cities Job creation in greater Vancouver, greater Toronto, greater Montreal and rest of Canada (RoC) Index 2007=100 VAN TOR MTL RoC NBF Economics and Strategy (data via Statistics Canada) 28

29 World: Home prices do not seem extreme in Canada Price per square feet in USD for downtown living* (summer 2017) Hong Kong London New York Beijing Paris San Francisco Stockhom Sydney Boston Tokyo Oslo Vancouver Los Angeles Rome Copenhagen Berlin Toronto Miami Chicago Montreal Houston Calgary Ottawa/Gatineau Quebec City * For a 645 sq.ft. apartment NBF Economics and Strategy ,328 1,246 1,228 1,083 1,075 1,055 1, ,861 3, ,000 1,500 2,000 2,500 3,000 3,500 USD 29

30 World: Perspective on household leverage Household debt as a percentage of net disposable income (major OECD countries) 350 % disposable income HUN LAT SLO POL CHI CZE SVK EST ITA AUT DEU FRA USA BEL GRC ESP FIN JAP PRT USA GBR CAN IRE SWE SWI AUS NOR NLD DNK NBF Economics and Strategy (data via OECD) U.S. adjusted to Canadian definition 30

31 Interest rates

32 CME: Probabilities of FOMC rate moves based on fed funds futures Federal Reserve Bank of New York President William Dudley said last Thursday the case for rate rises this year remains robust amid risks the economy could overheat, and warned that the new tax law could boost the U.S. deficit over time. OIS NBF Economics and Strategy (data via CME Group)

33 World Bank: Output gaps in advanced economies and EMDEs 2.8 Percent of potential GDP EMEDEs 1.6 World 1.2 Advanced economies NBF Economics and Strategy (data via World Bank)

34 Fed s five-year forward breakeven inflation rate NBF Economics and Strategy (data via Bloomberg) 34

35 Financial conditions have eased despite the FOMC s rate hikes NFCI shows financial conditions at year end 2017 easier than in the period from 2003 to Index The Chicago Fed s National Financial Conditions Index (NFCI) provides a comprehensive weekly update of U.S. financial conditions in money, debt and equity markets and in the traditional and shadow banking systems December 2015: First FOMC rate hike NBF Economics and Strategy (data via Bloomberg) 35

36 10-year yield: Sum of expected average short rate and term premium Expected average short rate over subsequent 10 years Term premium NBF Economics and Strategy (data via Bloomberg) 36

37 SOMA: 2018 Treasury maturities and run-off caps Maturity schedule of notes, bonds, floating-rate notes and TIPS 60,000 55,000 50,000 US$ million Based on December 6, 2017 Soma s portfolio 45,000 40,000 Reinvested portion 35,000 30,000 Cap 25,000 20,000 15,000 10,000 Portion rolling off the balance sheet 5, m m1 2018m2 2018m3 2018m4 2018m5 2018m6 2018m7 2018m8 2018m9 2018m m m m1 2019m2 2019m3 NBF Economics and Strategy (data via Federal Reserve Bank of New York) 2017/12/06 37

38 ECB: Officials widely agreed that the bank would need to change its guidance to investors The eurozone economy is in its best shape in more than a decade. Consumer sentiment is at its highest level since the turn of the century, unemployment is close to a nine-year low, and industrial production is booming, rising 1% on the month in November NBF Economics and Strategy (data via Bloomberg) 38

39 FOMC: More policy normalization in 2018 Balancing of risks to financial stability, the economy and inflation calls for gradual policy normalization % We expect 10-year Treasuries, currently trading at 2.48%, to be trading around 2.95% in Q U.S. economic forecast Q Q Q Q Q forecast forecast forecast forecast forecast forecast Real GDP growth (q/q % chg. saar) CPI (y/y % chg.) CPI ex. food and energy (y/y % chg.) Unemployment rate (%) Fed Fund Target Rate Year Treasuries NBF Economics and Strategy (data via Bloomberg) 39

40 US corporate bonds: Investment grade option adjusted spread OAS back to levels seen in 2004 to Basis points Average 93 bps Last observation: 95 bps NBF Economics and Strategy (data via Bloomberg, ICE BofAML) 40

41 Canada: Perspective on labour-market slack Unemployment rate, youth unemployment rate and underemployment rate % Youth unemployment rate Underemployment rate* (all ages) 7 6 Unemployment rate (total) Includes discouraged workers, waiting groups and involuntary part-time NBF Economics and Strategy (data via Statistics Canada) 41

42 Canada: Consumer Price Index inflation since 2007 Change in total CPI and change in average of the three core measures preferred by the Bank of Canada 4.0 % y/y Midpoint of BoC target range Total CPI (+2.1%) Average of core CPIs (+1.7%) OIS NBF Economics and Strategy (data via Statistics Canada) 42

43 Canada: More policy normalization in 2018 Balancing of risks to financial stability, economy and inflation calls for gradual policy normalization % We expect 10-year GoCs, currently trading at 2.15%, to be trading around 2.70% in Q Canada economic forecast Q Q Q Q Q forecast forecast forecast forecast forecast forecast Real GDP growth (q/q % chg. saar) CPI (y/y % chg.) CPI ex. food and energy (y/y % chg.) Unemployment rate (%) Boc`s overnight rate Year Gov. of Canada NBF Economics and Strategy (data via Bloomberg) 43

44 Corps A s yield spreads to Canadas BFV corporate A year year 5-year NBF Economics and Strategy (data via Bloomberg) 44

45 Ontario s yield spreads to Canadas Still well above levels seen in 2004 to year year year NBF Economics and Strategy (data via Bloomberg) 45

46 Canada: Underlying assumptions for total returns calculations Canada economic forecast Q Q Q Q Q forecast forecast forecast forecast forecast forecast Real GDP growth (q/q % chg. saar) CPI (y/y % chg.) CPI ex. food and energy (y/y % chg.) Unemployment rate (%) Boc`s overnight rate Year Gov. of Canada Province Avg. Avg. Avg. GDP N & L -2.0% 3.0% 4.7% P.E.I. 2.0% 1.5% 1.5% N.S. 1.2% 1.1% 1.0% N.B. 1.2% 1.0% 1.2% Quebec 2.6% 2.3% 1.3% Ontario 3.0% 2.6% 1.5% Manitoba 2.6% 2.1% 1.2% Sask. 2.2% 2.0% 1.9% Alberta 4.5% 2.3% 1.6% B.C. 3.1% 3.0% 1.7% NBF Economics and Strategy 46

47 Canada: Projected total returns, to T-bill % 1.49 Short Cdn Short Provi Short Corp 1.55 Mid Cdn Mid Provi Mid Corp 0.33 Long Can Long Provi Long Corp Total Can Total Provi Total Corp Universe NBF Economics and Strategy (author s calculation)

48 Conclusion: World, U.S.: Another year of above-potential growth - Global growth near 3.7% in China continues to grow at around 6.5% (good enough) - Eurozone, still great at 1.9% - Geopolitical risks to remain a major source of concern: U.S. Trade Policy? Interest rates, currency: - The Fed probably hikes three times in 2018 ; 10-year Treasury yield near 3.0%. - Expect the BoC to hike again this weeke, more to come after that (heading towards 2%) - Canadian dollar in the range (stronger in short-term); Oil in the $55-$62 range - Large correction in housing unlikely unless labour markets deteriorate markedly or mortgage rates surge. Equity over bonds for now with an eye on the yield-curve: Inflation comeback in 2018? 48