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Quarterly Economic Forecast (Dec 2016)

by Sergio Mariaca on Dec 15, 2016 11:37:16 AM |Share:

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Economic Momentum To Gain An Inch, Not A Yard

  • The U.S. economy has progressed largely as expected since our previous forecast. But, with new leadership in Washington, the outlook is cloudier than usual.
  • Economic growth is expected to run at 1.6% for 2016, before picking up to roughly 2.0% over the next two years. Until there is greater clarity on which policies the new administration will enact, our macroeconomic forecast does not incorporate new fiscal policy measures.
  • As it has over the past year, consumer spending will lead economic growth. Business investment stages a modest improvement, while a stronger U.S. dollar makes net trade a larger drag than previously expected.
  • Future fiscal policy changes also pose upside and downside risks for monetary policy. For now, we continue to expect a cautious pace of rate increases of one 25 basis point hike in each of 2017 and 2018, taking the funds rate to 1.25% by the end of 2018.


International Highlight

  • Global growth is expected to pick-up to 3.3% through 2018, consistent with its trend rate and broadly unchanged from our previous forecast.
  • We remain cautious on the stronger growth and reflation theme that has been driving recent market euphoria for a number of reasons. Most importantly, global excess capacity will dampen inflation, and stimulus measures in the U.S. are likely to underwhelm.
  • The main forces driving our outlook include a continuation of highly accommodative monetary policy, increased fiscal stimulus, the ongoing recovery of commodity exporters, and slow and steady implementation of structural reforms.
  • While emerging markets are expected to remain the main driver of growth, tighter financial conditions, the high U.S. dollar, and anti-trade measures could provide significant headwinds. Moreover, elevated political uncertainty could weigh on the outlook for the Eurozone.

 

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DISCLAIMER

This report is provided by TD Economics.  It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes.  The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.  The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs.  The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete.  This report contains economic analysis and views, including about future economic and financial markets performance.  These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties.  The actual outcome may be materially different.  The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

 

Data Release: Hiring remains robust in November, as unemployment plummets

by Sergio Mariaca on Dec 2, 2016 10:21:58 AM |Share:

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Data Release: Hiring remains robust in November, as unemployment plummets

  • Non-farm payrolls increased by 178k in November, or just shy of the 180k expected by the street. Revisions to the previous two months were largely a wash, down 2k positions in aggregate – subtracting 19k from the October tally but adding 21k to September's print, which is now north of 200k.
  • Private payrolls disappointed, rising by 156k, nearly 20k below consensus. Private hiring was led by professional & business services (+63k) – of which about a quarter were temporary help positions – health care & education (+44k) and leisure & hospitality (+29k). Goods-producing industries saw a fairly decent month on account of construction (+19k). Mining added 2k while manufacturing was down 4k positions given durable industry weakness. Government had a great month (+22k) with all three branches contributing to the hiring.
  • The unemployment rate fell by 0.3 percentage points to 4.6% as people exited the labor force for the second consecutive month after strong gains earlier in the year. The retracement has sent the participation rate down another 0.1pp to 62.7% – a six month low. Broader underemployment measures also suggested lessening slack, with the broadest measure (U-6) down 0.2pp to 9.3%.
  • Average hourly earnings fell by 0.1% during the month, with the year-over-year wage growth decelerating from 2.8% to 2.5% in November.
  • Average weekly hours were unchanged at 34.4.

Key Implications

  • This morning's report was not overly uplifting. The headline print came in largely as expected, with the pace of hiring more than enough to eat up existing slack in the labor market. The details were somewhat less rosy with private sector hiring disappointing, while one-tenth of newly created private sector positions were temporary.
  • The decline in underutilization, both in the headline and broader measures, is certainly a welcome development, but came largely on account of people leaving the labor force. Somewhat counterintuitively, the decline in unemployment failed to manifest in higher wages, with retirement of highly-experienced and highly-paid baby boomers together with compositional effects of holiday season temporary hiring likely playing a part in keeping wages down. Still, we don't expect this trend to last, with wages likely to accelerate after the holiday season is behind us.
  • This report is a mixed bag as far as the Fed is concerned. For one, the rising participation rate that many officials were pointing to as people re-entered the labor force appears to be at an inflection point. Should this be the case, and with both the headline and broader measures of underutilization declining, the Fed will likely want to get ahead of the curve and communicate a more hawkish bias. On the other hand, the slight downtick in wages this month offers some ammunition for doves, who may instead argue that retiring baby-boomers will likely continue to pressure the wage metric down for some time to come. On the whole, we don't expect this report to dissuade the Fed from raising rates mid-month, but the future path remains somewhat murky with the Fed likely to focus on incoming data – especially given the significant tightening already embedded in the recent run-up in rates and the dollar.

TD-1.jpgMichael Dolega, Senior Economist

 

DISCLAIMER

This report is provided by TD Economics.  It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes.  The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.  The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs.  The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete.  This report contains economic analysis and views, including about future economic and financial markets performance.  These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties.  The actual outcome may be materially different.  The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

 

U.S. Commentary: FOMC Statement

by Sergio Mariaca on Sep 22, 2016 9:11:13 AM |Share:

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U.S. Commentary: Fed keeps rates unchanged for the time being, but sets up a December rate hike

  • As broadly expected, the Federal Open Market Committee (FOMC) left the target range for the federal funds rate unchanged at between 1/4 and 1/2 percent. Having said that, the Committee judged that the case for a rate hike has strengthened, but will wait "for the time being" for this view to be more evident in the data.
  • The Committee believes that economic growth has accelerated from the "modest pace seen in the first half of this year," despite business investment remaining soft. The labor market was believed to have continued to strengthen as job gains have come in "solid, on average."
  • The Committee now views the near-term risks as roughly balanced, but will monitor global economic and financial developments closely.
  • The Fed remains optimistic as far as the economic outlook and expects the labor market to strengthen "somewhat further" and inflation to track higher as transitory factors dissipate.
  • In the attached summary of economic projections (SEP), Fed officials downgraded their outlook for GDP this year and over the longer run (by 0.2pp) to 1.8%. They also toned down slightly (0.1pp) their expectations for PCE headline inflation this year, and core PCE inflation next year. Unemployment was also seen as remaining slightly higher this year at 4.8% (prev. 4.7%) but is expected to trough at a lower level of 4.5% (vs. 4.6% before) in 2018.
  • Interest rates projections in the SEP were lowered, with the median expectations for this year 25bp lower at 0.625 and 50bp lower in the following two years at 1.13% and 1.88%, respectively. Long-term expectations were also generally lower, with eight members believing the natural rate of interest is below 3% and six believing it was at 3%. Only two members viewed the natural rate as being above 3%.
  • Esther George (K.C.) was joined by Loretta Mester (Cleveland) and Eric Rosengren (Boston) in dissenting, with all three preferring to raise rates by ½ percent this time around.

 

Key Implications

  • The Fed did not disappoint markets and kept the benchmark rates unchanged this time around. However, it would appear that the views of the Committee members are quite sanguine, with most of the downgrades to the economic outlook viewed as in the rear-view at this point. Importantly, the Fed views economic momentum to have accelerated from the first-half slowdown despite still weak business investment, with moderate growth expected for the remainder of the forecast horizon on the back of solid fundamentals in domestic demand.
  • In addition to the largely unchanged outlook, the Committee now also views the risks as balanced. This, alongside the view that the labor market has only "somewhat further" to strengthen, is indicative that most members feel that the we're nearing the level of full-employment. As such, we expect the Committee to pull the trigger on rates later this year, assuming that global markets don't convulse and U.S. data cooperates, with inflation metrics particularly in focus.
  • Ultimately, we view this statement as a set-up for a hike later this year. At this point, the Fed feels the case for a hike has strengthened and is merely waiting "for the time being" out of prudence to ensure that their outlook is corroborated by the incoming data. Taken together with the three hawkish dissents – something itself very rare – we believe that the Fed is running out of room to keep rates unchanged given the economic performance. Having said that, it would appear that the pace of future hikes will be much slower and the ultimate ceiling for rates lower than previously thought. We believe this is the correct approach, raising "earlier but slower" rather than "later and faster".

TD-1.jpgMichael Dolega, Senior Economist

 

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DISCLAIMER

This report is provided by TD Economics.  It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes.  The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.  The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs.  The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete.  This report contains economic analysis and views, including about future economic and financial markets performance.  These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties.  The actual outcome may be materially different.  The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

Data Release: G20 Joint Statement

by Sergio Mariaca on Sep 6, 2016 11:49:29 AM |Share:

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International Commentary: The joint statement by the Leaders of the G20 reinforces their commitment to achieving sustainable economic growth, confirms pivot toward coordinated monetary and fiscal policy.

Details

  • Overnight the Leaders of the G20 released a joint statement promising to improve economic policy coordination amongst many other goals. More specifically, member nations agreed on utilizing monetary, fiscal, and structural policy tools to achieve "strong, sustainable, balanced and inclusive growth". Interestingly enough, the statement was adamant that monetary policy alone was unable to achieve balanced growth, and advocates the need for complementary flexible fiscal policy – mainly in the form of high-quality public investment – to aid in this quest.
  • As is typical at these summits, the Leaders of the G20 committed to implement social and structural reforms intended to improve the supply side of economies of the member nations. These include policies that promote innovation, increase productivity, reduce pollution, and other policies that are aimed at improving people's lives.

  • Additionally, the statement reinforced the commitment of member nations to build an open world economy, promoting global trade and investment instead of embracing protectionism. Moreover, they agreed to refrain from competitive devaluations and avoid targeting exchange rates for competitive purposes.

Key Implications

  • The outcome of this weekend's G20 summit reinforces our view that global policymakers have begun to pivot away from monetary policy as the sole tool that is supporting the economic recovery after the Great Recession. Calls for additional policy stimulus by major international organizations such as the IMF and the OECD earlier this year appear to have finally been heeded by the leaders of the world's most economically important nations. The prospect of more fiscal stimulus bodes well for stronger global infrastructure investment going forward, and will be a key theme supporting our global outlook over the next few years.

TD-1.jpgFotios Raptis, Senior Economist

 

DISCLAIMER

This report is provided by TD Economics.  It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes.  The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.  The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs.  The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete.  This report contains economic analysis and views, including about future economic and financial markets performance.  These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties.  The actual outcome may be materially different.  The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

 

Data Release: July Personal Income & Spending

by Sergio Mariaca on Aug 29, 2016 9:59:02 AM |Share:

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Data Release: Strong personal income and spending growth in July

  • Personal income rose a robust 0.4% in July, on par with survey expectations. Controlling for inflation and taxes, real disposable personal income was also up 0.4% (price growth was flat on the month).
  • Personal consumption rose by 0.3% in both nominal and real terms. By component, real spending on durable goods led the way, rising by 1.9%. Spending on services rose 0.2%, while spending on non-durable goods edged down 0.1%
  • Both income and spending were revised up in June, with personal income now registering 0.3% growth (from 0.2%), and personal spending up 0.5% (from 0.4% previously).
  • Headline inflation edged down to 0.8% year-on-year (from 0.9% in June), while the core index remained steady at 1.6%.
  • The personal saving rate drifted up to 5.7% (from 5.5% in June).

Key Implications

  • This is a great way to start the second half of the year. Combined with upward revisions to the previous month and robust income growth, personal consumption is on track for 3.3% growth (annualized) in the third quarter. This builds on the narrative of strong household spending leading economic activity higher.
  • The strength in income growth is really the story of this report, allowing households to add to savings while also increasing spending. With a sturdy savings buffer, spending should continue to rise in the months ahead.
  • For a data-dependent Federal Reserve, the strength in real income and spending growth should offset the weak inflation reading. As long as job growth holds up and wages continue to move higher, the Fed should have all the evidence it needs to move forward with a rate hike this calendar year.

 

James Marple, Senior EconomistTD-1.jpg

 


DISCLAIMER

This report is provided by TD Economics.  It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes.  The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.  The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs.  The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete.  This report contains economic analysis and views, including about future economic and financial markets performance.  These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties.  The actual outcome may be materially different.  The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

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