1. Douglas Porter, CFA, Chief Economist, BMO Financial Group
December 16, 2016
BMO Capital Markets Economics
economics.bmocapitalmarkets.com 1-800-613-0205
Please refer to page 19 for important disclosures
5 Quirky Facts for 2016;
5 Quantum Forecasts for 2017
Fed Hikes by 25 bps, USD Surges
Dow Nears 20,000
Canadian Bond Yields Near 2-Year High
BoE on Hold
Mexico Hikes by 50 bps
Feature Article
Page 10
2. Page 2 of 19 Focus — December 16, 2016
Our Thoughts
Outlook 2017—For Once, Some Upside Risks
fter yet another mildly disappointing year for global growth in 2016, we look
for a modest pick-up in the coming year. This year’s cooler activity was a team
effort, as both emerging markets and the industrialized world took a step back.
Remarkably, each of the U.S., Europe and Japan recorded at least a modest
deceleration in GDP growth this year, compounded by a further cooling in China and
ongoing deep recessions in Brazil, Russia and many other commodity producers.
Some of the hardest-hit economies appear poised to turn the corner in 2017,
supported by the near-stealth recovery in a broad array of commodities from the
depths earlier this year. As well, there is the tantalizing prospect of U.S. fiscal
stimulus, and it’s hard for even the most jaded forecaster to not be at least mildly
bullish on growth as the Dow nears 20,000. Overall, we look for global GDP to perk
up slightly to 3.1% from the post-recession low of 2.8% in 2016. To put those figures
into perspective, the long-run average growth rate is 3.6%, so next year’s pace would
remain stuck slightly below trend for the sixth year in a row.
This so-called serial disappointment on global growth clearly played a big part in the
low-for-long mantra that gripped financial markets for much of the past year. However,
the election of Donald Trump may have been just the catalyst to break markets and
then, possibly, global growth out of its funk. For Canada, the potential combination of
firmer U.S. growth and the moderate recovery in commodity prices sets a better
backdrop for the coming year. After two years of struggling with roughly 1% growth,
we have bumped up our 2017 GDP outlook for Canada to 2%. Beyond a firmer
external backdrop, domestic growth will find some support from a roll-out of long-
awaited infrastructure outlays and supportive financial conditions. However, we expect
that the economy’s main growth engine of the past two years—the housing sector—
will lose momentum, partly owing to tighter mortgage insurance rules. On the flip side,
the economy’s biggest drag of the past two years—business investment—is projected
to nudge higher after a combined plunge of more than 18% in 2015/16.
The Canadian consumer is expected to keep grinding ahead next year; but, with
household debt burdens already at all-time highs, there’s little hope that consumption can
drive growth. No significant short-term measures are expected in the coming Federal
Budget to support incomes, following the hefty Canada Child Benefit this year—
Ottawa’s focus now appears to be on supporting the medium-term growth outlook. There
may be some modest moves at the provincial level, as we approach an election in B.C.
this spring, and in Quebec in 2018; both provinces are poised to report budget surpluses
this fiscal year. The great (and ever-elusive) hope for Canadian growth is net exports.
And on that front, there is still some room for optimism, despite the dark clouds of
protectionism rolling in from the south. Stronger U.S. spending would be the biggest
positive possible for exports, while the loonie remains at relatively competitive levels.
However, the gains may be more apparent in service industries, as almost any
merchandise export faces intense competition from Mexico and China—both of which
saw significant currency depreciations in the past year, even more so against Canada.
In fact, the Canadian dollar’s rebound to nearly 75 cents(US) was one of the
surprising economic plot lines in 2016. As of this writing, the C$ was up almost 4%
so far this year, and about flat since the U.S. election, leaving it as one of the
Douglas Porter, CFA
Chief Economist
douglas.porter@bmo.com
416-359-4887
A
3. Page 3 of 19 Focus — December 16, 2016
Our Thoughts
strongest currencies in the world this year. That’s a remarkable turnaround, after
plunging 16% in 2015, the loonie’s second worst year on record, and only bottoming
out at a 13-year low of 68.5 cents in mid-January. The big comeback in the C$ was
led by the recovery in oil prices, which have doubled from their lows, and countered
the divergence between U.S. and Canadian monetary policies. The loonie even
managed to buck the trend of a rising US$ in the wake of Trump’s victory, thanks to
the late-year OPEC deal and the resulting jump in oil prices. Given that we don’t see
much more upside in oil in 2017, but we do see further interest rate divergence on
more Fed rate hikes, we look for the Canadian dollar to weaken on balance into the
summer. The currency could bottom out around the 72 cent level, before making a
mild recovery by late-2017, and then head back to 75-76 cents in 2018. One big wild
card on that call is oil—and recall our estimate that a $10 move in oil leads to a 3-
cent move in the loonie. Another big wild card, and it’s a new one, will be U.S. trade
policy under the Trump Administration—we don’t believe it will have a material
impact on the loonie, but are mindful of the peso’s post-election plight.
U.S. Economy: Expecting a Trump Bump Not a Bunt
016 was a humbling year for most U.S. forecasters. Going in, we thought the
economy would repeat last year’s decent performance (2.6%) amid less drag from
the high dollar. We got the trade part right, only to be gob-smacked by the downturn
in business spending (the first annual drop since the recession). Consumer spending
and residential construction also moderated, but remained healthy on a diet of low
interest rates and solid job growth. While fast-running auto sales are losing traction,
the housing market recovery shows few signs of fading, as homebuilders have not
been this upbeat since the bubble.
Businesses are expected to step up to the plate in 2017, while consumers should
continue to belt out doubles. Both will face lob balls from reductions in personal and
corporate tax rates, even as fewer deductions add some spin. A dollop of federal
infrastructure spending will also support growth, as should looser restrictions on
energy production and bank lending. While the fiscal picture remains hazy, there is a
good chance that GDP growth will pick up to a decent 2.4% following 2016’s head-
first slide into first base (circa 1.6%).
Of course, the year ahead won’t be short of drama. More fiscal stimulus and a higher
dollar imply a larger trade gap, which will keep China and Mexico squarely in
Trump’s crosshairs. If he carries through with threats to raise duties on imported
goods to close the gap, it would risk reducing American purchasing power, while
triggering retaliatory action that undermines exports. Rising interest rates will also
apply a gentle brake on demand, notably for autos, but mortgage rates would need to
jump sharply to seriously undercut affordability in most regions.
Thankfully, high interest rates are not on the radar so long as inflation remains docile
(another reason for Trump to walk back his protectionist talk). With many part-time
workers aspiring for longer hours (especially if disposable income goes up), the
economy could retain some slack even as the jobless rate drifts down to 4.3% in
2017. This, along with a firm dollar, should prevent inflation from seriously
breaching the Fed’s 2% goal, limiting the scope of policy tightening.
Sal Guatieri
Senior Economist
sal.guatieri@bmo.com
416-359-5295
2
4. Page 4 of 19 Focus — December 16, 2016
Our Thoughts
Based on the financial markets’ response, expectations are running sky-high for
Donald Trump’s policies to at least make the U.S. economy better again. We share
some of this enthusiasm… but are also mindful of possible missteps that could lead
to another disappointing year. Perhaps not since the recession have we been this
uncertain about the U.S. outlook… with possible outcomes ranging from an upper-
deck home run to a fall-down strikeout. Play ball!
Fed Policy Outlook: Finally, Upside Risk for Rates
he FOMC’s 25 bp increase in policy rates this week was completely expected;
raising the median projection for 2017 rate hikes from two to three was not.
However, we’re sticking with our two-hike call in 2017 (June and December) for the
time being. The median change didn’t reflect a widespread shift in sentiment; the
mean only increased 6 bps, comparable to a net change in about 4 of 17 projections
(it just so happens these projections were at or near the old median to begin with).
Furthermore, the median rate hike projections for 2018 and 2019 were unchanged
(three each year, consistent with our own view). And, the annual rotation of voting
regional presidents will take a dovish veer. The one-time, dissenting-in-favour-of-a-
rate-hike trio of Kansas City’s George, Cleveland’s Mester and Boston’s Rosengren,
along with St. Louis’ “lowest dot” Bullard, will be replaced by Chicago’s “uber-
dove” Evans, along with Philadelphia’s Harker (hawkish-leaning), Dallas’ Kaplan
(more centrist) and Minneapolis’ Kashkari (dovish-leaning). As such, we don’t feel a
sense of urgency to “chase the dots”.
However, with the labour market already in the “vicinity of maximum employment”
(from Chair Yellen’s presser), the risks of fiscal-policy-stoked stronger economic
growth and faster inflation are legitimately stirring tightening sentiment at the Fed…
maybe not so much in 2017, but definitely in the outer years. Despite unchanged
medians, the FOMC’s mean tightening projections for 2018 and 2019 increased 12
bps and 15 bps, respectively. The latter is comparable to a net change in about 10 of
17 projections (more widespread, but not enough of them were at or near the median
to turn the dial). And, although Yellen acknowledged that “some” participants did
incorporate “a change in fiscal policy into their projections”, a glance at the little-
changed GDP and inflation forecast medians, central tendencies and ranges suggests
there is much more “incorporating” to come, along with commensurate upturns in
tightening projections.
The risks to our Fed rate hike outlook sit squarely on the upside (for a change) and
we’ve got markers in mind for when it might be time to consider realizing these risks.
For example, once fiscal stimulus measures start being fleshed out as to timing and
magnitude, and are no longer just skeletal tweets, we’ll be better able to ascertain growth
and inflation implications. We’ll be watching core inflation closely for any breach above
the current stable ranges. Core CPI inflation has been running in the 2.1%-to-2.3% range
for the past 11 months while core PCE inflation has been running in the 1.6%-to-1.7%
range for the past 10 months. We’ll also be watching the unemployment rate, for another
notch drop or two. Among participants, 4.5% is the lowest anyone assumes for the
natural rate and 4.4% marks the cyclical low achieved in the previous economic
expansion. No matter what misgivings you might have about the jobless rate correctly
Michael Gregory,
CFA
Deputy Chief Economist
michael.gregory@bmo.com
416-359-4747
T
5. Page 5 of 19 Focus — December 16, 2016
Our Thoughts
portraying “true” slack in the labour market, these rates are simply too low to ignore.
Finally, we’ll be watching for no (potentially policy-postponing) flare-ups on the
“global economic and financial developments” front. This is a tall order, perhaps, with a
plethora of European political and policy happenings looming.
Bottom Line: America’s policy mix is being rebalanced with looser fiscal policy and
tighter monetary policy, a traditional recipe for higher bond yields and a stronger
currency. Already, 10-year Treasury yields are up about 65 bps from their election
night levels to 27-month highs (at around 2.60%). We judge we’ll take a run at 3% at
one point next year. As for the greenback, the broad, trade-weighted index hit its
highest level since the spring of 2002 this week, and is perched less than 2% away
from its record peak (February 2002 but the series only starts in 1995). We judge
we’ll also take a run at the peak at one point next year. Of course, higher longer-term
borrowing costs and a stronger dollar will act as economic headwinds and thus do
some of the FOMC’s tightening work for them. This is another way of saying that
forecasting the Fed isn’t going to get any easier in 2017.
For BoC, 2017 to Look a Lot Like 2016
he Bank of Canada enters 2017 firmly on the sidelines as they wait for a number
of uncertainties to clear up. Perhaps the biggest wildcard is the U.S. outlook.
We’ve upgraded our 2017 and 2018 forecasts for U.S. GDP as a placeholder in
anticipation of Trump-driven stimulus. That prompted a small bump in our Canada
growth forecast as well, though it brings 2017 to just 2%. That takes into account the
initial wave of better U.S. growth and fiscal stimulus, as we continue to believe that
potential growth is around 1.5% in Canada. But the Bank of Canada will not follow
our lead until there are concrete plans in place for U.S. stimulus. Trump’s
inauguration is January 20th
, so we probably won’t have a better idea on stimulus
details until March at the earliest. On the domestic front, there are plenty of
uncertainties as well—housing, federal infrastructure spending, record-high
household debt, persistent softness in non-energy exports and investment.
Those uncertainties aren’t likely to clear up until well into 2017 for the most part,
contributing to the BoC remaining sidelined. That will keep Canadian short-term
bond yields pinned down through at least the first half of the year. Decent growth
through the middle of the year, an accelerating U.S. economy, a tightening Fed and
rising U.S. Treasury yields will combine to push Government of Canada yields
higher right across the curve as well. However, Canada is expected to outperform,
tightening Canada-U.S. spreads as Poloz will not be following the Fed’s lead.
The anticipated fixed income backdrop will be a headwind for the Canadian dollar,
which we anticipate will struggle through 2017. The loonie will be facing opposing
financial market forces, with tighter Canada-U.S. spreads weighing, while rising oil
prices provide support. Looking at the bigger picture, Canada’s still-wide current
account deficit (and poor non-energy export performance) strongly suggests that the
loonie needs to weaken further, perhaps materially. These factors underpin our
forecast for the Canadian dollar to average 73 U.S. cents (C$1.37) next year, hitting
its weakest point in the second half of the year around 72 U.S. cents or C$1.385
before recovering modestly to end 2017.
Benjamin Reitzes
Senior Economist
benjamin.reitzes@bmo.com
416-359-5628
T
6. Page 6 of 19 Focus — December 16, 2016
Our Thoughts
2017: A Year Filled With Political Uncertainty
on’t look for significantly stronger 2017 growth estimates outside of North
America. In Europe, the coming year promises plenty of political uncertainty,
especially with a number of key elections on deck. Euroskeptic parties are on the rise
and, whether they win these elections or not, their growing presence is creating
nervousness throughout Europe. That unease could potentially delay capital spending
and hiring, thus slowing economic growth. In Italy, newly appointed PM Gentiloni is
presiding over a familiar cabinet (most already in place under former PM Renzi), but the
populist Five Star Movement (M5S) and the Northern League could still force an early
election. Even then, there is no guarantee those parties would win, as the ‘No’ to the
constitutional reform vote was seen as a vote against giving the Lower House too much
power, not necessarily for the M5S. If these parties are victorious, expect a referendum
on whether or not Italy stays in the euro, which spells volatility for the currency. Then
there is France, where a presidential election is set for the spring. President Hollande
will not seek a 2nd
mandate, clearing the way for others in his party to run (such as
current PM Valls). The winner will then campaign against hardline Republican
reformist Fillon—favoured to win—and the National Front’s Marine Le Pen. Both
leading candidates are extreme opposites: Fillon supports a higher retirement age, social
security cuts and a longer work week; Le Pen wants to lower the retirement age and to
guarantee the welfare safety net. In March, the Netherlands’ election will be watched
intently as Geert Wilders, head of the anti-EU, anti-immigration Party for Freedom, is
well ahead in the polls. At least there should be some continuity in Germany, where
Chancellor Angela Merkel will likely win a 4th
term in the October election. That will be
needed given the new leaders emerging in the Euro Area. Still, it won’t be an easy win,
with tough questions centred on immigration and Brexit. And of course, Brexit will be
near the top of the ‘to worry’ list. First, there is debate on whether or not there will be a
parliamentary vote on triggering Article 50; next, we have the negotiations between the
EU and the U.K. Will they be civil? The EU’s Michel Barnier optimistically estimates
that the talks will end by October 2018, leaving six months to ratify the deal. Indications
that talks are not going well may cause other Europeans to think twice about voting to
leave the euro. In any event, the euro and British pound will remain soft under these
conditions. Parity for the euro is very possible, although the ECB will be watching for
more opportunities to signal that they’re looking for the exits.
Japan’s ongoing struggle with deflation and sub-1% growth will continue. The BoJ may
have to broaden the current QQE program, while PM Abe’s government will have to face
tough decisions on immigration. China will have many hurdles to overcome. Economic
growth will likely land near the lower end of the 6.5%-to-7.0% target range next year, as
the Trump Administration is ready to pounce on signs of currency manipulation, which
could threaten trade between both countries. As 2016 draws to a close, the yuan is now
down almost 7% for the year, and remains under sustained and heavy downward pressure
amid intense capital outflows. This hefty depreciation could become a financial market
flashpoint early in the New Year. On the political front, president-elect Trump’s
unconventional views on the relationship with Taiwan (“I don’t know why we have to be
bound by a One-China policy…”) and the rest of Asia (“America first”) are certain to
create more tensions between these two superpowers.
Jennifer Lee
Senior Economist
jennifer.lee@bmo.com
416-359-4092
D
7. Page 7 of 19 Focus — December 16, 2016
Our Thoughts
Regional Growth Disparity to Narrow in 2017
anada’s regional growth landscape should become a little less rugged in 2017,
with the gap between the best and worst performers expected to narrow. British
Columbia is expected to lead the pack for a third straight year, but growth should
downshift slightly to around 2.5% alongside softer housing market activity—that will
follow three years at 3% or better. Ontario is expected to hold at a solid 2.3%, while
Quebec should accelerate for a second consecutive year, albeit to a still-modest 1.5%,
as the labour market in the province continues to shine. The story in these provinces
isn’t changing all that much, with the lagged impact of a weaker loonie, low interest
rates, fiscal stimulus and improving demographic trends (at least in B.C. and Ontario)
helping to drive above-trend economic growth.
The bigger change in 2017 will likely be an end to Alberta’s recession, which is
estimated to have caused a steep 6% decline in real GDP in the two years through
2016. Growth should return next year as oil prices are moving higher, production will
be comparably stronger to the wildfire-impacted year in 2016, while Federal and
Provincial stimulus will be flowing. In fact, it’s not inconceivable to see Alberta
posting the strongest growth performance next year, at least on a real GDP basis. The
reality, however, is that broader economic conditions (e.g., the housing market,
commercial real estate and interprovincial population flows) will continue their
adjustment, and face a much more subdued recovery than that experienced after the
Great Recession. Also, keep in mind that while maintenance capex and spending on
projects underway will support overall business investment in the oilsands, WTI in the
$50-to-$60 range is not likely sufficient to spur capital investment on new projects.
Saskatchewan and Newfoundland & Labrador are also expected to return to modest
growth, while Atlantic Canada more broadly plods along around the 1% mark.
On the fiscal front, big deficits will persist federally and in Alberta, with neither
showing any interest in balancing their budgets. For investors who have already seen
Alberta’s credit deteriorate and spreads widen significantly, there might be some
concern about still-large deficits even with oil prices back to what most would
consider equilibrium levels. On the flip side, B.C. and Quebec should continue to see
their credit improve alongside budget surpluses and falling debt-to-GDP ratios. But
the eye-catching story will likely be a balanced budget in Ontario, finally, albeit 9
years long into the expansion and masking a still-robust borrowing program.
The U.S. regional outlook looks to remain similar next year, with one exception.
That is, the rally in oil prices has lifted drilling activity, which should breathe some
life back into the hard-hit producing states. Beyond that, the broader Midwest factory
sector should remain under pressure from the strong U.S. dollar and capex downturn
in agriculture, keeping growth in the region roughly half a percentage point below the
national average. The strength will remain on the coasts, especially in the West where
job growth is robust, population growth is strong and home prices are rising at a brisk
pace.
Robert Kavcic
Senior Economist
robert.kavcic@bmo.com
416-359-8329
C
8. Page 8 of 19 Focus — December 16, 2016
Our Thoughts
Commodity Outlook: Mixed Bag, with Energy Leading
atural resources staggered into 2016 alongside most risk assets. In January,
BMO’s composite index of 19 commodities fell to its lowest level since the
financial crisis as the existing drag of widespread oversupply was compounded by
investor flight from risk and a soaring U.S. dollar. Although headlines were
dominated by the precipitous drop in oil prices, the commodity collapse was also
notable for its breadth. At the start of the year, all but one of the 19 covered goods
had lost ground during the prior three months.
Fortunately, February’s oversold lows proved to be the bottom for commodities.
Between February and June, BMO’s commodity index regained 20% amid firming
investor sentiment, a more cautious Fed, and a temporary retracement of the U.S.
dollar. Just as crude oil led the commodity collapse, it also led the rebound, as signs of
falling U.S. production and chatter about a potential OPEC/Russia output freeze
propelled a 60% advance between February and June. Precious metals also rebounded
smartly on dovish central bank pronouncements and Brexit-related demand for safe-
haven assets, while base metals posted a more muted spring recovery.
BMO’s commodity index has moved almost directly sideways during the second half
despite continued volatility in some components. WTI, which fluctuated between $40
and $52 throughout the fall, recently pushed through the top of that range and has
now roughly doubled since its February low. The base metal recovery has also
accelerated since mid-year, with ongoing economic stimulus in China spurring large
second-half gains in copper and nickel. However, these gains have been countered by
a modest step back in precious metals, the continued structural decline of uranium
prices (given rising trepidation toward nuclear power), and a supply-induced plunge
in agricultural prices (with knock-on effects on potash). Although the commodity
space is ending the year in far better shape than when it started, 14 of 19 covered
goods remain more than 30% below post-recession highs.
Looking ahead, improving supply-demand balances should lift most commodities in
2017, but gains are expected to be tempered by still-sluggish global growth, rising
U.S. interest rates, and a correspondingly stronger greenback. In the energy space,
recent production-limiting agreements could cap oil production well below recent
norms which, assuming compliance, would keep WTI on an upward trajectory. The
outlook for precious metals is highly uncertain given both upside and downside risks,
but base metals look stretched and could be ripe for a correction. In the forest
products space, stronger U.S. homebuilding activity and the expiration of the
softwood lumber agreement should support prices in 2017, while in the agriculture
sector, current crop and livestock imbalances suggest only modest upside for prices
next year. Overall, our bottom-up forecast suggests a roughly 15% advance in
BMO’s commodity index over the next year, with energy leading the way. However,
volatility is likely to remain a key feature of many markets.
Aaron Goertzen,
CFA
Senior Economist
aaron.goertzen@bmo.com
416-359-8229
N
9. Page 9 of 19 Focus — December 16, 2016
Recap
Priscilla Thiagamoorthy
Economic Analyst
priscilla.thiagamoorthy@bmo.com
416-359-6229 Good News Bad News
Canada
BoCconcerned abouthousehold
debtandhousing imbalances…
butnew mortgagerulesshould
mitigaterisks
C$ falls from 8-week high on
stronger USD and lower oil
prices
Manufacturing New Orders +0.7% (Oct.)
Manpower Survey—Net Outlook +2 ppts to
+11% (Q1)
Foreigners bought a net $15.8 bln in Canadian
securities (Oct.)
Manufacturing Sales Volumes -1.7% (Oct.)
New Motor Vehicle Sales -5.5% y/y (Oct.)
Existing Home Sales -5.3% (Nov.)
MLS Home Prices +14.4% y/y (Nov.)—too strong
Household Debt to Disposable Income Ratio 166.9%
(Q3)—record high
United States
Fed raises rates by 25 bps to
0.50%-to-0.75%, as expected
Rate path projections now
reveal 3 hikes in 2017
USD surges
Consumer Prices +1.7% y/y (Nov.)
Producer Prices +1.3% y/y (Nov.)
Initial Claims -4k to 254k (Dec. 10th week)
Current Account Deficit narrowed to $113.0 bln (Q3)
Empire State Manufacturing Survey +1.4 pts to an ISM-
adjusted 48.6 (Dec.)
Philly Fed Index -1.5 pts to an ISM-adjusted 53.8
(Dec.)—but still above 50
NAHB Housing Market Index +7 pts to 70 (Dec.)
NFIB Small Business Optimism Index +3.5 pts to 98.4
(Nov.)—2-year high
Foreignersboughtanet$9.4blnofU.S.securities(Oct.)
Retail Sales +0.1% (Nov.)—below expected
Industrial Production -0.4% (Nov.)
Housing Starts -18.7% to 1.090 mln a.r. (Nov.)
Building Permits -4.7% to 1.201 mln a.r. (Nov.)
Budget Deficit widened to $136.7 bln (Nov.)
Import Prices -0.3% (Nov.)
Manpower Survey—Net Outlook -2 ppts to +16% (Q1)
Japan
BoJ policy announcement on
deck next week
Machine Orders +4.1% (Oct.)
Producer Prices +0.4% (Nov.)
Tankan Large Manufacturing Index +4 pts to 10 (Q4)
Manufacturing PMI +0.6 pts to 51.9 (Dec. P)
Tertiary Industry Index +0.2% (Oct.)
Europe
BoE on hold... while stronger
GBP may mean “slightly
lower path for inflation”
Paolo Gentiloni becomes
new PM of Italy
Euro Area—Manufacturing PMI +1.2 pts to 54.9
(Dec. P)—highest since Apr. ’11
Euro Area—Composite PMI unch at 53.9 (Dec. P)
U.K.—Retail Sales +0.2% (Nov.)
U.K.—Average Weekly Earnings ex. Bonus
+2.6% y/y (3 mths to Oct.)
U.K.—Jobless Rate unch at 4.8% (3 mths to Oct.)
U.K.—Consumer Prices +1.2% y/y (Nov.)
U.K.—Producer Prices +2.3% y/y (Nov.)
Euro Area—Industrial Production -0.1% (Oct.)
Euro Area—Services PMI -0.7 pts to 53.1 (Dec. P)
Euro Area—Trade Surplus narrowed to €19.7 bln (Oct.)
Germany—ZEW Survey unch at 13.8 (Dec.)
Italy—Industrial Production unch (Oct.)—below
expected
U.K.—Jobless Claims +2,400 (Nov.)
U.K.—Rightmove House Prices -2.1% (Dec.)
Other
Central Bank of Mexico
raises rates by 50 bps to
5.75%
Yuan weakens to an 8½-year
low against the greenback
China—Industrial Production +6.2% y/y; Retail Sales
+10.8% y/y (Nov.)—picked up
China—FixedAssetInvestment+8.3%y/y(Jan.-to-Nov.)
China—Aggregate Yuan Financing 1.7 trln (Nov.)—and
New Yuan Loans 0.79 trln
China—M2 Growth +11.4% y/y (Nov.)
Australia—Employment +39,100 (Nov.)—all full-time
Australia—House Price Index +1.5% (Q3)
Australia—Jobless Rate up a tick to 5.7% (Nov.)
Australia—New Motor Vehicle Sales -0.6% (Nov.)
Australia—Westpac Consumer Confidence -3.9% (Dec.)
Australia—NAB Business Conditions -2 pts to 5 (Nov.)
Indications of stronger growth and a move toward price stability are good news for the economy.
10. Page 10 of 19 Focus — December 16, 2016
Feature
5 Quirky Facts for 2016; 5 Quantum Forecasts for 2017
This year saw a brand new set of concerns and surprises, but producing yet another
mildly disappointing global growth tally of 2.8%. Aside from horrid 2009, that
marked the second slowest year in the past 15. Markets stumbled out of the gate in
2016 on fears of a big devaluation in China, and amid oil prices and the Canadian
dollar skidding to their lowest levels in 13 years. Then, just as markets were finding
their balance, they were walloped with the Brexit shock, which promptly sent global
bond yields plunging to yet new all-time lows over the summer. After a brief lull
around the Rio Olympics, attention then turned four-square on the U.S. election,
which managed to produce its own shocking result. However, contrary to nearly
every forecast, markets rallied hard in the wake of the vote, with equity records
falling like dominoes. Bonds were less enthused, as expected stimulus under
president-elect Trump seems to have broken the spell of lower-for-longer which had
gripped all markets for much of 2016. The upswing in yields was compounded by
OPEC’s output cut, lifting oil to an 18-month high. Amid those many moving parts,
here are five big surprises, or most unusual economic stats, for an interesting year.
1. The U.K. was the fastest growing major industrialized economy in 2016.
Partly thanks to solid momentum heading into the mid-year Brexit vote, Britain
is on course to grow by 2% for the year, which leaves it at the top of the heap
(Chart 1). While activity was slowing in the second half, the economy seemed to
hold up much, much better than the dire pre-vote forecasts suggested. After a
quick rate cut and liquidity injection in the summer, all the talk now is when the
BoE may start to raise rates. Meantime, Italy was on track to grab the slowest-
growing title in the G7 for the second year in a row at less than 1%.
2. The weakest economies had the best performing equity markets. Brazil and
Russia remained mired in deep recession; yet, these two posted the best stock
returns in the world—with rising currencies adding an additional kick. The
Bovespa soared a cannonading 63% in US$ terms, even amid a non-stop political
scandal. In a similar, albeit less dramatic vein, Canada’s TSX turned in its second
best year of the past decade despite another period of barely 1%
GDP growth, while both the U.K. and Mexican bourses
bounced even as their currencies flailed.
3. Gold was one of weakest commodities, while coal(!!) was one
of the strongest. Some folks may actually be hoping for a lump
of coal this year. But, perhaps the big surprise was the generally
robust overall performance of commodities in 2016, even as
global growth sagged. Aside from food, most commodities had
a strong comeback year, on the hope for firmer growth in 2017.
The ranking within commodities provided an added surprise, as
the energy complex was robust—led by a snapback in met coal,
of all things, as well as natural gas. This was followed by 20%-
to-30% gains in nickel, copper and lumber, but with most
precious metals at the back of the pack, despite all the
uncertainty swirling in the geopolitical space.
2016:Q3
1.0
1.3
1.6
1.7
1.8
2.0
2.3
6.7
7.3
-2.9
-0.5
-4 -2 0 2 4 6 8
Brazil
Russia
Japan
Canada
US
Euro Area
Australia
Mexico
UK
China
India
Real GDP
Global GDP: Mixed and Still Sluggish
(y/y % chng)
Chart 1
Source: BMO Economics, Haver Analytics
14 15 16 17
World 3.4 3.2 2.8 3.1
Emerging 4.6 3.9 3.6 4.0
G7 1.8 2.0 1.5 1.7
Douglas Porter, CFA
Chief Economist
douglas.porter@bmo.com
416-359-4887
11. Page 11 of 19 Focus — December 16, 2016
Feature
4. Quebec’s jobless rate fell to a record low; almost the lowest
in the country. Even as much of Canada struggled through with
a mediocre jobs performance in 2016—it was almost alone
among the OECD to see its unemployment rate rise in the year
and job growth was solely of the part-time variety—Quebec
enjoyed a strong year. Not only did its jobless rate dip to a
record low of 6.2% by late 2016 (Chart 2), it was challenging
B.C. for the lowest rate in the country, a first for this perennial
have-not province. Unfortunately, Alberta went the other way,
with its jobless rate surging to 9.0%, moving above the
Maritimes for the first time ever.
5. Toronto condo prices posted a double-digit increase. Amid
all the noise in Canada’s housing market in 2016, and there was
plenty of noise—parabolic gains in Vancouver, then Toronto,
the B.C. tax on non-residents, and Ottawa’s moves to damp
demand—this may be the most interesting development. Many
in the industry bray about a lack of supply as the main cause of white-hot home
prices in some major cities; yet, just a few short years ago, the biggest concern
many had was the “rampant overbuilding of Toronto condos”. Turns out we
needed those condos, with prices jumping 15% y/y by late in the year, averaging
over $443,000, or more than an average house in the rest of the country. Note
that the average home price in all of Ontario rose almost $90,000 in the past 12
months alone, meaning that, for most in the province, their house likely made
more than they did last year (especially since their house didn’t pay income tax).
Given those surprises, one would be forgiven for taking any forecast with a heaping
helping of salt. But, we would point out—with all due modesty, of course—that one of our
stretch calls from last year was that Trump would win. Of course, another stretch call was
that the Fed would actually hike rates in 2016 as much as economists thought they would.
With that backdrop, here are five major trends we see developing over the course of 2017:
1. Interest rates will continue to finally turn the corner, at least in a modest
way. And we really mean it this time. We expect 10-year Treasury yields to end
2017 around 2.7%, a bit higher than current levels—if so, that would mark the
third year in a row that these yields have nudged up, something that hasn’t
happened since 1979-81 (i.e., just before the 35-year bond bull began to run).
While years of overestimating interest rates have forced many forecasters to turn
gun shy on calling for higher yields, a serious fiscal boost from the U.S. and
firmer oil prices would provide a powerful one-two punch for the recent back-up
in yields to stick. However, demographic realities have not changed, and we
believe the Fed will remain quite deliberate in their rate hikes (looking for two in
2017), so any further back-up is likely to remain relatively mild. Stretch call:
The Fed goes more than twice, actually matching their latest dot plot for 2017—
we’ll go no further than that!
2. The Mexican peso may be poised for a partial rebound. After a savaging in
2016 (Chart 3), especially after the U.S. election, the peso stabilized late in the
year and may be headed for slightly better times in 2017. The economic backdrop
2
4
6
8
10
00 02 04 06 08 10 12 14 16
Unemployment Rate
Shifting Tides
(percent : s.a.)
Chart 2
Sources: BMO Economics, Haver Analytics
Alberta
Quebec
12. Page 12 of 19 Focus — December 16, 2016
Feature
in Mexico simply does not justify the brutal 15% drop in the
peso, and the Bank of Mexico cranked rates 275 bps to support
it. Also recall that Mexico still is a small net oil exporter.
Stretch call: After being the weakest major currency in 2016,
the peso is the firmest in 2017 as markets realize Trump’s trade
ire is focused more on China.
3. Canadian growth tops consensus. Staying within NAFTA,
2017 could see a moderate turnaround for the beleaguered
Canadian economy. After two tough years for growth, Canada
could benefit from the combination of higher oil and other
commodity prices, domestic fiscal stimulus, and stronger U.S.
growth. We have nudged up our call on Canadian GDP to 2%
for next year (versus an average of just 1.1% in 2015/16),
alongside an upgrade to the U.S. at 2.4%, but there are clear
upside risks to the call if even some of the pieces fall into place.
However, we haven’t changed our view that medium-term
potential growth remains stuck at around 1½%. Stretch call: Alberta leads the
charge—firmer energy prices, fiscal stimulus, pipeline approvals, and a
bounceback from the fires could snap Alberta’s growth back to life in a hurry
(albeit starting from a very weak spot).
4. The U.S. merchandise trade deficit will widen, not narrow. Even with
president-elect Trump’s strident anti-trade rhetoric—anti-import, to be precise—
all the stars are pointing to a widening trade gap. The combination of a stronger
US$, increased fiscal stimulus (which will stimulate domestic demand) and
higher oil prices will likely swamp efforts to contain imports. The relative
strength of domestic spending is typically the single biggest driver of trade
balances, and the U.S. is poised to spend big in coming years while almost no
one else is in the same boat. Stretch call: The deficit eclipses the record $867
billion shortfall hit a decade ago, although the broader current account deficit
should stay below $600 billion (versus $490 billion in 2016).
5. The S&P 500 posts a positive total return, for the 9th
year in a row. If the
S&P manages to eke out a net gain in 2017, this would match the longest annual
winning streak of all-time (it also achieved this feat in 1991-99, amid the tech
boom). Admittedly, this streak is holding up on a technicality, as only dividends
kept equity returns in the black in 2015 and 2011, but the longevity of the bull
market is indeed impressive. Stocks will face the usual wall of worry next year,
with rates rising, robust valuations and a new array of political uncertainty. But if
the new Administration can indeed deliver even a modest helping of stimulus, a
lighter regulatory touch, some tax relief on earnings repatriation, and avoid
serious protectionism, growth could surprise on the high side. That’s not asking
too much, is it? Stretch call: TSX 18,000? (I.e., essentially a repeat performance
of the crackling gains seen in 2016.)
One to watch in the future: The current U.S. economic expansion is now the fourth
longest on record at 90 months. If it lasts through the spring of 2018, it will be the
second longest (behind only the 1991-2001 expansion, which was 10 years to the
month). If this growth phase can last until mid-2019, it will be a new record cycle.
-15.9
-15.7
-10.1
-6.7
-4.0
-2.6
-1.0
0.4
1.7
1.8
2.1
3.5
10.0
16.6
-20 -10 0 10 20
Mexico
UK
Sweden
China
Euro
Switzerland
South Korea
Australia
Norway
Japan
New Zealand
Canada
South Africa
Brazil
Since End-2015 (% chng vs US$ : as of Dec. 16, 2016, 10:00 am)
Global Currencies
Chart 3
Sources: BMO Economics, Bloomberg
14. Page 14 of 19 Focus — December 16, 2016
Key for Next Week
Canada
Canadian consumer prices likely fell 0.2% in November,
with a chunky drop in gasoline and clothing prices
weighing on the headline. Gasoline was down about 5%,
and hopefully drivers enjoyed the windfall as gas prices
have moved higher along with oil prices in December. Other energy prices—natural
gas and heating oil—were already climbing, providing some offset. Clothing prices
are seasonally weak in November; and, with the currency holding relatively steady,
there’s no reason to doubt the seasonal pattern. Our call on total CPI would push
annual inflation down a tick to 1.4%.
Statistics Canada will unveil the Bank of Canada’s new core inflation measures in
this report. Gone is CPIX8. It is being replaced by three new measures: trimmed
mean, weighted median, and common component. While the BoC has strived for
increased transparency under Governor Poloz’s leadership, the change in the core
CPI measure is a step in the other direction. Which of the three measures should we
focus on? Will the BoC just take an average? Or, will policymakers just use
whichever one fits their story best? The measures are also extremely difficult to
forecast given their construct. These series may be more stable than the old core, but
they’re far more opaque.
Retail sales likely rose 0.1% in October, with all the gains coming from a more than
5% surge in gasoline prices (seasonally adjusted). Auto sales were down on the
month according to dealer tallies, leaving ex-auto sales up a firmer 0.4%. However,
again, it’s all gasoline, as core sales (ex. autos & gas) are expected to be about flat. A
pick-up in home sales in the month could have driven some related retail activity
(think renos and furniture purchases). After a very strong start to the year, retail sales
have slowed. There’s some hope that the altered child benefit will provide a lift,
though there’s little evidence on that front yet. And, consumers continue to face
record household debt levels, which should keep spending restrained. Goods prices
were up in October, suggesting retail volumes will see a modest decline after a solid
gain in the prior month.
The Canadian economy has had four solid months of growth driven by oil production
rebounding from the wildfire-induced plunge in May. Indeed, September GDP was
surprisingly strong, but we anticipate that momentum slowed in October, with retail
and manufacturing expected to pull back. Construction likely also contracted after a
big gain in the prior month. The oil sector looks to have a bit more upside after four
months of big post-wildfire gains, but don’t expect further similar-sized increases.
Despite our call for flat October GDP, the solid handoff keeps Q4 on pace for around
1.5% to 2% growth.
Benjamin Reitzes
Senior Economist
benjamin.reitzes@bmo.com
416-359-5628
Consumer Price Index
Thursday, 8:30 am
Nov. (e) -0.2% +1.4% y/y
(-0.1% sa)
Consensus -0.1% +1.4% y/y
Oct. +0.2% +1.5% y/y
New Core CPI measures:
• trimmed mean
• weighted median
• common component
Retail Sales
Thursday, 8:30 am
Ex. Autos
Oct. (e) +0.1% +0.4%
Consensus +0.2% +0.7%
Sep. +0.6% unch
Real GDP at Basic Prices
Friday, 8:30 am
Oct. (e) unch
Consensus +0.1%
Sep. +0.3%
15. Page 15 of 19 Focus — December 16, 2016
Key for Next Week
United States
The post-election jump in interest rates had buyers rushing
to lock in mortgage rates in November, juicing sales.
Despite higher borrowing costs, nationwide affordability
remains attractive, as the median family needs just 15% of
income to service mortgage payments on a typical single-family home. Mortgage
rates would need to leap about 3 percentage points to return this ratio to longer-run
norms (of 20%; albeit less if prices continue to outrun incomes). Seasonally warm
temperatures and decent job growth also supported sales last month. Look for new
home sales to increase 1.2% to 570,000, extending an upward trend but leaving the
level well below normal with plenty of room to run. Conversely, after two strong
months, sales of existing homes likely retreated last month from elevated levels. Still,
a tight supply of listings should keep prices cruising at an above 5% pace.
Boeing sales fell back to earth in November, slicing durable goods orders. We expect
overall bookings nosedived 4%, the first descent in five months. However, with
business surveys (ISM, NFIB and Business Roundtable) indicating a healthy post-
election bounce in confidence, core capital goods orders should increase 0.5%. This
would point to the first quarterly advance in business capex in more than a year. For
GDP growth to pick up materially next year, both consumers and businesses will
need to pull their weight. The decline in business investment in 2016—the first since
the recession—was, by far, the biggest setback on the economic stage. However,
lower corporate taxes and lighter regulation should spark a turnaround in 2017.
The start of the holiday shopping season wasn’t exactly jolly, but it at least matched
last year’s decent tally. Retail receipts rose slightly in November, clipped by
aggressive promotions. Auto sales also shifted out of top gear, while unusually warm
weather clipped home heating outlays. Following two strong quarters (averaging
3.5%), consumers likely took a breather, with spending growth moderating to about
2% in Q4. But with Santa’s bag filled with lots of tax-cut goodies, a hearty rebound
is coming down the chimney next year, assuming Congress isn’t naughty. Heavy
discounting likely held core PCE prices to a minimal 0.1% gain, keeping the yearly
rate at 1.7% for a fourth straight month. This is important because rising inflation
pressure could turn the Fed into the Grinch who steals Christmas next year.
Existing Home Sales
Wednesday, 10:00 am
Nov. (e) 5.57 mln a.r. (-0.5%)
Consensus 5.52 mln a.r. (-1.4%)
Oct. 5.60 mln a.r. (+2.0%)
New Home Sales
Friday, 10:00 am
Nov. (e) 570,000 a.r. (+1.2%)
Consensus 575,000 a.r. (+2.1%)
Oct. 563,000 a.r. (-1.9%)
Sal Guatieri
Senior Economist
sal.guatieri@bmo.com
416-359-5295
Durable Goods Orders
Thursday, 8:30 am
Ex. Transport
Nov. (e) -4.0% +0.5%
Consensus -4.0% +0.2%
Oct. +4.6% +0.8%
Personal Spending and Income
Thursday, 10:00 am
Personal Personal
Spending Income
Nov. (e) +0.2% +0.3%
Consensus +0.4% +0.3%
Oct. +0.3% +0.6%
Core PCE Price Index
Nov. (e) +0.1% +1.7% y/y
Consensus +0.1% +1.8% y/y
Oct. +0.1% +1.7% y/y
17. Upcoming Policy Meetings | BoE: Feb. 2, Mar. 16, May 11 | ECB: Jan. 19, Mar. 9, Apr. 27
Global Calendar: December 19 – December 23
Monday December 19 Tuesday December 20 Wednesday December 21 Thursday December 22 Friday December 23
Japan
Trade Balance
Nov. ’16 (e)+¥227.4 bln
Nov. ‘15 -¥387.5 bln
Department Store Sales
Nov.
Oct. -3.9% y/y
All Industry Activity Index
Oct. (e) +0.1%
Sep. +0.2%
Markets Closed
BoJ Monetary Policy Meeting (Dec. 19-20)
EuroArea
E U R O A R E A
Labour Costs
Q3
Q2 +1.0% y/y
G E R M A N Y
Ifo Business Climate
Dec. (e) 110.6
Nov. 110.4
G E R M A N Y
Producer Price Index
Nov. (e) +0.1% -0.2% y/y
Oct. +0.7% -0.4% y/y
E U R O A R E A
Consumer Confidence
Dec. A (e) -6.0
Nov. -6.1
F R A N C E
Producer Price Index
Nov.
Oct. +0.8% -0.9% y/y
E U R O A R E A
ECB Economic Bulletin
I T A L Y
Industrial Orders
Oct. (e) +0.5% +2.9% y/y
Sep. -6.8% +2.6% y/y
Retail Sales
Oct. (e) +0.3% -1.1% y/y
Sep. -0.6% -1.4% y/y
G E R M A N Y
GfK Consumer Confidence
Jan. (e) 9.8
Dec. 9.8
F R A N C E
Real GDP
Q3 F (e) +0.2% +1.1% y/y
Q3 P +0.2% +1.1% y/y
Q2 -0.1% +1.2% y/y
Consumer Spending
Nov. (e) -0.1% +2.4% y/y
Oct. +0.9% +1.5% y/y
U.K.
PM May appears before
Parliamentary Committee on Brexit
GfK Consumer Confidence
Dec. (e) -8
Nov. -8
Real GDP
Q3 F (e) +0.5% +2.3% y/y
Q3 P +0.5% +2.3% y/y
Q2 +0.7% +2.1% y/y
Other
A U S T R A L I A
RBA Minutes from Dec. 6 meeting
N E W Z E A L A N D
Real GDP
Q3 (e) +0.8% +3.6% y/y
Q2 +0.9% +3.6% y/y
18. C
= consensus
D
= date approximate
R
= reopening
North American Calendar:
December 19 – December 23
Monday December 19 Tuesday December 20 Wednesday December 21 Thursday December 22 Friday December 23
Canada
8:30 am Wholesale Trade
Oct. (e) +0.5%
Sep. -1.2%
8:30 am Survey of Employment,
Payrolls, and Hours (Oct.)
Noon 2-year bond auction $3.9 bln
8:30 am Consumer Price Index
Nov. (e) -0.2% +1.4% y/y
(-0.1% sa)
Consensus -0.1% +1.4% y/y
Oct. +0.2% +1.5% y/y
Statistics Canada releases three new
measures of core CPI: trimmed mean,
weighted median, common component
8:30 am Retail Sales Ex. Autos
Oct. (e) +0.1% +0.4%
Consensus +0.2% +0.7%
Sep. +0.6% unch
8:30 am Real GDP at Basic Prices
Oct. (e) unch
Consensus +0.1%
Sep. +0.3%
Ottawa’s Budget BalanceD
Oct. ’16
Oct. ’15 -$0.9 bln
UnitedStates
9:45 am Markit Services/Composite
PMI(Dec.P)
1:30 pm Fed Chair Yellen speaks in
Baltimore on the State of
the Job Market
11:00 am 4-week bill auction
announcement
11:30 am 13- & 26-week bill auction
$62 bln 11:30 am 4-week bill auction
7:00 am MBA Mortgage Apps
Dec. 16
Dec. 9 -4.0%
10:00 am Existing Home Sales
Nov. (e) 5.57 mln a.r. (-0.5%)
Consensus 5.52 mln a.r. (-1.4%)
Oct. 5.60 mln a.r. (+2.0%)
8:30 am Initial Claims
Dec. 17 (e) 259k (+4k)
C
Dec. 10 254k (-4k)
8:30 am ContinuingClaims
Dec. 10
Dec. 3 2,018k (+11k)
8:30 am Real GDP GDP Deflator
Q3 F (e) +3.4% a.r. +1.4% a.r.
Consensus +3.3% a.r. +1.4% a.r.
Q3 P +3.2% a.r. +1.4% a.r.
8:30 am DurableGoods
Orders Ex.Transport
Nov. (e) -4.0% +0.5%
Consensus -4.0% +0.2%
Oct. +4.6% +0.8%
8:30 am Chi. Fed Nat’l Activity Index
Nov. (e) unch
Oct. -0.08
9:00 am FHFA House Price Index
Oct. (e) +0.5% +6.2% y/y
Consensus +0.3% +6.0% y/y
Sep. +0.6% +6.1% y/y
9:45 am BloombergConsumerComfort
Index–Dec.18
th
week
10:00 am Pers. Spend. Pers. Income
Nov. (e) +0.2% +0.3%
Consensus +0.4% +0.3%
Oct. +0.3% +0.6%
10:00 am Core PCE Price Index
Nov. (e) +0.1% +1.7% y/y
Consensus +0.1% +1.8% y/y
Oct. +0.1% +1.7% y/y
10:00 am Leading Indicator
Nov. (e) +0.2%
C
Oct. +0.1%
11:00 am Kansas City Fed Mfg. Activity
Dec.
Nov. 1
11:00 am 4-, 13- & 26-week bill, 2-, 5- &
7-year note, 2
R
-year FRN
auction announcements
1:00 pm 5
R
-year TIPS auction $14 bln
10:00 am New Home Sales
Nov. (e) 570,000 a.r. (+1.2%)
Consensus 575,000 a.r. (+2.1%)
Oct. 563,000 a.r. (-1.9%)
10:00 am University of Michigan
Consumer Sentiment
Dec. F (e) 98.2
Consensus 98.1
Dec. P 98.0
Nov. 93.8
Upcoming Policy Meetings | Bank of Canada: Jan. 18, Mar. 1, Apr. 12 | FOMC: Jan. 31-Feb. 1, Mar. 14-15, May 2-3
