FINANCIAL MARKETS MONTHLY
Inside...
June 11, 2014
ECB makes its move
Overview
………………………………...page 1
Interest rate outlook
………………………………...page 5
Economic outlook
………………………………...page 6
Currency outlook
………………………………...page 7
Investors scratched their heads in May as an unrelenting bid for government bonds drove yields
lower despite a relatively steady stream of US data reports showing that the economy rebounded smartly from the weather-induced drop in the first quarter of 2014. Data from other
countries, including Canada, were less unequivocal although on balance still suggest that weakness early in the year was short-lived. While the bond market rally looked to have stalled in
early June, longer-term interest rates in many markets are still close to the bottom end of the
trading range established in the past year. The world stock market index continued to rise, gaining about 4% so far in 2014. Anticipation that the European Central Bank (ECB) would act to
bolster credit creation and ease strains in the money markets in part fuelled the wide-spread
gains in financial markets. By the time the ECB announced the package of stimulative policy
measures, it was largely priced into bond markets. Central banks in Canada, Australia, and the
UK made no changes to interest rates or the near-term policy bias. Quite likely, this will also be
the case when the US Federal Reserve meets in mid-June.
Economic data surprise to upside
Central bank watch
………………………………...page 8
BOC in neutral
……………….……………….page 9
Our monitoring of the economic data shows that many of the economic reports outperformed expectations, thereby suggesting an upside risk to global growth in the second quarter. The global
composite purchasing managers’ index rose in May recording one of the higher prints in the postrecession period. While the growth readings point to increased momentum, inflation remains benign and argues against central banks altering their current easy policy stance in the near term.
Central bank near-term bias
Three-months out, policy rate
The BoC maintained a neutral bias in June as stronger than
expected inflation was offset by “slightly increased risks” to
growth. We continue to expect rates will be held steady this
year, although a tightening bias could return sooner than later.
Improving labour markets set the course for tapering to continue with new asset purchases set to end later this year. Beyond this point, we expect the fed funds rate will be held
steady well into 2015.
With inflation forecasted to remain below target this year and
next, we expect the Bank Rate will be held steady until late2015 to facilitate further absorption of labour market slack.
Dawn Desjardins
Assistant Chief Economist
416-974-6919
[email protected]
Alongside several other measures to ease policy, the ECB cut
both the refi rate and deposit rate by 10bp. We expect these
rates will be held steady over our forecast horizon.
Recent data point to momentum fading, but the broader economic outlook remains consistent with the RBA’s forecasts.
As such, we continue to expect no rate hikes until Q2/15.
Josh Nye
Economist
416-974-3979
[email protected]
We expect 25bp hikes at each of the next two RBNZ meetings
before the tightening cycle is paused to assess the effect of
higher rates.
Highlights
Financial market volatility
spikes
investors
ECB as
boosts
policyworry
stimuabout
the
global
lus, validating therecovery.
rally in
financial markets.
Data reports have erred
onUS
theeconomic
weak side.
reports point
to a solid rebound in activity
in Q2 after Q1’s disappointthere were many
ingHowever
1.0% decline.
one-off factors that curtailed activity.
Inflation ticked up in
April although is unlikely to
As these
factors higher
ease,
move
significantly
growth
will accelerate.
until economic
slack is further diminished.
The US recession was
deeper
than was
previously
The spring
bond
rally is
reported
and
GDP
output
likely done, and we expect
stands
0.4 pp
its preU.S. yields
to below
grind higher
as
recession
peak.
data confirm that the economy’s growth rate has
picked up.
First quarter was an ugly ducking….
The second estimate of US first quarter 2014 real gross domestic product (GDP)
showed a 1.0% annualized decline, which was a markedly weaker showing than the
preliminary report that indicated the economy grew at a 0.1% pace. This was the first
quarterly GDP drop since early 2011. The composition showed widespread weakness
with the pace of inventory accumulation tumbling, both residential and non-residential
investment falling, while exports slipped and imports inched higher, thereby producing
a drag from net exports in the quarter. The bright spot was consumer spending, which
posted a second consecutive quarterly gain of more than 3%. Without doubt, conditions
supporting consumer spending activity have improved, with balance sheets in good order and labour markets finally showing sustained improvement.
Much of the first quarter’s weakness reflected the effect of unusually harsh weather on
activity as evidenced by the drop in construction activity and the emergence of transportation bottlenecks that prevented the shipping of goods.
...US economy will recover smartly in Q2
The long list of negatives in the first quarter was followed by a string of strong data
reports for April and May. Car sales, housing sales and starts, durable goods orders, and
employment posted solid increases. Our forecast is for US real GDP growth of 4.2%
annualized in the second quarter. Importantly, the breadth and depth of the data’s recovery set up for the US economy to grow at an above-potential rate beyond the second
quarter’s weather-related rebound. The long-awaited pickup in consumption reflects the
positive impulses coming from a stronger labour market combined with accommodative
financial conditions. The improvement in household balance sheets reflects the recovery
in asset values while credit growth to date has been relatively limited. Thus, it is the
combination of increased employment and access to low-cost loans that will keep US
consumers spending in the quarters ahead.
Inflation lifting its head?
The rise in the headline inflation rate to 2.0% in April was in part due to increasing food
and energy prices. The core measure provides a better read on the underlying price pressures because these volatile components are excluded. Core consumer inflation ticked
upward in April to the high end of the 1.6% to 1.8% range that has been in place for 13
months. Employment gains accelerated in recent months; however, there continues to be
slack in the labour market that is inhibiting wage growth and limiting the pickup in inflation. As the pace of economic growth accelerates and the amount of spare capacity
diminishes, upward pressure will come to bear on wages and prices. This process will
take time, meaning that sharp increases in inflation are not an imminent threat. With that
said, renewed acceleration in growth will lessen the need for the Fed to continue to implement extraordinary policy measures aimed at keeping downward pressure on longerterm rates. To that end, we anticipate the unwinding of the quantitative easing program
will proceed.
Spring rally in bond market has run its course
The confluence of factors that pushed long-term interest rates lower this spring looks as
if it has run out of steam. To be sure, the rebound in the economic data after the
weather-related slump in the first quarter likely has had some influence in supporting
the rise in the 10-year rate from a recent low of 2.43%. We maintain our forecast that
the 10-year rate will end the year at 3.30% as markets anticipate that with its quantitative easing program finished, the next step will be to stop reinvesting the funds as securities mature and, eventually, to raise the policy rate.
2
Canada’s economy geared down in Q1
Canada’s first-quarter 2014 GDP report confirmed a weather-related weakening in growth
to a 1.2% annualized pace from the 2.7% increase in the final quarter of 2013. The slowing largely reflected the effect of adverse winter conditions that dampened activity across
most of the economy. Consumer spending was slower than in 2013, and housing activity,
which was already on a downward trajectory, saw the pace of decline deepen due to the
weather. Similarly, business investment fell at a quicker pace, and government spending
unexpectedly moderated. The prevalence of slower or declining activity among the major
expenditure areas contributed to a pullback in final domestic demand that posted the first
negative print since the recession. Data for April and May suggest the downward pressure
on domestic demand was transitory, with activity expected to bounce back in the second
quarter with the return of seasonal temperatures. Our current forecast assumes real GDP
growth of 3.0% at an annual rate in the current quarter.
Bank of Canada gets case of the jitters on growth outlook...
Highlights
Canada’s economy eked
out a modest 1.2% growth
rate in Q1/14 that was held
back by poor weather.
Data for April and May
The slowing in real GDP output was more than the Bank of Canada anticipated in its
April forecast, although the difference between the reported 1.2% increase and the
Bank’s 1.5% forecast was negligible. This minor underperformance did not appear to be
a major concern for the Bank according to the June rate decision, and the main tenets of
the Bank’s forecast also appeared to be little changed. With that said, the Bank raised
concerns about the near-term outlook saying that the downside risks to the global economy had taken on greater weight and suggesting that the US economy “could” have
“slightly less underlying momentum.” The combination of these factors resulted in the
Bank concluding that the downside risks to Canada’s economic outlook were “slightly
increased.”
have been mixed but on bal-
...although concerns are likely misplaced
the lows were likely reached
Our reading of the data does not suggest that downside risks either to the global or to
the US economy have increased. The broad-based recovery in the US, as discussed, is
likely to be followed by a period of above-potential growth in the second half of 2014.
Furthermore, the broadest measure of current economic conditions, the global composite purchasing managers’ index (PMI), stands at an elevated level. Barring another bout
of geopolitical uncertainty, the reduction in the amount of fiscal policy tightening, continuation of accommodative monetary policies, and persistent stock market gains are
paving the way for the global economy’s growth rate to accelerate in 2014 after easing
for three consecutive years.
in 2013.
ance support our view that
Q1’s weather-related weakening will be short-lived.
The core inflation rate
held in the lower end of the
Bank’s target band, although
The BoC signalled nervousness about the global backdrop and used this to justify
maintaining its neutral policy bias.
Inflation edging higher
Canada’s inflation rates rose in April with the headline rate hitting a two-year high
while the core rate edged upward to 1.4%, after averaging 1.3% in 2013 and the first
quarter of 2014. The rise in the headline rate to the Bank of Canada’s 2% target was
aided by higher energy costs. Energy costs continued to rise in May; however, the pace
of increase slowed, and this will likely result in the headline rate falling back below
2.0%. The core rate excludes volatile components like energy and continues to hold in
the lower end of the Bank’s 1% to 3% target band. The absence of broad-based price
pressures reflects the fact that the economy is operating with excess capacity. The
weather-related slowing in economic activity in the first quarter will likely be made up
in the second quarter, although, on net, this will leave the economy no closer to eliminating the output gap. Rather, we expect to see the output gap narrow in the second half
of 2014, thereby setting up for the core inflation rate to move closer to the 2% target
rate in 2015. This outlook supports our view that the Bank will leave the overnight rate
at 1.0% in 2014 until there is clear evidence that the economy is growing fast enough to
reduce the amount of spare capacity and support a sustained pickup in core inflation.
3
Highlights
The ECB implemented
several measures to
combat weak inflation
and the persistent contraction in lending.
The BoE is unlikely to
tighten any time soon as
significant slack remains
despite stronger growth.
Recent indicators
point to slower growth in
Australia following a
stronger than expected
Q1.
4
ECB takes action as growth and inflation disappoint
Euro area growth slowed to a 0.2% non-annualized pace in the first quarter as divergence among
member states continued with German activity picking up and Spain strengthening further while the
French and Italian economies failed to grow in the quarter. While disappointing, the result does not
change our overall assessment that a slow euro area recovery is underway, and recent PMI readings
remain consistent with our forecast for growth to pick up slightly to 0.4% in the second quarter.
With slow growth doing little to absorb excess capacity, headline inflation in the euro area slipped
back to 0.5% year over year in May from 0.7% in April. The latest ECB staff projections show
limited price pressures on the horizon, with inflation expected to average just 0.7% in 2014, lower
than March’s projection of 1.0%. This downgraded outlook was one of the driving factors that
prompted the ECB to provide further monetary policy accommodation in early June. The refi rate
and deposit rate were both cut by 10 basis points to 0.15% and -0.10%, respectively, thereby making the ECB the first major central bank to implement a negative deposit rate. To facilitate the transmission of these lower rates to the real economy, the ECB also announced new targeted long-term
refinancing operations (TLTROs) that tie the provision of longer-term ECB financing to banks’
lending to the private non-financial, non-housing sector. Additional measures included extension of
the fixed rate, full-allotment tender procedures, suspension of SMP sterilization to provide additional liquidity in money markets, and intensification of “preparatory work” related to outright purchases in the asset-backed securities (ABS) market. This package of stimulative policy measures is
aimed at supplying the necessary conditions for continued recovery in the euro area, spur lending
and limit the downside risks to the weak inflation outlook. Reflecting our expectation that key ECB
rates will be held low for long, thus anchoring the front end of the curve, we lowered our euro area
rates profile with the 10-year yield not expected to reach 2.00% until the third quarter of 2015.
Macroprudential measures more likely than BoE policy change
The second estimate of UK GDP confirmed a 0.8% non-annualized increase in the first quarter.
While the pace of growth was encouraging, the composition was likely somewhat disappointing
relative to policymakers’ expectations for a broadening out of the recovery away from consumption. Solid momentum has carried into the second quarter as PMI readings, despite moderating
slightly in May, remain at elevated levels that are consistent with solid expansion in services,
manufacturing, and construction sectors. Employment indicators continue to be particularly firm,
thereby suggesting the strong pace of improvement in labour markets is being sustained. In the
Bank of England’s (BoE) mid-May Inflation Report, labour market slack was noted to have
fallen modestly in the past three months, although most Monetary Policy Committee (MPC)
members continued to view slack as being in the range of 1.0% to 1.5% of GDP. Given this degree of slack, and expectations that inflation will remain below the BoE’s target for the next two
years, we forecast the Bank Rate being held at its current level of 0.5% until late 2015. Any policy changes in the near term are more likely to come from the Financial Policy Committee (FPC).
With home prices continuing to heat up, we see an increasing probability that the FPC will soon
step in with macroprudential measures to dampen activity in the housing sector.
Australia’s Q1 growth impresses but momentum fading
Australian economic growth of 1.1% (non-annualized) in the first quarter marked the strongest
gain in two years. The pickup was driven by a significant contribution from net trade as export
volumes grew at their fastest pace in more than a decade. Domestically, household consumption
remained solid while a pickup in residential investment offset declining business investment.
This composition confirmed that the rotation in growth from resource-driven capex to the nonmining economy is underway. That said, the pace of expansion seen earlier this year is unlikely
to be maintained with timelier indicators pointing to an easing in momentum in the second quarter. The broader outlook remains largely consistent with the Reserve Bank of Australia’s (RBA)
forecasts resulting in few changes being made to the latest policy statement. Labour market slack
and a within-target inflation outlook continue to argue for “a period of stability in interest rates,”
and we expect the RBA will stay on the sidelines with the cash rate held at 2.50% until the second quarter of 2015.
Interest rate outlook
%, end of period
Actuals
Forecast
13Q1
13Q2
13Q3
13Q4
14Q1
14Q2
14Q3
14Q4
15Q1
15Q2
15Q3
15Q4
1.00
0.98
1.00
1.30
1.88
2.50
1.00
1.02
1.22
1.80
2.44
2.90
1.00
0.98
1.19
1.86
2.55
3.07
1.00
0.91
1.13
1.95
2.77
3.24
1.00
0.90
1.07
1.71
2.49
2.97
1.00
1.05
1.10
1.70
2.45
3.00
1.00
1.10
1.30
2.05
2.75
3.30
1.00
1.10
1.50
2.35
3.00
3.50
1.00
1.10
1.70
2.65
3.20
3.70
1.25
1.35
2.00
2.85
3.35
3.85
1.50
1.60
2.40
3.05
3.55
4.10
1.75
1.85
2.60
3.30
3.85
4.30
0.13
0.07
0.25
0.77
1.87
3.10
0.13
0.04
0.36
1.41
2.52
3.52
0.13
0.02
0.33
1.39
2.64
3.69
0.13
0.07
0.38
1.75
3.04
3.96
0.13
0.05
0.44
1.73
2.73
3.56
0.13
0.05
0.45
1.75
2.75
3.70
0.13
0.05
0.65
2.00
3.05
4.00
0.13
0.05
0.85
2.25
3.30
4.25
0.13
0.05
1.05
2.50
3.50
4.45
0.13
0.05
1.30
2.75
3.70
4.55
0.13
0.10
1.65
3.00
3.90
4.70
0.50
0.20
2.05
3.35
4.20
4.90
0.50
0.21
1.78
0.50
0.39
2.44
0.50
0.46
2.73
0.50
0.57
3.04
0.50
0.71
2.73
0.50
0.60
2.70
0.50
0.70
3.00
0.50
0.80
3.25
0.50
1.00
3.40
0.50
1.25
3.60
0.50
1.50
3.80
0.75
1.75
4.10
0.75
-0.02
1.28
0.50
0.19
1.73
0.50
0.17
1.78
0.25
0.21
1.94
0.25
0.17
1.57
0.15
0.10
1.40
0.15
0.10
1.60
0.15
0.10
1.75
0.15
0.10
1.80
0.15
0.10
1.90
0.15
0.10
2.00
0.15
0.10
2.25
3.00
2.83
3.42
2.75
2.58
3.76
2.50
2.57
3.81
2.50
2.68
4.23
2.50
2.78
4.08
2.50
2.80
4.00
2.50
3.00
4.30
2.50
3.30
4.65
2.50
3.50
5.00
2.75
3.75
5.30
3.00
4.00
5.50
3.25
4.30
5.90
2.50
2.43
3.52
2.50
2.85
4.16
2.50
3.01
4.59
2.50
3.81
4.74
2.75
4.01
4.62
3.25
3.90
5.00
3.50
4.00
5.30
3.50
4.10
5.50
3.75
4.10
5.80
4.00
4.20
6.10
4.00
4.40
6.30
4.00
4.60
6.50
88
162
157
130
59
109
122
216
205
154
118
131
136
231
227
161
124
158
164
266
247
173
155
93
142
229
202
140
130
61
135
230
210
130
120
110
145
240
230
150
130
130
150
245
245
165
135
140
150
245
240
170
150
170
135
240
235
180
155
190
115
225
230
190
150
190
125
215
235
215
160
190
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
Refi 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
Refi rate
0.15
0.25 June 11, 2014
Canada
Overnight rate
1.00
0.75
September 8, 2010
Australia
Cash rate
2.50
2.75 August 7, 2013
0.50
1.00
March 5, 2009
New Zealand
Cash rate
3.00
2.75 April 24, 2014
United Kingdom Bank rate
Source: Bloomberg, Reuters, RBC Economics Research
5
Economic outlook
Growth outlook
% change, quarter-over-quarter in real GDP
Canada*
United States*
United Kingdom
Euro Area
Australia
New Zealand
13Q1
13Q2
13Q3
13Q4
14Q1
14Q2
14Q3
14Q4
15Q1
15Q2
15Q3
15Q4
3.0
1.1
0.4
-0.2
0.5
0.6
1.9
2.5
0.7
0.3
0.8
0.1
3.0
4.1
0.8
0.1
0.6
1.0
2.7
2.6
0.7
0.3
0.8
0.6
1.2
-1.0
0.8
0.2
1.1
0.7**
3.0
4.2
0.6
0.4
0.6
0.6
2.8
3.1
0.6
0.3
0.5
0.6
2.7
3.3
0.5
0.3
0.6
0.6
2.7
3.3
0.6
0.3
0.9
0.6
2.5
3.1
0.6
0.3
0.9
0.6
2.4
3.0
0.6
0.3
0.9
0.6
2.2
2.9
0.6
0.3
0.9
0.6
2012A 2013A 2014F
1.7
2.8
0.2
-0.6
3.6
2.6
2.0
1.9
1.9
-0.4
2.4
2.7
2015F
2.4
2.3
2.9
1.0
3.2
3.0
2.7
3.2
2.4
1.2
3.1
2.4
2012A 2013A 2014F
2015F
*Seasonally adjusted annualized rates; **forecast
Inflation outlook
% change, year-over-year
13Q1
13Q2
13Q3
13Q4
14Q1
14Q2
14Q3
14Q4
15Q1
15Q2
15Q3
15Q4
0.9
1.7
2.8
1.8
2.5
0.9
0.8
1.4
2.7
1.4
2.4
0.7
1.1
1.6
2.7
1.3
2.2
1.4
0.9
1.2
2.0
0.8
2.6
1.6
1.4
1.4
1.8
0.7
2.9
1.7
1.9
1.9
1.7
0.6
3.1
1.8
1.6
1.6
1.6
0.4
2.7
1.8
1.7
1.7
1.8
0.6
2.4
2.0
1.6
1.9
1.7
0.8
2.5
2.2
1.6
1.9
1.8
0.9
2.6
2.3
1.9
1.9
1.8
0.9
2.6
2.3
2.0
2.0
1.6
0.9
2.8
2.4
Canada
United States
United Kingdom
Eurozone
Australia
New Zealand
1.5
2.1
2.8
2.5
1.8
1.1
0.9
1.5
2.6
1.3
2.4
1.1
1.6
1.7
1.7
0.6
2.8
1.8
1.8
1.9
1.8
0.9
2.7
2.3
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
Bank of Canada core CPI
2
1
Current period
Period ago
Year ago
Three-month trend
Six-month trend
Apr.
0.2
1.4
2.4
1.3
Apr.
0.2
1.4
1.4
1.3
United States
Core PCE
United Kingdom
All-items CPI
Apr.
0.3
1.7
2.1
1.7
Eurozone
All-items CPI
Apr.
0.0
0.7
1.1
0.2
Australia
Trimmed mean
Q1
0.5
2.6
N/A
N/A
New Zealand
CPI
Q1
0.3
1.5
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
Forecast
Actuals
Canadian dollar
Euro
U.K. pound sterling
New Zealand dollar
Japanese yen
Australian dollar
13Q1
13Q2
13Q3
13Q4
14Q1
14Q2
14Q3
14Q4
15Q1
15Q2
15Q3
15Q4
1.02
1.28
1.52
0.84
94.2
1.04
1.05
1.30
1.52
0.77
99.1
0.91
1.03
1.35
1.62
0.83
98.3
0.93
1.06
1.38
1.66
0.82
105.3
0.89
1.11
1.38
1.67
0.87
103.2
0.93
1.10
1.37
1.65
0.84
99.0
0.91
1.13
1.34
1.65
0.85
99.0
0.92
1.15
1.30
1.63
0.85
100.0
0.92
1.16
1.28
1.64
0.84
103.0
0.90
1.17
1.27
1.65
0.83
105.0
0.88
1.17
1.26
1.59
0.81
107.0
0.86
1.18
1.25
1.56
0.80
110.0
0.85
13Q1
13Q2
13Q3
13Q4
14Q1
14Q2
14Q3
14Q4
15Q1
15Q2
15Q3
15Q4
1.30
1.55
0.85
92.6
1.06
1.37
1.60
0.82
94.4
0.96
1.39
1.67
0.86
95.3
0.96
1.47
1.76
0.88
98.9
0.95
1.52
1.84
0.96
93.4
1.02
1.51
1.82
0.92
90.0
1.00
1.51
1.87
0.96
87.6
1.04
1.50
1.87
0.98
87.0
1.06
1.48
1.90
0.97
88.8
1.04
1.49
1.93
0.97
89.7
1.03
1.47
1.87
0.95
91.5
1.01
1.48
1.84
0.94
93.2
1.00
Canadian dollar cross-rates
EUR/CAD
GBP/CAD
NZD/CAD
CAD/JPY
AUD/CAD
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
1.70
1.20
1.60
1.10
1.50
1.40
1.00
1.30
1.20
0.90
1.10
0.80
Jun-13
1.00
Dec-13
Jun-14
Dec-14
Jun-13
Dec-13
Jun-14
Dec-14
U.K. pound
Japanese yen
2.00
116
106
1.80
96
1.60
86
1.40
76
66
Jun-13
Dec-13
Jun-14
Dec-14
1.20
Jun-13
Dec-13
Jun-14
Dec-14
7
Central bank watch
Bank of Canada
• Q1 growth slowed to an annualized 1.2%,
disappointing both market and BoC forecasts as
final domestic demand contracted for the first
time since the recession.
• Headline and core inflation have come in
slightly stronger than the latest BoC projections,
although downside risks to the inflation outlook
were still judged to be “as important as before”
supporting the Bank’s neutral policy bias.
Canadian real GDP growth
• Strong job growth and a falling unemployment rate show that a solid recovery in labour
markets is underway. However other indicators
point to slack persisting and argue for the fed
funds rate to be held steady beyond the end of the
asset purchase program expected later this year.
7
Forecast
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
2014
2015
Forecasted values:
Source: Statistics Canada, RBC Economics Research
Federal Reserve
• We expect growth will bounce back from
Q1’s weather-related slowdown with a 4.2% annualized gain forecast for Q2.
0
2002
U.S. real GDP growth
• The degree of slack in the economy has narrowed slightly but remains relatively significant;
along with below-target inflation, this will likely
see the BoE hold rates steady until late 2015.
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
U.S. target rate
7
Forecast
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
2014
2015
Forecasted values:
Source: Bureau of Economics Analysis, RBC Economics Research
0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Source: Bank of Canada, Federal Reserve Board, RBC Economics Research
ECB refi rate
Eurozone GDP
%
7
1.5
Forecast
1.0
6
0.5
5
0.0
-0.5
4
-1.0
3
-1.5
-2.0
2
-2.5
1
-3.0
-3.5
0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Forecasted values:
Source: Eurostat, RBC Economics Research
Bank of England
• Solid momentum has carried into Q2, and
employment indicators point to further improvement in labour markets.
2004
%
Quarter-over-quarter annualized % change
% change, quarter-over-quarter
• The ECB implemented several measures to
ease monetary policy, including rate cuts. Consistent with ECB guidance that rates will remain low
for “an extended period of time,” we expect no
rate hikes over our forecast horizon.
2003
Source: Bank of Canada, Federal Reserve Board, RBC Economics Research
8
European Central Bank
• Growth disappointed with a 0.2% nonannualized gain in Q1, but PMI readings remain
consistent with our forecast for a 0.4% rise in Q2.
Canadian overnight rate
%
Quarter-over-quarter annualized % change
8
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Source: ECB, RBC Economics Research
U.K. policy rate
U.K. real GDP growth
% change, quarter-over-quarter
%
1.5
7
Forecast
1.0
6
0.5
5
0.0
4
-0.5
3
-1.0
2
-1.5
1
-2.0
0
-2.5
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Source: Bank of England, RBC Economics Research
Source: Central Statistical Office, RBC Economics Research
Australia and New Zealand
• Australia’s Q1 growth surpassed market expectations, but recent indicators point to momentum slowing in Q2. Inflation is expected to remain within the RBA’s 2–3% target range and
the RBA is likely to hold the cash rate steady
throughout 2014.
• We forecast 25bp hikes in June and July before the RBNZ pauses to evaluate the effect of
higher rates.
8
Australia and New Zealand GDP growth
2.5
Australia and New Zealand inflation
% change, quarter-over-quarter
7
% change, year-over-year
Forecast
2.0
Australia
Forecast
New Zealand
6
1.5
5
1.0
4
0.5
3
0.0
2
-0.5
1
-1.0
Australia
-1.5
New Zealand
0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: Australian Bureau of Statistics, Statistics New Zealand, RBC Economics Research
2012
2013
2014
2015
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: Australian Bureau of Statistics, Statistics New Zealand, RBC Economics Research
2012
2013
2014
2015
Bank of Canada in neutral
Canada’s headline inflation rate touched 2% in April, and the
core measure crept up to 1.4%. Slack in the economy will
likely prevent the core rate from hitting 2% until 2015.
Canada’s economy in Q1 suffered a hit from unseasonably cold
and wet weather. Recent data point to a recovery in Q2, with a
strengthening in the US likely to spur a pickup in exports.
Canada: Inflation
Canada's real GDP growth
% change, year-over-year
Quarter-over-quarter % change, annualized rate
3.5
Forecast:
7
3.0
Forecast
BoC inflation target
6
5
2.5
4
2.0
3
1.5
2
1.0
1
0.5
Core
0
Headline
-1
0.0
2011
2012
2013
2014
2011
2015
2012
2013
2014
2015
Source: Statistics Canada, RBC Economics Research
Source: Statistics Canada, RBC Economics Research
The Bank indicated that household balance sheets are still a
high risk to the economic outlook. Credit growth has slowed
although this has not be sufficient to reduce the debt-to-income
ratio materially.
The currency’s decline was partly responsible for the pickup in
inflation according to the Bank of Canada. We expect the currency will depreciate further as the US dollar regains ground.
Canada: Total Household Credit
Canadian Dollar
Year-over-year, % change
US$/C$
7.0
1.10
6.5
1.05
6.0
1.00
5.5
0.95
5.0
0.90
4.5
0.85
4.0
0.80
3.5
0.75
3.0
Jan 2011
Forecast
Parity
0.70
Jul 2011
Jan 2012
Source: Bank of Canada, RBC Economics Research
Jul 2012
Jan 2013
Jul 2013
Jan 2014
Jan 11
Jul 11
Jan 12
Jul 12
Jan 13
Jul 13
Jan 14
Jul 14
Jan 15
Jul 15
Source:Bank of Canada, RBC Economics Research
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.
9