The Week Ahead April 6-10, 2015 CIBC World Markets Inc. CIBC World Markets • Population (billions) 1.8 1.6 1.4 1.2 1.0 Forecast 0.8 China 0.6 India 0.4 PO Box 500, 161 Bay Street, Brookfield Place, Toronto, Canada M5J 2S8 Corp 300 Madison Avenue, New York, NY 10017 • • • Bloomberg @ CIBC (212) 856-4000, • 2050 http://research.cibcwm. com/res/Eco/EcoResearch. html That’s going to be critical if Modi is to achieve another of his objectives, which is to follow China’s example by becoming a major manufacturing hub. India’s earlier economic wins were in services, where ports, Follow the People: India to Surpass China 2040 Modi came to office with a reformist agenda. His government’s first budget wasn’t quite a shock and awe document, but took steps towards tax reform (including a GST), pledged to address the underground “black money” economy, and started on the road to developing the infrastructure needed in a modern economy. Still, there’s much to be done in terms of improving the country’s networks for electric power and sanitation, removing land access impediments to such projects, and other major reforms. 2030 “...the economic opportunity that India could represent for Canada deserves a longer look.” Our Indo-Canadian business community has useful links to its home country, but the trade data suggest that we have yet to really capitalize on them. Let’s hope that as Mr. Modi comes to town, we do more than just create political photo ops, and use this as an opportunity to get moving on Canada-India trade. We’ll need more than just a cheaper loonie to shift growth from housing and debt-financed consumption to trade and capital spending. 2020 For those with more foresight, the economic opportunity that India could represent for Canada deserves a longer look. In terms of emerging markets, it’s been all about China, which is not only by far the largest such economy, but the only one that has really seen much in the way of growth as a destination for Canadian exports. But India actually outgrew China in the fourth quarter, has been easing interest rates, and looking ahead, its bulging population suggests that India could have more promise (Chart). Nick Exarhos (416) 956-6527 [email protected] For Canadian business, even though India is now saying it wants to be a net exporter of high-value-added goods down the road, the materials, engineering and even financial services needed for an infrastructure take-off should not be overlooked. Canada recently renewed negotiations towards a “CanadaIndia Comprehensive Economic Partnership Agreement”. But these talks have dragged on since 2010, with little to show for them. 2010 Andrew Grantham (416) 956-3219 [email protected] roads, and rails aren’t major issues. A “Make in India” plan will stumble if a growing workforce isn’t accompanied by reliable electricity and transportation networks. 2000 Benjamin Tal (416) 956-3698 [email protected] In the coming days, India will have its 15 minutes of fame in Canada’s business press. Not because it’s suddenly a key player in Canada’s trade, as only 0.7% of our exports are destined there, but because Prime Minister Modi is scheduled for an official visit on April 14-16, after which the subcontinent will no doubt move to the occasional back page reference. 1990 Avery Shenfeld (416) 594-7356 [email protected] by Avery Shenfeld 1980 ECONOMICS Mr Modi Comes to Town (416) 594-7000 (800) 999-6726 Friday April 10 Thursday April 9 Wednesday April 8 Tuesday April 7 Monday April 6 ` (Mar) (L) CIBC (Mar) (M) (Mar) (H) (Mar) (H) NOVA SCOTIA BUDGET 8:15 AM HOUSING STARTS SAAR 8:30 AM UNEMPLOYMENT RATE EMPLOYMENT CHANGE 6.8% 5.0K 188K 2.7% H, M, L = High, Medium or Low Significance (Feb) (M) (Feb) (L) 8:30 AM BUILDING PERMITS M/M NEW HOUSING PRICES M/M AUCTION: 5-YR CANADAS $3.3B AUCTION: 3-M BILLS $5.9B, 6-M BILLS $2.3B, 1-YR BILLS $2.3B CASH MANAGEMENT BUYBACK (Jun'15 - Jun'16) - $1.0B 10:30 AM BoC Business Outlook and Senior Loan Officer Surveys 10:00 AM IVEY PMI CANADA 0.1% 6.8% -1.0K 156K -12.9% -0.1% 49.7 Prior (Mar) 10:00 AM ISM - NON-MANUFACTURING (Feb) (Apr 3) 2:00 PM TREASURY BUDGET 8:30 AM IMPORT PRICE INDEX M/M 10:00 AM WHOLESALE INVENTORIES M/M 8:30 AM CONTINUING CLAIMS INITIAL CLAIMS (Mar) (Mar) (Feb) (Mar 28) (Apr4) Speaker: 9:30 AM William C. Dudley (New York, Vice Chairman) AUCTION: 30-YR TREASURIES $13B (prev) 2:00 PM Minutes of Mar 17-18th FOMC Meeting 7:00 AM MBA-APPLICATIONS Speaker: 8:50 AM Narayana Kocherlakota (Minneapolis) AUCTION: 10-YR TREASURIES $21B (prev) 3:00 PM CONSUMER CREDIT Speaker: 8:30 AM William C. Dudley (New York, Vice Chairman) AUCTION: 4-WEEK BILLS $40B (prev) AUCTION: 3-YR TREASURIES $24B (prev) (Mar) (Mar) 9:45 AM MARKIT US COMPOSITE PMI Final MARKIT US SERVICES PMI Final AUCTION: 3-M BILLS $24B, 6-M BILLS $24B UNITED STATES (L) (L) (L) (L) (H) (L) (L) (M) (L) (L) Speaker: 12:20 PM Narayana Kocherlakota (Minneapolis) Speaker: 8:30 AM Jeff Lacker (Richmond) SAAR = Seasonally Adjusted Annual Rate Consensus Source: Bloomberg Consensus CIBC -$43.0B -0.5% 0.1% 2405K 286K $13.5B 56.8 Consensus -$192.3B 0.4% 0.2% 2325K 268K 4.6% $11.6B 56.9 58.5 58.6 Prior Week Ahead Calendar And Forecast CIBC World Markets Inc. The Week Ahead—April 6-10, 2015 Week Ahead’s Market Call by Nick Exarhos and Andrew Grantham In Canada, the next issue of the Bank of Canada’s business outlook survey is due out on Monday, its release having gained importance since the official survey of business investment intentions has been delayed until the summer. The week ends with Canadian employment figures for March, where we expect a lacklustre 5K reading to keep the unemployment rate steady at 6.8%. That stability will mask what could be more concentrated provincial weakness out west, where we have already seen a deterioration in employment. Housing starts for March, also due on Friday, should see a bounce back to 188K after a weather-related dip in February. In the US, markets will have plenty of time to digest the non-farm payrolls release as they re-open after Easter, with nothing in terms of major data releases on the menu for next week. The minutes from the last FOMC meeting will give further clues as to what hurdles the US economy still has to negotiate before policymakers begin a liftoff on rate hikes. 3 CIBC World Markets Inc. The Week Ahead—April 6-10, 2015 Week Ahead’s Key Canadian Number: Labour Force Survey—March 100 (Friday, 8:30 a.m.) Nick Exarhos (416) 956-5427 Employment Unemployment Rate CIBC MktPrior Canadian Employment 000s 8.0 50 7.5 0 7.0 -50 6.5 -100 Feb-13 5.0K na-1K 6.8% na 6.8% % Aug-13 Feb-14 Month/Month Chg (L) Aug-14 6.0 Feb-15 Jobless Rate (R) Source: Statistics Canada, CIBC the unemployment rate have already started to slip. Developments out west will be an important detail in the next report that we’ll keep an eye on. Last month’s Labour Force Survey didn’t provide many fireworks, with the 1K drop not far from our expectations for a humdrum 5K retrenchment. We favour somewhat of a repeat performance in March. Despite the softening economic backdrop, employment likely increased by 5K, a lacklustre reading, but perhaps just good enough to leave the unemployment rate steady at 6.8%. F o re c a s t I m p l i c a t i o n s — T h o u g h t h e n a t i o n a l unemployment rate won’t see a dramatic increase, a widening in the output gap would suggest that we head near, or slightly above, 7% on the unemployment rate some time this year. We’re not likely to be so lucky further out in the year, as budget cutbacks are more fully felt in private payrolls. But we remain mindful that much of the weakness in the labour market will be a regional story, not a national one. We’ve already seen cracks in employment in Alberta and Saskatchewan, where top of the class grades on Market Impact—We don’t have the consensus at the time of writing, but given other recent news, we doubt that markets will be shocked by a lacklustre hiring figure. Other Canadian Releases: Housing Starts—March (Friday, 8:15 a.m.) Colder-than-normal weather in February had housing starts slip beneath the level that residential building intentions would have suggested. But for March, an unused backlog of permits should be a reason for starts to snap back to 188K, not far from the pace which is likely to persist for the year as a whole. Lower interest rates and demographic forces leave us sanguine on housing prospects in Canada for 2015, but since the trend is sideways, the economy won’t be able to rely much on residential investment as a growth catalyst. For building permits data due out on Thursday, we’re calling for a 2.7% increase in February, after a sizeable drop the prior month. 4 CIBC World Markets Inc. The Week Ahead—April 6-10, 2015 There are no US Key Numbers this week. 5 CIBC World Markets Inc. The Week Ahead—April 6-10, 2015 Equity Insights Nick Exarhos S&P Earnings Story Still Intact Ex-Energy Q1 Expected EPS Growth Goes Negative (L), But Forecasted Trend in Earnings Ex-Energy Still Higher (R) Jan-15 Sep-14 May-14 Jan-14 Sep-13 May-13 Blended Forward 12-mo Earnings Expectations 120 Index 2013=100 118 116 114 112 110 108 106 104 102 S&P 500 100 Ex-Energy 98 Jan-13 22-Mar 12-Mar 20-Feb 02-Mar 31-Jan 10-Feb 01-Jan 21-Jan 15Q1 Estimated YoY EPS Growth (%) 8 7 6 5 4 3 2 1 0 -1 -2 11-Jan As the first quarter has come to a close, the juggernaut that was to be the US economy hasn’t been unscathed from continued softness abroad and a surging exchange rate which has further hamstrung American exports. A stronger greenback has also dampened repatriated foreign earnings for members of the S&P, one reason why forecasts on quarterly earnings have come down dramatically. However, we aren’t yet ready to paint everything black. Though the S&P 500 isn’t as oily as the TSX, the collapse in crude has also played a role in weighing down expected earnings stateside. Stripping out the energy sector, the earnings trend for US-listed firms appears to have weathered the Q1 storm better than some of the headlines would have suggested. Source: Bloomberg, CIBC US Consumers Saving, For Now US Savings Rate Higher, But Now Back In Line With Longer-Term Average There are also reasons to believe that as spring rolls around, economic activity may see a quicker-thanexpected thaw. Though the consumer has disappointed, with households pocketing savings at the pumps instead of spending them at the mall, we may be poised to see better days ahead for retailing. The savings rate has zoomed higher recently, but it now appears to be in line with levels that prevailed before the 2013 changes in the tax code which had whipsawed saving and spending decisions. With new jobs steadily accumulating, and more meaningful wage gains likely to soon follow, the consumer could be the key in making up for a slow start in 2015. Savings Rate (% of Disposable Income) 11 10 Tax Changes 9 8 7 6 5 Avg '10 to mid-'12 4 Jan-15 Sep-14 Jan-14 May-14 Sep-13 May-13 Jan-13 Sep-12 May-12 Jan-12 Sep-11 May-11 Jan-11 Sep-10 May-10 Jan-10 3 Source: BEA, CIBC TSX vs S&P Dividend Payouts Though dividend cuts have dominated recently as the fall in oil has depleted energy company revenues, there are still some sectors in the Toronto Composite that are better positioned to deliver cashflows to investors than their counterparts stateside. Comparing dividend payout ratios, amounts paid out of earnings from Canada’s telecoms trail what’s being shared with holders in the US, ditto for consumer staples. But dividend hikes from Canadian consumer names, along with companies from other TSX sectors, could be an important selling point for investors as they insulate their portfolios from pain in the energy sector. That will be increasingly important as maintaining current distributions from energy companies will be reliant on an eventual rebound in oil prices. TSX and S&P 500 Payout Ratios By Sector Dividend Payout Ratio (% Earnings) Utilities Energy Financials Industrials TSX S&P 500 Infotech Cons Staples Telecoms Cons Disc 0 6 50 100 150 Source: Bloomberg, CIBC CIBC World Markets Inc. The Week Ahead—April 6-10, 2015 Currency Currents Andrew Grantham Canadian Trade—Diversity Deteriorates Trade Not Diversifying Away From US (L), as Exports to Key EM’s Deteriorate (R) A weaker C$ should be supporting Canadian exports not just to the US but also more broadly. Unfortunately, over the past year that doesn’t appear to have been the case. The US, which accounts for around three-quarters of Canadian exports in any given month, has accounted for a similar proportion of the growth over the past 12 months as well. We highlighted a while ago that the only emerging market that was becoming more important for Canada’s trade was China—and it appears that a slowing there has hurt exports. Unfortunately, there hasn’t been much improvement in trade to other emerging markets to compensate. That’s one chip on the side of looking for a bit more downside for the loonie while oil is still soft. Share of US in Cdn Exports 80% Change in Past Yr (Mn) 800 75% 400 70% 0 -400 65% -800 -1200 Prop. Chg Past Year Prop. of Exports 60% Brazil China HK India Indonesia Mexico S. Korea Taiwan -1600 Source: Statistics Canada, CIBC QE Shifts Euro Away From Economic Reality Euro-US$ Diverges From Economic Surprise Indexes 1.6 100 1.5 50 1.4 0 1.3 Mar-15 Mar-13 Mar-12 Sep-14 1 Mar-14 -150 Sep-13 1.1 Sep-12 1.2 Sep-11 -50 -100 EZ Surprise Index Minus US Surprise Index (L) EURUSD (R) Source: Bloomberg, Citi, CIBC USDJPY at Levels Similar to 2004-07 (L), But Export Growth Nowhere Near That Period (R) Not Much to Show For Yen Weakness 130 USDJPY 8 120 4 100 90 2 80 0 70 -2 Feb-15 Jul-13 Dec-11 Oct-08 May-10 Mar-07 Aug-05 60 7 Y/Y Growth Real Exports (%) 6 110 Jan-04 The yen has slumped by more than 35% over the past three years or so against the US$, and depreciated appreciably against other major currencies as well. Yet so far there’s still little to show for it in terms of exports. Admittedly, export volumes have stopped falling, as was the case in the early part of the global recovery when the yen was much stronger. However, a mere 0.5% rise for 2014 vs 2013, is a far cry from the 6% or so increases that were being seen between 2004-07 when the yen was at similar levels. Part of that is weakness in global demand growth relative to that period, but there may still be a case for the yen to depreciate further to make Japan more competitive in the global landscape as well. 150 Mar-11 Just looking at the change in the euro over the past 3-6 months and you’d have thought that the economy was back in recession. It’s true, the situation is still pretty bleak in many countries. But the trend is improving, and generally beating downbeat expectations. As a result, the EURUSD exchange rate and relative difference between the surprise indexes in the two countries has diverged widely. That doesn’t mean that the euro will strengthen rapidly from here, as part of the reason for previous economic disappointments was that the euro was overvalued at a 1.30-1.40 rate. But the encouraging trend within the economy should limit downside pressure in the near term and position us for a modest strengthening in the euro towards year-end. -4 Avg '04- Avg '1107 13 2014 Source: Bloomberg, SBJ, CIBC CIBC World Markets Inc. The Week Ahead—April 6-10, 2015 CANADIAN RELEASE AND EVENT DATES March/April 2015 MONDAY TUESDAY 30 INDUSTRIAL PRICES 8:30 AM M(NSA) Y DEC -1.6-0.4 JAN -0.3-2.1 FEB 1.8-1.6 WEDNESDAY 31 THURSDAY FRIDAY 2 1 GDP BY INDUSTRY 8:30 AM (2002$) GDPIND.PROD. MM NOV-0.2 -0.8 DEC0.3 0.4 JAN-0.1 0.4 MERCHANDISE TRADE 8:30 AM $MN 12 MO. BALANCE DEC -9864,553 JAN -1,4753,016 FEB -9841,394 3 GOOD FRIDAY (HOLIDAY) (Markets Closed) PAYROLL EMPLOYMENT, EARNINGS & HOURS 8:30 AM 7 6 INTERNATIONAL RESERVES 8:15 AM $BN $BN CHANGELEVEL JAN 0.13774.8 FEB-0.06974.8 MAR 9 8 NEW HOUSING PRICE INDEX 8:30 AM BUILDING PERMITS ($) 8:30 AM M M (RES)(NON-RES) DEC 1.515.0 JAN -7.0-22.8 FEB BUSINESS CONDITIONS SURVEY 8:30 AM Nova Scotia Provincial Budget IVEY PURCHASING MANAGERS’ INDEX 10:00 AM 13 14 16 15 SURVEY OF MANUFACTURING 8:30 AM SHIPMENTS M Y DEC 1.65.0 JAN -1.72.9 FEB Bank of Canada Interest Rate Announcement Bank of Canada Monetary Policy Report 21 LABOUR FORCE SURVEY 8:30 AM AVG EMPLOYUNEMP HRLY (HSHOLD) RATEEARN MY%Y JAN0.20.7 6.62.1 FEB0.00.7 6.81.7 MAR 17 RETAIL TRADE 8:30 AM (Current$) MY DEC -1.84.0 JAN -1.71.2 FEB CONSUMER PRICE INDEX 8:30 AM M(NSA) Y JAN -0.21.0 FEB 0.91.0 MAR INT’L TRANSACTIONS IN SECURITIES C$BN, NET 8:30 AM BONDS MONEY S TOCKSTOT MARKET DEC-8.5 2.0 -7.0 -13.5 JAN 10.5 -5.81.05.7 FEB BoC Governor Poloz and Sr. Dep. Gov. Wilkins attend press conference at 11:15 AM ET 20 10 HOUSING STARTS 8:15 AM 000’s (AR) TOTAL SINGLES JAN187 57 FEB156 55 MAR 22 23 24 30 1 WHOLESALE TRADE 8:30 AM Canadian Federal Budget 27 28 29 INDUSTRIAL PRICES 8:30 AM M(NSA) Y JAN -0.3-2.1 FEB 1.8-1.6 MAR GDP BY INDUSTRY 8:30 AM (2002$) GDPIND.PROD. MM DEC0.3 0.4 JAN-0.1 0.4 FEB PAYROLL EMPLOYMENT, EARNINGS & HOURS 8:30 AM WAGE SETTLEMENTS 10:00 AM (%) PVT. PUB.TOT. JAN 2.3 1.41.6 FEB 2.5 2.02.0 MAR Manitoba Provincial Budget All data seasonally adjusted except where noted “NSA”. M: per cent change from previous month. Q: per cent change from previous quarter at annual rates. Y: per cent change from year earlier. AR: Annual Rate. YTD: Year to date. Release dates are provided by sources outside CIBC World Markets Inc. Dates are subject to change. Sources for historical data: Statistics Canada, CMHC, Human Resources Development Canada and the Bank of Canada. 8 CIBC World Markets Inc. The Week Ahead—April 6-10, 2015 U.S. RELEASE AND EVENT DATES March/April 2015 MONDAY TUESDAY WEDNESDAY 31 30 THURSDAY GOODS & SERV. BALANCE (BOP) $B 8:30 AM GDS SERV TOT DEC -65.0 19.4-45.6 JAN -62.5 19.9-42.7 FEB -55.5 19.7-35.4 S&P/CASE-SHILLER HOUSE PRICE INDEX 9:00 AM ISM MFG SURVEY 10:00 AM COMP. PRICES INDEXINDEX CHICAGO PMI 9:45 AM CONSUMER CONFIDENCE 10:00 AM 2,5,7-Yr NOTE SETTLEMENT JAN FEB MAR 53.535.0 52.935.0 51.539.0 LIGHT VEHICLES SALES MIL (AR) Y JAN 16.5538.9 FEB 16.1655.4 MAR BOT (9:00) REDBOOK (8:55) FACTORY ORDERS 10:00 AM M(SA) Y(NSA) DEC -3.5-3.7 JAN -0.2-2.3 FEB 3 GOOD FRIDAY (HOLIDAY) (Stock Market Closed) EMPLOY. SITUATION 8:30 AM NON- CIVAVG FARMUNEMP HRLY PAYROLL RATE EARN (000s)M % Y JAN 2395.72.0 FEB 2955.51.6 MAR 3,10-Yr NOTE ANNOUNCEMENT INITIAL JOBLESS CLAIMS (8:30) 7 6 2 1 ADP SURVEY 8:15 AM PERS. INC & OUT. 10:00 AM SAVING INCOMECONS RATE M MAR DEC0.3 -0.3 4.9 JAN0.4-0.2 5.5 FEB0.10.15.8 FRIDAY 9 8 10 ISM NON-MFG SURVEY 10:00 AM CONSUMER CREDIT 3:00 PM 3-Yr NOTE AUCTION FOMC Minutes TREASURY BUDGET 2:00 PM 10-Yr NOTE AUCTION BOT (9:00) REDBOOK (8:55) 13 INITIAL JOBLESS CLAIMS (8:30) 14 RETAIL SALES 8:30 AM M Y JAN -0.83.6 FEB -0.61.7 MAR PPI (FINISHED GOODS) 8:30 AM M (SA) Y (NSA) JAN -2.1-3.1 FEB -0.1-3.4 MAR 30-Yr BOND AUCTION 16 15 CAPACITY UTIL/ IND. PROD. 9:15 AM LEV M Y JAN 79.1-0.3 4.3 FEB 78.90.1 3.4 MAR HOUSING STARTS 8:30 AMMIL (AR) M JAN 1.065-2.0 FEB 0.897-15.8 MAR Beige Book NET CAPITAL INFLOWS TICS 4:00 PM PHILADELPHIA FED INDEX 10:00 PM 3,10-Yr NOTE SETTLEMENT BOT (9:00) REDBOOK (8:55) 20 30-Yr BOND SETTLEMENT 21 27 28 NEW HOME SALES 10:00 AM 8:30 AM (AR) REAL IMPLICIT GDPDEFLATOR 14:Q3(F)5.0 1.4 14:Q4(F)2.2 0.2 15:Q1(A) ECI 8:30 AMWAGES & TOTALSALARY BEN. 14:Q3 0.70.80.6 14:Q4 0.60.50.6 15:Q1 CHICAGO PMI 9:45 AM CONSUMER CONFIDENCE 10:00 AM FOMC Rate Decision BOT (9:00) REDBOOK (8:55) LEADING INDICATOR 10:00 AM 24 DURABLE GOODS ORDERS 8:30 AM M Y JAN 2.04.7 FEB -1.40.6 MAR 30 29 GDP S&P/CASE-SHILLER HOUSE PRICE INDEX 9:00 AM 23 INITIAL JOBLESS CLAIMS (8:30) BOT (9:00) REDBOOK (8:55) MICHIGAN SENTIMENT (P) 9:55 AM INITIAL JOBLESS CLAIMS (8:30) 22 EXISTING HOME SALES 10:00 AM 17 CPI 8:30 AM M(SA) Y (NSA) JAN -1.10.0 FEB -1.00.4 MAR PERS. INC & OUT. 10:00 AM SAVING INCOMECONS RATE M MAR JAN0.4-0.2 5.5 FEB0.40.15.8 MAR 1 MICHIGAN SENTIMENT (F) 9:55 AM ISM MFG SURVEY 10:00 AM COMP. PRICES INDEXINDEX FEB MAR APR 52.935.0 51.539.0 LIGHT VEHICLES SALES MIL (AR) Y JAN 16.5538.9 FEB 16.1655.4 MAR INITIAL JOBLESS CLAIMS (8:30) All data seasonally adjusted except where noted “NSA”. M: per cent change from previous month. Q: per cent change from previous quarter at annual rates. Y: per cent change from year earlier. AR: Annual Rate. YTD: Year to date. Release dates are provided by sources outside CIBC World Markets inc. Dates are subject to change. Sources for historical data: U.S. Department of Commerce, U.S. Department of Labor and U.S. Federal Reserve Board. 9 CIBC World Markets Inc. The Week Ahead—April 6-10, 2015 This report is issued and approved for distribution by (a) in Canada, CIBC World Markets Inc., a member of the Investment Industry Regulatory Organization of Canada, the Toronto Stock Exchange, the TSX Venture Exchange and a Member of the Canadian Investor Protection Fund, (b) in the United Kingdom, CIBC World Markets plc, which is regulated by the Financial Services Authority, and (c) in Australia, CIBC Australia Limited, a member of the Australian Stock Exchange and regulated by the ASIC (collectively, “CIBC”) and (d) in the United States either by (i) CIBC World Markets Inc. for distribution only to U.S. Major Institutional Investors (“MII”) (as such term is defined in SEC Rule 15a-6) or (ii) CIBC World Markets Corp., a member of the Financial Industry Regulatory Authority. U.S. MIIs receiving this report from CIBC World Markets Inc. 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