1. society
2. work
3. unemployment

October 28, 2014 @ 7:30 EDT
Global Economics
Daily Points
Derek Holt (416) 863-7707
[email protected]
— Tracking the Numbers
Frances Donald (416) 862-3080
[email protected]
Dov Zigler (212) 225-6631
[email protected]
BoC Events
On Deck for Tuesday, October 28
Country
US
US
US
US
US
Date
10/28
10/28
10/28
10/28
10/28
Tim e
08:30
08:30
09:00
10:00
10:00
Indicator
Durable Goods Orders (m/m)
Durable Goods Orders ex. Trans. (m/m)
S&P/Case-Shiller Home Price Index (m/m)
Consumer Confidence Index
Richmond Fed Manufacturing Index
Period
Sep
Sep
Aug
Oct
Oct
BNS Consensus
0.6
0.5
0.7
0.5
0.3
0.2
88
87.0
-11.0
Latest
-18.4
0.4
-0.5
86.0
14.0
KEY POINTS:
 Equities upbeat, Treasuries and USD cautious ahead of tomorrow’s Fed
 Consensus has moved in favour of our longstanding 2015Q2 Fed hike
call…
 …but is divided on how tomorrow’s statement will address inflation risks
 Chinese equities rally on railway merger, earnings
 Japan retail sales offer good news and bad news…
 …and BoJ Governor Kuroda again says he stands ready to act if
necessary
 China industrial profits...
 Riksbank cuts to zero, but are real rates still too high…
 …or are household imbalances being aggravated?
 US durables, confidence, house prices, Richmond on tap
 US Earnings drone on
 US to auction 2s today
 Quiet in Canada
BoC Overnight Lending Rate
Current Rate: 1.0%
Next Move: Dec 3 @ 1.0%
Bias: Neutral
Fed Events
Fed Funds Target Rate
Current Rate: 0-0.25%
Next Move: Oct. 29 @ 0-0.25%
Bias: Dovish
UNITED STATES
A blend of data risk and earnings reports will combine to shape last
minute market sentiment ahead of tomorrow’s FOMC statement. For
what we think will transpire tomorrow please see our global week ahead
here. The latest Bloomberg poll that we answered as a US primary dealer
and that was released this morning shows the following results:







51.5% of shops are now in our camp calling for a 2015Q2 rate hike
which is now the median consensus call. 28.8% prefer Q3. 7.6%
expect the first hike in 2015Q1, and 7.6% expect it to arrive in
Q4. 4.5% expect the first hike sometime in 2016.
53% of forecasters think the Fed will retain statement references to
inflation developments as is tomorrow, while 45.2% expect it to
somehow elevate concern about low inflation readings.
97% of shops expect bond purchases to end this month
79.7% expect ‘considerable time’ to be retained, while 17.2% expect
different language such as ‘patient’ to be used and only 4.7% expect
‘considerable time’ to be dropped outright.
Only 10% of shops expect another QE program to be introduced over
the next year
72% of firms expect PCE inflation to hit 2% or higher for a full quarter
only by 2015Q4
Interestingly, most economists (72%) think falling market measures of
Scotiabank Economics
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Tel: (416) 866-6253 Fax: (416) 866-2829
Email: [email protected]
Key International Events
BoJ
Current Rate: 0.10%
Next Move: Oct 31 @ 0.10%
Bias: Dovish
BoE
Current Rate: 0.50%
Next Move: Nov. 6 @ 0.50%
Bias: Dovish
ECB
Current Rate: 0.05%
Next Move: Nov. 6 @ 0.05%
Bias: Neutral
This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank.
Opinions, estimates and projections contained herein are our own as of the date hereof and are
subject to change without notice. The information and opinions contained herein have been
compiled or arrived at from sources believed reliable but no representation or warranty, express or
implied, is made as to their accuracy or completeness. Neither Scotiabank nor its affiliates accepts
any liability whatsoever for any loss arising from any use of this report or its contents.
TM
Trademark of The Bank of Nova Scotia. Used under license, where applicable.
Daily Points is available on scotiabank.com and Bloomberg at SCOT
October 28, 2014
Global Economics
Daily Points
inflation expectations are due to falling commodity prices whereas 17.5% view falling market inflation expectations as
being driven by distortions caused by market dynamics (liquidity risk premia etc). This probably underweights the
distortions argument in our view.

Forty-nine firms listed on the S&P500 report earnings today including names like Facebook (after hours) and Pfizer.
There could be moderate upside to the September new orders of durable goods number (8:30amEDT), and consensus is
anticipating a +0.5% m/m number on recovery in airplane and vehicle orders. Core durable goods orders (i.e. extransportation) should be positive but not massively so as the ISM manufacturing index remained solid in September but lost
a little bit of momentum compared to August. New orders of aircraft should rebound as orders at Boeing were higher on the
month (122 in Sept. vs. 107 in Aug.).
Capital Goods Orders & Shipments
(Non-Defense, Ex-Air)
The key component in the report, however, will be new orders of capital
Back Above Pre-Crisis Levels
goods (non-defense, ex-air) which have lately been hitting new highs (see
chart). Shipments in this category are a proxy for investment in capital goods
75
by U.S. companies and is tracking for a strong gain in Q3 (near 10% q/q
US$, Billions
annualized) – one of the reasons that we expect GDP to come in above 3%
q/q annualized when the number prints on Thursday. The extent of the gains 70
so far this quarter at least raises the possibility of some give back, and
whether or not this tracking sticks could impact our GDP call for Q3 on
65
the margin. We’ll get another forward looking peek at what is happening in
the manufacturing sector in the form of the Richmond Fed’s manufacturing
index (10:00amEDT).
60
An update on the U.S. consumer also lands today in the form of both
consumer confidence numbers (10:00amEDT) and the Case Shiller home
price index for August (9:00amEDT). The latter has been providing some
fairly disconcerting data of late, with home prices having fallen in seasonally
adjusted terms in the three months through July. The declines so far have
been modest and we wouldn’t make too much of them – yet. The issue is
that rising home prices, while they might reduce affordability on the margin,
have the more important macroeconomic effect of eating away at the amount
of home owners carrying negative equity in their homes. As the chart to the
right shows, the drop in negative equity mortgages has moved in lock step
with rising home prices. Similarly, one of the reasons that we are less
pessimistic than most when it comes to U.S. inflation is that shelter prices
make up just under 1/3 of the CPI basket (32.1% to be precise) and insofar
as home prices are rising, and at a decent year-on-year clip at that, inflation
has some support against extreme downside scenarios. In short, much is at
stake if home prices sustain their recent downward momentum. Consensus
is looking for a 0.2% m/m increase to break the recent losing streak.
55
50
45
06
08
10
12
Orders
Shipments
12 per. Mov. Avg. (Orders)
14
Source: Census Bureau, Scotiabank Economics.
Negative Equity Mortgages Falling...
...Home Prices Rising
13
Index
Millions
12
On the consumer confidence front, markets will as usual be paying
particular attention to the labor component of the index as they reach for
hints ahead of non-farm payrolls. We don’t find that the relevant data in the
11
consumer confidence numbers correlate particularly well with monthly retail
sales or with nonfarm payrolls, though they do line up with trends in the
10
unemployment rate – which have unequivocally been improving, and to
which the market has become somewhat desensitized. Consensus is looking 9
for a marginal improvement to a reading of 87 from 86, in line with the
improvement in the U of M index and lower gasoline prices.
8
INTERNATIONAL
Equities are in a decidedly better mood so far this morning, but other asset
classes are little changed ahead of the Fed. European equity benchmarks
are up by as little as 0.3% in Germany to as much as 1.8% in
Italy. Japanese equities were soft, but China’s Shanghai and Shenzhen
composites rallied hard (see below). US and Canadian equity futures are up
solidly. 10s in the US, Canada, UK, France and Germany are slightly
cheaper. Most currencies are little changed versus the USD except the
Swedish Krona to the downside (more below) and the Brazilian real to the
145
160
175
7
6
190
09
11
12
13
14
Homes with Negative Equity Mtgs. (LHS)
Home Price Index (inverted, RHS)
Source: S&P, CoreLogic, Scotiabank Economics.
2
October 28, 2014
Global Economics
Daily Points
upside as yesterday’s selloff in Brazilian assets spurs some opportunity seeking behavior.
News was out overnight that the Chinese government plans to merge its two largest railway equipment manufacturers.
China CNR and CSR Corp have reportedly been competing against each other for overseas contracts (including the U.S.’
first high-speed rail project between San Francisco and Los Angeles), to both their detriments. The merger is an attempt to
become more competitive and secure more overseas rail projects, but China has also been actively expanding its own rail
network in an attempt to pursue fiscal spending that improves internal efficiencies. Rail track has increased in China by 35%
to 104,000kms between 2006 and 2013 and the government has targeted 120,000kms by the end of 2015. Streamlining
inefficiencies, developing more competitive international companies and moving towards a more market-based economy are
key reform objectives for Premier Li – this merger fits nicely in that mold and demonstrates ongoing commitment to the reform
agenda. The Hang Seng has rallied on the news and closed +1.63%, also helped by stronger industrial profits in September
which shook off August weakness (+0.4% y/y, prior -0.6% y/y) and may be carving out a bottom.
The Swedish Krona was the weakest overnight performer against the USD among the majors as the Riksbank cut its
main repo rate to zero. The currency has lost about 16% of its value versus the USD since March. A cut was almost
universally expected (minus two shops), but cutting to zero was only expected by two shops at the opposite end of the
spectrum of opinion. The real overnight rate is still positive by any yardstick. CPI inflation stands at -0.4% y/y, and inflation
break evens range from 0.5% for the one year to about 1.5% for 10s. The ‘underlying’ inflation rate, however, stands at 0.3%
y/y and thus still slightly positive and hence suggesting that much of the weakness stems from externally set prices the
central bank cannot influence. The central bank faces a dilemma by way of modest evidence of falling prices versus financial
stability considerations. Household debt growth recently accelerated to 5.7% y/y and is at its strongest since September
2011. In real terms, such debt is more burdensome if deflation risk defined as a sustained, broadly based drop in prices that
gets incorporated into expectations really is unfolding. The central bank’s updated forward rate guidance signals rate hikes
recommencing in mid-2016. At the margin, the debate has swung away from rate emphasis toward unconventional
policy. How things pan out for a small central bank with limited to no influence over the prices that are feeding
deflation but that is fanning an ongoing credit bubble remains to be seen but for now it is relying upon moral suasion by
declaring that addressing household imbalances has become “ever more urgent.” The debate is relevant to BoC watchers as
a test case. The BoC is also keeping policy options open and in favour of what I view as an asymmetrical bias to its inflation
views in favour of not worrying about upsides so much as inflation downsides and also in the context of imbalances in the
household sector.
Japanese retail sales surprised to the upside, growing 2.3% (expected
Japanese retail sales seem to be
0.6%) and securing what appears to be a solid recovery in consumption
recovering from the tax hike
following April’s consumption tax hike (see chart). This should be good news,
but it also lends itself to Prime Minister Abe’s desired second VAT tax
%, YoY
12
VAT tax hike
increase in October 2015 from 8% to 10%. Abe is set to make the decision
about whether or not to pursue the second tax hike by the end of the year,
10
and until then, it looks increasingly like good news is bad news. Market
8
reaction was not positive: the Nikkei fell 0.40%.
Ahead of Friday’s Bank of Japan meeting, Governor Kuroda spoke at
Japanese parliament and re-iterated much of what we’ve been hearing from
him over the past two months. He again stressed that the Japanese
economy is showing some weakness, mostly in output, but that private
consumption is on a solid uptrend as job and income conditions improve.
Critically, he re-iterated that the BoJ will not hesitate to adjust policy
should risks threaten the achievement of 2% inflation. There’s nothing
new here from Kuroda, but the consistency of message is not necessarily a
bad thing. In theory, it should be keeping a floor on markets, but Kuroda is
competing with expectations of tighter fiscal policy in 2015 which roils
equities regardless of the inflation target and BoJ action. Kuroda is
nevertheless convincing that QQE may be expanded: the yen is down this
morning and JGB yields continue to push lower.
6
Retail
sales
4
2
0
-2
-4
-6
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Source: Bloomberg, Scotiabank Economics
3
October 28, 2014
Global Economics
Daily Points
Equities
Fixed Income
Government Yield Curves (%):
2-YEAR
Last
5-YEAR
1-day 1-wk
Last
10-YEAR
1-day 1-wk
Last
30-YEAR
1-day 1-wk Last 1-day 1-wk
U.S.
0.38
0.38
0.36
1.49
1.49
1.43
2.26
2.26
2.22
3.03
3.04
2.99
CANADA
1.00
1.00
0.96
1.50
1.49
1.40
2.02
2.01
1.94
2.56
2.56
2.52
GERMANY
-0.04
-0.05
-0.05
0.16
0.16
0.16
0.88
0.87
0.87
1.78
1.78
1.79
JAPAN
0.02
0.02
0.03
0.12
0.12
0.14
0.46
0.47
0.49
1.62
1.62
1.62
U.K.
0.66
0.65
0.68
1.52
1.50
1.48
2.22
2.21
2.17
2.95
2.93
2.92
Spreads vs. U.S. (bps):
CANADA
62
62
60
2
0
-3
-24
-25
-29
-46
-48
-47
GERMANY
-42
-43
-41
-133
-133
-127
-139
-139
-135
-125
-126
-120
JAPAN
-36
-36
-33
-137
-137
-129
-180
-179
-174
-140
-142
-137
U.K.
27
26
31
3
1
5
-4
-5
-5
-7
-11
-7
% change:
1-wk
1-mo
Last
Change
1 Day
S&P/TSX
Dow 30
S&P 500
Nasdaq
DAX
FTSE
Nikkei
Hang Seng
CAC
14469.00
16817.94
1961.63
4485.93
9024.38
6383.73
15329.91
23520.36
4108.07
-74.82
12.53
-2.95
2.22
121.77
20.27
-58.81
377.13
11.33
-0.5
0.1
-0.2
0.0
1.4
0.3
-0.4
1.6
0.3
0.9
2.6
3.0
3.9
1.5
0.2
3.6
1.9
0.7
Commodities
WTI Crude
Natural Gas
Gold
Silver
CRB Index
81.07
3.57
1228.61
17.18
270.41
0.07
0.01
2.06
-0.01
0.19
0.1
0.1
0.2
-0.1
0.1
-2.1
-3.9
-1.6
-1.2
-0.3
Currencies
USDCAD
EURUSD
USDJPY
AUDUSD
GBPUSD
USDCHF
1.1219
1.2695
108.04
0.8832
1.6113
0.9501
-0.0028
-0.0003
0.2200
0.0030
-0.0007
0.0005
-0.2
-0.0
0.2
0.3
-0.0
0.1
-0.0
-0.2
1.0
0.6
0.0
0.1
-3.7
-1.7
-1.1
-0.6
-4.9
-4.0
-5.5
-0.7
-6.5
1-yr
8.2
8.0
11.3
13.9
0.5
-5.1
6.5
3.1
-3.4
% change:
-13.3
-10.5
0.8
-2.1
-3.5
-17.8
-0.1
-9.2
-23.1
-4.1
% change:
0.5
0.1
-1.3
1.3
-0.8
-0.1
7.4
-7.9
10.6
-7.7
-0.2
6.1
Source: Bloomberg. All quotes reflect Bloomberg data as at the time of publishing.
While this source is believed to be reliable, Scotiabank cannot guarantee its accuracy.
4