May 6, 2016 - 2016 and 2017 amid less momentum in advanced economies and continued .... growth pushed the household savi
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FINANCIAL MARKETS MONTHLY May 6, 2016
Sitting tight Overview ………………………………… page 1 Interest rate outlook ………………………………… page 5 Economic outlook ………………………………… page 6 Currency outlook ………………………………… page 7 Central bank watch ………………………………… page 8 Canada’s economy outperformed in Q1 ………………………………… page 9
The Reserve Bank of Australia’s (RBA) rate cut in early May was the lone monetary policy move in recent weeks, with other central banks content to stand back and assess the effect of earlier actions. The Bank of Japan disappointed those hoping for further easing in response to yen appreciation, and forecasters looking for another rate cut by the Reserve Bank of New Zealand (RBNZ) were let down by the central bank simply holding onto its easing bias in April. European Central Bank (ECB) Governor Draghi continued to play down the merits of further rate cuts, while the Bank of Canada (BoC) appears to be firmly on the sidelines, given strong first-quarter growth and upcoming fiscal stimulus. Markets continue to expect only limited policy tightening from the Fed. In mid-April, the International Monetary Fund (IMF) lowered its global growth forecasts for 2016 and 2017 amid less momentum in advanced economies and continued headwinds in emerging markets, particularly commodity producers. Markets seemed to shrug off the IMF’s growth concerns, and with monetary policy expected to remain accommodative, risk sentiment improved modestly in April. Equity markets recorded moderate gains with the MSCI World Index rising by 1.4% in April and reaching positive territory for the year to date. Government bond yields moved higher for much of April, with a particularly large increase in Canadian yields, although there was a modest pullback at the end of April that continued into May. Oil prices continued to pick up in April with West Texas Intermediate (WTI) hitting a six-month high of $45/barrel. The combination of stronger oil prices and a narrowing gap on government yields helped push the Canadian dollar upward to nearly 80 US cents by the end of April before the rally lost some steam in early May.
Central bank near-term bias Three-months out, policy rate Solid growth early this year and upcoming fiscal stimulus limit the odds of another rate cut, but we expect the BoC will keep monetary policy accommodative as the economy’s complex adjustment to lower oil prices continues. The Fed softened its language on global growth risks but will continue to monitor developments abroad closely. With the Committee preferring a cautious approach to tightening, we expect further rate hikes will be held off until later this year. The BoE is unlikely to change policy ahead of the June 23 Brexit vote, and we expect policymakers will take some time to assess how much of the slowdown early this year reflects domestic uncertainty. ECB President Draghi continues to sound reluctant to lower rates further into negative territory, but the central bank remains committed to defending its inflation target with all available options.
Josh Nye
The RBA cut interest rates ahead of our expectations as core inflation fell well below its 2–3% target range. Updated inflation projections imply further easing is needed, and we expect another rate cut will follow in June.
Economist 416-974-3979
[email protected]
While inflation is likely to move higher from here, the consistent shortfall relative to the RBNZ’s target will likely prompt one more rate cut in June.
Highlights
Financial market volatility
spikes as investors worry US Q1/16 GDP growth about the global recovery. slowed to just 0.5% as the drag from business investment and net trade intensi Data reports have erred fied. on the weak side. Continued strength in the However there were many labour market suggests a one-off factors that curslowdown in consumer
tailed activity. spending will be short-lived.
As these factors ease, The recent slowdown in growth accelerate. businesswill investment cannot
all be blamed on the energy sector. The US recession was deeper than was previously reported and GDP output The Fed dropped direct stands 0.4 to ppglobal belowrisks its prereference but recession indicated peak. that it will still closely monitor developments abroad.
Slow start to the year for the US economy The advance estimate of first-quarter 2016 gross domestic product (GDP) fell slightly short of already low expectations, with annualized growth of just 0.5% marking a further slowdown relative to the 1.4% gain in the fourth quarter of 2015. Growth in domestic demand was the slowest in nearly three years as the recent decline in business investment intensified. A further pullback in non-residential structures investment can be pinned on the energy industry, but the decline in equipment investment was more broad based. Slower growth in consumer spending contributed to moderation in first-quarter activity, although the 1.9% gain was slightly better than markets expected. A 15% jump in residential investment continued two years of strong growth in the sector while a rebound in government spending helped offset falling business investment in the quarter. On top of slowing domestic demand, the drag from net trade increased to 0.3 percentage points in the first quarter, as a strong US dollar and subdued external demand pushed exports lower.
Holding out hope for a Q2 rebound Moderation in consumer spending growth in the first quarter does not seem to square with a number of supportive factors for households including strong job growth and lower energy prices. Consumers’ reluctance to spend despite solid disposable income growth pushed the household savings rate upward to match a three-year high in March. This may have reflected an increase in precautionary saving amid a volatile start to the year for equity markets and tighter financial conditions. With market volatility easing, we expect a pullback in the savings rate to contribute to stronger consumer spending growth in the second quarter. Income growth is also expected to remain supportive, with April’s payroll employment report showing higher wages and an increase in hours worked. Headline employment growth fell short of expectations in the month, although the labour market has maintained considerable momentum with job gains averaging 200,000 in the last three months and initial claims remaining near multi-decade lows. As well, any slowdown in the pace of job creation is likely to reflect a tight labour market and should be accompanied by further growth in wages. A solid rebound in April auto sales provided early evidence that these factors are flowing to household consumption. Consumer spending shifting back into high gear would be a major factor in GDP growth returning to an above-trend pace going forward. The outlook for business investment is less certain. We expect falling investment in the energy sector to persist even with the recent pickup in oil prices, but the sector’s declining nominal share of overall investment will lessen the drag going forward. As for broader weakness in equipment investment, capital goods shipments edged higher in March following two consecutive declines, but flat orders in the month dampened prospects for a further pickup. That said, business sentiment has improved recently, and reduced market volatility combined with accommodative monetary policy and a pickup in other areas of domestic spending should give businesses the confidence to upgrade or expand plant and equipment. Our forecast assumes a return to modest growth in business investment will help overall GDP accelerate after a disappointing start to the year.
Fed providing limited guidance on timing of next hike As expected, the Fed left rates unchanged in April for the third consecutive meeting following December 2015’s hike. The policy statement was balanced, leaving the door open to a June rate hike but by no means indicating a move is a sure thing. The big question was whether the Committee would change its tone on global growth risks. The updated statement left out the previous reference to risks posed by global economic and financial developments, but noted the Committee will “closely monitor” those factors as well as inflation. This shift seemed to acknowledge that market volatility and global growth concerns have become less intense recently; at the same time, the Fed has not backed off from a cautious approach to policy tightening given downside risks to the outlook. The policy statement was otherwise as expected, with the Fed acknowledging slower growth earlier this year but remaining optimistic on consumer spending given further strengthening in the labour market. The Committee continues to expect a gradual increase in the fed funds rate will be appropriate, but with little evidence of a shift in the Fed’s cautious tone, our forecast assumes tightening will not resume until later this year. 2
Canada headed for Q2 slowdown after strong Q1 Canadian GDP fell 0.1% in February to interrupt a string of solid gains in the prior three months including a 0.6% increase in January. The modest decline was due to a pullback in goods-producing industries as manufacturing and resource extraction (particularly oil and gas) partially retraced January’s gains. Even with February’s pause, the strong trend in monthly GDP points to annualized growth accelerating to 3.1% in the first quarter, which would be double the pace recorded in the second half of 2015. On an expenditure basis, we expect this pickup in activity to reflect a sizeable addition from net trade and a significant increase in consumer spending. Both provide encouraging evidence that accommodative monetary policy and a weaker Canadian dollar are helping to offset the drag from falling energy sector investment. The first quarter’s increase in exports is unlikely to be sustained, however, with March’s trade report showing further payback for the recent surge in export volumes and providing a weak starting point for the second quarter. We also expect a hit to second-quarter exports from wildfire-related production shutdowns at oil sands facilities near Fort McMurray, Alberta. While the situation remains fluid, we are currently tracking a 0.5 percentage point hit to May GDP, which on an expenditure basis would contribute to net exports swinging from a significant addition to a sizeable drag. As a result, we lowered our second-quarter growth forecast to 0.5% from 1.5% previously. With the decline expected to be reversed as production returns to normal levels, we expect growth will rebound to 3.0% in the third quarter.
Highlights
ruary GDP followed three months of strong gains.
We expect growth of
more than 3% in the first quarter was driven by consumer spending and net trade.
Canada’s loonie takes flight Since dipping below 70 US cents in mid-January, the Canadian dollar steadily climbed to nearly 80 US cents by the end of April. This sharp reversal of the currency’s earlier depreciation reflected a number of factors. The price of oil recovered from less than US$30/barrel to around US$45/barrel currently on declining US rig counts, production issues overseas, prospects of a cap by some producers, and improving growth sentiment. At the same time, indications of economic strength at the start of 2016 and rising expectations that the Bank of Canada’s next rate move is more likely to be a hike rather than a cut have pushed government bond yields higher. A narrower spread relative to the US, where expectations of rate hikes have been pared back since January, put upward pressure on the Canadian dollar. Going forward, slower gains in oil prices and firming expectations that the Fed will raise rates again this year will likely result in a modest pullback in the Canadian dollar’s recent ascent. We do not expect a return to the lows seen early this year and expect the Canadian dollar to end 2016 at 75 US cents. Notwithstanding recent appreciation, we expect the currency will provide continued support to Canadian exporters, particularly as the lagged effects of significant depreciation last year continue to work through the economy.
The 0.1% decline in Feb-
The Canadian dollar has
appreciated significantly since mid-January but is unlikely to weigh on export growth.
The Bank of Canada now
expects the economy will reach full capacity in H2/17.
Bank of Canada’s balancing act With an improving trend in economic data and confirmation that fiscal support is on the way, the Bank of Canada was unanimously expected to hold rates steady in April. It did just that, characterizing risks to the inflation outlook as “roughly balanced.” In the accompanying Monetary Policy Report, the Bank struck a fairly neutral tone and kept growth projections muted despite the pickup in activity early this year. The forecast for global growth was downgraded, which along with the assumption of a stronger Canadian dollar, trimmed the Bank’s projection for export growth next year (the 2016 forecast for net trade was little changed, given strength in exports early this year and the lagged effect of currency depreciation). The Bank also incorporated a greater drag on growth from energy sector investment this year despite a modest increase in oil prices since the previous forecast. The Bank noted that these developments would have resulted in a downgrade to the overall growth outlook were it not for fiscal stimulus announced in the federal government’s March budget that implied a 0.5 percentage point boost to growth in each fiscal year 2016-17 and 2017-18. Aggregating these factors, the Bank revised upward its forecast for 2016 growth to 1.7% and left 2017 little changed at 2.3%. The stronger growth profile and lower estimate of potential growth in the economy resulted in the Bank moving forward the expected closing of the output gap to the second half of 2017. We expect the Bank will maintain a highly accommodative policy stance this year to facilitate the ongoing adjustment to lower oil prices but will begin raising interest rates in the first half of 2017 just ahead of the economy reaching full capacity. 3
Highlights
Euro area inflation
slipped back into negative territory in April, and inflation expectations remain subdued.
Euro area growth surprises in Q1 The initial estimate of first-quarter euro area GDP growth surprised to the upside with a 0.6% non-annualized increase that matches the strongest gain since 2011. The early reading provided no expenditure details, but other reports indicate a pickup in business investment added to another steady increase in domestic consumption. Survey data for the second quarter point to growth continuing, although we expect a more modest 0.4% gain. The ECB will be pleased with the consistency of domestic growth, but the threat of deflation remains the top priority for policymakers. The ECB left policy unchanged in April with the focus now turning to implementing and evaluating the broad-based increase in stimulus announced in March. Additional details on non-financial corporate bond purchases (set to begin later in the second quarter) revealed that the purchases will be broader in scope than previously expected, which helped lower spreads on a range of corporate bonds. The added stimulus (particularly lower rates and an increase in monthly asset purchases) has thus far failed to boost stubbornly low inflation expectations. ECB President Draghi again sounded unconvinced on the merits of lowering interest rates further into negative territory, but he noted in April that the Governing Council would “act by using all the instruments available within its mandate” if required.
Q1 GDP confirms less momentum in UK economy
The Bank of England
will remain cautious ahead of the upcoming ‘Brexit’ vote.
The RBA cut rates for
the first time in a year after an unexpectedly weak inflation report.
The RBNZ held off on
easing in April, but we expect one last rate cut in June.
4
The first estimate of first-quarter UK GDP showed a 0.4% non-annualized increase. Growth continued to rely heavily on the services sector as industrial production and construction activity were both estimated to have declined. The slowdown relative to the fourth quarter’s 0.6% gain was consistent with disappointing business condition indicators in February and March. Another round of weak survey data in April prompted us to lower our second-quarter growth forecast to 0.3% from 0.5% previously. Hiring also seems to have lost some momentum relative to last year, and while earlier job gains have left limited slack in the labour market, wage growth has not accelerated. Inflation unexpectedly picked up in March, although some of the increase is likely due to temporary factors, and overall inflation is expected to remain below 1% for the remainder of 2016. Subdued wage and price growth will keep the Bank of England on the sidelines this year, and policymakers are likely to remain particularly cautious ahead of the June 23 “Brexit” referendum on the UK’s membership in the European Union.
RBA resumes easing cycle amid weak inflation The RBA lowered the cash rate for the first time in a year after inflation fell well short of expectations in the first quarter. The rate cut was not fully anticipated by markets with forecasters roughly split on whether the central bank would resume its drawn out easing cycle in response to the inflation shortfall. Core inflation fell to a multi-decade low of 1.5% in the first quarter from 2.0% previously, marking a rare dip below the RBA’s 2–3% target range. Updated projections following the rate decision show that the RBA expects core inflation will continue to undershoot its target range throughout 2016 and barely test the 2% floor in 2017. With those forecasts conditioned on market expectations for another 25 basis point rate cut, the RBA clearly has a bias to ease further, although such forward guidance was not made explicit in May. Given the RBA’s rethink on inflation, we now expect another rate cut will follow in June. While we have long expected 1.50% would be the trough for the cash rate, there is a growing risk that easing continues in 2017 amid modestly sub-trend growth, a patchy labour market, and structurally slow wage growth.
RBNZ on hold…for now The RBNZ left the cash rate unchanged in April, thereby matching the market consensus, although a minority of forecasters expected further easing on the heels of March’s rate cut. Tweaks to the policy statement were minor with the RBNZ reiterating its easing bias and only modestly strengthening its language on the currency, which “remains higher than appropriate” after being little affected by March’s rate cut. The RBNZ expects inflation will pick up as the effect of lower oil prices drops out and capacity pressures build, and the first-quarter’s consumer price index (CPI) report seemed to corroborate that with the trough in headline inflation likely behind us. While there was some evidence of a pickup in core inflation as well, we expect price pressures will be slow to build with strong potential growth in the economy limiting the rate at which spare capacity is absorbed. The coming pickup in headline inflation should put a floor under inflation expectations, but given the lengthy undershoot of its inflation target, we expect the RBNZ will err on the side of easing with one more rate cut forecasted in June.
Interest rate outlook %, end of period Actuals
Forecast
15Q1
15Q2
15Q3
15Q4
16Q1
16Q2
16Q3
16Q4
17Q1
17Q2
17Q3
17Q4
0.75 0.55 0.50 0.77 1.36 1.98
0.75 0.58 0.48 0.82 1.69 2.31
0.50 0.43 0.52 0.80 1.43 2.20
0.50 0.51 0.48 0.73 1.40 2.15
0.50 0.45 0.54 0.67 1.23 2.00
0.50 0.40 0.60 0.80 1.35 2.10
0.50 0.50 0.65 0.85 1.50 2.25
0.50 0.55 0.75 1.10 1.80 2.55
0.50 0.60 0.90 1.25 1.95 2.65
0.75 0.85 1.20 1.65 2.25 2.90
1.00 1.10 1.50 1.90 2.50 3.05
1.25 1.35 1.85 2.15 2.70 3.20
0.25 0.04 0.56 1.37 1.93 2.54
0.25 0.03 0.64 1.64 2.35 3.12
0.25 0.00 0.64 1.37 2.04 2.86
0.50 0.17 1.05 1.76 2.27 3.02
0.50 0.21 0.73 1.22 1.79 2.63
0.50 0.20 0.85 1.40 2.00 2.75
0.50 0.10 0.90 1.55 2.20 2.95
0.75 0.35 1.15 1.80 2.45 3.25
1.00 0.75 1.25 1.90 2.55 3.30
1.25 1.00 1.50 2.20 2.85 3.55
1.50 1.25 1.75 2.45 3.05 3.65
1.75 1.50 1.95 2.65 3.20 3.75
0.50 0.43 1.58
0.50 0.55 2.01
0.50 0.56 1.76
0.50 0.66 1.96
0.50 0.45 1.43
0.50 0.55 1.70
0.50 0.60 1.75
0.50 0.75 2.10
0.75 0.85 2.40
0.75 0.95 2.50
1.00 1.10 2.75
1.00 1.10 3.00
-0.20 -0.25 0.18
-0.20 -0.23 0.77
-0.20 -0.26 0.59
-0.30 -0.34 0.63
-0.40 -0.48 0.15
-0.40 -0.50 0.35
-0.40 -0.50 0.40
-0.40 -0.50 0.55
-0.40 -0.50 0.75
-0.40 -0.50 0.95
-0.40 -0.50 1.10
-0.40 -0.50 1.25
2.25 1.72 2.32
2.00 2.01 3.01
2.00 1.81 2.61
2.00 2.02 2.88
2.00 1.89 2.49
1.50 1.70 2.70
1.50 1.60 2.80
1.50 1.70 2.95
1.50 1.70 3.15
1.50 1.75 3.45
1.50 1.80 3.75
1.50 2.00 4.00
3.50 3.48 3.71
3.25 3.09 3.89
2.75 2.69 3.48
2.50 2.83 3.73
2.25 2.19 2.97
2.00 2.20 3.20
2.00 2.20 3.40
2.00 2.30 3.80
2.00 2.50 4.10
2.00 2.70 4.30
2.25 3.00 4.60
2.50 3.20 4.80
86 137 115 43 60 23
121 171 146 100 100 80
91 140 120 85 80 79
92 122 130 97 86 90
69 106 98 63 60 78
75 115 115 85 100 100
85 130 115 90 120 120
105 130 135 105 125 150
105 130 155 125 145 160
105 135 155 145 170 160
100 130 165 160 195 160
85 125 190 175 200 160
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 Deposit 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, **Top of 25 basis point range Source: Reuters, RBC Economics Research
Central bank policy rate %, end of period
Current United States
Fed funds
Canada
Overnight rate
United Kingdom Bank rate
Current
Last
Last
0.0-0.25 December 16, 2015
Eurozone
Deposit rate
-0.40
-0.30 March 10, 2016
0.50
0.75
July 15, 2015
Australia
Cash rate
1.75
2.00 May 4, 2016
0.50
1.00
March 5, 2009
New Zealand
Cash rate
2.25
2.50 March 10, 2016
0.25-0.50
Source: Bloomberg, Reuters, RBC Economics Research
5
Economic outlook Growth outlook % c hange, quarter-over-quarter in real GDP
15Q1
15Q2
15Q3
15Q4
16Q1
16Q2
16Q3
16Q4
17Q1
17Q2
17Q3
17Q4
2014
Canada*
-0.9
-0.4
2.4
0.8
3.1
0.5
3.0
2.2
2.3
2.5
2.3
2.2
2.5
2015F 2016F 2017F
1.2
1.8
2.3
United States*
0.6
3.9
2.0
1.4
0.5
2.9
2.6
2.5
2.4
2.3
2.1
2.1
2.4
2.4
2.0
2.4
United Kingdom
0.5
0.6
0.4
0.6
0.4
0.3
0.6
0.5
0.6
0.5
0.6
0.6
2.9
2.3
1.8
2.1
Euro Area
0.6
0.4
0.3
0.3
0.6
0.4
0.5
0.5
0.5
0.4
0.4
0.4
0.9
1.5
1.7
1.8
Australia
0.9
0.3
1.1
0.6
0.4
0.7
0.5
0.7
0.7
0.6
0.7
0.8
2.6
2.5
2.4
2.7
New Zealand
0.3
0.3
0.9
0.9
0.5
0.5
0.5
0.5
0.5
0.5
0.6
0.6
3.7
2.5
1.8
2.1
15Q2
15Q3
15Q4
16Q1
16Q2
16Q3
16Q4
17Q1
17Q2
17Q3
17Q4
*annualized
Inflation outlook % c hange, y ear-over-y ear
15Q1
2014 2015F
2016F 2017F
Canada
1.1
0.9
1.2
1.3
1.5
1.5
1.5
1.9
2.4
2.4
2.4
2.2
2.0
1.1
1.6
2.3
United States
-0.1
0.0
0.1
0.5
1.1
0.9
1.1
1.7
2.4
2.4
2.5
2.4
1.6
0.1
1.2
2.4
United Kingdom
0.1
0.0
0.0
0.1
0.3
0.7
0.7
0.8
1.3
1.4
1.6
1.8
1.5
0.0
0.7
1.6
Eurozone
-0.3
0.2
0.1
0.2
0.0
0.1
0.3
0.5
1.1
1.0
1.0
1.0
0.4
0.0
0.3
1.0
Australia
1.3
1.5
1.5
1.7
1.3
1.4
1.5
1.7
2.6
2.6
2.7
2.8
2.5
1.5
1.5
2.7
New Zealand
0.3
0.4
0.4
0.1
0.4
0.5
0.6
1.4
1.5
1.5
1.5
1.6
1.2
0.3
0.7
1.6
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 United States
Current period Period ago
Bank of Canada core CPI Core PCE
1,2
United Kingdom All-items CPI Eurozone
All-items CPI
1
Australia
Trimmed mean CPI
New Zealand
All-items CPI
1
1
Year ago
Three-month trend Six-month trend
Mar
0.3
2.1
2.0
1.8
Mar
0.1
1.6
2.1
1.5
Mar
0.4
0.5
-1.8
-0.1
Apr
-0.1
-0.2
-0.7
-0.8
Q1
0.2
1.7
N/A
N/A
Q1
0.2
0.4
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
Actuals
Forecast
15Q1
15Q2
15Q3
15Q4
16Q1
16Q2
16Q3
16Q4
17Q1
17Q2
17Q3
17Q4
Canadian dollar
1.27
1.25
1.33
1.38
1.30
1.33
1.36
1.33
1.31
1.29
1.27
1.25
Euro
1.07
1.11
1.12
1.09
1.14
1.11
1.08
1.06
1.03
1.04
1.05
1.04
U.K. pound sterling
1.48
1.57
1.51
1.47
1.44
1.56
1.54
1.54
1.51
1.55
1.59
1.60
New Zealand dollar
0.75
0.68
0.64
0.68
0.69
0.68
0.65
0.61
0.58
0.58
0.59
0.60
Japanese yen
120.1
122.5
119.9
120.2
112.6
102.0
99.0
101.0
104.0
108.0
112.0
115.0
Australian dollar
0.76
0.77
0.70
0.73
0.77
0.75
0.72
0.69
0.66
0.66
0.67
0.68
Canadian dollar cross-rates 15Q1
15Q2
15Q3
15Q4
16Q1
16Q2
16Q3
16Q4
17Q1
17Q2
17Q3
17Q4
EUR/CAD
1.36
1.39
1.49
1.50
1.48
1.48
1.47
1.41
1.35
1.34
1.33
1.30
GBP/CAD
1.88
1.96
2.01
2.04
1.87
2.08
2.10
2.04
1.98
2.00
2.02
2.00
NZD/CAD
0.95
0.85
0.85
0.95
0.90
0.90
0.88
0.81
0.76
0.75
0.75
0.75
CAD/JPY
94.7
98.0
90.0
86.9
86.6
76.7
72.8
75.9
79.4
83.7
88.2
92.0
AUD/CAD
0.97
0.96
0.93
1.01
1.00
1.00
0.98
0.92
0.86
0.85
0.85
0.85
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 1.50
1.50
1.40
1.40
1.30
1.30
1.20 1.20
1.10 1.10
1.00
1.00
0.90 0.80 May-15
Nov-15
May-16
0.90 May-15
Nov-15
May-16
U.K. pound
Japanese yen 2.00
136
126
1.80
116 1.60
106
1.40
96
86 May-15
Nov-15
May-16
1.20 May-15
Nov-15
May-16
7
Central bank watch Bank of Canada February’s 0.1% decline still left GDP tracking above 3% in Q1/16, but that strength is unlikely to be maintained, with our forecast assuming a 0.5% gain in Q2/16 (partially reflecting temporary shutdowns in the oil sector). The Bank of Canada did not become overly excited about the Canadian economy’s strong start to 2016, but further easing seems unlikely with the output gap now expected to close before the end of 2017.
Forecast 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 2016 2017 Source: Statistics Canada, RBC Economics Research
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
U.S. target rate % 7
Forecast 6
6 4
5
2 4
-2
3
-4 2
-6 1
-8 -10 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
0 2002
Forecasted values:
Source: Bureau of Economics Analysis, RBC Economics Research
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Source: Bank of Canada, Federal Reserve Board, RBC Economics Research
ECB Deposit rate
Eurozone GDP % change, quarter-over-quarter
%
1.5
7
1.0
6
0.5
Forecast
5
0.0 4
-1.0
3
-1.5
2
-2.0 1
-2.5
0
-3.0 -3.5 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Bank of England
Forecasted values:
-1 2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Source: ECB, RBC Economics Research
U.K. real GDP growth
U.K. policy rate
%
% change, quarter-over-quarter
The BoE is unlikely to alter monetary policy ahead of the Brexit vote, and we think a hike in H2/16 is unlikely given the economy’s loss of momentum so far this year.
2004
8
Source: Eurostat, RBC Economics Research
UK GDP growth slowed to 0.4% in Q1/16, and disappointing PMI readings in April point to another subdued gain in Q2/16.
2003
Source: Bank of Canada, Federal Reserve Board, RBC Economics Research
U.S. real GDP growth
-0.5
The ECB has turned to implementing the slew of stimulus measures announced in March. It will take some time to evaluate its effect, but the ECB remains committed to further easing if required.
0 2002
Forecasted values:
Quarter-over-quarter annualized % change
European Central Bank Euro area growth surprised on the upside in Q1/16, but negative headline inflation and subdued inflation expectations continue to worry policymakers.
% 7
6
Federal Reserve Q1/16 GDP growth disappointed at just 0.5%, but we expect the slowdown will be short-lived, with stronger consumer spending and a rebound in business investment forecasted to boost growth to nearly 3% in Q2/16. While the Fed left the door open to a June rate hike, we expect a cautious approach to tightening amid global risks will leave monetary policy steady until later this year.
Canadian overnight rate
Canadian real GDP growth Quarter-over-quarter annualized % change 8
1.5
7
1.0
6
0.5
5
Forecast
0.0
4
-0.5 3
-1.0 2
-1.5 1
-2.0 -2.5
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Central Statistical Office, RBC Economics Research
Forecasted values:
Source: Bank of England, RBC Economics Research
Australia and New Zealand Australia and New Zealand GDP growth
The RBA resumed its drawn out easing cycle in April as core inflation dropped to its lowest level in decades. With the shortfall in inflation forecasted to persist, we expect another rate cut in June.
2.5
Australia and New Zealand inflation
% change, quarter-over-quarter
7
% change, year-over-year
Forecast 2.0
Forecast 6
1.5
Australia New Zealand
5
1.0 4
0.5 3
With New Zealand’s inflation remaining below target and the currency still “higher than appropriate,” we expect the RBNZ will deliver a final rate cut in June.
8
0.0 2
-0.5
Australia New Zealand
-1.0 -1.5
1 0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: Australian Bureau of Statistics, Statistics New Zealand, RBC Economics Research Source: Australian Bureau of Statistics, Statistics New Zealand, RBC Economics Research
Canada’s economy outperformed the US in Q1
Canada’s economy was much stronger than the US in Q1/16, but we expect that outperformance to reverse in Q2/16.
With the recent slowdown in US consumer spending likely to prove temporary, our forecast assumes growth in the economy will return to an above-trend pace going forward.
US real consumer spending
Canada & US real GDP growth forecast
SAAR %
SAAR %
4.0
3.5 US
3.1
Canada
Forecast
3.6 3.0
2.9
3.0
3.5 3.0
2.6
2.5
2.5
3.0
2.8 2.6
2.2
2.4
2.5
2.4
2.0
2.0
1.9
1.7
1.5
1.5 1.0
1.0 0.5*
0.5
0.5
0.5
0.0
0.0 Q1/2016
Q2/2016
Q3/2016
Q4/2016
Q1/15
*preliminary actual Source: Bureau of Economic Analysis, RBC Economics Research
Q2/15
Q3/15
Q4/15
Q1/16
Q2/16
Q3/16
Q4/16
Source: Bureau of Economic Analysis, RBC Economics Research
A strong rebound in oil prices since mid-January has been a major factor pushing the Canadian dollar higher.
Canada’s strong export growth boosted Q1/16 activity, but payback toward the end of the quarter points to less support from trade in Q2/16.
Canadian non-energy export volumes
Canadian dollar and oil prices
index, Jan/2010=100
US$/C$
135.0
US$/bbl
0.85
70
130.0
60 0.80
125.0
50 120.0
0.75
40
115.0
110.0
30
0.70 US$/C$ (left axis)
105.0
20
WTI oil price (right axis) 0.65
100.0
95.0 Jan/10
10
Jan/11
Jan/12
Source: Statistics Canada, RBC Economics Research
Jan/13
Jan/14
Jan/15
Jan/16
0.60 May/15
Jun/15
Jul/15
Aug/15
Sep/15
Oct/15
Nov/15
Dec/15
Jan/16
Feb/16 Mar/16
Apr/16
0 May/16
Source: EIA, WSJ, 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.
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