economic outlook trump: taxes, trade & treasuries · 4/11/2017 · bmo financial group (nyse,...
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Economic outlook Trump: Taxes, Trade & Treasuries
April 11, 2017
Douglas Porter, CFA Chief Economist, BMO Financial Group douglas.porter@bmo.com • 416-359-4887 A presentation of BMO Economics http://economics.bmocapitalmarkets.com • 1-800-613-0205
General Disclosure
“BMO Capital Markets” is a trade name used by the BMO Financial Group for the wholesale banking businesses of Bank of Montreal and its subsidiaries BMO Nesbitt Burns Inc., BMO Capital Markets Limited in the U.K. and BMO Capital Markets Corp. in the U.S. BMO Nesbitt Burns Inc., BMO Capital Markets Limited and BMO Capital Markets Corp are affiliates. Bank of Montreal or its subsidiaries (“BMO Financial Group”) has lending arrangements with, or provide other remunerated services to, many issuers covered by BMO Capital Markets. The opinions, estimates and projections contained in this report are those of BMO Capital Markets as of the date of this report and are subject to change without notice. BMO Capital Markets endeavours to ensure that the contents have been compiled or derived from sources that we believe are reliable and contain information and opinions that are accurate and complete. However, BMO Capital Markets makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this report or its contents. Information may be available to BMO Capital Markets or its affiliates that is not reflected in this report. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor. This material is for information purposes only and is not an offer to sell or the solicitation of an offer to buy any security. BMO Capital Markets or its affiliates will buy from or sell to customers the securities of issuers mentioned in this report on a principal basis. BMO Capital Markets or its affiliates, officers, directors or employees have a long or short position in many of the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. The reader should assume that BMO Capital Markets or its affiliates may have a conflict of interest and should not rely solely on this report in evaluating whether or not to buy or sell securities of issuers discussed herein.
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BMO Financial Group (NYSE, TSX: BMO) is an integrated financial services provider offering a range of retail banking, wealth management, and investment and corporate banking products. BMO serves Canadian retail clients through BMO Bank of Montreal and BMO Nesbitt Burns. In the United States, personal and commercial banking clients are served by BMO Harris Bank N.A., Member FDIC. Investment and corporate banking services are provided in Canada and the US through BMO Capital Markets. BMO Capital Markets is a trade name used by BMO Financial Group for the wholesale banking businesses of Bank of Montreal, BMO Harris Bank N.A, BMO Ireland Plc, and Bank of Montreal (China) Co. Ltd. and the institutional broker dealer businesses of BMO Capital Markets Corp. (Member SIPC), BMO Nesbitt Burns Securities Limited (Member SIPC) and BMO Capital Markets GKST Inc. (Member SIPC) in the U.S., BMO Nesbitt Burns Inc. (Member Canadian Investor Protection Fund) in Canada, Europe and Asia, BMO Capital Markets Limited in Europe, Asia and Australia and BMO Advisors Private Limited in India.
“Nesbitt Burns” is a registered trademark of BMO Nesbitt Burns Inc., used under license. “BMO Capital Markets” is a trademark of Bank of Montreal, used under license. "BMO (M-Bar roundel symbol)" is a registered trademark of Bank of Montreal, used under license.
® Registered trademark of Bank of Montreal in the United States, Canada and elsewhere.
™ Trademark Bank of Montreal in the United States and Canada.
© COPYRIGHT 2017 BMO CAPITAL MARKETS CORP.
A member of BMO Financial Group
© COPYRIGHT 2017 BMO CAPITAL MARKETS CORP. http://economics.bmocapitalmarkets.com
Good:
Tax cuts/reform
More infrastructure spending
Less regulation
Not-so-good:
Protectionism
Immigration uncertainty
Restrained by budget deficit and Congress
President Trump’s economic platform
A mix of “good-for-growth” and “not-so-good-for-growth”
1
© COPYRIGHT 2017 BMO CAPITAL MARKETS CORP. http://economics.bmocapitalmarkets.com 2
Nov ’16 Dec Jan ’17 Feb Mar Apr
Election Day
Record
17500
18500
19500
20500
21500
Stocks(Dow Jones Industrial Average)
Nov ’16 Dec Jan ’17 Feb Mar Apr
Record
vs C$
vsMexican
Peso
Broad¹
96
100
104
108
112
116
US dollar(November 1, 2016 = 100)
Nov ’16 Dec Jan ’17 Feb Mar Apr
2½-yr high
1.7
1.9
2.1
2.3
2.5
2.7
Bonds(10-year US Treasury yield : %)
¹ Broad index: Major currencies (Euro Area, Canada, Japan, United Kingdom, Switzerland, Australia, Sweden) plus 19 others, including Mexico and China
2016–17
Post-election markets: Trumped up… mostly
(as of April 7, 2017)
© COPYRIGHT 2017 BMO CAPITAL MARKETS CORP. http://economics.bmocapitalmarkets.com 3Sources: ¹ The Conference Board, ² National Federation of Independent Business, ³ National Association of Home Builders
75
100
125
150
175
14 15 16 17
United States ( January 2014 = 100)
Confidence booster
Consumer Confidence¹
Housing Market Index³
2005
2000
post election
Small Business Optimism Index²
2004
Highest since
© COPYRIGHT 2017 BMO CAPITAL MARKETS CORP. http://economics.bmocapitalmarkets.com 4
0.2
1.6
1.8
1.9
1.9
2.0
2.4
2.4
6.8
7.0
-2.5
-4 -2 0 2 4 6 8
Brazil
Russia
Japan
Euro Area
UK
Canada
US
Mexico
Australia
China
India
Real GDP
Average growth 2000-10: 4%
(y/y % chng)
Global GDP: Mixed and still sluggish
2016:Q4
15 16 17 18World 3.2 2.8 3.1 3.1Emerging markets 3.9 3.7 4.0 4.0G7 2.0 1.5 1.9 1.8
© COPYRIGHT 2017 BMO CAPITAL MARKETS CORP. http://economics.bmocapitalmarkets.com 5
US
Canada
forecast-5.0
-2.5
0.0
2.5
5.0
04 06 08 10 12 14 16 18
Real GDP
Canada bounces back
(y/y % chng)
North American growth: A better 2017
15 16 17 18Canada 0.9 1.4 2.5 1.9US 2.6 1.6 2.4 2.5
© COPYRIGHT 2017 BMO CAPITAL MARKETS CORP. http://economics.bmocapitalmarkets.com 6
US
Canada
forecast
4.4%
10.0%
4.5%
[33-year low]5.8%
8.7%
6.7%
4
5
6
7
8
9
10
06 08 10 12 14 16 18
Unemployment rate (percent)
Jobless rates: US still falling… Canada improving again
Greece 23.5 Spain 18.0 Italy 11.5 Portugal 10.0 France 10.0 Canada 6.7 Ireland 6.4 Australia 5.9 UK 4.7 US 4.5 Germany 3.9 Japan 2.8
4.75.4
Vancouver British Columbia
© COPYRIGHT 2017 BMO CAPITAL MARKETS CORP. http://economics.bmocapitalmarkets.com 7
Alberta
Saskatchewan
British Columbia
3
4
5
6
7
8
9
06 07 08 09 10 11 12 13 14 15 16 17
Unemployment rate
Canada (percent)
Jobless rates: Oilpatch turning the corner?
© COPYRIGHT 2017 BMO CAPITAL MARKETS CORP. http://economics.bmocapitalmarkets.com 8
US recession forecast
Nominal
Real²
0
40
80
120
160
70 75 80 85 90 95 00 05 10 15
Crude oil price¹
Long-term average price = $55 (today’s dollars)
(US$/bbl)
Oil price collapse in perspective
¹ West Texas Intermediate ² March 2017 US dollars
© COPYRIGHT 2017 BMO CAPITAL MARKETS CORP. http://economics.bmocapitalmarkets.com 9Source: BMO Economics forecasts
-2.5
0.5
1.3
1.4
1.8
2.3
2.4
2.6
2.7
2.8
-4 -2 0 2 4
NL
NB
PE
NS
SK
QC
MB
ON
AB
BC
2017
-2.5
-0.4
0.5
0.5
1.2
1.3
2.0
2.3
2.6
3.0
-4 -2 0 2 4
AB
NL
SK
NB
PE
NS
QC
MB
ON
BC
2016
Real GDP – Canada (y/y % chng)
Regional outlook: Ch-Ch-changes
Oil producers
© COPYRIGHT 2017 BMO CAPITAL MARKETS CORP. http://economics.bmocapitalmarkets.com 10
2017:“Toronto and surrounding cities are in a housing bubble”
– BMO Economics2016:“Party will end in the Toronto and Vancouver housing markets this year”
– Canadian bank2015:“Canada is in serious trouble”
– Deutsche Bank 20152014:“Why Canada isn’t immune to a US-style housing crash”
– Maclean’s2013:“Inside the great real estate crash of 2013”
– Maclean’s2012:“Canada’s housing crash begins”
– Canadian Business2011:“Canada’s housing bubble deemed close to bursting”
– CBC News2010:“Canada’s housing bubble: An accident waiting to happen”
– CCPA2009:“Why Canada’s housing bubble will burst”
– The Tyee2008:“Canada’s housing bubble could soon burst”
– US investment firm
Canada
Housing: Bubble Trouble?
© COPYRIGHT 2017 BMO CAPITAL MARKETS CORP. http://economics.bmocapitalmarkets.com
Averageprice
(y-t-d avg)
11
-1.9
-1.2
2
2
3
0.6
3.3
3.8
4.0
14.0
16.0
28.6
$459,000
$330,000
$355,000
$349,000
$381,000
$281,000
$950,000
$500,000
$917,000
-6 0 6 12 18 24 30 36
Calgary
Saskatoon
Edmonton
Montreal
Ottawa
Winnipeg
Vancouver
Canada
Toronto
Existing home prices¹
Federal government moves to cool market
Canada
Canadian house prices: Location, location, location
¹ HPI composite benchmark where available ² Average price (3-mnth ma) ³ March 2017 (HPI benchmark rate, average price)
(y/y % chng : nsa : as of February 2017)
© COPYRIGHT 2017 BMO CAPITAL MARKETS CORP. http://economics.bmocapitalmarkets.com 12
August 2016
Toronto
Vancouver
Hamilton
70
80
90
100
110
15 16 17
Teranet House Price Index
(August 2016 = 100)
Spot the city with a non-resident tax
© COPYRIGHT 2017 BMO CAPITAL MARKETS CORP. http://economics.bmocapitalmarkets.com 13
-40
-20
0
20
40
60
80
84 89 94 99 04 09 14
Real home prices¹
Bigbubble
Smallerbubble
Toronto (2-yr % chng)
Real home prices: Too too much in TO
Shading marks periods of US recession ¹ deflated by CPI March 2017 = estimate
© COPYRIGHT 2017 BMO CAPITAL MARKETS CORP. http://economics.bmocapitalmarkets.com 14
-5
0
5
10
15
05 07 09 11 13 15 17
Debt growth²(y/y % chng)
0.6
0.8
1.0
1.2
1.4
1.6
1.8
90 95 00 05 10 15
Debt ratio(ratio to personal disposable income)
Debt ratio at record highs, more to come¹ Households, nonprofits and unincorporated businesses ² Consumer credit and residential mortgages only
Households¹
Canadian consumers: “Vulnerabilities are elevated and rising”
Canada
US
crossover
Canada
US
© COPYRIGHT 2017 BMO CAPITAL MARKETS CORP. http://economics.bmocapitalmarkets.com 15(e) = estimate ¹ Source: Federal Budget 2017
forecast¹
(C$ blns : lhs)
(e)
(% of GDP : rhs)
-9
-6
-3
0
3
-60
-40
-20
0
20
80 90 00 10 20
Federal government budget balance Fiscal 17/18 deficit $28.1 bln
Strengthening economy provides upside versus budget assumptions
Little in the way of new measures, but “infrastructure” spending detailed
Deficits persist through forecast horizon
Debt/GDP stable
Canada
Budget 2017: Beauty (economy) and Beast (deficit)
© COPYRIGHT 2017 BMO CAPITAL MARKETS CORP. http://economics.bmocapitalmarkets.com
parity
Poloz takes over at BoC(June 1, 2013)106.1¢
68.7¢
74.6¢
60
70
80
90
100
110
11 12 13 14 15 16 17
Canadian dollar (US¢ : as of April 7, 2017)
16lines: weekly averages dots: daily closes forecasts: BMO Economics
Trade uncertainties
Canada
Canadian dollar: Where next?
Bank of Canada Governor
Stephen Poloz
Year-end 2016 74.5 2017 75.0 2018 78.5
© COPYRIGHT 2017 BMO CAPITAL MARKETS CORP. http://economics.bmocapitalmarkets.com
forecast
Total
Core
2.2%
2.7%
-3.0
-1.5
0.0
1.5
3.0
4.5
09 11 13 15 17
Total
Core¹1.6%
2.0%
-3.0
-1.5
0.0
1.5
3.0
4.5
09 11 13 15 17
17¹ Average of three new core inflation measures
0.2
0.8
1.5
2.0
2.3
2.6
2.7
4.8
0 2 4 6
Japan
China
Euro Area
Canada
UK
India
US
Brazil
Consumer price index (y/y % chng)
Inflation edging up
United States Canada
British Columbia: 2.3%
Total CPI(latest month)
© COPYRIGHT 2017 BMO CAPITAL MARKETS CORP. http://economics.bmocapitalmarkets.com
Consumer price index – Canada
Inflation and deflation
18
Deflationary Fresh vegetables -14.0%
Fresh fruit -13.3%
Bread -5.4%
Beef -4.2%
Coffee and tea -3.5%
Dairy and eggs -2.8%
Home entertainment equipment -2.6%
Telephone services -2.2%
Sports equipment -1.4%
Electricity -0.8%
Inflationary Gasoline 23.1%
Books 8.2%
Air fares 5.6%
Cigarettes 4.3%
Home insurance 3.6%
New autos 3.6%
Women’s clothing 3.5%
Property taxes 2.8%
Tuition fees 2.8%
Beer 1.8%
(y/y % chng : as of February 2017)
Overall CPI: 2.0%
Up 18.1% y/y in early April
Down 3.6% y/y in Ontario
© COPYRIGHT 2017 BMO CAPITAL MARKETS CORP. http://economics.bmocapitalmarkets.com 19
Canada
US
0
1
2
3
4
5
6
7
07 09 11 13 15 17
10-year bonds
forecast
Canada
US0
1
2
3
4
5
6
7
01 04 07 10 13 16
Overnight rate
Record spreadBoC: On hold
Interest rates: More US rate hikes coming
Canada US Current 1.60 2.38 End-2017 1.80 2.65 End-2018 2.30 3.00
(% : as of April 7, 2017)
Canada US Current 0.50 0.75-1.00 End-2017 0.50 1.25-1.50 End-2018 1.25 2.00-2.25
© COPYRIGHT 2017 BMO CAPITAL MARKETS CORP. http://economics.bmocapitalmarkets.com 20
-3.4
-2.4
2.5
2.9
3.2
4.5
5.2
5.4
6.3
8.2
9.2
11.7
-10 0 10 20 30
Russia
Japan
TSX
UK
Australia
DJIA
S&P 500
Germany
China
Brazil
Nasdaq
India
-11.3
0.4
1.8
7.0
7.5
8.0
9.5
13.4
14.4
17.5
37.5
52.2
-20 0 20 40 60
China
Japan
India
Australia
Nasdaq
Germany
S&P 500
DJIA
UK
TSX
Brazil
Russia
Equity markets (% chng)
Global stocks: Tables turn
20162017 year-to-date
(as of April 7, 2017)
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