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Focus

2020 U.S. Presidential Election Impacts UnConventional Wisdom

Low for Long-er-er

China: Housing Heats Up Again

August 28, 2020

Feature Article

Our Thoughts

     Our Thoughts

UnConventional Wisdom

.

Douglas Porter, CFA,

Chief Economist

douglas.porter@bmo.com

As the summer winds down, markets continue to gear higher, with the S&P 500 hittingrecord highs led by the mighty, mighty tech space. Bond yields got into the act, too,with the 10-year Treasury yield touching a three-month high of 0.75% on the inflation-seeking message from Jay Powell at Jackson Hole. Even oil took a look at its highestlevels since early March, but the run-up in WTI to above $43 had more to do withHurricane Laura than rising demand. No matter the source, firming resource prices andrising asset markets have also boosted the Canadian dollar above 76 cents, its bestlevel since the opening weeks of the year. Similar forces also lifted the TSX to a post-shutdown high, finding important support by generally better-than-expected Q3 bankearnings.

The latest batch of economic data was a mixed blessing for the markets, with moresigns of outsized strength in U.S. housing, strong new orders, but stubborn joblessclaims at 1 million, and an August slide in one measure of consumer confidence. Thehigh-frequency data suggest that the recovery continues to grind ahead in late August,and an ebbing number of new U.S. virus cases is helping calm nerves (albeit even ascases are rising unnervingly in Spain and France).

The big number for the week was from Canada, perhaps the last major economy asidefrom Australia to report on Q2 GDP. The spring quarter captured the full force of thelockdown across the advanced economies, and Canada was pretty much squarelyin the middle of the pack. Normally, we report the changes in quarterly GDP on anannualized basis (i.e., if that growth rate was maintained for a full year), but we willfocus on the European convention of unadjusted figures for the sake of cross-countrycomparison, and sanity. Canada’s GDP fell 11.5% in Q2, a bit better than the initial flashestimate by StatsCan of -12%. That was roughly in line with the Euro Area average of-12.1%. Printing deeper drops were, in order, the U.K. at -20.4%, France -13.8%, andItaly -12.4%, while hit a bit less hard were Germany at -9.7%, the U.S. -9.1% and Japan-7.8%. (Since you insist, Canada’s annualized drop was 38.7%, the U.S. was revised to adrop of 31.7%, while the deep U.K. slide works out to -59.8%.)

The good news, such as it is, is that by all accounts, these economies are headed forbig rebounds in Q3 as nations reopened at varying stages. In some cases, the reboundswill be huge, and Canada looks to be one of those cases. Along with the horrific,although expected, Q2 plunge, it was also revealed that GDP snapped back 6.5% inJune and the early estimate for July is another 3% pop. (As an aside, prior to this year,even that seemingly moderate July gain would have been a record monthly advancein GDP—these figures are all absolutely huge.) The three-month string of big monthlyincreases would leave the level of July GDP already up at a massive 41% annual rateversus the Q2 level. And many, many other indicators are pointing to a mammoth Q3rebound. Just as one example, the flash estimate on July manufacturing sales was an8.7% gain, leaving them up a towering 159% above Q2 levels (annualized). As wemaintained almost from day 1 of the shutdown, the deep spring slide in activity hasbeen followed by a rapid rebound in most measures upon reopening.

Two caveats to that upbeat message on the prospects for Q3. First, even with a hugesnap-back, the level of output by the end of Q3 is still expected to be well shy of pre-pandemic activity. We estimate that GDP will still be down about 5% from February’s

August 28, 2020 | Page 2 of 16

     Our Thoughts

high even by the end of the quarter. Putting that in perspective, the peak-to-bottomdrop in GDP in the 2008/09 downturn was roughly 5%. Second, while Canada seemspoised to blow the doors down in Q3 with something like a 45% surge in GDP, versusaround 25% for the U.S. economy in the quarter, it mostly reflects a much weakerstarting point. That is, the harder they fell initially, the bigger the bounce. The reality isthat because of much more pronounced weakness in Q1 and Q2, Canada is still headedfor a bigger annual decline in GDP this year than the U.S. economy.

And that brings us to the punchline. For the first time in more than four months, weare today revising our estimate on Canadian GDP growth for 2020. Through thelockdowns and the early stages of reopening, we have held our estimate at a declineof 6%, to be followed by a symmetrical 6% rebound next year. Given the combinationof a slightly milder drop than initially expected in Q2 and the better hand-off in Q3, weare nudging our call slightly to a smaller drop of 5.5% this year, but will stick with ourabove-consensus call of +6% for 2021. It’s a roughly similar story for the U.S., wherewe nudged up our call for this year by half a point on the Q2 revision to -4.5%, andlook for a 4% rebound next year. In both cases, it’s not a big change, but it’s the firstupward revision this year by us on Canada, which is a big deal.

There were a lot of big storylines this week in a normally quiet period for markets,including outside of the financial world. Sticking to economics, potentially the mostsignificant development was the semi-expected adjustment to the Fed’s missionstatement, as revealed by Fed Chair Powell’s Thursday speech. Robert digs into thedetails below, but the main takeaway is that its new flexible average-inflation targetand the increased focus on reversing weakness in job markets point to an easierpolicy for longer. The rubber will really meet the policy road later in this cycle, whenthe unemployment rate returns to quasi-normal, and the Fed will be slower to beginhiking. That is, they will likely let the economy run hotter for longer late in the cycle.

Market reaction, while generally muted, was to bump up long-term yields, mostlyreflecting a slightly higher long-term inflation outlook. However, we would hasten toadd that the five-year implied inflation outlook from the TIPS market remains at justover 1.8%; the market is still in “Show me” mode, doubtful that the Fed can generateinflation. That’s understandable, given that the core PCE deflator has averaged 1.67%annualized over the past 15 years (and was 1.3% y/y in July).

The Bank of Canada faces a very similar backdrop and may possibly make a similardecision as the Fed in its upcoming new Monetary Policy Framework. While the BoC’sofficial inflation target is headline CPI, curiously it has almost exactly matched theU.S. core PCE deflator since 2005. As of July, it had averaged 1.66% over the past 15years (and was running at just 0.1% y/y), presenting the BoC with a nearly identicalchallenge. But before the BoC makes any radical changes, allow a modest proposal:Perhaps the Bank could simply revert to aiming to keep inflation within a band of 1%-to-3%, as they did in earlier years of targeting. This by itself allows inflation to run hotfor a spell, without needing pre-emptive action (which the Fed now seems to eschew).And note that in the 15 years up to 2014, and before oil prices collapsed, headline CPIaveraged precisely 2.0%. It seems that the Bank had already hit on a perfect formula,so why not simply return to what worked in the past?

August 28, 2020 | Page 3 of 16

     Our Thoughts

Low for Long-er-er

.

Robert Kavcic,

Senior Economist

robert.kavcic@bmo.com

Federal Reserve Chair Powell used this week’s virtual Jackson Hole confab to officiallymove the central bank toward average inflation targeting. While this wasn’t ashocker in any way, as the market has long assumed such a move was imminent, itdoes mark a significant change in thinking that has implications for policy and financialmarkets. In a nutshell, the Fed “will seek to achieve inflation that averages 2 percentover time”. So, “following periods when inflation has been running below 2 percent,appropriate monetary policy will likely aim to achieve inflation moderately above 2percent for some time”. For example, coming out of the financial crisis, the FederalReserve probably wouldn’t have begun to raise interest rates in 2015 under this newframework, when five-year annualized core PCE inflation was running at just 1.5%.Neither would it likely have tightened by 200 bps through late-2018, with that samemeasure only briefly touching 2%.

That said, this new policy stance has been left flexible and leaves a few key factorsopen to interpretation. For example, if core PCE remains the key metric, the policyimplications might be quite a bit different (i.e., more dovish) than under core CPI(which did run near 2% during the last tightening cycle) or even some blendedmeasure of price pressure. The amount of time preferred to average out inflation isalso open to wide interpretation. For example, does this policy apply through the cycle,where the Fed will only average out low inflation readings during the pandemic? Orwill it be looking longer term? Keep in mind that bringing 10 years of 1.5% core PCEinflation back to 2% would require a decade at 2.5%, a serious task.

Doubling down, the Fed also said it will focus more intently on job-market strength.And, that should particularly apply "for many in low- and moderate-incomecommunities". This is shaping up to be a legitimate issue post-COVID, given muchdeeper job losses in lower-paying segments of the labour market. In practice, we'llprobably have to eschew the notion that some level of the jobless rate will bedeemed neutral, and force Fed tightening—that would be much, much later in thecycle anyway. We’ve long been preaching that we are in a low-for-long interest rateenvironment. Putting it together, this policy shift not only reinforces that theme, butcould set the stage for an even longer period of highly accommodative policy thanmany imagined pre-COVID, or even early in the downturn.

Treasury yields backed up modestly following Chair Powell’s speech, with the 10-yearup 10 bps on the week, to 0.74%, and the 30-year rising 16 bps by early Friday. Thecurve continues to gradually steepen, and Powell’s comments supported the recentmove in inflation expectations back to pre-COVID levels. Equities, of course, shouldcontinue to feast on this new monetary policy approach, and both the Nasdaq and S&P500 pushed further into record territory this week. Still, the gains continue to look top-heavy, with big-cap technology driving much of the growth. Indeed, S&P technology isup about 19% since the market's pre-COVID high in February, while an equal-weightedversion of the S&P 500 is still about 6% below those highs.

That said, the Canadian banks—one sector that has been held back so far—had aweek of relief alongside Q3 earnings results. Most of the group topped expectationsas provisions for credit losses were trimmed from the prior quarter’s increase. And,gains in capital markets and wealth management activity appear to be at least partly

August 28, 2020 | Page 4 of 16

     Our Thoughts

offsetting weakness in personal and commercial banking. What were once dividendyields north of 7% have now come back down to just over 5% for the group onaverage. Suffice it to say that anything yielding around 5%, safely, with the ability togrow their payout (and we’re not talking just banks) looks that much better in this newaverage inflation targeting world.

China: Housing Heats Up Again

.

Art Woo,

Senior Economist

art.woo@bmo.com

The Middle Kingdom is staging a pretty impressive economic recovery following theinitial COVID-19 outbreak and lockdown. And though many China Watchers are quickto point out that the recovery remains uneven and patchy–with growth being led bymanufacturing/state-driven investment and retail sales lagging–such a developmentshould not be considered too surprising. A weakened job market, particularly forthe country’s enormous 250-300 million migrant worker population, and lingeringuncertainty over COVID-19 are likely to have a long-lasting impact on consumerspending, particularly for services (e.g., restaurants and entertainment). Nonetheless,a less appreciated yet critical development that is supporting China’s recovery is takingplace in the housing market.

The latest National Bureau of Statistics survey shows that both new and second-handhousing prices continued to climb across the majority of the country’s 70 major cities.Of prominence, new home prices climbed on month-on-month terms in 59 cities inJuly, with resale prices rising in 45 cities. Note that there are generally more salesof new rather than existing homes, especially outside of China’s larger Tier-1 cities(Beijing, Guangzhou, Shanghai and Shenzhen). The strength of the housing market hasrevived concerns that the risk of a bubble is building again, which has forced a numberof municipalities to tighten housing restrictions to deter speculation in recent weeks.Some of the key measures introduced by local authorities (Shenzhen, Hangzhou,Nanjing, etc.) include (1) increasing down-payment requirements for second homes,(2) lengthening the lock-up period for resale, and (3) extending the qualifying period tobuy for new hukou residents.

The pick-up in the housing market highlights that prior long-term structural factorsidentified remain intact; namely urbanization, replacement/upgrader demand, andinvestment demand. Though the urbanization process remains advanced (61%of the population lived in cities in 2019), it still has some ways to go to meet thegovernment’s target of 70% by 2030. Replacement and upgrader demand are likelybigger drivers of new home sales, which reflect the poor quality of constructionof housing in the past and the rise in urban incomes. And despite President Xi’sproclamation that “houses are built for living, not for speculation”, investment demandremains a significant factor since Chinese residents' ability to invest outside the countrybecame more restrictive in 2016.

In a nutshell, a hot housing market provides further evidence that China’s economicrecovery has taken another valuable step forward, but also that long-running financialstability risks facing the country’s large property development sector have eased.Separately, we would be remiss if we did not mention that the risk of the U.S./ChinaPhase One trade agreement suddenly breaking down ahead of America’s presidentialelection appears to have receded. Trade talks conducted early in the week suggest thatboth sides appear to be relatively satisfied with how the deal has proceeded to date.

August 28, 2020 | Page 5 of 16

     Recap

Indications of stronger growth and a move toward price stability are good news for the economy.

Good News Bad News

Canada BoC Gov. Macklem: important

that “inflation expectations remain anchored on our target”

Monthly Real GDP +6.5% (June); +3.0% (July P) SEPH Employment +666,549 (June) Current Account Deficit narrowed to $34.5 bln a.r. (Q2)

Real GDP -38.7% a.r. (Q2)—record drop Conference Board’s Consumer Confidence -4.1 pts to 78.4 (Aug.) Ottawa posted a budget deficit of $120.4 bln (Apr.-to-June)—versus $0.1 bln deficit last year

United States Fed Chair Powell signals

employment and inflation to run hotter

Greenback weakens

Hurricane Laura causes less damage than initially feared

Real Personal Spending +1.6% (July) Personal Income +0.4% (July) Core PCE Deflator +1.3% y/y (July) Durable Goods Orders +11.2% (July)—and core +1.9% Initial Claims -98k to 1,006k (Aug. 22 week)—but above expected Retail Inventories +1.2% (July A) New Home Sales +13.9% to 901,000 (July) Pending Home Sales +5.9% (July) S&P Case-Shiller Home Prices +3.5% y/y (June) FHFA Home Prices +5.7% y/y (June) Chicago Fed National Activity Index +1.2 (July) U of M Consumer Sentiment revised up to 74.1 (Aug.)

Goods Trade Deficit widened to $79.3 bln (July A) Pre-Tax Corporate Profits -20.1% y/y (Q2 P) Wholesale Inventories -0.1% (July A) Chicago PMI -0.7 pts to 51.2 (Aug.) Conference Board’s Consumer Confidence -6.9 pts to 84.8 (Aug.)

Japan PM Abe resigns amid health

concerns

All-Industry Activity Index +6.1% (June)

Europe France considering another

lockdown?

BoE Gov. Bailey: “not out of firepower” to support economy

Euro Area—Private Sector Credit +4.7% y/y (July) Euro Area—Economic Confidence +5.3 pts to 87.7 (Aug.) Germany—ifo Business Climate +2.2 pts to 92.6 (Aug.) France—Consumer Confidence steady at 94 (Aug.) France—Business Confidence +7 pts to 91 (Aug.) Italy—Industrial Orders +23.4% (June) Italy—Consumer Confidence +0.7 pts to 100.8 (Aug.)

Germany—Gfk Consumer Confidence -1.6 pts to -1.8 (Sep.) France—Consumer Prices slowed to +0.2% y/y (Aug. P) France—Consumer Spending +0.5% (July) —below expected

August 28, 2020 | Page 6 of 16

     Feature

2020 U.S. Presidential Election Impacts

.

Sal Guatieri,

Senior Economist

sal.guatieri@bmo.com

Democratic presidential candidate Joe Biden will faceoff against President Donald Trump for the Oval Officeon November 3. Given widely different policy platforms,much is at stake for the economy and markets. Biden,who is currently leading in the polls (Chart 1), plans toraise taxes on corporations and high-income earners,and spend more on education, health care, and theenvironment. However, a significant shift in taxes wouldlikely require a Democratic sweep of Congress (bywinning a majority in the Senate and retaining controlof the House). Such a scenario could also see increasedregulations in the financial and energy industries.Meantime, a re-elected President Trump would likelyfocus on tax cuts, deregulation, and trade policy.Regardless of who wins, the next federal governmentwill need to start filling a deep budget hole.

.  

Mar Apr May Jun Jul Aug Sep

Biden

Trump

40

43

46

49

52

Average Support in Election Polls

Biden Lead Widens

2020 – United States

Chart 1

Sources: BMO Economics, fivethirtyeight.com

(as of August 28, 2020)

Before digging into a closer look at how the two contenders’ policies stack up, it’sworth stressing that these are proposals, and Congress ultimately holds the pursestrings and makes the decision on taxes and spending. Accordingly, the Senate racemay be the true key in the direction of policy. With that caveat, here are the highlights:

On individual taxes, President Trump wants to reduce rates further, and could seekto extend the 2017 individual tax cuts beyond 2025. Biden plans to reverse the Trumptax cuts for those earning more than $400,000 annually by restoring the 39.6% topmarginal tax rate from the current 37% and eliminating some special tax breaks, with apartial offset from repealing the current $10,000 cap on state and local tax deductions.Persons earning more than $1 million per year would pay a tax on capital gains anddividends equal to the new top rate on regular income, almost double the current rate.As well, a 12.4% Social Security tax would apply to earners making over $400,000, paidequally by workers and companies. The Committee for a Responsible Federal Budgetestimates that the Biden tax plan would raise taxes on the top 1% of earners by 13%-to-18%, while indirectly raising taxes on most other earners by 0.2%-to-0.6%. The TaxPolicy Center estimates that around 74% of the tax increase would be borne by the top1% of households and 93% would fall on the top 20% earning more than $170,000 peryear. On corporate taxes, Biden plans to reverse (by half) Trump's tax cuts by liftingthe rate to 28% from 21%, while also doubling the minimum tax rate on overseasincome of U.S. multinationals. Meantime, Trump would allow for the full expensing ofdeductions for essential industries that reshore manufacturing, supporting investment.

On spending, Biden would focus on infrastructure, education, child care, housing,and health care. His “Build Back Better” economic plan allocates $700 billion forinfrastructure and research and development. For education, he wants more supportfor lower-income students and free tuition for families making less than $125,000 a

August 28, 2020 | Page 7 of 16

     Feature

year. He also unveiled a $775 billion plan to increase funding for child and elderly care,including free preschool for children three- and four-years of age. Biden plans to invest$640 billion over a decade on affordable housing via rental assistance, tax credits, andbuilding low-cost units, while providing emergency funding to reduce homelessness. Incontrast to Trump, Biden aims to build on the Affordable Care Act by allowing workerswith employer coverage to buy into a public health-care plan and by using tax creditsto reduce insurance premiums, while retaining private insurance plans. Meantime,President Trump is keen on spending on infrastructure and defense, and providingfunds to employers that invest in child care. He aims to tighten requirements fordisability benefits.

The budget deficit is one area that will come under close scrutiny after the currenthealth and economic crises have passed, though neither candidate has provideddetails on how to tackle it. Depending on the next relief plan out of Congress (thefifth), the deficit could approach $5 trillion or 24% of GDP this year, more than doublethat during the Great Recession. Fitch's downgrade of the country's AAA credit-ratingoutlook to negative is a warning to lawmakers to produce a credible path back to fiscalsustainability.

On regulations, while Biden is not planning to unwind Trump's deregulations in thebanking sector, a Democratic-led Congress could push for changes. His selection ofcabinet members, particularly Treasury Secretary, would also influence regulatorypolicy.

While Trump plans to reduce immigration and complete the “wall” with Mexico,Biden intends to grant citizenship to 11 million undocumented migrants, accept morerefugees and rescind travel bans on some countries. Biden’s more liberal immigrationpolicies could support long-run economic growth.

After four years of tariffs and threats against friend and foe, we know where Trumpstands on trade. A Phase 2 deal with China could prove elusive given tense relationsbetween the two nations. Biden is less keen on tariffs than Trump, but says the U.S.needs a tough trade policy with China that includes aggressive enforcement actions,and he does not plan to reverse the current tariffs on the country. While he is likely totake a less strident approach than Trump in dealing with allies, it is unclear whetherhe would seek U.S. participation in multilateral trade deals, such as the Comprehensiveand Progressive Agreement for Trans-Pacific Partnership.

On the environment, the two contenders couldn't be farther apart. Trump is a strongsupporter of fossil fuels production including coal. Biden wants to end subsidies tofossil fuel companies, limit fracking, and create a Green New Deal that would invest$2 trillion over four years in technology to achieve a zero carbon pollution electricalgrid by 2035 and net-zero emissions by 2050. He would promote electric vehicles byspending on battery recharging stations and storage technology. He has been criticalof Canada's oil sands and aims to rescind the Keystone XL pipeline permit, a risk forAlberta’s oil producers.

For workers, Trump wants to increase funds for parental leave for working familiesand apprenticeship programs. Biden wants more union jobs and to more than doublethe federal minimum wage to $15, which could raise business costs and inflationtemporarily.

August 28, 2020 | Page 8 of 16

     Feature

Overall, a Joe Biden win would likely mark a significant shift in the policylandscape from the past four years, especially if coupled with a congressional “bluewave” and if the more progressive wing of the Democratic Party gains sway. A splitCongress would result in more incremental change. For the economy, Biden’s taxhikes on corporations and high-income earners that amount to nearly $4 trillionover a decade and the jump in the federal minimum wage could weigh on businessconfidence, earnings and investment, just as many firms are struggling with thepandemic. His climate-change policies would temper investment in fossil fuelindustries. However, Biden's spending ambitions could provide a counterweight for theeconomy. In fact, a Democratic sweep of Congress would likely usher in much morepandemic relief measures (and a larger budget deficit) given the wide gap in currentproposals between the House’s $3.5 trillion bill and the Senate’s roughly $1 trillionproposal. Biden’s less strident trade approach than Trump's could reduce businessanxiety and support investment. Expanded immigration would aid household formationand long-term growth. Meantime, a re-elected Donald Trump would likely stay thecourse on deregulation and mostly business-friendly policies, apart from the tariffs andimmigration restrictions such as on H1-B work visas.

The election’s uncertain effect on the economy implies an equally ambiguousimpact on inflation, the Fed and interest rates. Some steepening of the yield curvecould occur if investors become nervous about the budget deficit. Moreover, JeromePowell’s term as Fed Chair will be up in February 2022, and there is a chance hewill be replaced no matter who wins the election; by Biden because he was Trump’sappointment, and by Trump because of his oft-stated issues with Powell. The lattermay choose a somewhat radical candidate. A change in government would, by nature,lead to more policy-related uncertainty, resulting in some safe-haven demand forU.S. dollars. However, this could be offset by concern that higher corporate taxesand minimum wages would reduce competitiveness. The corporate tax hikes mightpressure credit spreads somewhat wider and weigh on equities, particularly forenergy companies affected by the Green New Deal. However, less concern about tradewars and Trump’s often mercurial foreign relations could support risk assets.

August 28, 2020 | Page 9 of 16

     Economic Forecast

.

Economic Forecast Summary for August 28, 2020

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

CANADA

Real GDP (q/q % chng : a.r.) -8.2 -38.7 45.0 7.8 6.5 4.2 3.5 3.2 1.7 -5.5 6.0

Consumer Price Index (y/y % chng) 1.8 0.0 0.4 0.4 0.7 1.9 1.6 1.7 1.9 0.7 1.5

Unemployment Rate (percent) 6.3 13.0 10.0 8.8 8.3 8.1 7.9 7.6 5.7 9.5 8.0

Housing Starts (000s : a.r.) 209 191 217 205 210 206 202 202 209 205 205

Current Account Balance ($blns : a.r.) -52.9 -34.5 -30.9 -25.7 -23.0 -22.8 -22.5 -23.6 -47.0 -36.0 -23.0

Interest Rates

Overnight Rate 1.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 1.75 0.50 0.25

3-month Treasury Bill 1.29 0.22 0.15 0.15 0.15 0.15 0.15 0.15 1.65 0.45 0.15

10-year Bond 1.20 0.59 0.55 0.65 0.75 0.90 1.00 1.15 1.59 0.75 0.95

Canada-U.S. Interest Rate Spreads

90-day 16 8 6 6 6 6 6 6 -45 9 6

10-year -18 -10 -10 -9 -8 -7 -6 -6 -56 -11 -7

UNITED STATES

Real GDP (q/q % chng : a.r.) -5.0 -31.7 25.0 2.5 5.8 5.7 4.1 3.2 2.2 -4.5 4.0

Consumer Price Index (y/y % chng) 2.1 0.4 1.1 1.0 1.2 2.4 1.9 1.8 1.8 1.2 1.8

Unemployment Rate (percent) 3.8 13.0 9.8 8.9 8.0 7.2 6.5 6.1 3.7 8.9 7.0

Housing Starts (mlns : a.r.) 1.48 1.06 1.43 1.33 1.30 1.31 1.31 1.32 1.30 1.33 1.31

Current Account Balance ($blns : a.r.) -417 -413 -524 -544 -579 -584 -594 -605 -480 -475 -590

Interest Rates

Fed Funds Target Rate 1.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 2.13 0.38 0.13

3-month Treasury Bill 1.13 0.14 0.10 0.10 0.10 0.10 0.10 0.10 2.10 0.35 0.10

10-year Note 1.38 0.69 0.65 0.75 0.85 0.95 1.10 1.20 2.14 0.85 1.00

EXCHANGE RATES

US¢/C$ 74.4 72.2 74.9 75.6 75.9 76.2 76.5 76.8 75.4 74.3 76.4

C$/US$ 1.34 1.39 1.34 1.32 1.32 1.31 1.31 1.30 1.33 1.35 1.31

¥/US$ 109 108 106 105 105 106 106 107 109 107 106

US$/Euro 1.10 1.10 1.17 1.20 1.20 1.21 1.21 1.22 1.12 1.14 1.21

US$/£ 1.28 1.24 1.30 1.30 1.30 1.31 1.32 1.33 1.28 1.28 1.31

Blocked areas mark BMO Capital Markets forecasts; up and down arrows ( ) indicate forecast changes; spreads may differ due to rounding

(average for the quarter : %)

(average for the quarter : bps)

(average for the quarter : %)

(average for the quarter)

2020 2021 Annual

2019 2020 2021

August 28, 2020 | Page 10 of 16

     Key for Next Week

Canada

.

Robert Kavcic,

Senior Economist

robert.kavcic@bmo.com

.

Merchandise Trade DeficitThursday, 8:30 am

July (e) $2.0 bln

June $3.2 bln

Canada’s merchandise trade deficit is expected to narrow to $2 bln in July, afterwidening sharply to $3.2 bln in the prior month. Exports and imports surged 17% and22%, respectively, in June as activity was restarting. As this continues, we could keepseeing big swings in the trade balance, and some heavy revisions. For example, energyexports were up only fractionally in June despite a bounce in prices. Canadian-dollarWTI prices rose a further 6% in July, which should help improve the balance. Autoproduction also rebounded further after massive bounces in both imports and exportsin the prior month. After net exports added 4 ppts to growth in the very challengingsecond quarter (imports plunged deeper than exports), the contribution should turnnegative in Q3 as imports rebound faster.

.

EmploymentFriday, 8:30 am

Aug. (e) +2.1% (+375,000)

July +2.4% (+418,500)

Unemployment Rate

Aug. (e) 10.0%

July 10.9%

Average Hourly Wages

Aug. (e) +5.0% y/y

July +6.3% y/y

Canadian employment is expected to rebound further in August, adding another375,000 jobs. Through the first three months of the employment recovery (May toJuly), employment jumped by almost 1.7 mln positions but, even with the presumedgain in August, the total will still be down nearly 1 million from pre-COVID levels. Asfast as the early portion of the job recovery has been, the going will likely get tougherin the period ahead, and the remaining employment hole will become tougher tofill due to permanent business closures, persistent capacity constraints and workersdropping out of the labour market. And, the path to recovery will continue to varywidely by industry. Accommodation & food services employment, for example, wasstill down 25% in July, while some financial and professional services were almost allthe way back. Combined with a more modest jump in the labour force, the joblessrate should fall again to 10.0%. Over the medium term, as generous federal supportbenefits get extended, incenting workers back into the labour force could become apotential headwind on the recovery—something we’ll be watching closely.

United States

.

Sal Guatieri,

Senior Economist

sal.guatieri@bmo.com

.

Manufacturing ISM (PMI)Tuesday, 10:00 am

Aug. (e) 54.2

Consensus 54.5

July 54.2

The ISM factory index is expected to hold at a 16-month high of 54.2 in August afterbouncing off 11-year lows of 41.5 in April. Production has been supported by higherdemand and lean inventories, though tempered by the resurgence in coronaviruscases. The ISM new orders measure hit a 22-month high last month, and another gainin August would be encouraging. As of July, manufacturing production had retraced justover half of its plunge, with output of business equipment lagging that of consumergoods. The sector still has a ways to go to return to pre-virus levels.

.Beige BookWednesday, 2:00 pm

The Fed’s regional report card, prepared for the September 15/16 meeting, will likelyreveal a divergence in activity across industries and regions. Those areas that wereforced to partially reverse reopening plans should report slower activity. The lastBeige Book (released July 15) noted that activity and employment rose “in almostall Districts”, but was “well below” pre-virus levels. The current update will allow

August 28, 2020 | Page 11 of 16

     Key for Next Week

policymakers to glean whether the new restrictions and an increase in consumeranxiety are causing a broader slowdown in the economy and jobs.

.

Non-manufacturingISM (NMI)Thursday, 10:00 am

Aug. (e) 57.0

Consensus 57.0

July 58.1

The ISM non-manufacturing index is expected to retreat to 57.0 in August afterunexpectedly surging to a 17-month high of 58.1 in July to further distance itself fromApril’s 11-year low of 41.8. Some states paused and even reversed reopening plans(for restaurants, bars, gyms and theatres), and oil production retreated. Residentialconstruction will provide some offset due to the galloping housing market. The servicessector has recovered much faster than anyone expected, even in some other countries,which is a testament to the massive government income-support programs that arepropping up consumer demand.

.

Nonfarm PayrollsFriday, 8:30 am

Aug. (e) +1,500k

Consensus +1,486k

July +1,763k

Unemployment Rate

Aug. (e) 9.8%

Consensus 9.8%

July 10.2%

Average Hourly Earnings

Aug. (e) unch +4.5% y/y

Consensus unch +4.5% y/y

July +0.2% +4.8% y/y

We look for a 1,500,000 increase in payrolls in August, slowing from July’s pace due torenewed restrictions in some states and an increase in consumer anxiety. Governmentre-staffing will add to the tally, possibly by 200,000 following a larger increase theprior month. Construction and retail should also see good gains given the sharprecovery in home building and sales. However, food services could face a setback dueto renewed restrictions on bars and in-door dining in some states. The unemploymentrate is expected to slip into the single-digits at 9.8% from 10.2% in July and a post-warhigh of 14.7% in April. Average hourly earnings likely were flat, slowing the yearly rateto 4.5%. The expected payrolls gain in August would still leave the tally more than 11million short of February’s level after retracing about half of the 22 million jobs lostin March and April. We’ll also have an eye on a reported 1.6 million increase in thenumber of permanent job losses during the crisis after stabilizing in July.

August 28, 2020 | Page 12 of 16

     Financials Markets Update

.

Financial Markets Update for August 28, 2020

Aug 28 ¹ Aug 21 Week Ago 4 Weeks Ago Dec 31, 2019

Canadian Call Money 0.25 0.25 0 0 -150

Money Market Prime Rate 2.45 2.45 0 0 -150

U.S. Money Fed Funds (effective) 0.25 0.25 0 0 -150

Market Prime Rate 3.25 3.25 0 0 -150

3-Month Rates Canada 0.15 0.15 0 -2 -151

United States 0.10 0.09 1 1 -145

Japan -0.10 -0.10 0 -1 1

Eurozone -0.48 -0.49 1 -1 -9

United Kingdom 0.06 0.07 -1 -2 -73

Australia 0.10 0.10 0 0 -81

2-Year Bonds Canada 0.28 0.28 0 2 -141

United States 0.13 0.14 -1 3 -144

10-Year Bonds Canada 0.63 0.54 9 17 -107

United States 0.72 0.63 9 19 -120

Japan 0.05 0.03 3 4 7

Germany -0.41 -0.51 10 12 -22

United Kingdom 0.31 0.21 10 21 -51

Australia 1.02 0.88 14 21 -35

Risk Indicators VIX 25.8 22.5 3.2 pts 1.3 pts 12.0 pts

TED Spread 14 16 -2 -2 -22

Inv. Grade CDS Spread ² 67 68 0 -3 22

High Yield CDS Spread ² 375 391 -16 -67 95

Currencies US¢/C$ 76.30 75.89 0.5 2.3 -0.9

C$/US$ 1.311 1.318 — — —

¥/US$ 105.28 105.80 -0.5 -0.5 -3.1

US$/€ 1.1899 1.1797 0.9 1.0 6.1

US$/£ 1.335 1.309 2.0 2.0 0.7

US¢/A$ 73.51 71.61 2.7 2.9 4.7

Commodities CRB Futures Index 153.24 149.96 2.2 6.6 -17.5

Oil (generic contract) 42.96 42.34 1.5 6.7 -29.6

Natural Gas (generic contract) 2.69 2.57 4.5 49.5 22.9

Gold (spot price) 1,968.47 1,940.48 1.4 -0.4 29.7

Equities S&P/TSX Composite 16,690 16,518 1.0 3.2 -2.2

S&P 500 3,491 3,397 2.8 6.7 8.1

Nasdaq 11,698 11,312 3.4 8.9 30.4

Dow Jones Industrial 28,582 27,930 2.3 8.2 0.2

Nikkei 22,883 22,920 -0.2 5.4 -3.3

Frankfurt DAX 13,039 12,765 2.1 5.9 -1.6

London FT100 5,979 6,002 -0.4 1.4 -20.7

France CAC40 5,008 4,896 2.3 4.7 -16.2

S&P ASX 200 6,074 6,111 -0.6 2.5 -9.1

¹ = as of 11:30 am ² = One day delay

(percent change)

(basis point change)

August 28, 2020 | Page 13 of 16

     Global Calendar — August 31–September 4

Monday August 31 Tuesday September 1 Wednesday September 2 Thursday September 3 Friday September 4

Japa

n Industrial Production July P (e) +5.0% -17.5% y/y June +1.9% -18.2% y/y Retail Sales July (e) -2.5% -1.7% y/y June +13.1% -1.3% y/y Consumer Confidence Aug. (e) 28.5 July 29.5

Jobless Rate July (e) 3.0% June 2.8% Capital Spending Q2 (e) -3.8% y/y Q1 +0.1% y/y Manufacturing PMI Aug. F (e) 46.6 July 45.2

Services PMI Aug. F (e) 45.0 July 45.4 Composite PMI Aug. F (e) 44.9 July 44.9

Euro

Are

a G E R M A N Y Consumer Price Index Aug. P (e) unch +0.1% y/y July -0.5% unch y/y

I T A L Y Real GDP Q2 F (e) -12.4% -17.3% y/y Q2 P -12.4% -17.3% y/y Q1 -5.4% -5.5% y/y Consumer Price Index Aug. P (e) -1.2% -0.1% y/y July -0.7% +0.8% y/y

E U R O A R E A Manufacturing PMI Aug. F (e) 51.7 July 51.8 Jobless Rate July (e) 8.0% June 7.8% Consumer Price Index Aug. P (e) -0.1% +0.2% y/y July -0.4% +0.4% y/y Core CPI Aug. P (e) +0.9% y/y July +1.2% y/y

G E R M A N Y Unemploy. Jobless Rate Aug. (e) +4,500 6.4% July -18,000 6.4%

I T A L Y Jobless Rate July P (e) 9.1% June 8.8%

G E R M A N Y Retail Sales July (e) +0.5% +4.1% y/y June -2.0% +6.0% y/y

E U R O A R E A Services PMI Aug. F (e) 50.1 July 54.7 Composite PMI Aug. F (e) 51.6 July 54.9 Retail Sales July (e) +1.2% +3.7% y/y June +5.7% +1.3% y/y

G E R M A N Y Factory Orders July (e) +5.0% -5.7% y/y June +27.9% -11.3% y/y

U.K.

Markets Closed

Nationwide House Prices Aug. (e) +0.5% +2.0% y/y July +1.7% +1.5% y/y

Services PMI Aug. F (e) 60.1 July 56.5 Composite PMI Aug. F (e) 60.3 July 57.0

Construction PMI Aug. (e) 58.6 July 58.1

Manufacturing PMI Aug. F (e) 55.3 July 53.3

Othe

r C H I N A Manufacturing PMI D Aug. (e) 51.2 July 51.1 Non-manufacturing PMI D Aug. (e) 54.1 July 54.2 Composite PMI D Aug. July 54.1

I N D I A Real GDP Q2 (e) -19.2% y/y Q1 +3.1% y/y

C H I N A Caixin Manufacturing PMI Aug. (e) 52.5 July 52.8

A U S T R A L I A Building Approvals Sep. (e) -1.0% Aug. -4.9%

RBA Monetary Policy Meeting B R A Z I L

Real GDP Q2 (e) -9.5% -11.1% y/y Q1 -1.5% -0.3% y/y

A U S T R A L I A Real GDP Q2 (e) -6.0% -5.2% y/y Q1 -0.3% +1.4% y/y

C H I N A Caixin Services PMI Aug. (e) 54.0 July 54.1 Caixin Composite PMI Aug. July 54.5

A U S T R A L I A Trade Surplus July (e) A$5.0 bln June A$8.2 bln

A U S T R A L I A Retail Sales July (e) +3.3% June +2.7%

D = date approximate Upcoming Policy Meetings | Bank of England: Sep. 17, Nov. 5, Dec. 17 | European Central Bank: Sep. 10, Oct. 29, Dec. 10

August 28, 2020 | Page 14 of 16

     North American Calendar — August 31–September 4

Monday August 31 Tuesday September 1 Wednesday September 2 Thursday September 3 Friday September 4

Cana

da

8:30 am Industrial Raw Product Materials Price Index Price Index

July June +0.3% +7.5% 8:30 am Building Permits July (e) +3.0% June +6.2%

BoC Buyback: 30-year sector

9:30 am Markit Manufacturing PMI Aug. July 52.9 Auto Sales D Aug. July -4.9% y/y 10:30 am 3-, 6- & 12-month bill

auction $10.0 bln (new cash -$10.2 bln)

BoC Buyback: short-end sector

8:30 am Labour Productivity Q2 (e) +7.5% Q1 +3.5% Noon 30-year real return bond

auction $0.3 bln

BoC Buyback: Real return sector

8:30 am Merchandise Trade Deficit

July (e) $2.0 bln June $3.2 bln Noon 5-year bond auction

$5.0 bln

2-year bond auction announcement

BoC Buyback: 5-year sector

8:30 am Employment Aug. (e) +2.1% (+375,000) July +2.4% (+418,500) 8:30 am Unemployment Rate Aug. (e) 10.0% July 10.9% 8:30 am Average Hourly Wages Aug. (e) +5.0% y/y July +6.3% y/y 10:00 am Ivey Purchasing

Managers Index (s.a.) Aug. July 68.5

BoC Buyback: 2-year sector

7:30 am Challenger Layoff Report Aug. July +576% y/y 8:30 am Initial Claims Aug. 29 (e) 950k (-56k) C Aug. 22 1,006k (-98k) 8:30 am Continuing Claims Aug. 22 Aug. 15 14,535k (-223k) 8:30 am Productivity Unit Labour

Costs Q2 F (e) +8.0% a.r. +11.5% a.r. Consensus +7.3 % a.r. +12.2 % a.r. Q2 P +7.3% a.r. +12.2% a.r. Q1 -0.3% a.r. +9.8% a.r. 8:30 am Goods & Services

Trade Deficit July (e) $58.0 bln Consensus $51.9 bln June $50.7 bln 9:45 am Markit Services/Composite

PMI (Aug. F)

10:00 am Non-manufacturing ISM (NMI)

Aug. (e) 57.0 Consensus 57.0 July 58.1 Fed Speaker: Chicago’s Evans (12:30 pm)

11:00 am 13-, 26- & 52-week bill, 3-, 10R-year note, 30R-year bond auction announcements

11:30 am 4- & 8-week bill auctions

Unite

d St

ates

10:30 am Dallas Fed Mfg. Activity Aug. (e) unch C July -3.0 Fed Speakers: Vice Chair Clarida (9:00

am); Atlanta’s Bostic (10:30 am) 11:30 am 13- & 26-week bill

auctions $105 bln

9:45 am Markit Manufacturing PMI (Aug. F)

10:00 am Manufacturing ISM (PMI) Aug. (e) 54.2 Consensus 54.5 July 54.2 10:00 am Construction Spending July (e) +1.0% C June -0.7% 1:00 pm Treasury Secretary

Mnuchin testifies on coronavirus measures

Ward’s Total Vehicle Sales D Aug. (e) 14.9 mln a.r. Consensus 14.6 mln a.r. July 14.5 mln a.r.

Fed Speaker: Governor Brainard (1:00 pm)

11:00 am 4- & 8-week bill auction announcements

11:30 am 119-day cash management bill auction $30 bln

11:30 am 42-day cash management bill auction $30 bln

7:00 am MBA Mortgage Apps Aug. 28 Aug. 21 -6.5% 8:15 am ADP National

Employment Report Aug. (e) +1,100k Consensus +850k July +167k 10:00 am Factory Orders July (e) +5.0% Consensus +4.1% June +6.2%

Fed Speakers: New York’s Williams (10:00 am); Cleveland’s Mester

(noon) 2:00 pm Beige Book

8:30 am Nonfarm Payrolls Aug. (e) +1,500k Consensus +1,486k July +1,763k 8:30 am Unemployment Rate Aug. (e) 9.8% Consensus 9.8% July 10.2% 8:30 am Average Hourly Earnings Aug. (e) unch +4.5% y/y Consensus unch +4.5% y/y July +0.2% +4.8% y/y

C = consensus D = date approximate R = reopening Upcoming Policy Meetings | Bank of Canada: Sep. 9, Oct. 28, Dec. 9 | FOMC: Sep. 15-16, Nov. 4-5, Dec. 15-16

August 28, 2020 | Page 15 of 16

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