1. Art and Diseño

Douglas Porter, CFA, Chief Economist, BMO Financial Group
January 30, 2015
Feature Article
Page 6
Oil and the Economy in Nine Charts
U.S. Real GDP Slows (Q4) — but Consumer
Spending Jumps the Most in 8 Years
Loonie Can’t Fly… Falls to 78 Cents (US)
More Central Banks Ease…
Russia, Denmark, Singapore
New Zealand Turns Dovish
Greece’s New PM to Meet Eurogroup Chair
BMO Capital Markets Economics
www.bmocm.com/economics  1-800-613-0205
Please refer to page 15 for important disclosures
Our Thoughts
Page 2 of 15
Focus — January 30, 2015
The January Defect
L
ast week’s tirade concluded with the wistful hope that our 2015 target for the loonie
wouldn’t be breached within the next week. Wishful thinking. After plunging 3.6%
last week on the Bank of Canada’s shock rate cut, the beleaguered loonie tumbled
almost another 3% this week to 78.3 cents by Friday morning (or $1.278/US$) before
bouncing. Simply put, the currency just cannot catch a break so far in 2015, falling a
cannonading 9% already this year. To put that into perspective, there has only been one
year when the Canadian dollar has dropped by more than 9% (2008), let alone a month.
The currency has been walloped by a series of unfortunate events, both external
(strong US$, weak oil prices) and domestic. In fact, here is a list of the economic
news that has faced Canadians just since the start of the year (and I won’t fall back on
that tired cliché of a Top 10 list):
 Oil prices collapse further, and now threaten Alberta with recession.
 In turn, Ottawa delays the timing of this year’s budget.
 As well, the Bank of Canada responds with a shock interest rate cut.
 In response, the Canadian dollar falls out of bed, down 9% in a month.
 Accordingly, bond yields plunge to record lows of 1.3% for 10-years.
 And, layoffs sweep through the energy sector, with unrelated industries piling on
with job cuts (including Tim Hortons).
 Target piles on, abruptly deciding to leave Canada and its 17,000 employees.
 This follows job losses in the final two months of 2014… and then StatsCan
knocks another 64,000 jobs off last year’s gain in a significant revision.
 And, real GDP drops 0.2% in November, dragged down by manufacturing, the
sector that was supposed to benefit from the weak C$ and lower energy prices.
 Playing their part, the Leafs score about 2 goals in an 8-game losing skid.
Now take a deep breath. Yes, that is a very ugly list of events; and, understandably, this
has cast some serious doubts on the Canadian outlook for 2015. However, many items on
that list are not clear-cut negatives for growth, and many carry important offsets. The
budget delay was a direct response to a major shift in a key variable (oil), while the rate
cut and the drop in bond yields (and even the drop in the C$) could support growth. Even
with another trim, we are still looking for 2% GDP growth this year, with a tailwind from
an improving U.S. economy (on track for 3% growth) partly countering the oil drag.
We would also make the point that—and contrary to media reports—a falling currency
does not necessarily equal economic doom. True, the limping loonie is making
southbound travel suddenly much more expensive, and will also put some serious
upward pressure on core inflation. But, the currency also acts as a buffer against big
changes in the price of Canada’s exports, and it is responding about in line with the
steep fall in oil, copper and iron ore. Finally, note that, despite the list of unfortunate
news, the TSX is about flat so far in 2015. It’s a funny old world when we are looking
to equities to be the calm voice of reason in turbulent times.
Douglas Porter, CFA
Chief Economist
[email protected]
416-359-4887
Our Thoughts
Page 3 of 15
Focus — January 30, 2015
Fed Will Remain Patient Longer as Inflation Trumps Growth
T
he U.S. economy slowed somewhat late last year amid cooler investment and
exports, but it’s still in decent shape now that consumers have grabbed the
spending baton from businesses. GDP growth downshifted to 2.6% in Q4, as expected,
due to a retracement of surging defense spending and falling imports the previous
quarter. After a show of strength, business spending slowed, likely in response to
collapsing energy capex and supply disruptions stemming from congestion at the West
Coast ports. Disappointing factory orders suggest investment will weaken further in
Q1. Exports also slowed due to the strong dollar and weak global demand. While
residential construction strengthened in Q4, recent housing indicators are mixed. New
home sales leaped 12% in December and mortgage applications have sprinted higher
recently, but resale transactions fell 3.7% in December and the homeownership rate
plumbed two-decade lows. Clearly, the wounds from the housing bust run deep, with
record-low mortgage rates acting only as a partial salve.
Sal Guatieri
Senior Economist
[email protected]
416-359-5295
Thus, a lot is riding on the backs of consumers; and, thankfully, they didn’t disappoint
last quarter, spending at the fastest clip in eight years (4.3%). Strong job growth and
big fuel savings helped, and explain why consumer confidence hit 10-year highs in
January. As well, new jobless claims hit 15-year lows. Overall, with consumers in
better financial shape, the economy should grow near 3% this year, its average rate of
the past 1½ years, despite the strong dollar and downturn in energy capex. However,
we did trim our Q1 growth estimate to 2.3% after the soft factory orders report.
We also lowered our outlook for core inflation a few notches due to the soaring
greenback and some pass-through of lower energy costs. The trade-weighted dollar’s
10% y/y rise will restrain import costs, while the impact of lower oil prices on
transportation and supply costs could shave about 0.5%. In fact, in the past six
months core inflation has risen at the slowest annual rate in four years (1.1%). We
now expect it to fall from 1.6% in December to 1.3% in the spring, before edging
higher later in the year as wage growth picks up in response to falling unemployment.
Lower core inflation means that “solid” economic growth and “strong”
employment, as depicted in the FOMC’s statement, won’t test the Fed’s patience for
a while. Accordingly, we pushed out our call on rate liftoff from June to September.
The risks remain toward a further delay if the dollar rises sharply further, equities
sag, or a political showdown over Keystone, the budget or the debt ceiling leads to a
government shutdown this year.
Central Bank Rate Cuts Drive Currency Wars
A
nother week passes, and yet more central banks cut rates. This week it was Russia
(in the midst of a crisis) and Denmark (struggling to maintain a currency peg).
The Reserve Bank of New Zealand was the outlier, holding rates steady, though it
warned that policy will likely be unchanged for longer than previously expected—the
next step of course is rate cuts. The Reserve Bank of Australia is up next week, along
with the Bank of England, and neither is expected to move. But, the risk for the former
is tilted toward easing, while the latter will likely talk down the potential for eventual
hikes. This comes after January brought a Bank of Canada rate cut and ECB QE.
Benjamin Reitzes
Senior Economist
[email protected]
416-359-5628
Our Thoughts
Page 4 of 15
Focus — January 30, 2015
The common theme here is easier monetary policy, as central bankers scratch and claw
for any modicum of growth. The unsurprising consequence of all this easing is a
weakening currency, which is a potentially easy avenue to export growth. Unfortunately,
when everyone is playing the same game, beggar-thy-neighbour currency depreciation
doesn’t work so well. The Fed is the only major central bank that seems to be headed in
the opposite direction, and the greenback is surging. The seismic shift in currencies will
benefit America’s trading partners, as U.S. consumers suck in imports.
Canada should be one of the main beneficiaries. While the Canadian dollar has
plummeted nearly 20% since the start of Governor Poloz’s reign, the Bank of Canada
is poised to weaken the currency further by cutting policy rates further. Sentiment is
now so globally negative on Canada, it won’t take much for continued hammering of
the loonie. Perhaps it’s time to ask Governor Poloz: how weak is weak enough for
the C$? Much of the loonie’s drop is attributable to the plunge in energy prices,
which is how the currency acts as a shock absorber for the economy. Whether the
BoC needs to grease the currency’s slide with lower rates is questionable, especially
given already highly leveraged households suggest rate cuts will have only a
marginal impact. These misgivings likely won’t keep the BoC from easing again in
March, pointing to lower yields and an even lower loonie.
Stronger Dollar Clips Earnings Growth
O
ne glaring nugget in the U.S. GDP report was that net exports carved a full
percentage point from growth in Q4, and cut into activity in three of four
quarters in 2014. Real exports managed to grind 2.0% y/y higher last year, but import
volumes jumped a much stronger 5.3% alongside the surging U.S. dollar. The strong
currency also weighed on Q4 earnings. According to Bloomberg’s tally, consensus
expectations are now for S&P 500 earnings to rise 5.5% y/y in the latest three-month
reporting period, down from a 9% pace in the prior three months. Revenue growth is
also on track to be cut in half to just 2.2% y/y. True, oil & gas has sapped earnings
momentum, with profits in the sector down 17% y/y, while financial-sector earnings
have also weakened. But, the momentum loss extends to sectors with exposure to
overseas sales. Consumer goods are now likely to see earnings fall almost 5% y/y
after posting near-3% growth in the prior period, as revenues dip. For example,
Colgate-Palmolive cut its earnings guidance in part due to the dollar, while Procter &
Gamble spoke of “unprecedented currency devaluations” in foreign markets—it no
longer expects any sales growth this year. Meantime, some technology and health
care bellwethers, such as Microsoft and Pfizer, also appeared to catch the dollar bug
in their latest quarter. A few quick takeaways: First, the latest results and tone from
the corporate sector tend to confirm what the economic data are saying—the surging
U.S. dollar is going to be a drag on economic growth in the year ahead. However, for
equity investors, earnings expectations are coming down quickly, which means the
bar for future quarters is already that much lower, and we remain very optimistic on
the performance of the domestic U.S. economy.
Robert Kavcic
Senior Economist
[email protected]
416-359-8329
Recap
Page 5 of 15
Focus — January 30, 2015
Jennifer Lee
Senior Economist
[email protected]
416-359-4092
Canada
Good News
Ottawa’s Budget Deficit narrowed to $3.3 bln
(Apr.to-Nov.)—from $13.4 bln a year ago
Real GDP at Basic Prices -0.2% (Nov.)
Employment -11,300 (Dec. R)—and downward revisions
to all of 2014
Conference Board’s Consumer Confidence Index +9.8
pts to 102.9 (Jan.)—highest since August 2007
S&P Case Shiller Home Price Index +0.7% (Nov.)
New Home Sales +11.6% to 481,000 a.r. (Dec.)
Initial Claims -43k to 265k (Jan. 24 week)
Chicago PMI +0.6 pts to 59.4 (Jan.)
Real GDP slowed to +2.6% a.r. (Q4 A)
Durable Goods Orders -3.4% (Dec.)
Pending Home Sales -3.7% (Dec.)
Employment Cost Index +0.6% (Q4)—wages &
salaries slowed
Trade Deficit narrowed to ¥661 bln (Dec.)—exports
jumped +12.9% y/y
Jobless Rate –0.1 ppts to 3.4% (Dec.)
Industrial Production +1.0% (Dec. P)
Retail Sales -0.3% (Dec.)
Household Spending -3.4% y/y (Dec.)
Core Consumer Prices slowed to +2.5% y/y (Dec.)
Eurozone—Private Sector Credit -1.6% y/y (Dec.)
—improving
Eurozone—Economic Confidence +0.6 pts to
101.2 (Jan.)
Eurozone—Jobless Rate -0.1 ppts to 11.4% (Dec.)
Germany—Ifo Survey +1.2 pts to 106.7 (Jan.)
Germany—Unemployment -9,000 (Jan.)
Germany—Real Retail Sales +0.2% (Dec.)
Germany—GfK Consumer Confidence +0.3 pts to
9.3 (Feb.)
France—Consumer Spending +1.5% (Dec.)
Italy—Jobless Rate -0.4 ppts to 12.9% (Dec. P)
U.K.—GfK Consumer Confidence +5 pts to +1 (Jan.)
U.K.—Nationwide House Prices +0.3% (Jan.)
Eurozone—Consumer Prices -0.6% y/y (Jan. P)
Germany—Consumer Prices -0.5% y/y (Jan. P)
Germany—Producer Prices -0.7% (Dec.)
France— Jobless Rate flat at 10.3% (Dec.)
Italy—Industrial Orders -1.1% (Nov.)
U.K.—Real GDP slowed to +2.7% y/y (Q4)
Australia—NAB Business Confidence +1 pt to 2 (Dec.)
Australia—Core Consumer Prices +2.2% y/y (Q4)
India—Real GDP revised sharply higher to 6.9%
(2013/2014)—new methodology
Australia—Producer Prices +1.1% y/y (Q4)—slowed
S&P downgrades Russia to BBB- (junk)
 BMO trims 2015 GDP call
to 2.0% as the downbeat
news continues
 Loonie tumbles to 78 cents
(US)—first time since 2009
United States
 FOMC “patient”, sees
“solid” pace of expansion,
but watching “international
developments”
 Weekly crude inventories @
80-year highs weigh on oil
 Labour dispute at West
Coast ports… verge of
settlement
Japan
 Government may start
watching GDP deflator to
gauge inflation
Europe
 Encouraging trend in Euro
Area private sector
lending… but deflation
deepens
 Greece’s Syriza Party wins
election; some of their
inexperienced views earn the
country a downgrade
warning from S&P
Other
 China to lower 2015 growth
target to around 7%
 RBNZ on hold, turns dovish
 Singapore eases by slowing
pace of SGD’s appreciation
 Russia cuts rates to 15%
Bad News
Indications of stronger growth and a move toward price stability are good news for the economy.
Feature
Page 6 of 15
Oil and the Economy in Nine Charts
Douglas Porter, CFA, Chief Economist • [email protected] • 416-359-4887
Robert Kavcic, Senior Economist • [email protected] • 416-359-8329
 The plunge in oil prices of more than 55% in just over six months
is the third deepest correction in such a short period of time in the
past 45 years.
Focus — January 30, 2015
Chart 1
Crude Prices Collapse
(US$/bbl)
Crude Oil — WTI
40-year average price in today’s dollars: US$57
forecast 2
160
120
 Our economic forecast now assumes that prices will remain on the
defensive through the first half of this year and average just $52
(WTI) in 2015. While we see a partial rebound next year, our
working assumption has been trimmed to $65 for 2016.
80
Real 1
40
 These levels compare with an average price of $57 over the past
40 years, measured in today’s dollars.
Nominal
0
70
75
80
85
90
95
00
05
10
15
¹ January 2015 US$ ² [nominal] half-year averages
 While a variety of factors have conspired to undercut prices,
including a roaring U.S. dollar, the dominant factor has been on
the supply side.
Chart 2
Global Oil Production: Gathering Speed
Crude Oil
(mmbpd)
Supply
 Global supply rose by 2.0% last year, above the long-run average
growth rate of 1.6%.
Average growth
=1.6%/yr
100
 Notable gains have come from the U.S. (again the world’s largest
producer), Canada (now the fourth largest) and Iraq (reaching
record levels of 4 million bpd by December).
80
Other
60
 Fully 8 of the top 10 producers are now reporting output well
above their own 20-year trend. Only Iran and Mexico have seen
production declines.
40
U.S.
20
Russia
Canada
OPEC
forecast
0
93
1
 Softer-than-expected global growth has also played a role in oil’s
weakness. Even with global GDP growth of just over 3% in 2014
(similar to what is expected in 2015), oil demand only rose 0.8%.
00
07
includes products
14
Top
Producers ¹
US
Russia
Saudi Arabia
Canada
China
Iraq
Iran
UAE
Kuwait
Mexico
2014
11.7
10.4
9.7
4.3
4.1
3.3
2.8
2.8
2.8
2.8
19932013
Average
8.1
8.2
7.8
3.0
3.5
1.8
3.3
2.1
2.1
3.3
Global 2014
93.2
+2.0%
Source: International Energy Agency
Chart 3
Global Oil Demand: Losing Momentum
Crude Oil
(mmbpd)
Top
Consumers
Demand
 That divergence between 2% supply growth and 0.8% demand
growth swung the overall oil market from a balanced (or even
tight) market a year ago, to an over-supplied market of more
than 1% (i.e., more than 1 million bpd).
100
80
 What caught the market completely off guard, and thus the steep
plunge in prices, was the fact that OPEC (i.e., Saudi Arabia)
refused to step in to balance the market. Recall that prices were
still around $75 prior to the late-November OPEC meeting.
60
Other
40
Asia ex
China
China
Europe
20
U.S.
0
93
1
98
03
Former Soviet Union
08
13
19932013
2014 Average
US
19.0
19.2
Europe
13.5
14.9
Other Asia
12.2
8.3
China
10.3
6.1
Middle East
8.1
5.8
Latin America
6.8
5.2
Russia 1
4.8
4.1
Africa
4.0
2.8
92.5
+0.8%
Global 2014
Source: International Energy Agency
Feature
Page 7 of 15
Focus — January 30, 2015
 Zeroing in on just the past four years reveals the crux of the issue
for the oil market, and the mismatch between supply and demand.
Chart 4
 U.S. production has seen an amazing turnaround, with output
surging nearly 4 million bpd, taking it back to levels not seen
since the early 1970s and reversing more than three decades of
declining production.
Crude Oil
US
Other Asia
 Meantime, Canada has been quietly churning out solid gains as
well, which in fact have been underway since the early 1980s.
Saudi Arabia
China
Canada
Africa
Iraq
Latin America
Kuwait
Middle East
What Has Changed?
(2010-14 chng : mmbpd)
Supply
 On the flip side, demand growth remains muted and confined to
the emerging markets. Note that oil consumption is now lower in
the industrial world than it was 20 years ago.
0
1
2
3
Demand
4
0
1
2
3
4
Source: International Energy Agency
 The net effect on the global economy of the deep dive in oil
prices is still a matter of debate. While we would agree that it is,
on balance, a positive for global growth, the benefits may be a bit
more tempered this cycle because: 1) most major central banks
don’t have room to cut interest rates meaningfully (which
normally provides the positive second-round effects); and, 2) a
number of oil producers will face immediate strains.
 The most obvious strain will be on Russia, which is facing a very
serious recession in 2015.
 On the flip side, almost all of the industrialized world will benefit
from the oil price slide, especially the big importers in Japan,
India and China. Canada and Norway are the outliers on this front.
Chart 5
Winners and Losers of Low Oil
Net Trade in Oil & Products — 2014 est.
Losers: Net Exporters
Turkey
6.2
Saudi Arabia
42.9
Japan
5.1
Venezuela
36.4
India
5.1
Russia
13.5
Eurozone
3.0
Iran
13.1
China
2.8
Norway
9.8
United States
1.2
Canada
3.5
United Kingdom
0.6
Mexico
1.0
 The decline in oil prices is a net negative for the Canadian
economy, likely cutting 0.5 ppts from real GDP growth in 2015.
Chart 6
 Oil & gas extraction directly accounts for just over 6% of GDP,
and roughly 2% of total employment. But, the true footprint is
larger after accounting for support activities and spinoffs to other
related sectors (manufacturing, transportation, etc.)
Share of Total — 2014 estimates
 Capital spending in the oil patch will feel the most direct hit, with
many 2015 budgets slashed by 20%-to-30%. This accounts for a
third of all private non-housing related capex.
 Lower oil prices mean lower incomes and corporate profits, which
will cut Ottawa’s tax revenues by about $5 billion.
(% of GDP)
Winners: Net Importers
Oil Industry — How Big?
(percent)
Oil & Gas
Extraction
Est. Net
Capital
GDP
GDP Employment ¹ Spending ² Impact ³
Canada
6.2
2.2
34
-0.5
Alberta
24
7.4
64
-3.0
Saskatchewan
15
5.0
30
-1.0
Nfld. and
Labrador
22
7.1
23
-2.0
1.7
0.7
8
+0.5
United States
1 Natural
3
resources sector 2 Private non-res. business investment
Impact over the next year
Feature
Page 8 of 15
Focus — January 30, 2015
 The most dramatic impact may well be the reshaping of the
regional economic growth landscape.
Chart 7
 Oil & gas directly accounts for 24% of GDP in Alberta, 22% in
Newfoundland & Labrador and 15% in Saskatchewan.
(y/y % chng)
 Growth in Alberta is expected to stall (0.5% in 2015) after a
strong outperformance in recent years. Interprovincial migration
flows to the province are likely to be cut by about two thirds from
recent levels, while Calgary’s housing market is already in the
grips of a correction.
 The fiscal impact in these provinces is likely in the $8 bln range.
 Most other provinces benefit from lower oil prices and the
associated weakness in the Canadian dollar. Ontario GDP growth
should top the national average for only the 2nd time in 13 years.
 After cutting interest rates 25 bps, Governor Poloz said that,
“the drop in oil prices is unambiguously negative for the
Canadian economy”.
 The cut was sold as an “insurance” move, should the expected
offsetting positives (consumer spending, exports, business
confidence) take longer to develop, or develop with less vigour.
 The Bank assumed $60 oil in the accompanying outlook, but sub$50 oil could trim another quarter point from growth in the first
half of 2015, further delaying the closing of the output gap, which
is now pegged at the end of 2016.
 Barring a quick rebound in oil prices or clear evidence that strong
U.S. demand is lifting other sectors of the Canadian economy,
another rate cut is possible in March.
Regional Outlook: The Changing of the Guard
Retail Sales 2
(3-mnth m.a.)
(3-mnth m.a.)
AB
MB
SK
BC
ON
NS
PE
QC -0.4
NB -1.3
NL -1.9
-4
1 Dec.
BC
ON
MB
NS
QC
SK
NB
PE
AB
NL -1.0
6.6
6.3
5.5
4.8
4.6
4.1
4.0
3.7
2.0
1.3
4
2 Nov.
Real GDP 3
0
5
3
2014
10
-4
2.6
2.5
2.3
2.1
2.1
1.9
1.6
1.6
0.5
0
4
BMO forecast
Chart 8
Bank of Canada: Another Rate Cut Possible
(% : as of January 30, 2015)
Overnight Rate
10-year Government
Bonds
6
6
forecast
5
5
4
4
2.30%
[Year-end ’15]
3
3
2
2
1
1
0%-0.25%
0
0.75%
 A $10 move in oil prices typically swings the loonie by about 3-5
cents.
150
US
Canada
1.77%
1.37%
1.90%
11
13
0
07
01 04 07 10 13
Chart 9
 Diverging monetary policy prospects for the Bank of Canada
(easing) and Federal Reserve (preparing to tighten) will also apply
pressure.
2.4 AB
BC
2.0
ON
1.7
MB
0.8
NL
0.8
NB
0.6
PE
0.3
SK
QC
NS
0
2014
 The loonie is arguably the biggest loser from the slide in oil
prices, now moving above the $1.27/USD (79 US cents) mark for
the first time since the financial crisis.
 Barring a sudden rebound in oil, we look for the currency to
weaken further to around $1.30/USD (77 US cents) by mid-year.
—— 2015 ——
—————— 2014 ——————
Employment 1
09
15
Oil’s Impact on the Loonie
(as of January 29, 2015)
1.2
forecast
125
1.1
C$ 1
(rhs)
100
1.0
C$ parity
75
0.9
WTI Oil
Price 2
50
0.8
(lhs)
25
0.7
0
0.6
00
02
04
1 (US$/C$)
2 (US$/bbl)
actuals: weekly averages
06
08
10
12
14
Vertical bands represent US recessions
Forecast: monthly averages
Economic Forecast
Page 9 of 15
Focus — January 30, 2015
Economic Forecast Summary for January 30, 2015
BMO Capital Markets Economic Research
2014
2015
Annual
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2013
2014
2015
Real GDP (q/q % chng : a.r.)
1.0
3.6
2.8
2.0
1.1 
1.8
2.0
2.2
2.0
2.4
2.0 
Consumer Price Index (y/y % chng)
1.4
2.2
2.1
1.9
0.8 
0.3 
0.5 
1.1 
0.9
1.9
0.7 
Unemployment Rate (percent)
7.0
7.0
7.0
6.7
6.7
6.7
6.7 
6.6
7.1
6.9
6.7 
176
196
199
185
184
177
183
188
189
180
Current Account Balance ($blns : a.r.) -45.0
-39.6
-33.6
-52.7
-56.3
-42.7
-70.0
CANADA
Housing Starts (000s : a.r.)
178
-73.7  -76.2  -67.7  -62.5 
(average for the quarter : %)
Interest Rates
Overnight Rate
1.00
1.00
1.00
1.00
0.67
0.50
0.50
0.50
1.00
1.00
0.54
3-month Treasury Bill
0.87
0.93
0.94
0.90
0.60
0.41
0.41
0.41
0.97
0.91
0.46
10-year Bond
2.47
2.35
2.14
1.95
1.42 
1.42 
1.58 
1.82 
2.26
2.23
1.56 
34 
Canada-U.S. Interest
(average for the quarter : bps)
Rate Spreads
90-day
82
90
91
87
58 
39 
31 
8
91
88
10-year
-30
-27
-36
-33
-37 
-39 
-39 
-40 
-9
-31
-39
-2.1
4.6
5.0
2.6
2.3 
3.0
2.8
2.7
2.2
2.4
3.1
Consumer Price Index (y/y % chng)
1.4
2.1
1.8
1.2
0.0 
-0.3 
0.1 
1.0 
1.5
1.6
0.2 
Unemployment Rate (percent)
6.6
6.2
6.1
5.7
5.6
5.3
5.1
4.9
7.4
6.2
5.2
0.93
0.99
1.03
1.07
1.10
1.19
1.27
1.31
0.93
1.00
1.22
Current Account Balance ($blns : a.r.) -408
-394
-401
-438 
-411  -408  -421  -438 
-400
-410  -420 
UNITED STATES
Real GDP (q/q % chng : a.r.)
Housing Starts (mlns : a.r.)
(average for the quarter : %)
Interest Rates
Fed Funds Target Rate
0.13
0.13
0.13
0.13
0.13
0.13 
0.21 
0.46 
0.13
0.13
0.23 
3-month Treasury Bill
0.05
0.03
0.03
0.02
0.02 
0.02 
0.10 
0.33 
0.06
0.03
0.12 
10-year Note
2.76
2.62
2.50
2.28
1.79 
1.80 
1.97 
2.22 
2.35
2.54
1.95 
EXCHANGE RATES
(average for the quarter)
US¢/C$
90.6
91.7
91.8
88.1
81.6
78.9
78.7
79.5
97.1
90.6
79.7
C$/US$
1.103
1.090
1.089
1.136
1.226
1.268
1.271
1.257
1.030
1.105
1.255
¥/US$
103
102
104
115
120
122
123
125
98
106
122
US$/Euro
1.37
1.37
1.32
1.25
1.13
1.14
1.14
1.13
1.33
1.33
1.14
US$/£
1.66
1.68
1.67
1.58
1.51
1.52
1.52
1.51
1.56
1.65
1.51
Blocked areas represent BMO Capital Markets forecasts
Up and down arrows indicate changes to the forecast 
Key for Next Week
Page 10 of 15
Focus — January 30, 2015
Canada
Merchandise Trade Balance
Thursday, 8:30 am
Dec. (e)
-$1.2 bln
Consensus -$1.1 bln
Nov.
-$0.6 bln
Employment
Friday, 8:30 am
Jan. (e)
+6,000 (+0.03%)
Consensus +5,000 (+0.03%)
Dec.
Jan. (e)
-11,300 (-0.1%)
Unemployment Rate
6.7%
Consensus 6.7%
Dec.
Jan. (e)
Dec.
6.7%
Average Hourly Wages
+1.9% y/y
+1.8% y/y
Canada’s trade balance returned to deficit in October and Robert Kavcic
November, and the slide in oil prices likely dragged it Senior Economist
[email protected]
deeper into the red in December. Look for a $1.2 billion 416-359-8329
merchandise trade deficit in the month, which would bring
the Q4 tally to $2.2 billion (before any revisions—there are usually big ones), but
leave a small surplus in place for all of 2014. With export volumes slumping in the
prior two months, trade looks to carve more than a percentage point from real GDP
growth in Q4. However, the outlook is brighter in 2015, with the weaker loonie and
strong U.S. demand likely to support export volumes outside the energy sector. The
speed of this response is one uncertainty faced by the Bank of Canada, but we look
for a steady contribution from net exports through the year.
After StatsCan’s Labour Force Survey revisions, it turns out that employment growth
in Canada was quite a bit weaker than first thought in 2014, clocking in at 0.7% y/y
in December. In fact, 102,000 jobs were revised away in December, which puts our
quibbling over a few thousand jobs, plus or minus, in any given month into some
perspective. That said, we are calling for a 6,000 increase in January employment,
reflecting soft underlying conditions, but also some rebound after back-to-back
monthly declines to end 2014. One area to watch will be the resource sector where
we are on the verge of some negative job prints. Note that Alberta was still quite
solid in December, adding 8,400 jobs and up 2.8% y/y. Rather, the late-year
weakness was largely in Ontario, an economy that should, eventually, benefit from
the slide in oil prices and the loonie. So, look for relative employment trends in these
two provinces to flip, with the former weakening as the latter strengthens—January
might give us a glimpse of this. The other wild card in January was Target’s
announced exit from Canada, which will impact more than 17,000 jobs. This
shouldn’t show up yet in the employment data (depending on how some respond),
but there is clearly some weakness ahead in the retail sector as these stores close. The
jobless rate is expected to hold steady at 6.7%. Average hourly wages will also be
eyed closely after slowing to just 1.4% y/y in Q4, below the rate of inflation and the
weakest clip in 16 years, and revisions trimmed annualized wage growth during the
recovery by roughly a tenth of a percentage point.
United States
Personal Income &
Consumption
Monday, 8:30 am
Personal
Income
Dec. (e)
+0.3%
Consensus +0.2%
Nov.
Personal
Spending
-0.2%
-0.2%
Dec. (e)
+0.4%
+0.6%
Core PCE Deflator
+0.1%
+1.4% y/y
Nov.
unch
Consensus unch
+1.3% y/y
+1.4% y/y
Although households spent at the fastest rate in eight years Sal Guatieri
in Q4 (4.3%), they likely cooled their jets a bit in Senior Economist
December, retrenching 0.2%. Retail sales pulled back, as [email protected]
416-359-5295
lower gasoline prices gouged service station receipts and
auto sales reversed from eight-year highs. However, personal income should rise a
decent 0.3% due to strong job growth. Lower gas prices are also lifting spending
power, notably for lower-income earners who have a high propensity to spend.
Lower fuel costs will drag down the PCE price measure by 0.2%, cutting its yearly
rate to 0.8%. In addition, the strong greenback should temper any increase in core
prices after no change in November, keeping its yearly rate at 1.4%. We see it
slipping further in coming months, keeping the Fed “patient” until September.
Key for Next Week
Page 11 of 15
Focus — January 30, 2015
Manufacturing ISM
Monday, 10:00 am
PMI
Jan. (e)
54.5
Prices Paid
36.0
Dec.
38.5
Consensus 54.8
55.1
40.0
Nonmanufacturing ISM
Wednesday, 10:00 am
Jan. (e)
56.5
Consensus 56.5
Dec.
56.5
Goods & Services Trade Deficit
Thursday, 8:30 am
Dec. (e)
$38.0 bln
Consensus $38.0 bln
Nov.
$39.0 bln
Nonfarm Payrolls
Friday, 8:30 am
Jan. (e)
+230,000
Consensus +231,000
Dec.
Jan. (e)
+252,000
Unemployment Rate
5.6%
Consensus 5.6%
Dec.
Jan. (e)
5.6%
Average Hourly Earnings
+0.3%
Dec.
-0.2%
Consensus +0.3%
Weaker regional factory surveys, including a nasty spill in the oil-rich Dallas Fed
region, suggest the ISM manufacturing index retreated for a third straight month in
January, possibly to 54.5. While this would still indicate moderate growth, it would
also mean the sector has lost momentum after touching three-year highs in the fall, as
the mighty dollar and oil downdraft weighed on business spending. By disrupting
import supplies, the congestion at the West Coast ports isn’t helping. Keep an eye on
the export index, which could return to negative territory for the first time since the
Eurozone debt crisis flared in 2012. However, factory production should pick up this
year if consumer spending strengthens.
The nonmanufacturing index is also coming off multi-year highs, and likely stood
still at 56.5 in January. The oil and mining sectors should retrench in the face of
lower resource prices, but retail and services will benefit from lower fuel costs, and
construction will get a lift from lower mortgage rates.
The U.S. trade deficit is expected to decline to $38 billion in December, as the 7
million barrels of oil that the country imports each day just got a whole lot cheaper.
But the improving trend won’t last, as oil prices are expected to head higher later this
year. Moreover, the mighty dollar (up 10% y/y on a trade-weighted basis) and
sluggish global demand will clamp down on exports, which are already slowing.
Trade looks to carve about half a percentage point from GDP growth this year, fully
offsetting the expected boost from lower energy costs.
Following the strongest job growth (3 million) since 1999, nonfarm payrolls likely
began 2015 with a little less gas. Payrolls could increase 230,000, downshifting
moderately from 252,000 in December and the six-month trend of 264,000. While oil
and gas drillers have yet to reduce staff, January could mark the start of a prolonged
downturn. Thankfully, the sector is too small to make a meaningful dent in overall
job growth. After tumbling two tenths in November as the participation rate probed
37-year lows, the unemployment rate should hold at 5.6%. Last year, nearly three
times as many people found work than entered the workforce, greasing the
unemployment rate’s 1.1-ppts slide to 6½-year lows. December’s quirky drop in
average hourly earnings should more than retrace (or get revised away), as other
wage measures have turned modestly higher.
Financial Markets Update
Page 12 of 15
Focus — January 30, 2015
Jan 30 ¹
Jan 23
Week Ago
4 Weeks Ago
Dec. 31, 2014
(basis point change)
-25
-25
-15
-15
Canadian
Money Market
Call Money
Prime Rate
0.75
2.85
0.75
3.00
0
-15
U.S. Money
Market
Fed Funds (effective)
Prime Rate
0.25
3.25
0.25
3.25
0
0
0
0
0
0
3-Month
Rates
Canada
United States
Japan
Eurozone
United Kingdom
Australia
0.60
0.01
-0.01
0.05
0.56
2.56
0.60
0.02
0.00
0.05
0.57
2.65
0
-1
0
0
0
-9
-32
-1
-1
-2
0
-20
-31
-3
-1
-2
0
-22
2-Year Bonds
Canada
United States
Canada
United States
Japan
Germany
United Kingdom
Australia
0.41
0.47
1.29
1.68
0.27
0.33
1.35
2.44
0.54
0.49
1.44
1.80
0.23
0.36
1.48
2.63
-13
-1
-15
-12
4
-3
-12
-19
-59
-19
-45
-43
-5
-17
-36
-43
-60
-19
-50
-50
-5
-21
-40
-30
20.0
25
69
367
16.7
24
67
353
10-Year Bonds
Risk
Indicators
VIX
TED Spread
Inv. Grade CDS Spread ²
High Yield CDS Spread ²
Currencies
US¢/C$
C$/US$
¥/US$
US$/€
US$/£
US¢/A$
Commodities
CRB Futures Index
Oil (generic contract)
Natural Gas (generic contract)
Gold (spot price)
Equities
S&P/TSX Composite
S&P 500
Nasdaq
Dow Jones Industrial
Nikkei
Frankfurt DAX
London FT100
France CAC40
S&P ASX 200
¹ = as of 10:30 am
² = One day delay
78.51
1.274
117.51
1.1303
1.502
77.58
80.52
1.242
117.77
1.1204
1.499
79.12
3.3 pts
1
2
14
2.2 pts
1
2
6
0.8 pts
3
3
10
-2.5
—
-0.2
0.9
0.2
-1.9
(percent change)
-7.5
—
-2.5
-5.8
-2.0
-4.1
-8.8
—
-1.9
-6.6
-3.6
-5.1
213.44
45.35
2.67
1,268.10
216.61
45.59
2.96
1,294.10
-1.5
-0.5
-9.7
-2.0
-6.6
-13.9
-11.1
6.6
-7.2
-14.9
-7.5
7.0
14,618
2,010
4,654
17,284
17,674
10,704
6,790
4,608
5,588
14,779
2,052
4,758
17,673
17,512
10,650
6,833
4,641
5,502
-1.1
-2.0
-2.2
-2.2
0.9
0.5
-0.6
-0.7
1.6
-0.9
-2.4
-1.5
-3.1
1.3
9.6
3.7
8.4
2.8
-0.1
-2.4
-1.7
-3.0
1.3
9.2
3.4
7.8
3.3
Global Calendar: February 2 – February 6
Japan
EURO AREA
Manufacturing PMI
Jan. F (e) 51.0
Dec.
50.6
U.K.
Manufacturing PMI
Jan. F (e) 52.1
Dec.
52.0
Euro Area
Monday February 2
Tuesday February 3
Wednesday February 4
Thursday February 5
Leading Index
Dec. P (e) 105.4
Nov.
103.9
Composite PMI
Jan.
Dec.
51.9
Services PMI
Jan.
Dec.
51.7
Manufacturing PMI
Jan. (e)
52.7
Dec.
52.5
EURO AR
Producer Price Index
Dec. (e)
-0.7%
Nov.
-0.3%
ITALY
Consumer Price Index
Jan. P (e) -2.4%
Dec.
unch
EA
-2.5% y/y
-1.6% y/y
-0.4% y/y
-0.1% y/y
Construction PMI
Jan. (e)
57.0
Dec.
57.6
EURO AREA
Composite PMI
Jan. F (e) 52.2
Dec.
51.4
Services PMI
Jan. F (e) 52.3
Dec.
51.6
Retail Sales
Dec. (e)
unch
Nov.
+0.6%
+2.0% y/y
+1.5% y/y
EURO AREA
Retail PMI
Jan.
Dec.
47.6
GERMANY
Factory Orders
Dec. (e)
+1.5%
+0.7% y/y
Nov.
-2.4%
-0.4% y/y
ECB Monthly Report
Composite PMI
Jan. (e)
55.5
Dec.
55.2
Other
Bank of England Monetary Policy Meeting (Feb. 4-5)
CHINA
HSBC Manufacturing PMI
Jan. F (e) 49.8
Dec.
49.6
AUSTRALIA
Trade Deficit
Dec. (e)
A$850 mln
Nov.
A$925 mln
Manufacturing PMI D
Jan. (e)
50.2
Dec.
50.1
Building Approvals
Dec. (e)
-5.0%
+5.6% y/y
Nov.
+7.5%
+10.1% y/y
Reserve Bank of Australia
Monetary Policy Meeting
INDIA
Reserve Bank of India
Monetary Policy Meeting
Nonmanufacturing PMI D
Jan.
Dec.
54.1
= date approximate
CHINA
HSBC PMI Composite Services
Jan.
Dec.
51.4
53.4
NEW ZEALAND
Employment
Q4 (e)
+0.8%
+3.0% y/y
Q3
+0.8%
+3.2% y/y
GERMANY
Industrial Production
Dec. (e)
+0.4%
-0.3% y/y
Nov.
-0.1%
-0.5% y/y
FRANCE
Trade Deficit
Dec. (e)
€3.3 bln
Nov.
€3.2 bln
Dec. (e)
Nov.
Services PMI
Jan. (e)
56.3
Dec.
55.8
D
Friday February 6
AUSTRALIA
Retail Sales
Dec. (e)
+0.3%
Nov.
+0.1%
Upcoming Policy Meetings | ECB: Mar. 5, Apr. 15, June 3, July 16, Sep. 3, Oct. 22, Dec. 3
Trade Deficit
£9.1 bln
£8.8 bln
Non-EU
£3.0 bln
£2.6 bln
North American Calendar: February 2 – February 6
Canada
Monday February 2
9:30 am
Jan.
Dec.
RBC Manufacturing PMI
53.9
Conference Board’s Consumer
Confidence Index D
Jan.
Dec.
88.9
Tuesday February 3
8:30 am
Dec. (e)
Nov.
Industrial
Product
Price Index
-0.5%
-0.4%
Raw
Materials
Price Index
-8.0%
-5.8%
Wednesday February 4
10:00 am
Jan.
Dec.
Thursday February 5
Ivey Purchasing Managers’ 8:30 am
Index (s.a.)
Dec. (e)
Merchandise Trade Balance
-$1.2 bln
8:30 am
Jan. (e)
Employment
+6,000 (+0.03%)
55.4
-$0.6 bln
Dec.
-11,300 (-0.1%)
8:30 am
Jan. (e)
Unemployment Rate
6.7%
Consensus -$1.1 bln
Nov.
Auto Sales D
Jan.
Dec.
+16.1% y/y
United States
Dec. (e)
Personal
Income
+0.3%
Personal
Spending
-0.2%
Nov.
+0.4%
+0.6%
8:30 am
Dec. (e)
Core PCE Deflator
+0.1%
+1.4% y/y
Nov.
unch
Consensus +0.2%
Consensus unch
-0.2%
+1.3% y/y
7:45 am
8:55 am
9:45 am
Jan. (e)
Dec.
Retail Economist-GS Same- 7:00 am
Store Sales – Jan 31st week Jan. 30
Jan. 23
Johnson Redbook Samest
Store Sales – Jan 31 week 8:15 am
New York ISM
60.0
70.8
+1.4% y/y
10:00 am Factory Orders
-1.5%
9:45 am
Markit Manufacturing PMI Dec. (e)
Consensus -2.0%
(Jan. F)
Nov.
-0.7%
10:00 am Manufacturing ISM
10:00
am
IBD/TIPP
Economic
PMI
Prices Paid
Optimism Index
Jan. (e)
54.5
36.0
Feb. (e)
51.4 C
Consensus 54.8
40.0
Jan.
51.5
Dec.
55.1
38.5
Total Vehicle Sales D
10:00 am Construction Spending
Jan. (e)
17.0 mln a.r.
Dec. (e)
+0.6%
Consensus +0.8%
Nov.
-0.3%
MBA Mortgage Apps
-3.2%
Jan. (e)
ADP National
Employment Report
+220,000
8:30 am
Initial Claims
Jan. 31 (e) 289k (+24k) C
Jan. 24
265k (-43k)
Dec.
+241,000
Continuing Claims
10:00 am
Jan. (e)
Nonmanufacturing ISM
56.5
8:30 am
Jan. 24
Jan. 17
8:30 am
Dec.
56.5
Q4 P (e)
Productivity Unit Labour
Costs
unch
+2.0% a.r.
Q3
+2.3% a.r.
8:30 am
Consensus +220,000
Consensus 56.5
C
= consensus
D
= date approximate
Fed Speakers: St. Louis’ Bullard (10:00 am);
Minneapolis’ Kocherlakota (11:45 am)
11:30 am 4-week bill auction
11:30 am 52-week bill auction
$25.0 bln
Average Hourly Wages
+1.9% y/y
+1.8% y/y
8:30 am
Dec. (e)
Nov.
Building Permits
+5.0%
-13.8%
8:30 am
Jan. (e)
Nonfarm Payrolls
+230,000
Dec.
+252,000
8:30 am
Jan. (e)
Unemployment Rate
5.6%
Consensus +231,000
+6.6% y/y
Consensus 5.6%
5.6%
8:30 am
Jan. (e)
Average Hourly Earnings
+0.3%
Dec.
-0.2%
8:30 am
Dec. (e)
Goods & Services
Trade Deficit
$38.0 bln
Annual Establishment
Employment Survey
Revisions
3:00 pm
Dec. (e)
Consumer Credit
+$16.0 bln
Nov.
$39.0 bln
Nov.
+$14.1 bln
9:45 am
Bloomberg Consumer
Comfort Index
2,385k (-71k)
+1.0% a.r.
-1.0% a.r.
Consensus $38.0 bln
Fed Speakers: Governor Powell (10:00
am); Cleveland’s Mester (12:45 pm)
8:30 am 3- & 10-year note, 30-year
bond auction
announcements
6.7%
8:30 am
Jan. (e)
Dec.
Dec.
Feb. 1
Jan. 25
11:00 am 4-week bill auction
announcement
11:30 am 13- & 26-week bill auction
$52.0 bln
Challenger Layoff Report
Consensus +0.9% a.r.
16.8 mln a.r.
Dec.
2-year bond auction announcement
7:30 am
Jan.
Dec.
Consensus 16.8 mln a.r.
Dec.
Consensus +5,000 (+0.03%)
Consensus 6.7%
12:05 pm 30-year bond auction
$1.4 bln (new cash $1.4 bln)
8:30 am
Friday February 6
Consensus +0.3%
Consensus +$15.0 bln
47.3
Fed Speaker:
Boston’s Rosengren (5:00 am)
11:00 am 13- & 26-week bill auction
announcements
Fed Speaker:
Atlanta’s Lockhart (12:45 pm)
Upcoming Policy Meetings | Bank of Canada: Mar. 4, Apr. 15, May 27 | FOMC: Mar. 17-18, Apr. 28-29, June 16-17
Page 15 of 15
Focus — January 30, 2015
General Disclosure
“BMO Capital Markets” is a trade name used by the BMO Investment Banking Group, which includes the wholesale arm of Bank of Montreal and its subsidiaries BMO Nesbitt Burns Inc., BMO Capital
Markets Ltd. in the U.K. and BMO Capital Markets Corp. in the U.S. BMO Nesbitt Burns Inc., BMO Capital Markets Ltd. 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.
Dissemination of Research
Our publications are disseminated via email and may also be available via our web site http://www.bmonesbittburns.com/economics. Please contact your BMO Financial Group Representative for
more information.
Conflict Statement
A general description of how BMO Financial Group identifies and manages conflicts of interest is contained in our public facing policy for managing conflicts of interest in connection with investment
research which is available at http://researchglobal.bmocapitalmarkets.com/Public/Conflict_Statement_Public.aspx.
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
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 Corporation Limited, 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.
TM Trademark Bank of Montreal
© COPYRIGHT 2015 BMO CAPITAL MARKETS CORP.
A member of BMO Financial Group