The Hike in Oil Prices Helped the Canadian Stock Market and the Loonie (PDF, 534 KB) - This link will open in a new window.

ECONOMIC STUDIES | OCTOBER 15, 2021

WEEKLY NEWSLETTER

The Hike in Oil Prices Helped the Canadian Stock Market and the Loonie

MUSINGS OF THE WEEK

• When markets challenge the Bank of Canada.

KEY STATISTICS OF THE WEEK

• United States: Inflation levels off.
• United States: Retail sales continue to climb.
• Canada: Manufacturing and wholesale sales increased in August.

A LOOK AHEAD

• The auto sector probably limited U.S. industrial production growth in August.
• United States: Housing starts and home resales are expected to increase.
• Canada: Inflation should continue to rise in September.
• Canada: The number of housing starts could still pull back.
• Canada: Retail sales should rebound in August.

FINANCIAL MARKETS

• North American stock market indexes are buoyed by financial results.
• Oil prices reach new highs.
• The Canadian dollar climbs to around US$0.81.

CONTENTS
Musings of the Week.........................................	2	Financial Markets...............................................	4	Economic Indicators of the Week.......................	7
Key Statistics of the Week..................................	3	A Look Ahead....................................................	5	Tables: Economic indicators...............................	9
United States, Canada		United States, Canada, Overseas		Major financial indicators .....................	11

Desjardins, Economic Studies: 514‑281‑2336 or 1 866‑866‑7000, ext. 5552336 • [e-mail] • desjardins.com/economics

NOTE TO READERS: The letters k, M and B are used in texts and tables to refer to thousands, millions and billions respectively.

IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. The data on prices or margins are provided for information purposes and may be modified at any time, based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. The opinions and forecasts contained herein are, unless otherwise indicated, those of the document's authors and do not represent the opinions of any other person or the official position of Desjardins Group. Copyright © 2021, Desjardins Group. All rights reserved.

ECONOMIC STUDIES

Musings of the Week

When Markets Challenge the Bank of Canada

By Jimmy Jean, Vice-President, Chief Economist and Strategist

Markets are overshooting in the repricing of the Bank of Canada's (BoC) normalization timeline. As a result, the Canadian front end has cheapened up dramatically since the beginning of the month. The reference 2-year yield jumped 11 basis points last Thursday, with the 0.5% November 2023 bond gaining benchmark status on that day, and as BoC Governor delivered a speech that was slightly biased to the hawkish side. This was followed by a 5 basis-point jump October 7, as the jobs report blew past expectations, and as of Friday morning, the 2-year yield had risen by another 7 basis points on the week, to reach 0.76%. It is thus a 25 basis-point increase since October 1st, and the Canada-US2-year spread has widened 15 basis points over this period. Futures on bankers' acceptances have also cheapened markedly, a move that started about a month ago. The March 2022 contract has jumped by 16 basis points since September 8 and the market is discounting a hike with a high probability over this short horizon. In overnight index swap markets, a hike by the April 2022 meeting is discounted nearly in full and the market expects that the Bank will lift rates at least twice next year.

However, the market has been getting a bit carried away, in our view. The BoC has been clear that it would tie liftoff to the closure of the output gap. Either growth would need to overshoot versus its expectations (which was not the case in Q2), either the BoC would need to cut its potential growth estimates, from the 1.5% estimated for 2021 and 1.3% for 2022. With potential growth having averaged 1.8% from 2020 to 2018, these estimates were already fairly conservative. And the Bank of Canada's measure of inflation that is tied to the output gap was at only 1.8% in August, likely upholding the Bank's conviction on the existence of excess slack and therefore the temporary nature of inflationary pressures.

True, Governor Macklem has acknowledged more uncertainty on the mix of temporary vs persistent influences. On October 6, Macklem recognized that the Bank's margin of error on inflation had diminished, as inflation has overshot its forecasts through most of the year. But there are still reasons to think the Bank will not yield to calls for a more aggressive approach. Federal pandemic supports will likely be getting phased out as some point in the next quarters and the lagged insolvency reaction this process might entail is still an important risk. Meanwhile, the Fed will itself still be tapering next spring and there is always the risk of a tantrum event during that process, which would tighten financial conditions in Canada as well. Remember that global real rates still have quite a long runway from the abnormally low levels they have maintained for most of the year. And there

is the case of housing, by far the most rate-sensitive segment of the economy, which has been cooling, and for which higher mortgage rates will constitute another headwind.

All this being said, with the lack of clarity over many critical inputs (i.e. the pandemic, the duration of the global supply shock, energy price pressures, the stockpile of savings, wages, etc.), it is far from inconceivable that the BoC ultimately moves a bit early into the broad guidance (i.e. second half of 2022) it has provided. But at this stage, we'd most likely be talking about a meeting or two ahead of our latest forecast of October 2022, and probably not two quarters. What we believe markets should also be pondering these days is whether the North American central bank decoupling currently priced in makes sense. The market sees roughly 50 basis points of extra tightening in Canada relative to the U.S. through the September 2023 horizon. Given the highly indebted Canadian consumer, this looks fairly questionable.

OCTOBER 15, 2021 | WEEKLY NEWSLETTER 2

ECONOMIC STUDIES

Key Statistics of the Week

By Francis Généreux, Senior Economist, and Benoit P. Durocher, Senior Economist

UNITED STATES

• The consumer price index (CPI) rose 0.4% in September after gaining 0.3% in August and 0.5% in July. Energy prices climbed 1.3% in September after gaining 2.0% in August. Food prices jumped 0.9% in September, the largest monthly uptick since April 2020. Excluding food and energy, core CPI edged up 0.2% in September, after gains of 0.1% in August and 0.3% in July. The annual variation in total CPI rose slightly from 5.3% to 5.4% in September. Core inflation was flat at
  4.0%.
• The producer price index (PPI) recorded a 0.5% increase in September, a little less than expected, and a deceleration compared with the gains of 0.7% in August and 1.0% in July. The biggest surprise comes from the increase of only 0.2% in the index excluding food and energy. This marks the weakest monthly growth since December 2020. We are seeing a drop in transportation and warehousing costs.
• Retail sales grew 0.7% in September, after rising 0.9% in August and falling 1.6% in July. Auto sales were up by a surprising 0.5% in September after a 3.3% decline in August.
  The value of service station sales climbed 1.8% in September. Excluding motor vehicles and gasoline, sales advanced 0.7% after a strong gain of 2.1% in August.
• The New York Federal Reserve's Empire regional manufacturing index dropped from 30.7 in September to 19.8 in October. Despite the pullback, the level is still relatively high.
• U.S. consumer confidence deteriorated slightly, as seen in the University of Michigan index, which slipped from
  72.8 in September to 71.4 in October, according to the preliminary version. The drop stems a little more from the current situation component (-2.2 points) than the consumer expectations component (-0.9 points).

CANADA

• The value of manufacturing sales climbed 0.5% in August, which was in keeping with preliminary data. Significant increases were noted in petroleum and coal products (+7.3%), chemicals (+6.3%) and primary metal manufacturing (+3.3%).
  However, these increases were partially offset by a drop in sales of wood products (-17.1%), motor vehicles (-8.7%) and motor vehicle parts (-10.5%). In real terms, total sales were up 0.6%, while inventories climbed 1.7%.
• Wholesale sales grew 0.3%, in line with the preliminary data.
  Significant increases were noted in the food, beverage and tobacco, miscellaneous, and building materials and supplies sectors. Total sales in constant dollars rose 0.3% in August.
• In Canada, the downtrend in existing home sales lost steam in September, with an increase of 0.9% for the month. This is the first monthly increase since last March's peak. Sales are still relatively high, historically speaking, and the downtrend may yet return in the months to come. The existing home price index continued to climb in September, posting a 1.7% monthly increase. Prices are up 21.5% from a year ago.

CANADA

The drop in existing home sales appears to be stabilizing while prices continue to increase

Existing homes

Units per month						In $
65,000	Sales (left)		Home price index (right)	750,000
					725,000
						700,000
55,000						675,000
						650,000
45,000						625,000
					600,000
						575,000
35,000						550,000
					525,000
						500,000
25,000						475,000
						450,000
						425,000
15,000						400,000
2015	2016	2017	2018	2019	2020	2021

Sources: Canadian Real Estate Association and Desjardins, Economic Studies

OCTOBER 15, 2021 | WEEKLY NEWSLETTER 3

ECONOMIC STUDIES

Financial Markets

Corporate Earnings Season Revives Market Optimism

By Hendrix Vachon, Senior Economist, and Lorenzo Tessier-Moreau, Senior Economist

The corporate earnings season got off to a good start this week with the U.S. banking sector posting strong financial results. Financial markets were still volatile at the start of the week, but investors' concern over inflation gave way to optimism despite a slightly higher than expected U.S. inflation rate published on Wednesday. Investors then turned their attention to the solid financial results posted by the banking sector, as well as the strong U.S. retail sales numbers published Friday morning. At the time of writing, the NASDAQ, S&P 500 and the S&P/TSX gained roughly 2%, whereas the Dow Jones was up by around 1.5% over the week. Oil prices also reached new highs this week, as they were driven upward by strong anticipated demand for fossil fuel. The price for a barrel of WTI (West Texas Intermediate) was above US$82 on Friday, which also contributed to the gains of the Canadian stock market index.

The release of U.S. inflation figures and the Federal Reserve (Fed) minutes on Wednesday amplified the flattening of the bond yield curve that began earlier this week. Investors are anticipating higher rates in the medium term, which added a few points to 2- and 5-year maturities, while long-term yields were down, pointing to a less favourable outlook for the economy in the long run.

Following a strong start to the week, the U.S. dollar depreciated with lower long-term interest rates. The euro climbed to roughly US$1.16. The rise in the pound sterling was more marked as strong economic numbers were published in the United Kingdom and signs of inflationary pressures are mounting. The pound was worth around US$1.375 on Friday morning. The yen had a more difficult week, reaching 114 yen/US$. Monetary tightening expectations remain very low in Japan. The Canadian dollar continues to benefit from favourable movements in interest rates and oil prices. It is now hovering around US$0.81.

GRAPH 1

Stock markets

Index	Index
4,575	20,900
4,525	20,700
4,475	20,500
4,425
4,375	20,300
4,325	20,100
4,275	19,900

2021-09-022021-09-102021-09-202021-09-282021-10-062021-10-14

S&P 500 (left)	S&P/TSX (right)
Sources: Datastream and Desjardins, Economic Studies

GRAPH 2

Bond markets

10-year yield

In % points					In %
0.03					1.7
0.00					1.6
-0.03					1.5
-0.06					1.4
-0.09					1.3
-0.12					1.2
-0.15					1.1
2021-09-02	2021-09-10	2021-09-20	2021-09-28	2021-10-06	2021-10-14

Spread (left)

United States (right)

Canada (right)

Sources: Datastream and Desjardins, Economic Studies

GRAPH 3

Currency markets

US$/C$	US$/€
0.810	1.190
0.805	1.185
0.800	1.180
1.175
0.795
1.170
0.790
1.165
0.785
1.160
0.780	1.155
0.775	1.150

2021-09-022021-09-102021-09-202021-09-282021-10-062021-10-14

Canadian dollar (left)	Euro (right)
Sources: Datastream and Desjardins, Economic Studies

OCTOBER 15, 2021 | WEEKLY NEWSLETTER 4

ECONOMIC STUDIES

A Look Ahead

By Francis Généreux, Senior Economist, and Benoit P. Durocher, Senior Economist

MONDAY October 18 - 9:15

Septemberm/m

Consensus0.2%

Desjardins0.0%

August0.4%

TUESDAY October 19 - 8:30

September

Consensus 1,610,000

Desjardins 1,635,000

August1,615,000

THURSDAY October 21 - 10:00

Septemberm/m

Consensus0.5%

Desjardins0.4%

August0.9%

THURSDAY Octobre 21 - 10:00

September
Consensus	6,000,000
Desjardins	6,250 000
August	5,880,000
MONDAY October 18 - 8:15
September	In thousands
Consensus	256.5
Desjardins	258.0
August	260.2

WEDNESDAY October 20 - 8:30

Septemberm/m

Consensus0.1%

Desjardins0.1%

August0.2%

UNITED STATES

Industrial production (September) - Industrial production saw 0.4% growth in August after gaining 0.8% in July. August performance was hampered by Hurricane Ida in the southern and eastern United States at the tail end of the month. The storm likely had other adverse consequences in early September, but the situation has had time to normalize since then. The shortage of electronic parts in the motor vehicle sector probably had a more significant effect in September. Hours worked among automakers fell 4.8% in September, and we expect a steep drop in production in this sector. The rest of the manufacturing sector likely performed better, as signalled by the high level of the current production component of the ISM manufacturing index. We expect a 0.1% increase in manufacturing production, despite the decline in the motor vehicle sector. A decrease in energy production is anticipated, but so is a return to growth in the mining sector after the 0.6% slump in August. The bottom line is that industrial production should stagnate.

Housing starts (September) - After a 6.3% plunge in July, housing starts recovered some of the ground lost with a 3.9% increase in August. Another gain is expected for September. The very high number of building permits issued points in this direction. Material supply issues seem to be causing construction delays at this time, but this is impacting finishing more than housing starts. Residential construction jobs were up in September as well, with an additional 2,200 workers. We expect housing starts to hit 1,635,000 units.

Leading indicator (September) - The leading indicator continued its strong uptrend in August with a monthly gain of 0.9%. We expect weaker growth in September, however. The substantial contribution from unemployment claims in August will give way to more modest support. The ISM manufacturing index should play the biggest part in the leading indicator's monthly contribution. However, negative contributions are expected to come from hours worked, consumer confidence and building permits. In short, a 0.4% gain in the leading indicator is anticipated for September.

Existing home sales (September) - Home resales fell 2.0% in August after increasing a total of 3.8% over the previous two months. Existing home sales should rebound well in September, as signalled by the 8.1% rise in pending sales the previous month. An upswing in mortgage applications in anticipation of a purchase has also been noted. Lastly, regional data signal an increase from August as well. All in all, we expect existing home sales to move up to 6,250,000 units.

CANADA

Housing starts (September) - The housing market should continue to normalize in September, which will foster another slight reduction in the number of housing starts. Despite the pullback, new construction numbers will nevertheless stay relatively high from a historical standpoint.

Consumer price index (September) - Prices at the pump put gas down just 0.7% in September, which will barely make a dent in the monthly variation in the total CPI. Seasonal adjustments are usually negative in September, around -0.2%, mainly as a result of the drop in fresh fruit and vegetable prices as crops start to come on the market. Taking the uptrend in other components into account, the monthly variation in the total CPI could be slightly positive in September. Total annual inflation could increase from 4.1% to 4.3%.

OCTOBER 15, 2021 | WEEKLY NEWSLETTER 5