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The Week Ahead
June 18-22, 2018
The Rental Solution
by Benjamin Tal
Economics
The Canadian housing market continues The recent decision to replace the Ontario
to soften and the process is not over yet. Municipal Board (OMB) with a local planning
The gravitational forces generated from appeal tribunal, de facto eliminated the
Avery Shenfeld the unsustainable surge in the Vancouver power of the province to approve projects.
(416) 594-7356
avery.shenfeld@cibc.com
market in 2015 and in Toronto in 2016 and That will work to further limit the supply
early 2017 are fading away, but the impact of housing in the region as NIMBY factors
Benjamin Tal of OSFI’s B20 qualification rules is now in play a more significant role in the decision-
(416) 956-3698
benjamin.tal@cibc.com
full force. making process. Here again, we doubt the
new government will make any significant
Andrew Grantham Mortgages outstanding have slowed down to changes.
(416) 956-3219
andrew.grantham@cibc.com a year-over-year rate of 4.9%—the slowest
pace since mid-2014. A growing number of Where we see the highest chance of material
Royce Mendes
(416) 594-7354
buyers are finding it more difficult to close a change is on the issue of rent control. A
royce.mendes@cibc.com transaction under the new rules, while some well-functioning rental market must be
are being forced to find alternative sources an integral part of any effort to improve
Katherine Judge
(416) 956-6527
of funding. New-home builders are starting affordability in the region. But that is not
katherine.judge@cibc.com to delay new projects, and from what we are what we have right now.
hearing, the main damage to housing starts
will be felt next year. As any renter will tell you, the market is on
fire, vacancy rates are extremely low, and
All of this is actually good news as both hundreds of thousands of tenants (under
Vancouver and Toronto desperately need rent control) live in constant fear that their
a breather. But what is being done during landlord will find a way to vacate them into a
that time-out will be crucial for the future market that is totally out of reach to them. If
trajectory of housing—and here we zoom we had a greater supply of rental units, that
in on the Ontario market in general, and fear would ease.
the GTA market in particular. Following the
recent change of power in Ontario there The current rent control policy should be
is a golden opportunity to rethink housing modified in a way that combines tenant
policies in the province. protection with greater motivation to
increase purpose-built rental units. A good
The number one issue, of course, is the way to achieve this is to allow (under the
impact of the Places To Grow Act on available umbrella of rent control) for an annual rent
land supply. In our assessment, that plan increase of inflation plus, say 2% (currently
played a significant role in elevating home it’s only inflation) for new projects. Many
prices in the GTA over the past two decades. developers will tell you that the celerity of
We doubt that the new government will such policy and the extra 2% would, in
change the Act in any meaningful way. The many cases, make the difference between
only hope is that we might see increased going ahead or not, with a new project. That
pressure on municipalities to release land simple move could go a long way to ease
http://economics.cibccm.com
more quickly. But even here we believe the current supply pressure facing the GTA
that progress will be too slow to materially housing market.
change the landscape.
CIBC Capital Markets • PO Box 500, 161 Bay Street, Brookfield Place, Toronto, Canada M5J 2S8 • Bloomberg @ CIBC • (416) 594-7000Week Ahead Calendar And Forecast
` CANADA UNITED STATES
CIBC Consensus Prior CIBC Consensus Prior
Monday AUCTION: 3-M BILLS $48B, 6-M BILLS $42B
June 18
Speaker: 3:45 PM John C Williams (President, San Francisco)
Speaker: 1:00 PM Raphael Bostic (President, Atlanta)
Speaker: 9:00 AM William C. Dudley (President, New York)
Speaker: 12:45 PM Lynn Patterson (Deputy Gov.) Speaker: 8:45 AM William C. Dudley (President, New York)
Tuesday CASH MANAGEMENT BUYBACK (Aug'18 - Nov'19) - $0.5B AUCTION: 4-WEEK BILLS $35B (prev)
June 19 AUCTION: 52-WEEK BILLS $26B
8:30 AM
HOUSING STARTS SAAR (May) (M) 1323K 1314K 1287K
BUILDING PERMITS SAAR (May) (H) 1330K 1350K 1364K
Speaker: 7:00 AM James Bullard (President, St Louis)
Wednesday AUCTION: 10-YR CANADAS $2.2B 7:00 AM
June 20 MBA-APPLICATIONS (Jun 15) (L) -1.5%
8:30 AM
CURRENT ACCOUNT (Q1) (L) -$128.9B -$129.0B -$128.2B
10:00 AM
EXISTING HOME SALES SAAR (May) (M) 5.55M 5.46M
EXISTING HOME SALES M/M (May) (M) 1.5% -2.5%
Speaker: 9:30 AM Jerome H Powell (Chairman)
Thursday 8:30 AM 8:30 AM
June 21 WHOLESALE TRADE M/M (Apr) (M) 0.4% 1.1% INITIAL CLAIMS (Jun 16) (M) 220K 218K
ADP EMPLOYMENT CHANGE (May) CONTINUING CLAIMS (Jun 9) (L) 1697K
PHILADELPHIA FED (Jun) (M) 29.0 34.4
9:00 AM
HOUSE PRICE INDEX M/M (Apr) (M) 0.3% 0.1%
10:00 AM
LEADING INDICATORS M/M (May) (M) 0.4% 0.4%
Friday 8:30 AM 9:45 AM
June 22 RETAIL TRADE TOTAL M/M (Apr) (H) 0.0% 0.6% MARKIT US SERVICES PMI (Jun P) (L) 56.8 56.8
RETAIL TRADE EX-AUTO M/M (Apr) (H) 0.3% -0.2% MARKIT US COMPOSITE PMI (Jun P) (L) 56.6
CPI M/M (May) (H) 0.5% 0.3% MARKIT US MANUFACTURING PMI (Jun P) (L) 56.1 56.4
CPI Y/Y (May) (H) 2.6% 2.2%
CPI Core- Common Y/Y% (May) (M) 1.9% 1.9%
CPI Core- Median Y/Y% (May) (M) 2.1%
CPI Core- Trim Y/Y% (May) (M) 2.1%
H, M, L = High, Medium or Low Significance SAAR = Seasonally Adjusted Annual Rate Consensus Source: BloombergCIBC Capital Markets The Week Ahead—June 18-22, 2018
Week Ahead’s Market Call
by Royce Mendes
In the US, the economic calendar is unusually bare. Housing starts should rebound from a
weak month that looked like an aberration, continuing the upward trend and suggesting
resilient demand in the face of higher interest rates and lumber prices.
In Canada, data flow will remain patchy. April retail sales were likely impacted by bad
weather in parts of the country. Headline inflation on the other hand is set to accelerate
above 2½%, With the core common component indicator also running just a hair below
2%, central bankers are still on course to hike rates in July.
Globally, all eyes will be on the OPEC decision next Friday. The ECB Forum in Sintra, Portugal
will also garner attention, with a discussion between the leaders of the Fed, ECB, BoJ and
RBA highlighting the agenda.
3CIBC Capital Markets The Week Ahead—June 18-22, 2018
Week Ahead’s Key Canadian Number:
5 Canadian Retail Sales (%) 10.0
Retail Trade—April
8.0
(Friday, 8:30 a.m.)
3 6.0
Royce Mendes (416) 594-7354 4.0
1 2.0
0.0
CIBC Mkt Prior
-2 -2.0
Retail Sales 0.0% na 0.6% Apr-16 Dec-16 Aug-17 Apr-18
Ex-Autos 0.3% na -0.2% Month/Month (L) Year/Year (R)
Source: Statistics Canada, CIBC
Retail sales grew a whopping 7% last year, but the days Forecast Implications—Higher borrowing rates and
of such heady readings are now clearly in the rearview smaller job gains will keep consumers from adding to
mirror. During the first quarter of 2018, retail sales shrank growth in the same way they did last year. So, while
at an annualized pace of 1.5%. While Q1 did end on a the solid handoff from the first quarter will still see an
positive note, it doesn’t look like that momentum carried acceleration in Q2 GDP growth, that’s unlikely to be the
over into April. beginning of a new trend as increases over the second
half of 2018 looks likely to average below 2%.
Data from other sources already suggest that auto sales
will be a drag. Furthermore, adverse weather in parts
of the country probably also provided a headwind to
retailing during the month.
Other Canadian Releases:
Consumer Price Index—May
(Friday, 8:30 a.m.)
For the first time since 2012, inflation looks set to bottomed out at last year. Another reading show healthy
accelerate above 2½%. Higher energy costs have been price pressures will inch central bankers even further
providing a material lift to CPI, so underlying readings in the direction of another rate hike in July. Thereafter,
of consumer prices will look a bit tamer. But, the Bank though, a gradual pace to subsequent moves is likely
of Canada’s preferred measure of core inflation is now warranted given the risks to growth on a number of
running just a sliver below 2%, a far cry from the 1.3% it fronts.
4CIBC Capital Markets The Week Ahead—June 18-22, 2018
Week Ahead’s Key US Number:
US Housing Starts, SAAR, 000s
Housing Starts—May 1350
Housing Starts
(Tuesday, 8:30 a.m.)
1300 6-mma
Katherine Judge (416)956-6527 1250
1200
CIBC Mkt Prior 1150
Housing Starts 1323K 1314K 1287K 1100
1050
Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18F
Housing starts cooled in April as the volatile multi-family Forecast Implications—As homebuilding normalizes to
segment took a breather and unseasonal weather likely a more sustainable pace following hurricane distortions,
deferred some building of single-family homes. With a we expect higher mortgage rates to limit demand only
return to warmer weather in May, the pace of housing somewhat, with constrained inventories supporting
starts is poised to pick up to 1323K. Indeed, residential healthy homebuilding going forward.
construction payrolls ticked up slightly in May and a
pickup in homebuilding would align with the elevated Market Impact—Due to the secondary nature of this
pace of building permits seen recently. release, limited market reaction is expected.
A nascent rebound in the homeownership rate suggests
that demand remains intact in the housing market,
partially a result of higher incomes. That should help
mitigate the effects of rising mortgage costs while tight
inventories support strong price growth, incentivizing
building.
5CIBC Capital Markets The Week Ahead—June 18-22, 2018
Equity Insights
Katherine Judge and Royce Mendes
Should Canadian Equity Investors Be Worried Wage Acceleration in Labour Force Survey an Outlier So Far
About Wages Yet? Change in YoY Rate From Previous Period (%-pts)
A major part of corporate operating costs come from 0.4
wages and salaries paid to workers. There’s a clear
0.2
negative correlation between pay and corporate profits.
So last week’s Canadian employment release might have 0.0
been slightly jarring for equity investors. It showed that -0.2
wages were rising at a sizzling rate. Amidst an historically
-0.4
low unemployment rate, it would make sense if firms
were bidding up wages to score talented workers. Except -0.6
they may not actually be doing that, at least not yet. The -0.8
wage series released on Friday is showing a gain off of a
very weak base. Three other measures, all of which are -1.0
LFS SEPH Prod. Acct. Nat. Acct.
arguably more reliable, have actually decelerated recently.
Source: Haver Analytics, CIBC
While faster wage growth will gradually show up, last
week’s release appears to overstate the progress. Small-cap Stocks have Outperformed (L),
But Not on Account of Tax Cut Prospects (R)
Small Caps Not Seeing Tax Cut Lift Yet YTD % Chg. Price
10 18 YTD % Chg. Forward
Equity investors were betting on small-cap stocks 16
Earnings
outperforming their larger-cap counterparts this year on 8 14
account of tax reform. And small caps have outpaced the
S&P 500 year-to-date, however, that may not be solely 12
6
related to tax reform. Indeed, small businesses are likely 10
to see less of a negative impact from the rise in global 8
4
protectionism than multinationals. At the same time, 6
growth in 12-month forward earnings projections for
2 4
small caps are only marginally above those for the S&P
2
500, suggesting that equity analysts aren’t seeing the
same benefits from fiscal stimulus that rising consensus 0 0
S&P 500 Russell 2000 S&P 500 Russell 2000
GDP forecasts suggest. That runs the risk of small caps
underperforming over the remainder of the year. Source: Bloomberg, CIBC
Labour Scarcity Varies by Industry (L)
Wage Pressures Lagging in Tightest US Markets Implying Faster Wage Growth is on the Horizon for Some (R)
As the US economy inches further towards full Unemployed-Job Avg. Hourly Earnings
employment, different industries are facing varying Openings Diff (000s) 5 Y/Y % Chg. Latest
degrees of labour scarcity. Indeed, many service 0
-100 4
industries have seen labour markets tighten faster than -200
the aggregate job market as job openings significantly -300 3
-400
surpass idle labour supply. While some industries have -500 2
boosted wages in response, that hasn’t occurred yet in -600
labour markets such as health/education and professional -700 1
-800
services. Those industries could see wage inflation pick 0
up in the months ahead, eroding some of the benefits of
faster US growth and adversely impacting earnings for
the associated US equities.
Source: BLS, CIBC
6CIBC Capital Markets The Week Ahead—June 18-22, 2018
Currency Currents
Andrew Grantham
Twin Deficits…No Problem? Twin Deficits Haven’t Led to FX Depreciation Recently
Change in Effective Exchange Rate
Large, growing budget and current account deficits 4 Over Past 12 Months (% y/y)
have led to speculation that the US$ will suffer over the
years ahead. However, as we’ve seen in the past year, 2
Twin Surpluses
trade/current account balances haven’t been much of
a predictor of FX fortunes recently. Three developed
0
economies with twin surpluses have, on average, seen
currency depreciations. In contrast, three with twin
-2 Twin Deficits
deficits have on average seen their currencies gain on a
trade-weighted basis. As such, large and growing deficits
-4
in the US won’t necessarily hurt the greenback.
-6
NOK CHF SEK GBP CAD USD
Inflating a Currency’s Performance Source: Bloomberg, CIBC
More important for FX markets recently has been a
country’s ability to create inflation and thereby move Inflation and FX Performance Have Been Correlated in Past Year
interest rates off historically low levels. In that sense
6
running a budget deficit, as long as it boosts growth
% Chg vs US$ past 12 months
NOK GBP
and inflation, has been viewed as a positive. Apart from
DKK
the Danish Krona, among advanced economies there 4
has been a clear positive relationship between inflation
and FX moves over the past year. While UK inflation and 2 CAD
expectations for BoE policy are now waning, the pick-up
in price pressures was a key factor supporting sterling
0
over the past year. In contrast, three of the four countries 0 0.5 1 1.5 2 2.5 3
with the lowest CPI readings (Switzerland, NZ and Japan)
% Yr/Yr Change in
have also seen the worst currency performance. -2 Headline CPI
Ex-DKK
Trend line
Where Next for Canadian and US CPI? -4
If this correlation holds, the relative moves in US and Source: Bloomberg, CIBC
Canadian CPI will be important in determining the flight Shelter Prices Converging (L),
path of the loonie. More than a year ago, we argued But Air Fares Have Boosted Canadian CPI vs US Inflation (R)
that Canadian inflation may accelerate more than in Owned Accomodation Air Transportation
4 CPI (% y/y) 20 CPI (% Yr/Yr)
the US given how low it was and the way that owned
accommodation costs are calculated. However, the 3 15 Canada
convergence in owned accommodation CPI is already 2 US
10
well underway. Currently, another factor, airline fares is
1
having an opposite impact on relative inflation between 5
the two countries. Whereas in Canada air transport prices 0
are up more than 10% year-over-year, in the US they are 0
-1
down over 6%. While not a large weight in the basket, -5
-2 Diff
the size of the moves account for 0.2%-pts of difference US
in headline CPI and 0.3%-pts for core. A convergence in -3 Canada -10
Jan-11
May-14
Mar-15
Jan-16
Sep-12
Sep-17
Jul-13
Nov-11
Nov-16
Jan-11
May-14
Mar-15
Jan-16
Sep-12
Sep-17
Jul-13
Nov-11
Nov-16
airfares could see US inflation be firmer than Canadian in
2019, supporting a faster pace of hiking by the Fed and
modest further CAD depreciation. Source: Statistics Canada, BLS, CIBC
7CIBC Capital Markets The Week Ahead—June 18-22, 2018
CANADIAN RELEASE AND EVENT DATES
June/July 2018
MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY
11 12 13 14 SURVEY OF
MANUFACTURING 15
8:30 AM SHIPMENTS
M Y
CANADA’S INTERNATIONAL NEW HOUSING PRICE FEB 2.7 4.9
INVESTMENT POSITION INDEX MAR 1.4 6.0
8:30 AM 8:30 AM APR -1.3 3.6
INT’L TRANSACTIONS
IN SECURITIES C$BN, NET
8:30 AM
BONDS MONEY STOCKS TOT
MARKET
FEB -0.7 2.2 3.0 4.5
MAR -0.2 6.3 0.4 6.4
APR 8.8 -2.1 2.4 9.1
18 19 20 21 CPI 22
8:30 AM M Y
WHOLESALE TRADE MAR 0.3 2.3
Bank of Canada 8:30 AM
Dep. Governor Patterson APR 0.3 2.2
speaks in Toronto at MAY
ADP EMPLOYMENT SURVEY RETAIL TRADE
IIAC/IIF @12:45 PM ET 8:30 AM 8:30 AM (Current$)
M Y
FEB 0.5 3.8
MAR 0.6 4.1
APR
GDP
25 26 27 28 BY INDUSTRY 29
8:30 AM (2002$)
GDP IND.PROD.
M M
FEB 0.4 1.3
MAR 0.3 0.9
APR
INDUSTRIAL PRICES
8:30 AM M (NSA) Y
Bank of Canada MAR 0.9 2.4
Governor Poloz speaks APR 0.5 2.4
at 3:00 PM ET in Victoria MAY
Bank of Canada
Business Outlook Survey
2 3 4 5 LABOUR 6
INTERNATIONAL FORCE SURVEY
RESERVES 8:30 AM AVG
8:15 AM $BN $BN EMPLOY UNEMP HRLY
CHANGE LEVEL (HSHOLD) RATE EARN
APR -1,074 82.2 M Y % Y
CANADA DAY OBSERVED MAY -1,444 80.8 APR 0.0 1.5 5.8 3.3
(HOLIDAY) JUN MAY 0.0 1.3 5.8 3.9
(Markets Closed) JUN
MERCHANDISE TRADE
8:30 AM $MN 12 MO.
BALANCE
MAR -3,933 -29,839
APR -1,902 -30,634
MAY
9 10 11 12 13
BUILDING
PERMITS ($) NEW HOUSING PRICE
8:30 AM M M INDEX
(RES) (NON-RES) 8:30 AM
MAR 1.1 1.7
APR -4.3 -5.2
MAY
Bank of Canada
Interest Rate Announcement
HOUSING Bank of Canada
STARTS Monetary Policy Report
8:15 AM 000’s (AR)
TOTAL SINGLES Bank of Canada
APR 217 57 Governor Poloz
MAY 196 58 & Sr. Dep. Gov. Wilkins
JUN speak at 11:15 AM ET
All data seasonally adjusted except where noted “NSA”. M: per cent change from previous month. Q: per cent change from previous quarter at annual rates. Y: per cent change
from year earlier. AR: Annual Rate. YTD: Year to date. Release dates are provided by sources outside CIBC World Markets Inc. Dates are subject to change. Sources for histori-
cal data: Statistics Canada, CMHC, Human Resources Development Canada and the Bank of Canada.
8CIBC Capital Markets The Week Ahead—June 18-22, 2018
U.S. RELEASE AND EVENT DATES
June/July 2018
MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY
11 12 13 14 15
RETAIL
CPI PPI CAPACITY UTIL/IND. PROD.
SALES
8:30 AM M(SA) Y (NSA) 8:30 AM M (SA) Y (NSA) 9:15 AM LEV M Y
8:30 AM M Y
MAR -0.1 2.4 MAR 0.3 3.0 MAR 77.5 0.5 3.6
MAR 0.7 5.1
APR 0.2 2.5 APR 0.1 2.7 APR 78.1 0.9 3.6
APR 0.4 4.8
MAY 0.2 2.8 MAY 0.5 3.1 MAY 77.9 -0.1 3.5
MAY 0.8 5.9
MICHIGAN SENTIMENT (P)
BUSINESS INVENTORIES
10:00 AM
10:00 AM
TREASURY BUDGET NET CAPITAL INFLOWS TICS
2:00 PM FOMC Rate Decision 4:00 PM
3, 10-Yr NOTE AUCTION 30-Yr BOND AUCTION
Fed Chair Powell speaks
3, 10-Yr NOTE SETTLEMENT
BOT (9:00) REDBOOK (8:55) INITIAL JOBLESS CLAIMS (8:30) 30-Yr NOTE SETTLEMENT
18 19 20 21 22
HOUSING STARTS CURRENT ACCOUNT BAL. PHILADELPHIA
8:30 AM Mn. M/M 8:30 AM FED INDEX
MAR 1.336 3.6 8:30 PM
APR 1.287 -3.7 EXISTING HOME SALES LEADING INDICATOR
MAY 10:00 AM 10:00 AM
2, 5-, 7-Yr NOTE ANNOUNCE.
BOT (9:00) REDBOOK (8:55) INITIAL JOBLESS CLAIMS (8:30)
25 26 27 28 29
PERS. INC & OUT.
ADV. TRADE IN GDP
8:30 AM SAVING
INTERNATIONAL GOODS 8:30 AM (AR) REAL IMPLICIT
INCOME CONS RATE
8:30 AM GDP DEFLATOR
M M AR
17:Q4(F) 2.9 2.3
DURABLE GOODS ORDERS MAR 0.2 0.5 3.0
S&P CORE LOGIC/CASE- 18:Q1(P) 2.2 1.9
8:30 AM M Y APR 0.3 0.6 2.8
SHILLER HOUSE PRICE INDEX 18:Q1(F)
MAR 2.7 11.2 MAY
9:00 AM
APR -1.6 7.9 CHICAGO PMI
CORPORATE PROFITS
MAY 9:45 AM
CONSUMER CONFIDENCE 8:30 AM
NEW HOME SALES
10:00 AM
10:00 AM MICHIGAN SENTIMENT (F)
10:00 AM
2-Yr NOTE AUCTION 5-Yr NOTE AUCTION 7-Yr NOTE AUCTION
BOT (9:00) REDBOOK (8:55) INITIAL JOBLESS CLAIMS (8:30)
2 3 4 5 6
EMPLOY.
ADP SURVEY SITUATION
8:15 AM 8:30 AM NON- CIV AVG
FARM UNEMP HRLY
ISM MFG SURVEY FACTORY ORDERS ISM NON-MFG SURVEY PAYROLL RATE EARN
10:00 AM COMP. PRICES 10:00 AM M(SA) Y(NSA) 10:00 AM APR 159 3.9 2.6
INDEPENDENCE DAY MAY 223 3.8 2.8
INDEX INDEX MAR 1.7 9.1
(HOLIDAY) JUN
APR 57.3 79.3 APR -0.8 7.4
(Markets Closed)
MAY 58.7 79.5 MAY
GOODS &
JUN SERV. BALANCE (BOP) $B
8:30 AM GDS SERV TOT
LIGHT VEHICLES FOMC Minutes
MAR -69.3 22.1 -47.2
SALES MIL (AR) Y
APR -68.3 22.1 -46.2
APR 17,113 0.9
3, 10-Yr NOTE ANNOUNCEMENT MAY
MAY 16,806 0.6
2, 5-, 7-Yr NOTE SETTLEMENT JUN 30-Yr NOTE ANNOUNCEMENT
BOT (9:00) REDBOOK (8:55) INITIAL JOBLESS CLAIMS (8:30)
9 10 11 12 13
CPI
8:30 AM M(SA) Y (NSA)
APR 0.2 2.5
MAY 0.2 2.8
JUN MICHIGAN SENTIMENT (P)
TREASURY BUDGET 10:00 AM
CONSUMER CREDIT 2:00 PM
3:00 PM
3-Yr NOTE AUCTION 10-Yr NOTE AUCTION 30-Yr BOND AUCTION
BOT (9:00) REDBOOK (8:55) INITIAL JOBLESS CLAIMS (8:30)
All data seasonally adjusted except where noted “NSA”. M: per cent change from previous month. Q: per cent change from previous quarter at annual rates. Y: per cent change
from year earlier. AR: Annual Rate. YTD: Year to date. Release dates are provided by sources outside CIBC World Markets inc. Dates are subject to change. Sources for histori-
cal data: U.S. Department of Commerce, U.S. Department of Labor and U.S. Federal Reserve Board.
9CIBC Capital Markets The Week Ahead—June 18-22, 2018
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operate under the brand name CIBC Capital Markets.
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