Banks go ‘all in’ with policy stimulus doc

FINANCIAL MARKETS MONTHLY April 5, 2013 Banks go ‘all in’ with policy stimulus Central banks around the world are providing a united front by keeping monetary policy extraordi- narily stimulative and waiting for the returns to show up in faster economic activity. This tactic is not without risks although it has yet to instigate any worrying inflation pressures. In fact, the aim of this week’s aggressive policy easing in Japan is to break the persistent run of deflation with the Bank of Japan (BoJ) aiming to get the inflation rate to 2.0%. The BoJ’s announcement that it will increase the size and lengthen the maturity of its bond buying program while shifting its opera- tional target to the monetary base from the overnight rate exceeded investor expectations. The Reserve Bank of Australia (RBA), the European Central Bank (ECB), and the Bank of England (BoE) left policy unchanged at their meetings this week with the Bank of Canada (BoC) and US Federal Reserve likely to follow the same course at their meetings later in the month. This ‘steady as she goes’ monetary policy stance was echoed in financial markets with 10-year bond yields, outside of Germany and Japan, holding in recent ranges and the MSCI World stock index clocking in another 2.1% gain in March. Data — bumping along US economic reports in the past month indicated that despite the concern about the effect that the January 1 US payroll tax increases and March 1 implementation of sequestration, the econ- omy likely grew at a faster than 3% pace in the first quarter of 2013. In Canada, the January real GDP report similarly set up for a strengthening in growth following two consecutive quarters of Inside Overview ……………………………… page 1 Interest rate outlook ……………………………… page 5 Economic outlook ……………………………… page 6 Currency outlook ……………………………… page 7 Central bank watch ……………………………… page 8 Q1 growth rebound; inflation low……………….……… page 9 Dawn Desjardins Assistant Chief Economist 416-974-6919 dawn.desjardins@rbc.com David Onyett-Jeffries, CFA Economist 416-974-6525 david.onyett-jeffries@rbc.com Central bank near-term bias Bias three-months out Against a backdrop of muted inflation and soft growth, there is little urgency for the BoC to begin withdrawing stimulus, and it is likely that policy will remain on hold until the second half of 2014. Despite downward revisions to FOMC forecasts for growth and inflation, the unemployment rate forecast moved lower and is projected to fall below the 6.5% in 2015, which is consistent with the fed funds target holding steady to the end of 2014. The April MPC meeting was a non-event as expected, with no changes coming to policy rates or the size of the asset purchase program. We expect policy to remain on hold through 2013. The dovish tone of the ECB’s statement and press conference accompanying April’s steady policy decision has raised the risks of further policy easing; however, we continue to expect that policy rates will remain unchanged. The RBA made a small upgrade to its assessment of the do- mestic economy in April but maintained an easing bias. We continue to expect a 25bp cut to the OCR in June. The RBNZ stated in March that it expects “to keep the OCR unchanged through the end of the year.” Accordingly, we maintain our call for the OCR to remain at 2.50% into 2014. 2  Financial market volatility spikes as investors worry about the global recovery.  Data reports have erred on the weak side.  However there were many one-off factors that cur- tailed activity.  As these factors ease, growth will accelerate.  The US recession was deeper than was previously reported and GDP output stands 0.4 pp below its pre- recession peak. Highlights sub-1% increases. European data, on the other hand, point to another quarter of contrac- tion in early 2013 although the pace of decline is likely smaller than the whopping 0.6% drop recorded in late 2012 even with the uncertainty created by Cyprus. Having said that, the low level recorded in the March surveys boosted the risk that the euro area economy continued to contract early in the second quarter. US Q1 real GDP forecast revised upward After stumbling out of 2012, the US economy picked up speed in early 2013. Alongside another double-digit rise in residential construction activity, consumption reports for January and February showed gains that were consistent with consumer spending growth coming in much quicker than the fourth-quarter 2012’s 1.8% pace, assuming that a small increase in real personal consumption expenditure in March results in con- sumption growth of 3.2% at an annualized rate. Shipments of durable goods posted a solid gain in February, and the subcomponent, non-defence capital goods shipments excluding aircraft, rebounded to more than retrace January’s decline. This is notable because it enters directly into the quarterly estimate of business capital spending. The average level for the two months stood 4.4% at an annu- alized rate above its fourth-quarter 2012 average and is on track to build on the fourth quarter’s strong gain. Recent data also point to businesses rebuilding inventories in the first quarter of 2013 following the sharp destocking that took place in the fourth quarter and trimmed 1.5 percentage points from the quarterly growth rate. Thus, despite higher payroll taxes, stronger consumer spending, rising residential and non-residential invest- ment, and inventory rebuilding are likely to result in real GDP growth of 3.2% in the first quarter, which would be a vast improvement following the negligible 0.4% gain recorded in the fourth quarter. but let us not be too excited The improved tone in the data for January and February flagged a bit in March with the Institute for Supply Management (ISM) indices posting unexpectedly large declines and non-farm payroll employment rising at a much more modest clip. Part of this modera- tion likely reflected concerns about the effect of the ‘across the board’ sequestration cuts that came into effect at the beginning of March. To some degree, these concerns are warranted with the coming fiscal contraction likely to weigh on overall GDP growth in the near term. Having said that, both ISM measures remain above the break-even level of 50, and as indicated, other monthly data are consistent with a relatively large rebound in real GDP in the first quarter. We expect that fiscal restraint measures will be most evident in real GDP growth in the second quarter of 2013 but contend that the strength in underlying private demand, supported by low interest rates, will result in a reaccelera- tion in the second half of 2013. US inflation benign despite monthly pop The overall US consumer price index (CPI) recorded a sizeable 0.7% increase in Febru- ary with the annual pace rising to 2.0%, matching the annual increase in the core infla- tion rate and the Federal Reserve’s longer-term inflation goal. As most of the upward pressure on the headline rate was due to a jump in gasoline prices that reversed course in March, the US inflation rate is projected to edge lower in March. Furthermore, infla- tion is expected to remain close to 2% throughout 2013 as the still considerable unused capacity in the economy limits the ability of retailers to pass through prices increases. Fed policy—let it ride! With no policy meeting until April 30, the latest directive came at the March 20 meeting when the Fed maintained its policy stance and made small tweaks to the economic pro- jections. On balance, the strengthening in recent economic reports were offset by con-  Central banks keep push- ing on the gas and waiting for growth to pick up.  Global yields stay in re- cent ranges and stocks rise.  The US economy is on track for a decent pop in Q1/13 although a hit from fiscal restraint is likely to dampen momentum in Q2/13.  The Fed will have little reason to alter its current policy at its meeting in late April. 3  Canada’s economy posts a solid gain in January.  Early indicators point to another decent increase in February  setting up for the econ- omy to break out of the sub- 1% growth range in the sec- ond half of 2012.  The Bank of Canada is likely to tweak its near-term forecasts at its upcoming meeting, but no change to policy is expected  More interesting will be the announcement of the new Governor. Highlights cerns about the pace of fiscal contraction thus supporting the characterization of ‘moderate economic growth’ lending support to the decision to maintain the extraordi- nary amount of monetary policy stimulus. We, too, expect that the pace of growth to ease in the near term as the fiscal headwinds slow activity and then reaccelerate in the latter part of 2013 and in 2014; however, the acceleration is unlikely to be sufficient to push the unemployment rate below the Fed’s 6.5% threshold through the end of next year. Against this backdrop, we expect the Fed to continue with asset purchases through the end of this year with the fed funds rate likely to be maintained at its current ‘exceptionally low range’ of 0.00% to 0.25% into 2015. At long last, Canadian real GDP grew 0.2% It was worth waiting for the 0.2% rise in real GDP in Canada in January; it was a long time in coming and, as expected, was the result of a 0.4% rise in output in goods- producing industries. The increase was boosted by manufacturing activity rising rapidly with mining output up at a more moderate pace. Service-producing industries managed to increase output as well and were helped by wholesale trade and a surge in the arts, entertainment, and recreation component due to the end of the NHL strike. The increase in January GDP reversed December’s disappointing decline. Indications that both auto and drilling activity picked up in February point to another decent gain and sup- port our forecast for first-quarter 2013 growth to strengthen to 1.9% following the fourth quarter’s modest 0.6% increase. The net improvement in the trade balance in January and February, on a volumes basis, relative to the fourth quarter, bodes well for trade to add at about 0.5 percentage points to annualized growth in the first quarter. The labour data was disappointing with a net 25,700 jobs lost in the first quarter. The 161,000 jobs created in the second half of 2012 seemed out of step with the economy just managing to grow at a 0.6% annualized pace in that period. As the economy reaccelerates, we expect job creation to start up again and the unemployment rate to edge lower. Monthly jump in inflation although annual increase still tame The all-items Canadian CPI index rose 1.2% in the month of February bringing the an- nual inflation rate to 1.2% from 0.5% in January. The sharp rise in the month reflected higher prices for clothing, vehicles, and an 8.4% jump in gasoline prices. Despite the snapback in prices in the month of February, inflation pressures remain muted with both the annual headline and core rates, at 1.2% and 1.4% respectively, holding near the lower end of the Bank’s 1% to 3% target range. The sub-par growth recorded in the second half of 2012 introduced more slack into the economy and resulted in downward pressure being exerted on prices relative to a year earlier. The low starting point for the inflation rates in early 2013 make it likely that readings of sub-2% will persist until the latter part of 2014. Against this backdrop, there is little urgency for the BoC to embark on a program of stimulus withdrawal, and it now looks likely that the overnight rate will remain at 1.0% in 2013 and the first half of 2014; after which, a reacceleration in both the pace of growth and price pressures, are likely to prompt the BoC into action. Looking for clues from the Bank of Canada Markets are not only watching and waiting for the April 17 rate decision and update to the Bank’s economic forecasts but are also keenly looking to see who will replace Mark Carney as Governor when he steps down on June 1, 2013. The rate decision is likely to mimic the details of the March statement with the economic update likely to show small downward tweaks to the near-term growth and inflation forecasts (for example, first- quarter 2013 GDP lower than the January forecast of 2.3%). On balance, we do not ex- pect a significant change in tone or sentiment to be announced. More interesting will be the announcement of the new Governor. As there is no official timetable, central bank watchers are going to have to do just that—watch. 4  The ECB’s dovish tone in April raises the risks of added policy easing in the coming months, but we continue to expect the refi rate to be held steady.  A weaker near-term growth outlook in the UK implies a worsened fiscal position with debt-to- GDP now expected to peak over 100%.  Despite a modestly improved tone in domes- tic data, the elevated exchange rate keeps the RBA’s mild easing bias in place.  RBNZ Governor Wheeler expects “to keep the OCR unchanged through the end of the year,” which would be consistent with our long- held call for policy to remain on hold into 2014. Highlights Just when you thought it was safe to go back into European waters… After hints that conditions in the euro area were stabilizing in early 2013, the tide has again turned in the beleaguered region with the flare up of another crisis (this time in Cyprus) and weakness in recent economic data. While the contagion from Cyprus’ banking crisis has thus far been limited thanks to the combination of the improved capital positions of most European banks and the ECB ensuring ample liquidity in the financial system, the situation has rattled financial markets and elevated uncertainty. Recent indicators of activity, credit flows, and inflation have been weak and highlight the aggregated economy’s struggles in finding its footing. The March purchasing managers’ indexes (PMI) data point to real GDP contracting again in the first quarter of 2013 with the poor handoff to the second quarter creating some risks to our call for activity to stabilize. This more downbeat assessment of the outlook was echoed by ECB President Draghi in the statement following April’s unchanged policy decision when he noted that a recovery is now unlikely until the second half of 2013 and dropped all references to “signs of stabilization”. The dovish tone increased the risks of a rate cut or further non-standard policy easing, yet we see little benefit from further rate cuts for the real economy in the crisis countries and thus expect develop- ments are more likely to be on the ‘non-standard’ front going forward. Weak economic outlook weighs on UK government’s books The non-annualized 0.3% contraction in UK fourth-quarter 2012 real GDP was confirmed and early data for the first quarter of 2013 suggest that a rebound is not yet in the cards. The index of production fell to a two-decade low in January while construction data also disappointed. Ser- vice-sector activity picked up, but PMI data in March pointed to limited improvement in the first quarter, thereby prompting us to revise our growth forecast down to 0.0% from a non-annualized 0.2% quarterly gain previously. The UK Budget included a weaker near-term outlook with the revisions, implying a weaker fiscal outturn and a larger borrowing requirement that result in the government’s debt-to-GDP ratio now peaking above 100%. The Budget also included the annual review of the BoE’s remit, which endorsed the Monetary Policy Committee’s (MPC) current approach toward flexible inflation targeting while also calling on the MPC to assess its policies on communicating its forward guidance in the August Inflation Report. We anticipate that the MPC will thus maintain the status quo with respect to policy at least until August. RBA maintains easing bias though rate cut hurdle getting higher The RBA delivered a steady policy decision in April. The accompanying statement was fairly balanced. The RBA noted that the “substantial easing of monetary policy” undertaken since the end of 2011 is having the desired effect of propping up activity in interest rate-sensitive sectors of the economy. Consumer spending and housing demand have picked up so far this year, and recent improvements in consumer sentiment bode well for further traction being gained in the near term. Policymakers, however, continue to express concern over the ‘uncomfortably high’ exchange rate. This remains a key policy consideration that underpins the RBA’s mild easing bias as well as our call for a further 25 basis point rate cut in June. Ad- mittedly, the recent domestic data flow suggests the hurdle for further easing is rising, but we continue to expect that conditions will lead to the prevailing bias being exercised. RBNZ expects to keep rates on hold “through the end of the year” New Zealand’s economy expanded by a non-annualized 1.5% in the fourth quarter of 2012. While drought conditions will likely weigh on near-term agriculture production and exports, the pick up in construction should result in growth maintaining an upward trajectory in 2013. The solid handoff from 2012 has led us to revise our forecast for real GDP growth in 2013 to 2.9% from 2.7% previously, implying a further reduction of spare capacity and thus reduced disinfla- tionary pressures. The Reserve Bank of New Zealand acknowledged the indications of rising output and inflation in its March Monetary Policy Statement but bluntly stated that it “expects to keep the OCR unchanged through the end of the year.” Accordingly, we maintain our long-held call for the OCR to remain at 2.50% through 2013, with a gradual tightening of policy in 2014. 5 Interest rate outlook %, end of period Central bank policy rate %, end of period Source: Bloomberg, Reuters, RBC Economics Research * Two-year/10-year spread in basis points **New Zealand’s yield curve: 10-year vs. three-year Source: Reuters, RBC Economics Research Current Last Eurozone Refi rate 0.75 1.00 Jul. 05, 2012 Australia Cash rate 3.00 3.25 Dec. 5, 2012 New Zealand Cash rate 2.50 3.00 Mar. 10, 2011 Current Last United States Fed funds 0.0-0.25 1.00 Dec. 16, 2008 Canada Overnight rate 1.00 0.75 Sep. 8, 2010 United Kingdom Bank rate 0.50 1.00 Mar. 5, 2009 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 14Q3 14Q4 Canada Overnight 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.25 1.50 Three-month 0.92 0.88 0.90 1.05 0.98 1.00 1.00 1.00 1.05 1.10 1.25 1.55 Two-year 1.20 1.03 1.15 1.05 1.00 0.90 1.05 1.10 1.15 1.25 1.45 1.70 Five-year 1.56 1.25 1.35 1.30 1.30 1.20 1.40 1.50 1.55 1.70 1.90 2.15 10-year 2.11 1.74 1.75 1.75 1.88 1.85 1.95 2.10 2.15 2.30 2.50 2.80 30-year 2.64 2.33 2.40 2.40 2.50 2.55 2.65 2.70 2.70 2.75 2.90 3.15 United States Fed funds 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 Three-month 0.07 0.09 0.10 0.05 0.07 0.05 0.05 0.05 0.05 0.05 0.05 0.05 Two-year 0.34 0.25 0.25 0.25 0.25 0.25 0.35 0.45 0.65 0.85 1.00 1.25 Five-year 1.04 0.70 0.72 0.70 0.77 0.90 1.05 1.20 1.40 1.50 1.75 2.00 10-year 2.20 1.60 1.65 1.70 1.87 2.10 2.25 2.40 2.55 2.65 2.95 3.25 30-year 3.32 2.70 2.80 2.90 3.10 3.45 3.60 3.85 3.95 4.00 4.20 4.50 United Kingdom Bank rate 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 Two-year 0.43 0.40 0.20 0.20 0.21 0.20 0.30 0.40 0.50 0.30 0.40 0.40 10-year 2.00 1.80 1.70 1.70 1.78 1.80 2.00 2.25 2.50 2.25 2.35 2.50 Eurozone Refi rate 1.00 1.00 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 Two-year 0.09 0.10 0.00 0.00 -0.02 0.10 0.15 0.20 0.30 0.30 0.40 0.40 10-year 1.61 1.50 1.50 1.50 1.29 1.50 1.60 1.75 2.00 2.10 2.20 2.25 Australia Cash target rate 4.25 3.50 3.50 3.00 3.00 2.75 2.75 2.75 2.75 2.75 2.75 3.00 Two-year 3.49 2.46 2.49 2.75 2.83 2.80 2.90 3.10 3.25 3.30 3.40 3.50 10-year 4.10 3.04 2.94 3.00 3.42 3.60 3.65 3.70 3.85 3.95 4.35 4.75 New Zealand Cash target rate 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.75 3.00 3.00 3.25 Three-year 3.11 2.37 2.55 2.60 2.60 2.70 2.80 2.90 3.00 3.20 3.40 3.50 10-year 4.17 3.40 3.57 3.80 3.52 4.10 4.25 4.50 4.70 4.80 5.10 5.50 Yield curve Canada 91 71 60 70 88 95 90 100 100 105 105 110 United States 186 135 140 145 162 185 190 195 190 180 195 200 United Kingdom 157 140 150 150 157 160 170 185 200 195 195 210 Eurozone 152 140 150 150 131 140 145 155 170 180 180 185 Australia 61 58 45 25 59807560606595125 New Zealand 106 103 102 120 92 140 145 160 170 160 170 200 ForecastActuals 6 Economic outlook Inflation tracking Source: Statistics Canada, Bureau of Labor Statistics, Bank of England, European Central Bank, Reserve Bank of Australia, Reserve Bank of New Zealand, RBC Economics Research Source: Statistics Canada, US Bureau of Labor Statistics, Bank of England, European Central Bank, Reserve Bank of Australia, Reserve Bank of New Zealand, RBC Economics Research 1 Seasonally adjusted measurement. 2 Personal consumption expenditures less food and energy price indices. *Seasonally adjusted annualized rates Inflation Watch Current period Three-month trend Six-month trend Canada Bank of Canada core CPI 1 Feb. 0.5 1.3 1.2 0.9 United States Core PCE 2 Feb. 0.1 1.3 1.1 1.1 United Kingdom All-items CPI Feb. 0.6 2.8 2.7 3.0 Eurozone All-items CPI Feb. 0.2 1.8 -0.9 1.3 Australia Trimmed mean Q4 0.6 2.3 N/A N/A New Zealand CPI Q4 -0.2 0.9 N/A N/A Measure Period ago Year ago Growth outlook % change, quarter-over-quarter in real GDP 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q 4 14Q1 14Q2 14Q3 14Q4 2011A 2012A 2013 F 2014F Canada* 1.2 1.9 0.7 0.6 1.9 2.4 2.9 3.0 3.2 2.9 2.8 2.7 2.6 1.8 1.8 2.9 United States* 2.0 1.3 3.1 0.4 3.2 1.9 2.8 3.0 3.0 3.0 3.1 3.3 1.8 2.2 2.2 2.9 United Kingdom -0.1 -0.4 0.9 -0.3 0.0 0.3 0.5 0.5 0.5 0.5 0.5 0.5 1.0 0.3 0.8 2.0 Eurozone -0.1 -0.2 -0.1 -0.6 -0.1 0.2 0.3 0.3 0.3 0.3 0.3 0.3 1.5 -0.5 -0.3 1.0 Australia 1.2 0.6 0.6 0.6 0.6 0.6 0.8 0.7 0.9 0.8 0.8 0.8 2.4 3.6 2.5 3.2 New Zealand 1.0 0.2 0.2 1.5 0.5 0.8 0.7 0.7 0.7 0.6 0.6 0.5 1.4 2.5 2.9 2.7 Inflation outlook % change, year-over-year 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q 4 14Q1 14Q2 14Q3 14Q4 2011A 2012A 2013 F 2014F Canada 2.4 1.6 1.2 0.9 0.9 1.4 1.7 1.8 1.8 1.8 1.9 1.9 2.9 1.5 1.5 1.9 United States 2.8 1.9 1.7 1.9 1.7 1.8 1.7 1.8 1.9 1.9 1.8 1.9 3.2 2.1 1.8 1.9 United Kingdom 3.5 2.8 2.4 2.7 2.7 2.9 3.0 2.6 2.4 2.3 2.3 2.2 4.5 2.8 2.8 2.3 Eurozone 2.7 2.5 2.5 2.3 1.8 1.6 1.5 1.4 1.5 1.5 1.3 1.3 2.7 2.5 1.6 1.4 Australia 1.6 1.2 2.0 2.2 2.9 3.1 2.4 2.9 2.8 2.8 2.9 3.0 3.3 1.8 2.8 2.9 New Zealand 1.6 1.0 0.8 0.9 0.8 0.9 1.0 1.7 1.7 1.7 1.8 1.7 4.0 1.1 1.1 1.7 7 Currency outlook RBC Economics outlook compared to the market Source: Bloomberg, RBC Economics Research Level, end of period Rates are expressed in currency units per US dollar and currency units per Canadian dollar, except the euro, UK pound, Australian dollar, and New Zealand dollar, which are expressed in US dollars per currency unit and Canadian dollars per currency unit. The following charts track historical exchange rates plus the forward rate (dashed line) compared to the RBC Economics forecast (dotted line) out one year. The cone for the forecast period frames the forward rate with confidence bounds using implied option volatilities as of the date of publication. Canadian dollar 0.80 0.90 1.00 1.10 1.20 Apr-12 Oct-12 Apr-13 Oct-13 Euro 1.00 1.10 1.20 1.30 1.40 1.50 1.60 1.70 Apr-12 Oct-12 Apr-13 Oct-13 Japanese yen 66 76 86 96 106 Apr-12 Oct-12 Apr-13 Oct-13 U.K. pound 1.20 1.40 1.60 1.80 2.00 Apr-12 Oct-12 Apr-13 Oct-13 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 14Q3 14Q4 Canadian dollar 1.00 1.02 0.98 0.99 1.02 1.04 1.05 1.04 1.03 1.02 1.02 1.02 Euro 1.33 1.27 1.29 1.32 1.28 1.26 1.24 1.22 1.21 1.20 1.21 1.22 U.K. poun d ster l ing1.601.571.621.621.521.521.551.541.571.581.611.63 New Zea l an d d o ll ar 0.82 0.80 0.83 0.83 0.84 0.84 0.85 0.86 0.85 0.83 0.82 0.80 Japanese yen 82.9 79.8 77.9 86.8 94.2 90.0 85.0 82.0 80.0 81.0 82.0 85.0 C h inese renmin b i 6.296.366.296.236.216.206.156.156.126.106.086.06 Austra l ian d o ll ar 1.03 1.02 1.04 1.04 1.04 1.07 1.10 1.12 1.10 1.08 1.06 1.04 Mexican peso 12.8 13.4 12.9 12.9 12.3 12.5 12.3 12.2 12.0 11.9 11.8 11.8 Canadian dollar cross-rates 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 14Q3 14Q4 EUR/CAD 1.331.291.261.311.301.311.301.271.251.221.231.24 GBP/CAD 1.601.601.591.611.551.581.631.611.621.611.651.66 NZD/CAD 0.820.810.820.820.850.870.890.890.880.850.840.82 CAD/JPY 83.0 78.5 79.2 87.4 92.6 86.5 81.0 78.8 77.7 79.4 80.4 83.3 AUD/CAD 1.031.041.021.031.061.111.161.161.131.101.081.06 Forecast Actuals 8 Central bank watch Bank of Canada Federal Reserve European Central Bank Bank of England Australia and New Zealand • Canadian Q1/13 growth is expected to re- bound to 1.9% from a 0.6% gain in Q4/12. • Modest growth combined with inflation re- maining in the bottom half of the BoC’s target range argues for monetary conditions to remain accommodative. We expect the overnight rate to hold at 1.00% until mid-2014. • The third estimate of US Q4/12 GDP growth was revised upward again to show a 0.4% annual- ized increase (previously reported as a 0.1% gain). • The FOMC revised downward its forecasts for growth and inflation, and we look for the target funds rate to rise in 2015, which is consistent with the outlook for the unemployment rate to fall below the 6.5% threshold in 2015. • The non-annualized 0.3% contraction in UK real GDP in Q4/12 was confirmed, and weak data thus far for the beginning of 2013 suggest that a rebound is not in the cards in Q1. • The April MPC meeting was uneventful with no changes to either rates or asset purchases. We expect the BoE to maintain the policy rate at 0.5%. • The RBA delivered another steady-rate ver- dict in April and maintained an easing bias, thereby supporting our expectation for one final 25bp cut to the OCR in June. • New Zealand real GDP was solid in Q4/12 and indicated that construction activity has begun to gain traction. The RBNZ remains on track to remove monetary stimulus starting in Q1/14. • The March PMI showed a deterioration in manufacturing, construction, and services, therein providing downside risk to our forecast for a modest 0.1% contraction in Q1/13 real GDP • Recent weak data and a further moderation in inflation led the ECB to adopt a more downbeat tone in April and to support accommodative pol- icy remaining in place for the foreseeable future. -10 -8 -6 -4 -2 2 4 6 8 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Quarter-over-quarter annualized % change Canadian real GDP growth Forecasted values: Source: Statis tics Canada, RBC Economics Research -10 -8 -6 -4 -2 2 4 6 8 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Quarter-over-quarter annualized % change U.S. real GDP growth Source: Bureau of Economics Analysis, RBC Economics Research Forecasted values: -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 % change, quarter-over-quarter Eurozone GDP Source: Eurostat, RBC Economics Research Forecasted values: -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 % change, quarter-over-quarter U.K. real GDP growth Source: Central Statistical Office, RBC Economics Res earch 0 1 2 3 4 5 6 7 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Bank of England, RBC Economics Res earch % Forecast U.K. policy rate -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Australia New Zealand % change, quarter-ov er-quarter Australia and New Zealand GDP growth Source: Australian Bureau of Statistics, Statistics New Zealand, RBC Economics Research Forecast 0 1 2 3 4 5 6 7 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Australia New Zealand % change, year-over-year Australia and New Zealand inflation Source: Australian Bureau of Statistics, Statistics New Zealand, RBC Economics Research Forecast 0 1 2 3 4 5 6 7 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: ECB, RBC Economics Research % Forecast ECB refi rate 0 1 2 3 4 5 6 7 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Bank of Canada, Federal Reserve Board, RBC Economics Research % Forecast Canadian overnight rate 0 1 2 3 4 5 6 7 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Bank of Canada, Federal Reserve Board, RBC Economics Research % Forecast U.S. target rate 9 The material contained in this report is the property of Royal Bank of Canada and may not be reproduced in any way, in whole or in part, without express authoriza- tion of the copyright holder in writing. The statements and statistics contained herein have been prepared by RBC Economics Research based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This publication is for the informa- tion of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities. ®Registered trademark of Royal Bank of Canada. ©Royal Bank of Canada. Q1 growth rebound; inflation still low Inflation rates in Canada and the US remain at or below the 2% target thereby providing no incentive for central banks to start to withdraw stimulus. Canada’s economy’s anemic growth in H2/12 looks to have ended in early 2013. Even with tax hikes put in place on January 1, 2013, Q1 con- sumer spending picked up its pace… …consistent with a jump in Q1 real GDP although sequestration will likely damped the growth rate in Q2. -3 -2 -1 0 1 2 3 4 5 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Canada U.S. Source: Statistics Canada, Bureau of Economic Analysis, RBC Economics Research Inflation: Canada and the U.S. % change, year-over-year -10 -8 -6 -4 -2 2 4 6 8 2009 2010 2011 2012 2013 2014 Quarter-over-quarter, % change, annualized rate Canada's Real GDP Forecast Source: Statistics Canada, RBC Economics Research -3 -2 -1 1 2 3 4 5 2009 2010 2011 2012 2013 Quarter-over-quarter, % change, annualized rate U.S. Real PCE Source: Bureau of Economics Analysis, RBC Economics Research -6 -4 -2 2 4 6 2009 2010 2011 2012 2013 2014 Quarter-over-quarter, % change, annualized rate U.S. Real GDP Source: Bureau of Economics Analysis, RBC Economics Research Forecast . April 5, 2013 Banks go ‘all in’ with policy stimulus Central banks around the world are providing a united front by keeping monetary policy extraordi- narily. increases. Fed policy let it ride! With no policy meeting until April 30, the latest directive came at the March 20 meeting when the Fed maintained its policy