Economic outlook Trump: Taxes, Trade & Treasuries · 4/11/2017 · BMO Financial Group (NYSE, TSX: BMO) is an integrated financial services provider offering a range of retail banking,

Please refer to the next page for Important Disclosures

Economic outlook Trump: Taxes, Trade & Treasuries

April 11, 2017

Douglas Porter, CFA Chief Economist, BMO Financial Group [email protected] • 416-359-4887 A presentation of BMO Economics http://economics.bmocapitalmarkets.com • 1-800-613-0205

General Disclosure

“BMO Capital Markets” is a trade name used by the BMO Financial Group for the wholesale banking businesses of Bank of Montreal and its subsidiaries BMO Nesbitt Burns Inc., BMO Capital Markets Limited in the U.K. and BMO Capital Markets Corp. in the U.S. BMO Nesbitt Burns Inc., BMO Capital Markets Limited 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://economics.bmocapitalmarkets.com. 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 Inc., 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.

™ Trademark Bank of Montreal in the United States and Canada.

© COPYRIGHT 2017 BMO CAPITAL MARKETS CORP.

A member of BMO Financial Group

© COPYRIGHT 2017 BMO CAPITAL MARKETS CORP. http://economics.bmocapitalmarkets.com

Good:

Tax cuts/reform

More infrastructure spending

Less regulation

Not-so-good:

Protectionism

Immigration uncertainty

Restrained by budget deficit and Congress

President Trump’s economic platform

A mix of “good-for-growth” and “not-so-good-for-growth”

1

© COPYRIGHT 2017 BMO CAPITAL MARKETS CORP. http://economics.bmocapitalmarkets.com 2

Nov ’16 Dec Jan ’17 Feb Mar Apr

Election Day

Record

17500

18500

19500

20500

21500

Stocks(Dow Jones Industrial Average)


Record

vs C$

vsMexican

Peso

Broad¹

96

100

104

108

112

116

US dollar(November 1, 2016 = 100)


2½-yr high

1.7

1.9

2.1

2.3

2.5

2.7

Bonds(10-year US Treasury yield : %)

¹ Broad index: Major currencies (Euro Area, Canada, Japan, United Kingdom, Switzerland, Australia, Sweden) plus 19 others, including Mexico and China

2016–17

Post-election markets: Trumped up… mostly

(as of April 7, 2017)

© COPYRIGHT 2017 BMO CAPITAL MARKETS CORP. http://economics.bmocapitalmarkets.com 3Sources: ¹ The Conference Board, ² National Federation of Independent Business, ³ National Association of Home Builders

75

100

125

150

175

14 15 16 17

United States ( January 2014 = 100)

Confidence booster

Consumer Confidence¹

Housing Market Index³

2005

2000

post election

Small Business Optimism Index²

2004

Highest since


0.2

1.6

1.8

1.9

1.9

2.0

2.4

2.4

6.8

7.0

-2.5

-4 -2 0 2 4 6 8

Brazil

Russia

Japan

Euro Area

UK

Canada

US

Mexico

Australia

China

India

Real GDP

Average growth 2000-10: 4%

(y/y % chng)

Global GDP: Mixed and still sluggish

2016:Q4

15 16 17 18World 3.2 2.8 3.1 3.1Emerging markets 3.9 3.7 4.0 4.0G7 2.0 1.5 1.9 1.8


US

Canada

forecast-5.0

-2.5

0.0

2.5

5.0

04 06 08 10 12 14 16 18

Real GDP

Canada bounces back

(y/y % chng)

North American growth: A better 2017

15 16 17 18Canada 0.9 1.4 2.5 1.9US 2.6 1.6 2.4 2.5


US

Canada

forecast

4.4%

10.0%

4.5%

[33-year low]5.8%

8.7%

6.7%

4

5

6

7

8

9

10

06 08 10 12 14 16 18

Unemployment rate (percent)

Jobless rates: US still falling… Canada improving again

Greece 23.5 Spain 18.0 Italy 11.5 Portugal 10.0 France 10.0 Canada 6.7 Ireland 6.4 Australia 5.9 UK 4.7 US 4.5 Germany 3.9 Japan 2.8

4.75.4

Vancouver British Columbia


Alberta

Saskatchewan

British Columbia

3

4

5

6

7

8

9

06 07 08 09 10 11 12 13 14 15 16 17

Unemployment rate

Canada (percent)

Jobless rates: Oilpatch turning the corner?


US recession forecast

Nominal

Real²

0

40

80

120

160

70 75 80 85 90 95 00 05 10 15

Crude oil price¹

Long-term average price = $55 (today’s dollars)

(US$/bbl)

Oil price collapse in perspective

¹ West Texas Intermediate ² March 2017 US dollars

© COPYRIGHT 2017 BMO CAPITAL MARKETS CORP. http://economics.bmocapitalmarkets.com 9Source: BMO Economics forecasts

-2.5

0.5

1.3

1.4

1.8

2.3

2.4

2.6

2.7

2.8

-4 -2 0 2 4

NL

NB

PE

NS

SK

QC

MB

ON

AB

BC

2017

-2.5

-0.4

0.5

0.5

1.2

1.3

2.0

2.3

2.6

3.0

-4 -2 0 2 4

AB

NL

SK

NB

PE

NS

QC

MB

ON

BC

2016

Real GDP – Canada (y/y % chng)

Regional outlook: Ch-Ch-changes

Oil producers


2017:“Toronto and surrounding cities are in a housing bubble”

– BMO Economics2016:“Party will end in the Toronto and Vancouver housing markets this year”

– Canadian bank2015:“Canada is in serious trouble”

– Deutsche Bank 20152014:“Why Canada isn’t immune to a US-style housing crash”

– Maclean’s2013:“Inside the great real estate crash of 2013”

– Maclean’s2012:“Canada’s housing crash begins”

– Canadian Business2011:“Canada’s housing bubble deemed close to bursting”

– CBC News2010:“Canada’s housing bubble: An accident waiting to happen”

– CCPA2009:“Why Canada’s housing bubble will burst”

– The Tyee2008:“Canada’s housing bubble could soon burst”

– US investment firm

Canada

Housing: Bubble Trouble?


Averageprice

(y-t-d avg)

11

-1.9

-1.2

2

2

3

0.6

3.3

3.8

4.0

14.0

16.0

28.6

$459,000

$330,000

$355,000

$349,000

$381,000

$281,000

$950,000

$500,000

$917,000

-6 0 6 12 18 24 30 36

Calgary

Saskatoon

Edmonton

Montreal

Ottawa

Winnipeg

Vancouver

Canada

Toronto

Existing home prices¹

Federal government moves to cool market

Canada

Canadian house prices: Location, location, location

¹ HPI composite benchmark where available ² Average price (3-mnth ma) ³ March 2017 (HPI benchmark rate, average price)

(y/y % chng : nsa : as of February 2017)


August 2016

Toronto

Vancouver

Hamilton

70

80

90

100

110

15 16 17

Teranet House Price Index

(August 2016 = 100)

Spot the city with a non-resident tax


-40

-20

0

20

40

60

80

84 89 94 99 04 09 14

Real home prices¹

Bigbubble

Smallerbubble

Toronto (2-yr % chng)

Real home prices: Too too much in TO

Shading marks periods of US recession ¹ deflated by CPI March 2017 = estimate


-5

0

5

10

15

05 07 09 11 13 15 17

Debt growth²(y/y % chng)

0.6

0.8

1.0

1.2

1.4

1.6

1.8

90 95 00 05 10 15

Debt ratio(ratio to personal disposable income)

Debt ratio at record highs, more to come¹ Households, nonprofits and unincorporated businesses ² Consumer credit and residential mortgages only

Households¹

Canadian consumers: “Vulnerabilities are elevated and rising”

Canada

US

crossover

Canada

US

© COPYRIGHT 2017 BMO CAPITAL MARKETS CORP. http://economics.bmocapitalmarkets.com 15(e) = estimate ¹ Source: Federal Budget 2017

forecast¹

(C$ blns : lhs)

(e)

(% of GDP : rhs)

-9

-6

-3

0

3

-60

-40

-20

0

20

80 90 00 10 20

Federal government budget balance Fiscal 17/18 deficit $28.1 bln

Strengthening economy provides upside versus budget assumptions

Little in the way of new measures, but “infrastructure” spending detailed

Deficits persist through forecast horizon

Debt/GDP stable

Canada

Budget 2017: Beauty (economy) and Beast (deficit)


parity

Poloz takes over at BoC(June 1, 2013)106.1¢

68.7¢

74.6¢

60

70

80

90

100

110

11 12 13 14 15 16 17

Canadian dollar (US¢ : as of April 7, 2017)

16lines: weekly averages dots: daily closes forecasts: BMO Economics

Trade uncertainties

Canada

Canadian dollar: Where next?

Bank of Canada Governor

Stephen Poloz

Year-end 2016 74.5 2017 75.0 2018 78.5


forecast

Total

Core

2.2%

2.7%

-3.0

-1.5

0.0

1.5

3.0

4.5

09 11 13 15 17

Total

Core¹1.6%

2.0%

-3.0

-1.5

0.0

1.5

3.0

4.5

09 11 13 15 17

17¹ Average of three new core inflation measures

0.2

0.8

1.5

2.0

2.3

2.6

2.7

4.8

0 2 4 6

Japan

China

Euro Area

Canada

UK

India

US

Brazil

Consumer price index (y/y % chng)

Inflation edging up

United States Canada

British Columbia: 2.3%

Total CPI(latest month)


Consumer price index – Canada

Inflation and deflation

18

Deflationary Fresh vegetables -14.0%

Fresh fruit -13.3%

Bread -5.4%

Beef -4.2%

Coffee and tea -3.5%

Dairy and eggs -2.8%

Home entertainment equipment -2.6%

Telephone services -2.2%

Sports equipment -1.4%

Electricity -0.8%

Inflationary Gasoline 23.1%

Books 8.2%

Air fares 5.6%

Cigarettes 4.3%

Home insurance 3.6%

New autos 3.6%

Women’s clothing 3.5%

Property taxes 2.8%

Tuition fees 2.8%

Beer 1.8%

(y/y % chng : as of February 2017)

Overall CPI: 2.0%

Up 18.1% y/y in early April

Down 3.6% y/y in Ontario


Canada

US

0

1

2

3

4

5

6

7

07 09 11 13 15 17

10-year bonds

forecast

Canada

US0

1

2

3

4

5

6

7

01 04 07 10 13 16

Overnight rate

Record spreadBoC: On hold

Interest rates: More US rate hikes coming

Canada US Current 1.60 2.38 End-2017 1.80 2.65 End-2018 2.30 3.00

(% : as of April 7, 2017)

Canada US Current 0.50 0.75-1.00 End-2017 0.50 1.25-1.50 End-2018 1.25 2.00-2.25


-3.4

-2.4

2.5

2.9

3.2

4.5

5.2

5.4

6.3

8.2

9.2

11.7

-10 0 10 20 30

Russia

Japan

TSX

UK

Australia

DJIA

S&P 500

Germany

China

Brazil

Nasdaq

India

-11.3

0.4

1.8

7.0

7.5

8.0

9.5

13.4

14.4

17.5

37.5

52.2

-20 0 20 40 60

China

Japan

India

Australia

Nasdaq

Germany

S&P 500

DJIA

UK

TSX

Brazil

Russia

Equity markets (% chng)

Global stocks: Tables turn

20162017 year-to-date

(as of April 7, 2017)

Documents

Economic outlook Trump: Taxes, Trade & Treasuries · 4/11/2017 · BMO Financial Group (NYSE, TSX: BMO) is an integrated financial services provider offering a range of retail banking,