BMO Financial Group Focus 10-28-2011

8/3/2019 BMO Financial Group Focus 10-28-2011

1/15

FEATURE ARTICLE, PAGE 6

The Many Dangers of

Low-for-Long Interest Rates

EU Deal Promising, But Lots of Work Ahead BoC Lowers Growth and Inflation Outlook U.S. Economy Back to Pre-Recession Levels

Finally!

BoJ Boosts Asset Purchases; RBI Tightens

OCTOBER 28, 201


2/15

PAGE 2 FOCUS OCTOBER 28, 2011

European Debt: Progress Made, Long Road AheadEuropean leaders took an important step this week in corralling th

sovereign debt crisis. The difficulty in reaching an agreement, with earli

meetings postponed and running through the night, suggests that th

relevant players were forced to compromise and that this agreemen

could be the beginning of the end of the crisis. Euro Area leaders agree

on three main points: 1) Greece bondholders face a voluntary 50% haircut.

Leveraging the European Financial Stability Facility (EFSF) up to 1 trillion by offerin

first loss insurance as a part of primary debt sales and providing the initial equity (als

first loss) for Special Purpose Vehicles (SPVs) designed to attract funds from priva

and public sector financial institutions and investors. The SPVs would be directed t

extend loans, for bank recapitalization and for buying bonds in the primary an

secondary markets.3) A plan to recapitalise banks to the tune of 106 billion.

Markets reacted extremely positively, with equities surging the day of th

announcement, led by financial stocks (which had been pounded by the crisis). Whi

the actions from Europe are encouraging, markets may be getting ahead othemselves. The problems are far from fully solved, as some cracks can be found i

each of the three main points of agreement. The haircuts may not be enough to pu

Greece on a sustainable path; theres no guarantee investors will be attracted by th

EFSFs insurance or SPVs and there still arent sufficient funds to bail out Spain and/o

Italy if that becomes necessary; and, the bank recapitalization plan falls well short

IMF and private sector estimates, and wont necessarily keep banks from shrinkin

their loan books in an effort to boost capital ratios. And, many details still need to b

ironed out.

The results from the latest European Summit are an important step toward tamin

the sovereign debt crisis. However, all three main decisions will take weeks, if nmonths, to finalize. That leaves the region at risk of another flare up perhaps as early a

next year, if something unexpected happens (e.g. larger-than-expected fiscal deficit

Implementation risks remain a key potential hurdle to overcoming this crisis. Greec

Ireland, Portugal, Spain and Italy have to follow through with budget cuts, asset sale

and economic reforms or recent efforts will have been for naught. France could b

included in that list as well, with its AAA credit rating at risk according to rating

agencies. This package should at best mark the beginning of the end of the crisis. A

worst it will buy Europe more time to implement economic reforms and strengthen th

monetary union before another inevitable crisis flares up. Considering that we rema

concerned about Greece, bank recapitalisation appears lacking in size, and the EFSF not of sufficient size to bail out Italy and/or Spain, the debt troubles will likely linger we

into 2012 and perhaps beyond, even if the acute phase of the crisis has passed.

Our Thoughts


3/15


Things are starting to look up again for the U.S. economy, though its to

soon to uncork the champagne. A brisk 0.6% gain in personal spendin

in September, alongside a stellar gain in business spending in Q

allowed real GDP growth to double to 2.5% annualized that quarter. Fin

domestic sales rose the most (3.2%) in over a year. While it has taken th

U.S. economy nearly four years to return to pre-recession levels (th

longest in the last six decades and twice as long as for Canada), the expansion phas

has at least officially started. Moreover, we have revised up our Q4 growth estimate

full percentage point to 2.5% in light of surprisingly weak inventory investment in Q

With equities reversing their year-to-date losses (which were tracking double-digi

earlier this month), the adverse wealth effect on spending should subside. Recessio

risks have ebbed, and will continue to do so as long as Europe can make furthe

progress in resolving its debt crisis.

Still, guarded optimism appears warranted. First, consumers have reached dee

into the savings well to sustain spending in the face of weak incomes. The savings ra

dropped to 3.6% in September, a level not seen since late 2007 when shoppers westill draining their housing ATM. As then, thats not a recipe for sustainable growt

Disposable personal income has flat-lined in the past three months, and has droppe

nearly 4% annualized after accounting for inflation and population growth. Secon

consumer confidence has sunk to Great Recession levels, suggesting man

households will be in a Grinch-like mood this holiday shopping season. Third, thre

consecutive declines in pending home sales (and a hefty one at -4.6% in Septembe

suggest the housing market remains depressed. Fourth, the surprising acceleration

business investment in Q3 almost surely reflects the possible year-end expiration

the accelerated depreciation allowance (unless Congress votes otherwise). Fifth, o

prices are moving up again, halting the recent drop in gasoline prices. And sixtcurrent hefty cuts in federal nondefense and state/local spending are likely t

continue for some time. All in, economic growth will likely pick up only modestly

coming quarters from the current 1.6% pace of the past year. That beats the dreade

double dip, though its no reason to celebrate, not with 14 million job seekers st

looking for work.

One seemingly massive disconnect for investors is the fact that Nort

American consumer confidence is plumbing the depths while spendin

just keeps chugging along. For instance, U.S. confidence slid in Octob

to lows not seen since March 2009, which coincided with the very pit othe financial crisis, and yet retail sales are up almost 8% from a year ago

The divergence is unprecedented but also no big mystery. W

managed to whip ourselves into a frenzy of negativity over the summer and ear

fallU.S. Default! S&P Downgrade! European Debt Crisis! Bear Market! Recessio

Risks Rise!yet most of the fundamentals simply did not change for consumers. Jo

growth continued to churn along, albeit at a modest pace. Consumer prices didn

suddenly bolt higher for necessities; in fact, gasoline prices eased a tad. An alread

miserable housing backdrop didnt get materially worse. Taxes did not suddenly ris

SAL GUATIERI

Our Thoughts

DOUGLAS PORTER


4/15


The only meaningful shift for spending was the heavy damage to equity prices

August and September. And yet even that has been largely reversed with October

massive rebound (which has brought the S&P 500 back into positive terrain for 2011

The simple answer thus is that, while the headlines were in a paroxysm of pessimism

the situation on the ground did not significantly change for consumers.

The big issue now is how does this unprecedented gap between consum

perceptions and actions close? Confidence is likely to gradually recover, especial

with equity markets on the mend, and if employment keeps grinding ahead. Howeve

as a wise man once said, confidence grows like a coconut tree, but falls like

coconutin other words, the repair job will likely be slow, and could be susceptible t

new shocks. Meantime, actual spending is likely to cool somewhat in the month

ahead, after the surprisingly upbeat performance of recent months.

As quickly as they melted down in August, stocks have stormed back th

month. The S&P 500 has rallied more than 13% since the end

September, putting it on pace for the best month since October 197while all major U.S. indices broke above their 200-day moving average

after the details of the European Summit were announced. Sentime

had become so depressed since the spring that the prevailing mood wa

about as bad as it was in early 2009, at the tail end of the worst recession of th

postwar era. For example, net expectations for stock price performance 12 month

hence were a near record low in October, according to the Conference Board Surve

leaving the equity market looking like a dry pile of tinder just waiting for any kind of

spark. The market got two sparks this week, with Europe stepping back from the brin

and U.S. recession fears subsiding further amid a pickup in Q3 growth.

Meantime, the Q3 earnings season continues to play out quietly in thbackground, and while results have been a little choppier than in recent quarters, the

continue to point to modest growth ahead. To date, 75% of S&P 500 companies hav

beaten earnings expectations, about in line with the performance at this point

recent quarters, while the share of misses is tracking slightly higher. The view from th

front lines appears slightly foggier, generally pointing to modest, but somewha

uneven, economic growth. On the positive side, industrial bellwether Caterpilla

trounced expectations this week, saying that although there is a good deal of econom

and political uncertainty in the world, we are not seeing it much in our business at th

point we believe continued economic recovery, albeit a slow recovery, is the most like

scenario as we move forward. But that relatively upbeat report was temperesomewhat by the likes of 3M, which noted that the economic softening we experience

late in the second quarter continued into the third. All told, the quick snapback in equi

markets likely reflects an unwinding of extremely negative sentiment, and curren

valuations now look close to what seems appropriate given a slowing earnings growt

environment.

ROBERT KAVCIC

Our Thoughts


5/15


GOOD NEWS BAD NEWS

CANADABoC on hold a neutral policy

bias now in place

MPR cuts growth and inflationforecasts

Retail Sales +0.5% (Aug.)and +0.3% in real terms

CANADAConference Boards Consumer Confidence

Index -3.3 pts to 71.8 (Oct.)

UNITED STATESRecession fears easeHousing still the weak spotRun down in consumer savings

rate worrying

Real GDP +2.5% a.r. (Q3 A)

Core Durable Goods Orders +2.4% (Sep.)

Real Personal Spending +0.5% (Sep.)

New Home Sales +5.7% to 313,000 a.r. (Sep.)

Initial Claims -2,000 to 402,000 (Oct. 22 wk)

U of M Consumer Sentiment Index +1.5 pts to 60.9

(Oct. F)preliminary decline erased

U.S.

Conference Boards Consumer Confidence

Index -6.6 pts to 39.8 (Oct.)

S&P Case-Shiller House Prices -3.8% y/y (Aug.)

FHFA House Prices -4.0% y/y (Aug.)

Pending Home Sales -4.6% (Sep.)

Employment Cost Index +0.3% (Q3)smallest

increase in two years

Savings Rate falls to 3.6% (Sep.)lowest in nearlyfour years

Redbook -0.8% (Oct. 22 wk)

EUROPEEU leaders hammer out a deal,

addresses haircut on Greek

debt (50%), leveraging EFSF (to

1 trln) and bankrecapitalization (106 bln)

Details sketchy; need foreigninvestors

EurozoneIndustrial New Orders +1.9% (Aug.)

EurozoneSmoothed M3 +2.6% y/y (Sep.)

GermanyGfK Consumer Confidence +0.1 pts to

5.3 (Nov.)first gain in 8 months

GermanyConsumer Prices unch (Oct. P)

ItalyRetail Sales unch (Aug.)

EUROPEEurozoneEconomic Confidence -0.2 pts

to 94.8 (Oct.)

EurozoneManufacturing PMI -1.2 pts to 47.3;

Services PMI -1.6 pts to 47.2 (Oct. A)

FranceConsumer Spending -0.5% (Sep.)

U.K.GfK Consumer Confidence

-2 pts to -32 (Oct.)

JAPANBoJ raises asset purchases by

5 trln to 20 trln as recovery

slows

Exports +2.4% y/y (Sep.)

Household Spending +0.9% (Sep.)

Jobless Rate -0.2 ppts to 4.1% (Sep.) JAPANIndustrial Production -4.0% (Sep. P)

Retail Sales -1.5% (Sep.)

Consumer Prices unch from a year ago (Sep.)

AUSTRALIARBA rate cut next week still a

possibility

Core Consumer Prices +0.3% (Q3)

Producer Prices +0.6% (Q3)below expected

AUSTRALIA

Indications of stronger growth and a move toward price stability are good news for the economy.

Jennifer Lee, Senior Economist

Recap


6/15


The Many Dangers of Low-for-Long Interest RatesDouglas Porter and Benjamin Reitzes

This weeks Bank of Canada decision to leave rates on hold for the ninth consecutive meeting (and thirteent

straight month) left the impression that policy may well be on hold for the next nine meetings as well. In othe

words, the Bank seems in precisely no rush to lift borrowing costs with: a) the deeply uncertain global econombackdrop, b) the highly fluid European debt situation, and c) the Federal Reserve likely on hold until at least mi

2013. While the prevailing wisdom is that this is absolutely the correct course of action, and many are cheerin

the prolonged period of ultra-low borrowing costs, the policy does carry a variety of important risks whic

should not be lightly brushed aside. Moreover, if the acute crisis phase of the European debt drama is overan

that is still a big ifthen how long will the current Canadian interest rate setting remain appropriate? After a

BoC Governor Carney recently stated that Europe is the biggest threat facing Canada.

Low-for-long interest rates risk triggering broad financial imbalances. This is a purposely vague risk, because almost b

definition if officials knew where potential problem areas we

brewing, they would address these issues. Suffice it to say,

long period of deeply negative real interest rates is qui

simply abnormal, and can quietly encourage risky behavio

among borrowers and investors (Chart 1). The following a

some of the potential imbalances that might arise:

1) It encourages households to take on potential

excessive debt: While an extended period of low intere

rates can give the illusion that a hefty debt load

manageable, even a small rise in rates can cause problem

for many borrowers. Of course, this is a fact the Bank itse

has oft mentioned, stressing that borrowers should not blulled into a false sense of security that low rates a

permanent, thus heightening the shock when rate

inevitably rise. However, actions speak much louder tha

words for the Bankit doesnt really matter how much th

Bank scolds Canadians if it continues to offer the heavy-du

lure of near-record low borrowing costs. Household deb

has risen almost non-stop over at least the past 20 years an

to a record share of personal disposable income (Chart 2

Indeed, the Banks concern about household debt is like

one key reason near-term rate cuts are unlikely.

2) It risks inflating a housing bubble: Average hom

prices have more than doubled in the past ten years, an

are up more than 20% in the past three years alone, both f

above personal income growth. While affordability remain

reasonable, the long stretch of solid gains could set th

stage for more speculative activity.

Feature

CPI = (y/y % chng)

MONEY FOR NOTHINGCanada (ppts)

CHART 1

BoC Overnight Rate minus CPI

93 94 96 98 99 01 03 04 06 08 09 11-4

-2

0

2

4

6

8

A GROWING CONCERN(ratio to personal disposable income)

Household credit and mortgages plus unincorporated business mortgages

CHART 2

95 97 99 01 03 05 07 09 110.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

Canada

U.S.Crossover


7/15


3) It discourages saving: We suggested earlier this year tha

based on current expected financial market return

Canadians on average should be aiming to save roughly 10

of income to ensure adequate retirement savings (Focu

February 11, 2011: Are Canadians Saving Enough?). Th

savings rate has instead weakened to just 4.2% so far this ye(Chart 3). There really is little mystery behind why savings a

so weak: Between volatile financial markets and deep

negative real interest rates, there is precious little incentive

save. While the TFSA was an entirely welcome addition to th

savings landscape, it appears to have made little net impa

on the level of household savings rates.

4) It encourages inappropriate risk taking: For tho

who have no choice but to save, the paltry returns from

savings accounts, GICs, and Government of Canada bond(sub-2.5% ten-year yields), could prompt some to reac

for yield. But this reach carries risk, and there are no fre

lunches. Indeed, Boomers closing in on retirement, or eve

retirees, who might be tempted to boost the risk profile o

their investment portfolio, could irreparably harm the

expected retirement income if financial markets go south

5) It threatens the health of pension plans: Th

combination of weaker equity markets and sliding long

term interest rates has delivered another hammer blow t

the financial position of pension plans globally. Aon HewittPension Risk Tracker shows that Canadian private pensio

plans currently have a shortfall of about $18 billion, and th

their assets covered only 89% of their obligations. U

private plans are in worse shape, with a US$314 billio

deficit, with assets covering only 82% of liabilities.1 (Chart

The deep dive in long-term government bond yields pump

up the present value of liabilities for pension plans. Whi

GOC yields have nudged up slightly from their Q3 lows, th

10-year yield is still down roughly 75 bps since the start o

the year (Chart 5). Bank of Canada policy does not directdrive these long-term rates, but a less-loose policy cou

nudge yields slightly higher, taking some pressure o

pension funds.

1 Note that the Canadian Institute of Actuaries recently harmonized t

methodology for calculating the discount rate (lowering Aon Hewit

rate 0.2-to-0.5 ppts). The new policy, which has yet to be implemente

will weaken Canadian funding levels.

Feature

LITTLE INCENTIVE TO SAVECanada (% of disposable income : 4-qtr m.a.)

CHART 3

Personal Savings Rate

61 66 71 76 81 86 91 96 01 06 110

5

10

15

20

25 forecast

Source: Aon Hewitt

TIME FOR A TOP-UP?CHART 4

Pension Funding Ratio

07 08 09 10 1160

70

80

90

100

110

120

U.S.

Canada

(assets as a percent of liabilties : as of October 26, 2011)

surplus

deficit

MEAGRE RISK-FREE RETURNSCanada (percent)

CHART 5

Benchmark Bond Yields

90 92 94 96 98 00 02 04 06 08 102

4

6

8

10

12

30-Year

10-Year

RecordLows


8/15


6) It poses a risk to inflation: This may be the most contentious of the risks. Howeve

it seems probable that the prolonged bout of very loose global monetary policies

playing at least a small part in pumping up widespread headline inflation. The fact th

core inflation is grinding gradually higher almost everywhere is evidence that there

more at play than simply supply-related issues for some key commodities. While w

are not ringing the warning bell on stagflation, it is fair to say that the trade-obetween growth and inflation has become much less favourable in recent years.

other words, even the meek industrial world recovery has generated a surprisin

degree of inflation pressure.And at least some of that pressure in Canada has come the form of a hot housing marketwhich, in turn, has been fired up by the extende

period of ultra-low borrowing costs.

Bottom Line: Ultimately, an extended period of negative real interest rates is a heav

punishment for savers and a juicy reward for debtors. Can there be any doubt that th

end result will be a household sector that is overburdened by debt and unde

supported by savings?

Feature


9/15


CANADA I II III IV I II III IV 2010 2011 2012

Real GDP (q/q % chng : a.r.) 3.6 -0.4 2.0 1.5 1.8 2.0 2.3 2.5 3.2 2.2 1.8

Consumer Price Index (y/y % chng) 2.6 3.4 3.0 2.6 2.2 2.0 2.3 2.0 1.8 2.9 2.1Unemployment Rate (%) 7.7 7.5 7.2 7.2 7.4 7.3 7.3 7.2 8.0 7.4 7.3

Housing Starts (000s : a.r.) 178 192 205 185 184 181 181 182 192 190 182

Current Account Balance ($blns : a.r.) -40.3 -61.3 -56.2 -62.3 -59.9 -57.8 -57.7 -56.8 -50.9 -55.0 -58.0

Interest Rates

(average for the quarter : %)

Overnight Rate 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.60 1.00 1.00

3-month Treasury Bill 0.95 0.95 0.88 0.86 0.86 0.86 0.86 0.86 0.56 0.91 0.86

10-year Bond 3.31 3.16 2.53 2.31 2.27 2.25 2.40 2.63 3.24 2.83 2.39

Canada/U.S. Interest Rate Spreads(average for the quarter : bps)

90-day 82 90 86 84 84 84 84 84 42 85 84

10-year -15 -5 10 18 23 25 23 21 2 2 23

UNITED STATES

Real GDP (q/q % chng : a.r.) 0.4 1.3 2.5 2.5 1.7 2.1 2.6 2.9 3.0 1.8 2.2

Consumer Price Index (y/y % chng) 2.2 3.3 3.8 3.8 3.2 2.9 2.7 2.4 1.6 3.3 2.8

Unemployment Rate (%) 8.9 9.1 9.1 9.2 9.2 9.1 9.0 8.9 9.6 9.1 9.1

Housing Starts (mlns : a.r.) 0.58 0.57 0.62 0.60 0.61 0.62 0.63 0.64 0.58 0.59 0.63

Current Account Balance ($blns : a.r.) -478 -472 -467 -444 -439 -435 -435 -431 -4 71 -465 -435

Interest Rates

(average for the quarter : %)

Fed Funds Target Rate 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13

3-month Treasury Bill 0.13 0.05 0.03 0.02 0.02 0.02 0.02 0.02 0.14 0.05 0.02

10-year Note 3.46 3.21 2.43 2.13 2.03 2.00 2.17 2.42 3.21 2.81 2.15

EXCHANGE RATES

(average for the quarter)

US/C$ 101.4 103.4 102.1 98.3 96.7 95.2 96.8 99.2 97.1 101.3 97.0

C$/US$ 0.986 0.967 0.979 1.017 1.034 1.050 1.033 1.008 1.030 0.987 1.031

/US$ 82 82 78 76 75 75 77 79 88 79 77

US$/Euro 1.37 1.44 1.41 1.37 1.35 1.33 1.35 1.39 1.33 1.40 1.35

US$/ 1.60 1.63 1.61 1.58 1.54 1.50 1.53 1.58 1.55 1.60 1.54

Note: Blocked areas represent BMO Capital Markets forecasts

Up and down arrows indicate changes to the forecast

2011 2012 ANNUAL

Economic Forecast


10/15


CANADA Michael Gregory, CFA, Senior Economi The Canadian economy likely expanded modestly in August (+0.1%), as the facto

sector continued to rebound from its spring setback. Along the distribution chai

however, the decrease in real wholesale activity overwhelmed the increase in reta

sales volumes. Meantime, the housing sector took a breather; starts were dowsharply as resales were essentially flat (and it was a breather because both metric

bounced back in September). Overall, employment was also essentially flat, which wa

partly offset by fatter hours, but job creation turned out to mimic the housing metric

recording a strong rebound in September. Given this modest monthly GDP gain, afte

a 0.2%-0.3% June-July handoff to start the quarter, and assuming we get at lea

another modest September gain, there should be no problem living up to our 2.0%

annualized growth call for Q3 GDP. While this is still slightly below potential, at lea

Q2s fractional contraction (-0.4% annualized) wasnt repeated.

Temporary jobs related to a slew of provincial elections should support employmegrowth in October, amid paybacks for historically extreme industry-specific move

The prior months job losses in the finance, insurance, real estate and leasing indust

(-35.3k) were the worst for this sector (for any month) since the Labour Force Surve

began in 1976. Any positive payback here will probably be at least partly offset b

negative paybacks in professional, scientific and technical services along with nonfarm

natural resources for these sectors second-strongest months on record (+35.6k an

+17.1k, respectively, in September), although the latter was likely legitimately flattere

by catch-up hiring in the oil patch. Meantime, underlying labour demand likely coole

amid the months escalating economic uncertainty and ebbing business confidenc

We look for total employment to grow 15,000, which should keep the unemploymen

rate at 7.1% (with a net risk of a tenth tip up).

UNITED STATES Sal Guatieri, Senior EconomiImproved regional surveys suggest the ISM manufacturing index rose modestly to 5

in October, a second monthly gain after nearly slipping below 50 (neutral) in Augus

Auto production has rebounded from the supply-chain glitch, while business capit

spending is speeding up ahead of the possible year-end expiration of the accelerate

depreciation allowance. A pickup in the employment sub-index could indicate the fir

increase in factory payrolls in three months.

After announcing unconventional easing moves at the last two meetings (low-fo

longer pledge and Operation Twist), the Fed could take a breather, comforted b

firmer economic data. Still, given our view that more stimulus will eventually b

required to reduce the unemployment rate, and given recent comments from ke

officials (Vice Chair of the Board of Governors Yellen, Vice Chair of the FOMC Dudle

and Governor Tarullo) that suggest a bias to do more, we cant rule out another mov

next week. In the event, reviving the MBS purchase program (a feature of QE1) cou

Key for Next Week

Real GDP at Basic PricesMonday, 8:30 am

Aug. (e) +0.1%Consensus +0.2%

July +0.3%

EmploymentFriday, 7:00 amOct. (e) +15,000 (+0.1%)

Consensus +20,000 (+0.1%)Sep. +60,900 (+0.4%)

Unemployment RateOct. (e) 7.1%

Consensus 7.2%Sep. 7.1%

Average Hourly WagesOct. (e) +1.6% y/ySep. +1.5% y/y

Manufacturing ISMTuesday, 10:00 am

PMI PricesOct. (e) 52.0 55.0

Consensus 52.2 55.0Sep. 51.6 56.0

FOMC AnnouncementWednesday, 12:30 pm


11/15


be the next tool that Bernanke pulls out of his policy toolkit. The resulting downwar

pull on mortgage rates would complement the Administrations revamped progra

that allows more underwater homeowners to refinance at lower rates. Should th

FOMC vote for more stimulus, three members (Fisher, Plosser and Kocherlakota) w

likely rebel again.

Although the ISM nonmanufacturing index took a step back in September, it shou

more than retrace to 54 in October, indicating continued economic growth. Th

business activity sub-index reached a six-month high in September, and a furthe

advance would suggest some economic momentum in Q4. Conversely, the job

measure fell to a 1-year low last month, suggesting companies are trying to milk th

productivity cow again in the face of heightened economic uncertainty. A furth

decline in the jobs measure would flag a weak October payrolls report. Just nin

industries reported growth last month, the fewest in over a year, and the tone of th

responses reflected increased concerns about the economic outlook and Europe.

Nonfarm payrolls probably rose a modest 70,000 in October, down from 103,000

September, a gain flattered by the return of 45,000 striking Verizon workers. Priva

sector payrolls should show some modest underlying improvement, rising 100,000 afte

a Verizon-adjusted increase of 92,000 in September. Governments likely chopped 30,00

positions in October, in line with the norm of the past six months. Job growth is to

weak to reduce the jobless rate, which likely edged up to 9.2% in October. Of note, th

effective unemployment rate of 16.5% has turned up recently, as more job seeke

have been forced to accept part-time work and/or have given up looking. Meantime, th

average duration of unemployment hit a new high of 40.5 weeks in September. Despit

the economic pickup, the national crisis (according to Bernanke) continues.

Nonmanufacturing ISMThursday, 10:00 am

Oct. (e) 54.0Consensus 53.5

Sep. 53.0

Nonfarm PayrollsFriday, 8:30 am

Oct. (e) +70,000Consensus +95,000

Sep. +103,000

Unemployment RateOct. (e) 9.2%

Consensus 9.1%Sep. 9.1%

Average Hourly EarningsOct. (e) +0.2%

Consensus +0.2%

Sep. +0.2%

Key for Next Week


12/15


OCT 28 * OCT 21 WEEK AGO 4 WEEKS AGO DEC. 31/10

Call Money 1.00 1.00 0 0 0Prime Rate 3.00 3.00 0 0 0

Fed Funds (effective) 0.25 0.25 0 0 0Prime Rate 3.25 3.25 0 0 0

Canada 0.91 0.88 3 11 -6United States 0.00 0.02 -2 -2 -12Japan 0.20 0.10 10 10 8Eurozone 1.59 1.59 1 4 59United Kingdom 0.99 0.98 1 3 23Australia 4.82 4.86 -3 -2 -8

Canada 1.09 1.08 1 21 -59

United States 0.30 0.27 3 5 -30

Canada 2.41 2.36 5 26 -71United States 2.32 2.22 10 40 -98Japan 1.04 1.01 3 1 -9Germany 2.18 2.10 8 30 -78United Kingdom 2.60 2.53 7 17 -80Australia 4.54 4.49 5 32 -100

Risk IndicatorsVIX 25.7 31.3 -5.6 pts -17.2 pts 8.0 pts

TED Spread 43 40 3 8 25Inv. Grade CDS Spread ** 114 131 -17 -31 29High Yield CDS Spread ** 619 718 -99 -207 189

US/C$ 100.55 99.34 1.2 5.6 0.4C$/US$ 0.995 1.007 /US$ 75.73 76.29 -0.7 -1.7 -6.6US$/Euro 1.4165 1.3896 1.9 5.8 5.8US$/ 1.610 1.595 0.9 3.3 3.1US/A$ 107.08 103.76 3.2 10.8 4.6

CommoditiesCRB Futures Index 322.92 311.08 3.8 8.3 -3.0Oil (generic contract) 92.79 87.40 6.2 17.2 1.5Natural Gas (generic contract) 3.90 3.83 1.9 6.4 -11.5Gold (spot price) 1743.53 1642.38 6.2 7.4 22.7

S&P/TSX Composite 12497 11949 4.6 7.5 -7.0S&P 500 1280 1238 3.3 13.1 1.7Nasdaq 2729 2637 3.5 13.0 2.9Dow Jones Industrial 12198 11809 3.3 11.8 5.4Nikkei 9050 8679 4.3 4.0 -11.5Frankfurt DAX 6320 5971 5.8 14.9 -8.6London FT100 5691 5489 3.7 11.0 -3.5France CAC40 3341 3171 5.3 12.0 -12.2S&P ASX 200 4353 4142 5.1 8.6 -8.3

* as of 10:30 am ** One day delay

Equities

CHANGE FROM: (BASIS POINTS)

(% CHANGE)

Canadian Money Market

U.S. Money Market

3-Month Rates

Bond Markets

10-year Bond

2-year Bond

Currencies

Financial Markets Update


13/15

MONDAY OCTOBER 31 TUESDAY NOVEMBER 1 WEDNESDAY NOVEMBER 2 THURSDAY NOVEMB

JAPANManufacturing PMI

Oct.Sep. 49.3 Culture Day

(Markets Closed)

EUROZONE

E U R O Z O N E

Consumer Price IndexOct. P (e) +2.9% y/ySep. +3.0% y/y

Jobless RateSep. (e) 10.0%Aug. 10.0%

G E R M A N Y

Retail SalesSep. (e) +1.0% +1.6% y/yAug. -2.7% +2.2% y/y

F R A N C E

Producer Prices

Sep. (e) +0.1% +6.1% y/yAug. unch +6.3% y/y

I T A L Y

Consumer PricesOct. (e) +0.6% +3.5% y/ySep. +2.0% +3.6% y/y

Producer PricesSep. (e) +0.4% +4.7% y/yAug. +0.1% +4.8% y/y

Jobless RateSep. (e) 7.9%Aug. 7.9%

E U R O Z O N E

Manufacturing PMIOct. F (e) 47.3Oct. A 47.3Sep. 48.5

G E R M A N Y

UnemploymentOct. (e) -10,000Sep. -26,000

Jobless RateOct. (e) 6.9%Sep. 6.9%

E U R O Z O N E

ECB Monetary Policy M

Real GDPQ3 A (e) +0.3% +0.4% y/yQ2 +0.1% +0.6% y/y

Manufacturing PMIOct. (e) 50.0Sep. 51.1

Nationwide House PricesOct. (e) unch +0.5% y/ySep. +0.1% -0.3% y/y

Construction PMIOct. (e) 50.0Sep. 50.1

Services PMIOct. (e) 52.0Sep. 52.9

C H I N A

Manuf. PMI HSBC PMIOct. (e) 51.8 n.a.Sep. 51.2 49.9

A U S T R A L I A

Reserve Bank of Australia

Monetary Policy Meeting

Building ApprovalsSep. (e) -4.9% +0.1% y/yAug. +11.4% -5.5% y/y

A U S T R A L I A

Retail SalesSep. (e) +0.4%Aug. +0.6%

C H I N A

Non-manufacturing PMIOct.Sep. 59.3

HSBC Services PMIOct.Sep. 53.0

U.K.

OTHER

OCTOBER 31 NOVEMBER 4


14/15


15/15

PAGE 15 FOCUS OCTOBER 28 2011

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BMO Financial Group Focus 10-28-2011

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