DOLLARS & SENSE TD Economics

April 29, 2014

ITS A SLOW WORLD AFTER ALL

Highlights Once again, markets have been disappointed that after years of ultra-stimulative monetary policy, slow economic growth and low inflation prevail in many developed market economies. Add in emerging market jitters and geopolitical uncertainty, and the next leg up in bond yields has been postponed. In this slow-growth world, we now expect the ECB to cut rates in June, and that China will likely need further economic stimulus to reach its growth target for 2014. As for the U.S., we remain optimistic that growth will accelerate through the remainder of the year after its winter chill. Still, concerns do linger about the degree of housing strength. Bond yields should eventually head higher, and our expectation for the Fed to hike rates in Q4 2015 remains intact. The Canadian yield forecast has been adjusted in line with that for U.S. Treasuries. The Canadian dollar is forecast to fall to the 85-cent U.S. range by mid-year, but with the U.S. dollar rally currently stalled, that timing is looking a little aggressive.

Recently markets have been reminded that the world continues to be challenged by a slow growth environment, despite over five years of unconventional monetary stimulus by major central banks around the world. Bond yields rose last year in anticipation of a gradual end to increasingly ultra-stimulative monetary policy in the U.S., but have recently moved sideways as markets are once again faced with concerns about economic growth in many corners of the globe and amid heightened geopolitical uncertainty on relations between Russia and western countries aligned with Ukraine. Six months ago, 2014 was billed as the year global growth would break out of its recent funk as some of the more acute threats to the global economy namely the European sovereign debt crisis and endless budget showdowns in Washington fell behind us. But, four months into the year we have downgraded our bond yield forecasts (see table page 3) as markets are once again disappointed by economic growth prospects, and accordingly the lower inflation risks. For three years post-recession, the European sovereign debt crisis topped our list of risks to the global economy. However, over the past year this has been replaced by fragile emerging market economies and concerns about economic growth in China. Markets have become increasingly focused on a larger-thananticipated growth slowdown in China. Chinas economy slowed to 7.4% growth in the first quarter of 2014, below the governments stated target of 7.5% (for more details see Chinas Rocky Road to LongTerm Prosperity). It looks increasingly likely that further economic stimulus will be required for China to hit its economic growth target. It has already enacted targeted fiscal stimulus, and cuts to the required reserves at some rural banks, enabling more money to be available for loans. China has also weakened its currency slightly to provide a bit more stimulus. We expect China has the ability to act to stimulate the economy further if growth continues to underperform. In the meantime the impact of slower growth in China shows up most directly in our commodity price forecasts and our short-term copper outlook has been downgraded slightly. In contrast, our forecast for the price of oil has been upgraded due to ongoing risks of a disruption to Russian supplies (see table page 3), which continues to elevate oil prices as tensions in Ukraine show no signs of easing.
Craig Alexander, SVP & Chief Economist, 416-982-8064 Leslie Preston, Economist, 416-983-7053

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This is unfortunate for the euro zone, which has had some positive signs recently, such as successful bond auctions by beleaguered governments in Greece and Portugal. On the downside, inflation remains uncomfortably low. Inflation in the euro zone is currently at a five-year low and well below the European Central Banks (ECB) 2% target. The ECBs has signalled its willingness to engage in more unconventional monetary stimulus in response to a prolonged period of below-target inflation. It has also stated its discomfort with a strong euro, which contributes further to low inflation. TD now expects the ECB to lower its key policy rate 10 basis points at its June meeting to help weaken the euro and try to get inflation to start heading back towards target.
The Knights armor is tarnished

STRONGER U.S. DOLLAR TREND HAS STALLED

1.14 1.12 1.10 1.08 1.06 1.04 1.02 1.00 0.98 0.96 Cdn $ (left axis) euro (right axis) Stronger US Dollar CDN Dollar per U.S. Dollar Euro per U.S. Dollar 0.80 0.78 0.76 0.74 0.72 0.70

15-Aug-13

07-Nov-13

30-Jan-14

0.68 24-Apr-14

The United States was expected to be the global economys knight in shining armor, riding to the rescue with stronger growth no longer weighed down by fiscal drag. This would in turn help to lift export growth in many of its trading partners. The knights armor is looking a little tarnished as U.S. economic growth was sideswiped by an abnormally severe and snowy winter. TD expects U.S. growth of not much better than 1% annualized in Q1 to rebound in the second quarter to above 3%, but it is still not entirely clear exactly how much of the U.S. weakness can be chalked up to weather. Notably, concerns are increasing about slower activity in the housing sector, which had been hit by the weather, but was in fact already faltering last year as interest rates rose. Our forecast for an acceleration in U.S. growth this year hinges on a stronger housing market driving residential investment and consumer spending, and as the housing data remains lukewarm, markets are cautious about how strong
10-YEAR GOVERNMENT BOND YIELD
3.5
%

Source: Haver Analytics

U.S.
3.0

Canada

2.5

2.0

1.5

1.0

23-May-13

15-Aug-13

07-Nov-13

30-Jan-14

24-Apr-14

Source: Haver Analytics

the rebound in housing activity will be. Fortunately some indicators are showing signs of a spring thaw in the U.S. economy. Our broader theme that yields will head higher this year is unchanged, but the recent pause has pushed back the timing and lowered our forecast yield curve in the near-term (see table page 3). The U.S. Federal Reserve is still expected to take rates higher in the final quarter of 2015. Hand-in-hand with our forecast for higher yields is our forecast for a stronger U.S. Dollar, a trend which has similarly stalled in recent months (see chart). This development is much to the consternation of many central banks, who would like their own currencies to weaken against the Dollar to aid growth domestically. A weaker Loonie would help aid the long-awaited transition to export-led growth in Canada, and stoke some inflationary pressures. We still see the Canadian dollar depreciating to the 85 U.S. cent range by mid-year, but concede that the recent pause in the greenbacks upward momentum is making the June timing look a little ambitious. Still, at roughly 90 U.S. cents the Canadian dollar is already 13% below its 2012 highs, lending a hand to exporters. The bottom line is that after much optimism at the end of 2013 about growth prospects, markets have been disappointed once again. Bank of Canada Governor Stephen Poloz still expects export-led growth to strengthen this year, but it has now been delayed. The Bank is firmly in the neutral zone, with below-target inflation evidence of the slack that remains in the economy. We have moved back our increases in government bond yields in line with the U.S., but we still expect the Bank of Canada to raise rates roughly one quarter before the Fed. This reflects a smaller degree of economic slack in Canada at this point in the cycle.
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April 29, 2014

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INTEREST RATE OUTLOOK

Spot Rate Apr-28 CANADA Overnight Target Rate 3-mth T-Bill Rate 2-yr Govt. Bond Yield 5-yr Govt. Bond Yield 10-yr Govt. Bond Yield 30-yr Govt. Bond Yield 10-yr-2-yr Govt Spread U.S. Fed Funds Target Rate 3-mth T-Bill Rate 2-yr Govt. Bond Yield 5-yr Govt. Bond Yield 10-yr Govt. Bond Yield 30-yr Govt. Bond Yield 10-yr-2-yr Govt Spread CANADA - U.S SPREADS Can - U.S. T-Bill Spread Can - U.S. 10-Year Bond Spread 0.94 -0.25 0.91 -0.11 0.98 -0.08 0.96 -0.10 0.84 -0.27 0.85 -0.27 0.85 -0.25 0.80 -0.20 0.75 -0.20 0.70 -0.15 0.55 -0.15 0.60 -0.25 0.40 -0.30 0.25 0.02 0.43 1.74 2.70 3.49 2.27 0.25 0.07 0.25 0.77 1.87 3.10 1.62 0.25 0.04 0.36 1.41 2.52 3.52 2.16 0.25 0.02 0.33 1.39 2.64 3.69 2.31 0.25 0.07 0.38 1.75 3.04 3.96 2.66 0.25 0.05 0.44 1.73 2.73 3.56 2.29 0.25 0.10 0.50 1.80 2.90 3.65 2.40 0.25 0.15 0.55 1.95 3.05 3.85 2.50 0.25 0.20 0.70 2.15 3.20 4.00 2.50 0.25 0.25 0.80 2.30 3.30 4.05 2.50 0.25 0.50 1.05 2.50 3.45 4.15 2.40 0.25 0.80 1.40 2.80 3.70 4.35 2.30 0.50 1.00 1.75 3.05 3.85 4.45 2.10 1.00 0.96 1.08 1.70 2.45 2.97 1.37 1.00 0.98 1.00 1.30 1.76 2.50 0.76 1.00 1.02 1.22 1.80 2.44 2.89 1.22 1.00 0.98 1.19 1.86 2.54 3.07 1.35 1.00 0.91 1.13 1.95 2.77 3.24 1.64 1.00 0.90 1.07 1.71 2.46 2.96 1.39 1.00 0.95 1.05 1.85 2.65 3.10 1.60 1.00 0.95 1.10 2.00 2.85 3.30 1.75 1.00 0.95 1.30 2.20 3.00 3.45 1.70 1.00 0.95 1.50 2.40 3.15 3.60 1.65 1.00 1.05 1.70 2.60 3.30 3.75 1.60 1.50 1.40 1.95 2.75 3.45 3.85 1.50 1.50 1.40 2.05 2.90 3.55 3.95 1.50 Q1 2013 Q2 Q3 Q4 Q1 2014F Q2F Q3F Q4F Q1F 2015F Q2F Q3F Q4F

F: Forecast by TD Bank Group as at April 2014; All forecasts are end-of-period; Source: Bloomberg, Bank of Canada, Federal Reserve.

GLOBAL STOCK MARKETS

S&P 500 S&P/TSX Composite DAX FTSE 100 Nikkei MSCI AC World Index*
Source: Bloomberg.

Apr-28 1,869 14,531 9,446 6,700 14,288 410

30-Day % Chg. 0.6 1.9 -1.5 1.3 -2.8 0.6

YTD % Chg. 1.1 6.7 -1.1 -0.7 -12.3 0.4

52-Week High 1,891 14,556 9,743 6,866 16,291 414

52-Week Low 1,573 11,837 7,692 6,029 12,445 346

* Is a weighted equity index including both developed and emerging markets

COMMODITY PRICE FORECASTS

Price 52-Week 52-Week Apr-28 High Low Q1 101 111 91 94 4.78 7.92 3.27 3.50 1297 1477 1189 1631 19.6 24.6 18.5 30.0 308 338 292 359 8.37 8.37 6.03 7.85 84 89 76 91 8.61 10.37 7.81 9.32 2013 Q2 Q3 94 106 4.01 3.56 1415 1328 23.1 21.4 324 321 6.79 6.31 83 81 9.14 8.40 Q4 97 3.85 1271 20.8 325 6.31 80 8.52 Q1 99 4.75 1292 20.5 321 6.60 78 9.33 2014F Q2F Q3F 101 97 4.45 4.25 1175 1200 18.3 18.6 308 312 7.95 8.00 83 84 9.20 9.10 Q4F 94 4.00 1225 19.0 310 8.50 86 9.00 Q1F 94 3.85 1250 19.5 300 8.75 84 9.05 2015F Q2F Q3F 94 92 4.20 4.00 1275 1300 19.5 20.0 300 280 9.25 8.75 82 82 9.10 9.20 Q4F 94 4.10 1300 20.3 280 9.00 80 9.20 Annual Average 2013 2014F 2015F 98 98 94 3.73 4.36 4.04 1411 1223 1281 23.8 19.1 19.8 332 313 290 6.82 7.76 8.94 84 83 82 8.85 9.16 9.14

Crude Oil (WTI, $US/bbl) Natural Gas ($US/MMBtu) Gold ($US/troy oz.) Silver (US$/troy oz.) Copper (cents/lb) Nickel (US$/lb) Aluminum (Cents/lb) Wheat ($US/bu)

F: Forecast by TD Bank Group as at April 2014; All forecasts are period averages; Source: Bloomberg, USDA (Haver).

April 29, 2014

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FOREIGN EXCHANGE OUTLOOK

Currency Exchange rate Spot Price Apr-28 102.5 1.39 1.68 0.88 1.10 0.93 0.85 1.39 142 0.82 1.22 1.53 1.50 1.62 102.5 142 172 116.4 92.9 94.9 87.5 0.91 92.9 1.53 1.85 0.80 0.98 1.06 Q1 94.2 1.28 1.52 0.95 1.02 1.04 0.84 1.28 121 0.85 1.22 1.30 1.23 1.53 94.2 121 143 99.2 92.7 98.0 78.7 0.98 92.7 1.30 1.54 0.93 0.95 1.18 Q2 99.2 1.30 1.52 0.95 1.05 0.92 0.78 1.30 129 0.86 1.23 1.37 1.42 1.68 99.2 129 151 105.0 94.3 90.9 76.9 0.95 94.3 1.37 1.60 0.90 1.04 1.23 2013 Q3 98.3 1.35 1.62 0.90 1.03 0.93 0.83 1.35 132 0.84 1.22 1.39 1.45 1.63 98.3 132 159 108.7 95.4 91.8 81.8 0.97 95.4 1.39 1.67 0.88 1.04 1.17 Q4 105.3 1.38 1.66 0.89 1.06 0.89 0.82 1.38 145 0.83 1.23 1.47 1.54 1.68 105.3 145 174 118.2 98.9 94.0 86.6 0.94 98.9 1.47 1.76 0.84 1.05 1.14 Q1 103.0 1.38 1.67 0.88 1.11 0.93 0.87 1.38 142 0.83 1.22 1.52 1.49 1.60 103.0 142 172 117.2 93.4 95.7 89.7 0.91 93.4 1.52 1.84 0.80 0.98 1.04 2014F Q2F 107.0 1.32 1.63 0.93 1.18 0.88 0.80 1.32 141 0.81 1.23 1.55 1.50 1.65 107.0 141 174 114.8 91.0 94.2 85.6 0.85 91.0 1.55 1.92 0.79 0.97 1.06 Q3F 108.0 1.26 1.62 0.98 1.15 0.87 0.78 1.26 136 0.78 1.23 1.45 1.45 1.62 108.0 136 174 110.6 94.0 94.0 84.2 0.87 94.0 1.45 1.86 0.85 1.00 1.11 Q4F 110.0 1.22 1.58 1.03 1.15 0.87 0.77 1.22 134 0.77 1.25 1.40 1.40 1.58 110.0 134 174 107.4 95.7 95.7 84.7 0.87 95.7 1.40 1.82 0.89 1.00 1.13 Q1F 112.0 1.22 1.61 1.04 1.15 0.86 0.76 1.22 137 0.76 1.27 1.40 1.42 1.61 112.0 137 180 107.6 97.4 96.3 85.1 0.87 97.4 1.40 1.85 0.91 1.01 1.14 2015F Q2F 112.0 1.20 1.60 1.08 1.14 0.85 0.74 1.20 134 0.75 1.30 1.36 1.41 1.62 112.0 134 179 103.4 98.6 95.2 82.9 0.88 98.6 1.36 1.82 0.95 1.04 1.19 Q3F 115.0 1.20 1.60 1.08 1.11 0.85 0.73 1.20 138 0.75 1.30 1.33 1.41 1.64 115.0 138 184 106.2 103.5 97.8 84.0 0.90 103.5 1.33 1.78 0.97 1.06 1.23 Q4F 115.0 1.20 1.58 1.08 1.11 0.84 0.72 1.20 138 0.76 1.30 1.33 1.43 1.67 115.0 138 182 106.2 103.5 96.6 82.8 0.90 103.5 1.33 1.75 0.97 1.07 1.25

Exchange rate to U.S. dollar Japanese yen Euro U.K. pound Swiss franc Canadian dollar Australian dollar NZ dollar U.S. dollar Japanese yen U.K. pound Swiss franc Canadian dollar Australian dollar NZ dollar U.S. dollar Euro U.K. pound Swiss franc Canadian dollar Australian dollar NZ dollar U.S. dollar Japanese yen Euro U.K. pound Swiss franc Australian dollar NZ dollar JPY per USD USD per EUR USD per GBP CHF per USD CAD per USD USD per AUD USD per NZD USD per EUR JPY per EUR GBP per EUR CHF per EUR CAD per EUR AUD per EUR NZD per EUR JPY per USD JPY per EUR JPY per GBP JPY per CHF JPY per CAD JPY per AUD JPY per NZD USD per CAD JPY per CAD CAD per EUR CAD per GBP CHF per CAD AUD per CAD NZD per CAD

Exchange rate to Euro

Exchange rate to Japanese yen

Exchange rate to Canadian dollar

F: Forecast by TD Bank Group as at April 2014; All forecasts are end-of-period: Source: Federal Reserve, Bloomberg, TDBG.

This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

April 29, 2014