GLOBAL ECONOMICS - gbm.scotiabank.com

1 1 June 11, 2018 @ 8:55 EST GLOBAL ECONOMICS | DAILY POINTS Visit our web site at or contact us by email at CONTACTS Derek Holt, VP & Head of Capital Markets ECONOMICS Scotiabank ECONOMICS KEY POINTS: CAD underperforms all crosses after Trump s tantrum Fact checking trade claims against Canada by Trump et al UK growth indicators come in soft Norwegian inflation falls short, diminishing faith in rate guidance A heavy day for US debt auctions GLOBAL Week Ahead Please see the GLOBAL Week Ahead here. The risk dashboard includes: FOMC ECB BoJ Russian CB G7 Summit US-NK Summit US tariffs on China US CPI, retail, IP CDN manufacturing, housing Chile s CB Mexican Presidential debate Chinese CPI, macro hits Indian CPI Australian jobs UK CPI Eurozone supercore CPI US debt auctions INTERNATIONAL Until central banks take over starting on Wednesday, the start of the week is about G7 and NAFTA trade tensions, huge US debt auctions and tonight s Trump-Kim Summit (9pm eastern time).

2 There is generally a risk-on bias in GLOBAL markets. Weak UK growth indicators and softer than expected Norwegian inflation are regional distractions. Equities are little changed but with Europe leading the way. London is up by over %, Italy is up and Madrid is up by % while the Dax is flat. US equity futures are flat on average and TSX futures are little changed but slightly on the positive side. The USD on a DXY basis is little changed. The weakest crosses versus the USD include the Mexican peso and CAD on Trump s weekend temper tantrum, plus the rand, yen, pound sterling (soft data, see below) and Norwegian krone (soft CPI). CAD is depreciating by about three quarters of a cent versus the USD since Friday s close as Trump s tweets simply result in a competitiveness offset through a weaker currency.

3 The Euro and euro-related crosses are holding their own alongside the A$. ON DECK FOR MONDAY, JUNE 11 CountryDateTimeIndicatorPeriodBNSC onsensusLatestNo material economic releases in Canada or the Visit our web site at or contact us by email at June 11, 2018 GLOBAL ECONOMICS | DAILY POINTS Sovereign bond yields are mixed with the biggest move being a steep yield decline across Italy s curve in a bull steepener. The Italian 2 year yield is down about 60bps and the 10 year yield is down 25bps. US Treasury yields are about 1bp higher across the curve while Canada s curve is richer by about 2bps from 2s through 20s. Gilts are little changed and bunds are 3bps higher across the curve. Oil prices are down with WTI at just above US$65 and Brent at US$ A higher US rig count and higher Russian output are being fingered.

4 Saudi Arabia and Russia are among the parties seeking increased output at the June 22-23 OPEC meeting. UK indicators disappointed. Industrial production unexpectedly fell ( m/m, + consensus) and this wiped out tiny growth over the prior two months to reset output levels back to where they were in January. A m/m plunged in manufacturing output was the main culprit and this makes for three months of contraction and lower output for the year-to-date. The trade deficit unexpectedly widened in April primarily due to 6% m/m plunge in export volumes that was entirely due to non-energy products and more heavily focused upon non-EU countries. Import volumes were up by m/m. Once again, the data proves that Carney was right to have held off a rate hike in May and he ll hold off again next week.

5 Norwegian inflation unexpected slipped to y/y ( prior, consensus) due to a decline in underlying inflation that excludes energy and tax changes to y/y ( prior, consensus). The inflation undershoot lessened market confidence in Norges Bank s guidance that it may start to raise rates after the summer and whether it may firm up such guidance in next week s communications. UNITED STATES The Trump-Kim Summit starts tonight at 9:00pmET (9:00am Singapore time). Trump, Secretary of State Pompeo, National Security Adviser John Bolton and White House Chief of Staff John Kelly will represent the US. Trump has said We re not going to go in and sign something on June 12th and we never will. We re going to start a process.

6 On a Korean peace deal, he then said he could absolutely sign an agreement with North Korea. But that s really the beginning. The hard part remains after that. The meeting is therefore more about seeking common ground and avoiding major gaffs which means keeping Bolton quiet at an absolute minimum. The US Treasury auctions $144 billion of debt today. That includes $22 billion of 10s in a reopening at 1pmET, $32 billion of 3s at 11:30amET and $90 billion of 3 month and six month bills at 11:30amET. It will then auction $14 billion of 30 year bonds in a reopening tomorrow alongside a four-week bills auction. CANADA A trio of fast-talking gunslingers in the US administration defamed Canada s institutions, leadership, values and policies over the weekend.

7 The vulgarity of the remarks is worth a recap before turning to the factual errors that are behind their beliefs. The remarks suggest thought processes at the core of the US administration that are not well grounded in reason, diplomacy or facts. US Trade adviser Peter Navarro: There's a special place in hell for any foreign leader that engages in bad faith diplomacy with President Donald J. Trump and then tries to stab him in the back on the way out the door. And that's what bad faith Justin Trudeau did with that stunt press conference. That's what weak, dishonest Justin Trudeau did, and that comes right from Air Force One." President Trump: PM Justin Trudeau of Canada acted so meek and mild during our G7 meetings only to give a news conference after I left saying that, US Tariffs were kind of insulting and he will not be pushed around.

8 Very dishonest & weak. Our Tariffs are in response to his of 270% on dairy! Ultimately that's what you want. You want a tariff free. You want no barriers. And you want no subsidies. Because you have some cases where countries are subsidizing industries and that's not fair." US National economic Council Director Larry Kudlow: He really kind of stabbed us in the back. We were very close to making a deal with Canada on NAFTA, bilaterally 3 Visit our web site at or contact us by email at June 11, 2018 GLOBAL ECONOMICS | DAILY POINTS perhaps, and then we leave and Trudeau pulls this sophomoric, political stunt for domestic consumption. All accounts of what PM Trudeau said in his press conference following the G7 meeting indicate that nothing new was said that he hasn t previously stated.

9 Trudeau said that an ambitious G7 communique was created before Trump withdrew support and that Canada would retaliate if the US went ahead with steel and aluminum duties that Trudeau described as kind of insulting. Trudeau is 1000% right. Behind the US government s assertions is a poor understanding of the facts on tariffs and the implied belief that trade is far less free in Canada than the United States. This is patently false. Indeed, the evidence leans slightly in the other direction. The World economic Forum measures average tariff rates across countries on a simple average and weighted average basis here and here. On a weighted average basis - that is the best way to look at it - the US is slightly higher than Canada ( versus ).

10 Trump s use of 270% to besmirch Canada s overall trade policies is disingenuous to be polite about it. It refers to milk and the flap over changes to rules governing unfiltered milk that reduced US imports. That s right, Trump is quoting a figure that applies to milk that accounts for a tiny fraction of Canada s $33 billion of goods imported from the United States each month (latest March). Better judgement would question whether an entire trading relationship needs to be jeopardized in order to appeal to dairy farmers in Wisconsin. Furthermore, the WEF s Enabling Trade Index (here) ranks Canada and the United States tied. The WEF has the following to say about the US ranking and the takeaway is that the US is less open to NAFTA trade than Canada and Mexico.