News Releases

CHICAGO, IL--(Marketwired - Jul 26, 2013) -

• U.S. gross domestic product is about three percent larger than it was at its 2007 peak
• Housing market revitalization is being spurred by low mortgage rates and years of waning prices
• U.S. employment rate ticking upwards, but still 1.6 percent below 2008 peak

The U.S. Federal Reserve has injected nearly $3 trillion into capital markets over the last five years and the United States economy has responded positively. Nevertheless, BMO Private Bank's August 2013 Outlook report reveals that investors remain concerned that the Fed's intention to trim its $85 billion monthly bond buying program could push interest rates higher and frighten off potential homebuyers.

Highlights from the report include:

U.S. Economy Upbeat

The U.S. economy is steady in light of the difficulties facing its major trading partners. Retail activity shows particular promise, with inflation remaining the same despite historically low interest rates. According to the report:

• U.S. GDP is three percent larger than it was at its 2007 peak.
• Exports and consumption expanded, while government spending flatlined and capital investment contracted.
• Auto sales increased at a 10 percent annual rate
• Other discr etionary purchases such as clothing, gained 3.8 percent over the last year and food and drink sales expanded by 4.4 percent.
• Housing starts are poised to rise 18 percent this year, which is on pace with homebuilder confidence.

"American economic news is positive, yet the future is predicated on the Federal Reserve's generosity and its plans for quantitative easing," said Jack Ablin, Chief Investment Officer, BMO Private Bank. "Despite this uncertainty, the housing market is what is really moving the needle in the nation's recovery. Low mortgage rates and years of decreasing prices have helped the revitalization; however, we will have to watch for how the markets react to the rebound in mortgage rates this summer."

Income Markets Shaken Up

The report also noted that the prospect of the Federal Reserve cutting back bond purchases has hit the bond market the hardest and affected fixed income investment strategies:

• Long-dated Treasuries plunged 12.5 per cent to their worst quarterly showing in 10 years.
• Emerging market bond yields sold off at six percent in Q2 due to concern about China's economy and political unrest in Brazil, Turkey and Egypt. However, yields are now approaching 7 percent in certain emerging market bonds and are attracting attention.
• High yield bonds suffered a 2.5 percent pullback in Q2 as investors recalculated their income strategies.

"The yield on the benchmark 10-year Treasury note surged nearly 80 basis points in Q2," said Mr. Ablin. "If a reasonable estimate of 'fair value' on the note is the rate of nominal GDP growth, then the current 2.54 percent yield is still about one percentage point shy of that mark. Year-over-year nominal GDP is 3.3 percent and we estimate this will likely move higher."

Workforce Expansion Remains Instrumental to Global Economic Growth

Growth in the global labour market continues to be slow, according to the report:

• U.S. workforce growth has increased incrementally over the last five years but remains about 1.6 percent below the 2008 peak.
• Japan's workforce is set to decline nearly 0.7 percent per year through the end of the decade, with the trend accelerating thereafter.

"On a decade-by-decade basis, 2009 was time when actual economic expansion trailed its potential due to that period's financial meltdown," said Mr. Ablin. "The European Union has been suffering economic contraction for six consecutive quarters. Given that the developed world currently accounts for just over 50 percent of economic activity, a slowdown there could dent global growth."

To view a copy of the report please visit:
http://research-ca.bmocapitalmarkets.com/documents/D7EB00F4-A88E-4B74-8584-ACD9DFC03A6F.PDF

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